Cheniere’s Total Dominance in U.S. LNG

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Sabine Pass Liquefaction LLC, a subsidiary of Houston based Cheniere Energy Partners (NYSEMKT: CQP), has entered into a massive 20 year LNG sale and purchase agreement (SPA) with the French oil giant Total’s (NYSE: TOT) Total Gas & Power North America Inc. through train five at the Sabine Pass LNG terminal. According to the agreement, Total will purchase around 2 million tons of LNG each year, which forms about 44% of the total capacity of train five. Sabine Liquefaction has plans for developing five trains at the Sabine Pass LNG terminal, which is under the complete ownership of Cheniere Energy. Work on the first two is currently under way while development for the third and fourth trains will start next year. Train five is expected to become operational by 2018 and the SPA’s term will start from the date of its first delivery. The agreement also has an option for extension of another ten years.

The enormous Sabine Pass LNG terminal, the first of its kind in the United States, boasts re-gasification and send-out capacity of 4 billion cubic feet/day and can store up to 16 billion cubic feet equivalent.

Total already has a terminal use agreement with Sabine Pass LNG, and later Sabine Liquefaction entered into a separate agreement with Total allowing the former to use the latter’s facilities at Sabine Pass. This is another step towards the day when Sabine Pass will start transporting LNG. Total is also one of the leading global players in the LNG sector with operations in Australia, Indonesia, Russia, U.A.E, Oman, Qatar, Yemen, Nigeria, Norway and Angola.

It should be noted that no other company in the United States, besides Cheniere, has a U.S. Department of Energy approved LNG export terminal. In other words, Cheniere will become the first LNG exporter of the country and will enjoy a monopoly for some time. The oversupply of natural gas in the U.S has created an opportunity to export the commodity at a higher price but the infrastructure is simply not there. Other energy giants, such as Exxon Mobil (NYSE: XOM) – the biggest U.S. natural gas producer – are also looking to tap into exporting-the-natural-gas-play.

Exxon, along with ConocoPhillips, BP and TransCanada, submitted a preliminary feasibility for an Alaskan project to the state’s Governor in October 2012 that involves an 800 mile pipeline, liquefaction plant and storage facilities at a cost of $65 billion. But this could take more than 10 years to complete. In addition, Exxon’s joint venture with Qatar Petroleum, called Golden Pass Products, is also looking for regulatory approval to export LNG from its Port Arthur, Texas terminal originally built to import gas. If approved, then an additional investment of $10 billion would be required and the project would take five years to construct. Exxon is clearly not as well positioned as Cheniere at this point. 

Moreover, one cannot discount the political angle in all of this.  There are plenty of applications for LNG terminals, either new facilities or retrofits like Exxon Mobil’s, that await approval from the Obama administration, but all of them have been held up for more than a year with no timetable for approval.  Expect a lot of backroom dealing and billions of dollars changing hands in order to get these projects moving. 

Virginia based Dominion Resources (NYSE: D) is one of the companies that have made an application to the DoE for exporting LNG from its facility in Cove Point, Maryland. Along with Dominion, there is also Sempra Energy (NYSE: SRE) which also wants to export LNG from its LNG terminal in Hackberry, Louisiana.

According to the International Energy Agency, the future demand for LNG is going to come from the energy-hungry Chinese, as well as the rest of Southeast Asia, which will more than double from 130 billion cubic meters in 2011 to 273 billion in 2017. On the other hand, the European demand will shrink to 2010 levels over that same period of time.

Overall, the global demand will increase at an average annual rate of 2.7% through 2017 to 3.94 trillion cubic meters, with ~70% of the increase coming from emerging markets.  Within the U.S, demand will increase by 13% from 2011 levels to match the Chinese estimates. Similarly, according to the BG Group, by 2025, Japan, China, India and South Korea will emerge as the biggest LNG markets, meaning that the U.K and Spain will no longer be on that list. The 2011 data on natural gas consumption provided by BP yields similar insights: China, Saudi Arabia and Japan’s consumption of natural gas rose by 21.5%, 13.2% and 11.6% in 2011 while that of EU shrunk by 9.9%.

<table> <tbody> <tr> <td> <p><strong> </strong></p> </td> <td> <p><strong>Cheniere</strong></p> </td> <td> <p><strong>Sempra</strong></p> </td> <td> <p><strong>Dominion</strong></p> </td> <td> <p><strong>Exxon</strong></p> </td> </tr> <tr> <td> <p><strong>Stock YTD</strong></p> </td> <td> <p><strong>+18.13%</strong></p> </td> <td> <p><strong>+32.25%</strong></p> </td> <td> <p><strong>-2.10%</strong></p> </td> <td> <p><strong>+4.84%</strong></p> </td> </tr> <tr> <td> <p><strong>P/E</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>20.2</p> </td> <td> <p>25.56</p> </td> <td> <p>9.4</p> </td> </tr> <tr> <td> <p><strong>EPS</strong></p> </td> <td> <p>-0.5</p> </td> <td> <p>3.6</p> </td> <td> <p>2.03</p> </td> <td> <p>9.46</p> </td> </tr> <tr> <td> <p><strong>Yield</strong></p> </td> <td> <p>8.40%</p> </td> <td> <p>3.40%</p> </td> <td> <p>4.10%</p> </td> <td> <p>2.60%</p> </td> </tr> <tr> <td> <p><strong>ROA</strong></p> </td> <td> <p>1.89%</p> </td> <td> <p>3.15%</p> </td> <td> <p>3.55%</p> </td> <td> <p>9.31%</p> </td> </tr> <tr> <td> <p><strong>ROE</strong></p> </td> <td> <p>-46.30%</p> </td> <td> <p>9.13%</p> </td> <td> <p>10.07%</p> </td> <td> <p>28.16%</p> </td> </tr> </tbody> </table>

Despite reporting losses in the four previous quarters, Cheniere’s stock is up 18% this year.  But, Cheniere’s story is not about what it’s done or what it is doing, but rather what it will do and what it has – a virtual monopoly on selling LNG to all comers at stupendous margins.  When one can produce it for $3 per MM BTU, liquefy and ship it for another $4-5 and sell it for $15-18, one has the closest thing to a license to print money this side of a central bank.  For its rivals, getting the DoE’s approval for LNG export is itself a very lengthy process that can take more than a year, and the actual construction of export facilities only comes after that – with the politicians wanting their cut standing in the way.  On the other hand, Cheniere is nearing completion of its first two trains and will be selling LNG by 2015.

PeterPham8 has no position in any stocks mentioned. The Motley Fool recommends Dominion Resources, Inc. and Total SA. (ADR). The Motley Fool owns shares of ExxonMobil Corp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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