I recently got an email from (a reader) who posed a very interesting question. Take a look:
I bought a nice position in CQP. It is not clear to me if they are in a position to benefit earnings-wise from future expansions of the business. Is a future dividend increase in the cards? ~Harry M.
The broadening initiative to export liquefied natural gas (LNG) from the U.S. to Europe and Asia has put a few companies in the spotlight.
Cheniere is certainly one of them.
With Cheniere, we have both the company pioneering the LNG exports (Cheniere Energy, or LNG), and the partnership controlling the company's Sabine Pass terminal on the Gulf of Mexico at the border between Louisiana and Texas (Cheniere Partners, or CQP).
My Energy Advantage subscribers will tell you – we're always discussing the new age of natural gas, the impact LNG trade will have on profitability, and the position of Cheniere in this process. And CQP is just one of the high dividend/high return stocks I have identified for them.
As you probably already know , LNG is a major remedy for the accelerating glut of American and Canadian unconventional production, which runs the risk of over-saturating the market and depressing prices. (See "A Solution for America's Natural Gas Surplus," November 2, 2010.)
Exporting the gas, on the other hand, taps into a widening international demand and carries the prospect of actually improving profitability for gas producers in North America, even while the domestic need for the energy does not keep pace with the rising supply.
In so doing, U.S. and Canadian producers are simply paralleling developments already in place with major projects in Australia, New Guinea, Russia, and above all Qatar – the first dominant gas producer in the world to commit all of its exports to LNG shipping.
This worldwide trend has led to the transformation of the LNG trade from import to export.
As recently as five years ago, we were still talking about importing more LNG into the U.S., as our conventional production declined.
Now with shale gas (along with coal bed methane and tight gas), the unconventional sources are providing more available gas than we ever imagined.
The issue now is how to export the surplus gas.
Enter Cheniere's Sabine Pass terminal.
Getting the Gas Around the Globe
This terminal is a modular facility that increases its footprint as major long-term contracts are signed.
Cheniere has also received the first blanket permission from the U.S. Department of Energy to export LNG to any country in the world not on a sanctions list. It has responded by lining up big deals with some of the world's largest LNG importers – either for straight sales or contract swaps.
Now, the downside to this has been the heavy debt load Cheniere is carrying, currently at $3 billion, combined with a price tag more than twice the actual building of the terminal.
Both refinancing the debt and building the facility will require new finance. And that is likely only if contracts are secured.
Of course, several of these have emerged this year, including just last month, when we got word of a very significant agreement with London-based BG Group worth $8 billion over 20 years.
Either way, the export of LNG from North America is no longer up for debate.
Canada has already revised the LNG terminal under construction at Kitimat on the British Columbian coast from an import to an export location (siphoning off some of the rising volume from the major Horn River and Montney shale gas plays in northern BC and Alberta).
In the U.S., Dominion Resources Inc. (NYSE:D) runs the Cove Point, Md., LNG receiving terminal – the largest on the East Coast. Recently, the company applied to retrofit half of the facility for the export of LNG. Once the upgrades are complete, Cove Point will be the exit to Europe for rising volume from the Marcellus Shale play.
Here is where the combination of capital appreciation in share value and dividends are likely to make a nice return. It also gets me back (finally) to Harry's question…
A Double Return for Investors
Cheniere Energy is a straight share price play. It pays no dividend. However, its value will increase with each major contract Cheniere signs.
And the BG Group contract certainly did that. The stock is up 127.6% in one month, as of open today.
Cheniere Partners has also increased in value (21.4% in the last month). But unlike Cheniere Energy, though, CQP also carries a hefty dividend – currently 10.3% annualized.
The high dividend is the result of how the partnership is structured. Under law, CQP must pass all profits – without any corporate tax imposed – directly on to the partners.
When the partnership has also spun off an equity issue, the portion of profits represented by the stock comes to shareholders directly as a high dividend.
Take my word for it: The LNG export market will only be increasing.
That means playing both ends of the Cheniere picture can provide a nice pop in share value, and a nice dividend.
So yes, Harry, the CQP dividend will stay high.
And so long as the partners choose not to issue any additional shares, that dividend should be going up, too.