LNG pipeline and terminal operator Cheniere Energy Inc. (LNG) stands to gain huge from the landmark 20-year $8 billion deal between its publicly-traded partnership company Cheniere Energy Partners (CQP) and British energy firm BG Group Plc (BRGYY.PK), whereby BG has agreed to purchase 3.5 million tons per annum (mtpa) of liquefied natural gas via its Sabine Pass terminal facility in Louisiana. The deal per Cheniere CEO Souki is expected to reap $410 million a year. Per our calculations, this relates to the $2.15/MMBtu premium that Cheniere will charge BG. However, this is on top of the 115% of U.S. benchmark Henry Hub prices that Cheniere will sell the liquefied natural gas for to BG, with the additional 15% being used for fuel and sourcing the gas. That 15% assuming current natural gas prices of in the $3.60/MMBtu range should yield another $100 million.
Given that the initial phase of the Sabine Pass terminal facility is proposed to have a capacity of 9 mtpa, with approval from the U.S. Department of Energy for up to 16 mtpa of LNG destined to all countries with which trade is permissible, one can extrapolate that at full development, the Sabine Pass terminal facility would generate at least $2.3 billion to Cheniere. We believe that the actual value that they will reap at full development will be higher as it would be reasonable to assume that natural gas prices would rise once the link is established between the surplus shale gas producing regions in the U.S. and the markets in Asia and Europe. Currently, natural gas prices in Europe and Japan, for example, are in the $12-$15 range, while U.S. prices for natural gas stand at $3.60, so it would be reasonable that with the export link established, prices may trend up to at least the $6-8 range. Based on that assumption, Cheniere would reap $2.6 and $2.9 billion at full build-out of the Sabine Pass terminal facility.
We believe that despite the huge 80% plus intra-day surge today, the markets may not have fully c! aptured the value of this landmark deal. The company back in 2005-07 was valued at over $2 billion when it had almost no revenue. Assuming even build-out of the initial phase of 9 mtpa (instead of the approved 16 mtpa), and further assuming 20% net margins, Cheniere has the potential to earn over $3 per share. Applying even a reasonable 4-5 forward P/E would get us to a valuation in the low- to mid-teens. Cheniere has already said that they expect to announce another deal soon. With one deal in the bag, and another coming shortly, we believe that the run-up in LNG may have only started. However, we would advise to scale gradually into it to take advantage of any weakness.
It is import to remember here that Cheniere started out building LNG import terminals, but that with the development of domestic shale natural gas production in the U.S. prices collapsed domestically while prices overseas have stayed higher. This discrepancy in the prices was possibly due to the lack of infrastructure to connect the excess shale supply with the demand overseas. Cheniere's Sabine Pass project is the first and only U.S. approved project with an export license to ship LNG worldwide, although four more are already at work here in the U.S. The only other approved LNG export facility in North America is KM LNG, a joint venture between oil and gas exploration and production companies Apache Corp. (APA), Encana Inc. (ECA) and EOG Resources, Inc. (EOG). That project received a license from Canada's National Energy Board to export from a deepwater port in Kitimat, B.C. Also, Canada has another two LNG export facilities under development in western Canada.
Besides LNG, CQP, APA, ECA, and EOG, other North American publicly traded companies involved in the liquefaction and transportation of LNG companies that could be impacted by this landmark development include:
- Golar LNG Ltd. (GLNG), a provider of international marine transportation service for LNG with a fleet of 12 vessels.
- Devon Energy Corp. (D! VN), eng aged in the exploration and production of oil, gas, and natural gas liquids in the U.S. and Canada.
- Teekay LNG Partners LP (TGP), a provider of international marine transportation services for LNG and crude oil with a 30 vessel fleet.
- Interoil Corp. (IOC), engaged in the refining, liquefaction, marketing and distribution of oil and natural gas in Papua New Guinea.
The deal also should be a boon to domestic shale gas production companies in the U.S. that we will explore in another article that may soon be accessed from our author page.
Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LNG over the next 72 hours.
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