Cheniere Energy: How Attractive Is The Industry's Outlook?

| About: Cheniere Energy, (LNG)

The Freeport LNG terminal recently received a conditional approval for the export of natural gas from the Department of Energy (DoE) as the sector gears up for some significant development. The glut of natural gas in the U.S. following the massive shale gas boom has made exports of the commodity more lucrative. Markets were already expecting positive developments, particularly after President Obama indicated his support for exports of natural gas when he said earlier that the U.S. could become a net seller of LNG in the next seven years.

So far, Cheniere Energy's (LNG) Sabine Pass terminal has been the only other facility to have received a conditional approval for exports of up to 2.2 billion cubic feet/day about two years ago.

The Freeport LNG terminal is partly owned by the energy firm ConocoPhillips (COP) and the chemical giant Dow Chemical (DOW). The approval still requires a permit from the Federal Regulatory Energy Commission (FERC) hence it is still "conditional". In the near future, these companies will be able to export natural gas from Sabine Pass and Freeport to those countries that do not have a free trade agreement with the U.S., which includes some of the biggest buyers of LNG.


The Freeport LNG project proposed to add liquefaction infrastructure at the existing facility to export gas of 2 billion cubic feet per day. The $10 billion project will have three liquefaction trains. The management was expecting the DoE's approval in "early-2013", which has happened now. The next step involves getting an authorization from FERC, which is expected in the third quarter of the current year, after which the construction work will begin immediately. This can take from four to five years which means that the project could be operational by 2017.

Cheniere gearing up for exports

Cheniere Energy, the parent of Cheniere Energy Partners which is the operator of the coveted Sabine Pass LNG terminal, leads the U.S. LNG export race. The terminal is located just about four miles from the Gulf Coast. In its quarterly earnings report released about two weeks ago, the business missed both top and bottom line estimates amid increasing expenditure on the development work. Cheniere reported a loss per share of $0.54, which missed analysts' estimates by $0.34. Revenues came in at $65.9 million, $8.9 million short of estimates.

Cheniere is developing six trains at Sabine Pass of which the first four have received all the necessary approvals from FERC and DoE. Construction work on the first two trains has been completed while the third and fourth trains will be ready by the first half of 2013. The first two trains will begin operations by 2015-16 while the third and fourth trains will start operating a year later (i.e. 2016/17).

For the fifth and sixth trains, the DOE authorization process has been initiated and the company expects to receive the FERC's authorization to begin construction of the two trains in the second half of 2014. The last two trains will begin operations by 2018.

LNG: Stock Update

Cheniere has recently been given a price target of $38 by Credit Suisse. Barclays Capital raised its target to $32 from $28 while on 16th April, BB&T issued a buy rating with a target of $33. On the other hand, Zacks has downgraded the stock to "neutral" and given a price target of $31.60. The company's shares are currently hovering around $30.50 and have been up more than 97% in the last six months. I believe that a hold rating is appropriate at the moment.

Industry Outlook

Analysts from Morgan Stanley believe that U.S. could export 6.5 billion to 8.5 billion cubic feet of natural gas per day by 2020. The American Petroleum Institute (API), energy firms, particularly Cheniere, and the midstream companies have been lobbying for the LNG exports. I believe that in the coming years, by the middle of 2016, we could witness two more conditional approvals, otherwise the exports won't be able to touch the low end of market's expectations. Morgan Stanley believes that by 2020, three other LNG export projects - Cameron LNG, Lake Charles and Cove Point - will also be exporting natural gas.

The global demand for natural gas in 2011 was 32 billion cubic feet per day, so it is safe to assume that it is significantly more now. The U.S. export terminals will be supplying only a small part of the overall demand. However, this won't be an easy ride. The American LNG exporters will face intense competition in the international markets as dozens of leading players are betting on the rising energy demands from Asia Pacific. Currently there are more than 60 new LNG export terminals being developed around the world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.