Counting on LNG Exports

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The shale gas boom in North America brought with it a natural gas production bonanza, which was subsequently followed by the commodity's plunging prices. But Asian countries were not so lucky, and natural gas still costs over $12 per mmBtu there. According to a recent report, Asian demand for LNG accounted for 67% of the world's LNG imports in 2011.

The report also stated that due to higher energy demand, even LNG exporting nations (such as Indonesia and Malaysia) might be required to import LNG. Naturally, exporting natural gas to Asian countries would be a logical move, but the shortage of gas liquefaction capacity in the US prevents this. But Cheniere Energy’s (NYSEMKT: LNG) Sabine Pass is the only project that was able to procure necessary permissions and approvals by the Energy Department and FERC.

The Numbers Game

According to this source, "The company reported ($0.19) EPS for the quarter, beating the Thomson Reuters consensus estimate of ($0.26) by $0.07. The company had revenue of $67.42 million for the quarter, compared to the consensus estimate of $71.50 million."

The company also repurchased its $550 million worth of 7.25% Senior Secured Notes due in 2013, and issued $420 million worth of 6.5% Senior Secured Notes due to in 2020. This early repayment led to savings of up to $12.5 million. In order to meet the developing costs, the company recently issued $1.5 billion of 5.625% Senior Secured Notes, which will be due for repayment by 2021. By 2017, its Sabine Pass Terminal is expected to be fully operational, and I don’t think that the company will have any sort of debt related worries.

Opening to the Developing World

Cheniere Energy announced that in October, the US Department of Energy authorized it to export around 15 million mtpa of LNG to countries that had Free Trade Agreements (FTA). The US has a strict policy that allows exports to only FTA countries. But the Obama administration made an exception this month, when it permitted LNG exports to India (which doesn’t have an FTA).

According to news sources, state-run GAIL India got the permission to ship 3.5 mmpta of LNG from the Sabine Pass Terminal. Naturally Cheniere Energy stands to benefit here, but the Indian government is pushing the US administration to further relax its export policy. Since the US is already struggling with its trade deficit, I think more relaxations might be around the corner, and seeing as Sabine Pass is the leading LNG exporter it would be its prime beneficiary.

Buzz on the Street

Foreseeing the rising energy demand and the need for cleaner fuels, Eni (NYSE: E) and Anadarko Petroleum (NYSE: APC) are developing the world’s second largest LNG export terminal in Mozambique. The hydrocarbon rich reserves in the region are being considered as one of the greatest gas finds ever, but even then the demand for natural gas is estimated to outpace its supply. This leaves room for both the Sabine Pass and Mozambique projects to operate with mutually exclusive clients and still thrive in the market.

According to its public announcement, Eni plans to spend about $50 billion on the project, but neither Anadarko nor Eni have deep enough pockets to fund such an ambitious project. As a result, Anadarko has decided to sell its 10% stake, and Royal Dutch Shell (NYSE: RDS-A) seems to be interested in purchasing it. But since Eni owns nearly a 70% stake in the project, it might be also willing to sell a part of its share to Royal Dutch Shell.

Company

Cash and Cash Equivalents

Debt/Eqity

Eni

$7.34 billion

39.8%

Anadarko Petroleum

$2.47 billion

60.4%

Royal Dutch Shell

$18.84 billion

19.4%

Royal Dutch Shell has huge cash reserves, along with low debt/equity levels. The company is known for its expertise in LNG development, and the management of Eni believes that Royal Dutch Shell could be a great partner.

Conclusion

I think Cheniere Energy only has upside to offer. As the completion date for Sabine Pass approaches, it would be able to secure more willing buyers. The company may not have the best set of financials or fundamentals, but I think the Sabine Pass terminal would be enough to stage a complete turnaround for the company. I think Cheniere Energy is worth a buy rating.


PiyushArora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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