Until recently the outlook for Cheniere Energy Partners LP (CQP) was somewhat shaky, but with the signing of three new multi-billion dollar deals two in Oct and one in December, it looks like CQP has pulled a Houdini and managed to escape the guillotine; in fact, things are looking downright positive for CQP right now; a gain of 67% from its October lows is clear evidence of this. Without these deals, it would have had a hard time securing financing for some of it debt, which is coming due in May 2012.
Cheniere Energy Partners, in which LNG has a 90.6% ownership interest, owns and operates the Sabine Pass Terminal in Louisiana. CQP initially built the Sabine Pass liquefaction plant to import natural gas. The US was a net importer of Natural gas until production from the Shale fields suddenly exploded in 2010, which led to a collapse of natural-gas prices and destroyed CQP's business model. With such a glut of natural gas, it made no sense to import natural gas and store it. As a result of this sudden turn around CQP started to haemorrhage, but the new deals now provide it with an incredibly strong chance to turn around and start booking profits in the not too distant future. The U.S. has nearly 100 years worth of supply of natural gas based on current demand. Natural gas fetches much higher prices in Europe and Asia; in Asia, prices are north of $14.
The Sabine pass project sits on 853 acres and will have an initial capacity 9 million tonnes, but CQP has already received approval from the U.S Department of Energy to build up to 16 million tonnes capacity. Construction of the liquefaction facility at the Sabine Pass is scheduled to start in 2012 and will be completed in 2015.
Let's take a look at the 3 new deals
Cheniere Energy Partners L P entered into two multibillion dollar contracts one with the BG Group this October valued at $8 billion to supply 3.5 million tons per year of LNG from its Sabine Pass Liquefaction project. The second deal was signed with Spain's gas Natural Fensoa for $9 billion to supply 3.5 million tons of LNG per year for 20 years with the option of extending it for another 10 years.
The third deal was signed with state-run Indian Energy Company Gail India Ltd to supply it with 3.5 million tonnes per year (mtpa) of LNG from Sabine Pass for 20 years starting in 2017. This deal is estimated to be worth at least $15 billion.
The BG deal translates roughly $400-$450 million in revenue per year. The deal with natural Fensoa is also good for another $420 -$460 million in revenue per year and finally the deal with Gail of India should generate even larger sums of revenue. This translates into roughly $1.3-1.6 billion a year in additional income. Once the Sabine facility is running at full capacity and the new plant scheduled to be build near corpus Christi Texas, is operational Cheniere Energy Partners could potentially earn up to $3 billion a year.
Other factors to keep in mind
- By 2035 China alone will consume more natural than all of Europe
- There is a huge price discrepancy between what natural gas sells in the US and what it commands in Asia and Europe. Given that the discrepancy is rather large it's fair to assume that US prices will slowly gravitate upwards as more companies get into the LNG businesses and start diverting US gas to the rest of the world.
- Cheniere Energy is already making plans to build a second LNG Export plant on the US Gulf coast (near Corpus Christi in Texas). This facility is expected to have a capacity of 1.8 billion cubic feet per day by 2017.
- Demand for natural gas in India is increasing in leaps and bounds as indicated by the deal inked out between Gail India and CQP.
Advantages of Natural gas
It is odorless, takes 1/1600th the volume when liquefied, is non corrosive, non toxic and has an energy density that is similar to petrol and produces significantly less pollution.
Key ratios on Cheniere Energy
It has a dividend yield of 9.30%, price/sales value of 10.70, a quarterly revenue growth (year over year) of -2.76% a total return of 377% for the past three years, and a levered free cash flow rate of $27 million.
- Price to sale 10.70
- Price to tangible book -5.82
- Price to cash flow 129.90
- Price to free cash flow - 85.80
- 5 year sales growth N/A
- Inventory turnover 9.30
- Asset turnover 0.20
- ROE N/A
- Return on assets 5.15%
- EBITDA 191.17M
- 200 day moving average $ 16.30
- Book value $-3.07
- Total debt $2.19B
- Operating cash flow 21.82M
- Levered Free cash flow 27.63M
- Dividend yield 5 year Average 15%
- Dividend rate $1.70
- Payout ratio 293%
- Dividend growth rate 5 year average ---
- Consecutive dividend increases 0 years
- Paying dividends since 2007
- Total return last 3 years 385%
Cheniere Energy will run into strong resistance in the 20.00-20.50 ranges and a failure to break past these ranges will most likely result in a re test of the 15.50-16.00 ranges. If this should come to pass it would make for a good entry point. A weekly close above 22.50 should lead to a series of new 52-week highs.
Other companies that stand to benefit from this deal
Once the construction of Cheniere Energy Partners natural gas liquefying plant is completed it will provide Midwest natural gas producers with a better option (closer) to get their natural gas to tankers headed for other nations. To get the natural gas to CQP, these companies will have to use pipelines to transport the gas. That's where Southern Union Company (SUG) and Targa Resources Partners LP (NGLS) come in. They both have major pipeline networks in the Louisiana area and if a producer wants to sell natural gas overseas there is a good chance that the gas will have to pass through one of these terminals. NGLS and SUG stand to earn more as the volume of gas piped through their terminal's increases. SUG and NGLS both pay dividends and sport yields of 1.5% and 6.4% respectively.
NGLS has enterprise value of $4.72 billion a revenue growth of 40%, a quarterly earning growth of 160%, a ROE of 16.37%, a three-year dividend growth rate of 7.03%, a five dividend average of 8.80%, has consecutively increased its dividends for four years in a row, has total three year return of 392% and has been paying dividends since 2007. It increased its dividend from $0.57 to $0.5825 and it has a levered free cash flow rate of $50.3 million.
- Price to sales 0.51
- Price to tangible book 2.71
- Price to cash flow 8.80
- Price to free cash flow -9.10
- 5 year sales growth N/A
SUG has enterprise value of $9.62 billion a revenue growth of 26.6%, a quarterly earning growth of 55%, a ROE of 9.87%, a five-year dividend growth rate of 9.7, a five dividend average of 2.2%, has total 3 year return of 291% and has been paying dividends since 2006. It has a levered free cash flow rate of $111 million.
- Price to sales 1.98
- Price to tangible book 2.02
- Price to cash flow 11.20
- Price to free cash flow 40.40
- 5 year sales growth 0.60
Encana Corporation (ECA) also stands to benefit in the long run. It is one of North Americans largest producers of natural gas, only behind Exxon Mobil. In 2010, it produced over 1.2 trillion cubic feet of natural gas. Once terminals begin to open up in the west cost to export gas to the Energy hungry Asian markets, natural-gas prices should start to stabilize. As stated above, China will consume more natural gas than the whole of Europe by 2035, and it's entirely possible that China might get to this stage even earlier than projected. With the huge price natural gas commands in Asia, it's just a matter of time before there is an all out building spree of natural gas liquefying plants. Natural gas prices in Asia have traded as high as $15 per 1000 cubic feet of gas.
"We think that the prices are going to stay robust in Asia. You look today in Japan, it's still $13 US (per 1,000 cubic feet) over there," Mike Graham, who heads up Encana's Canadian division, told the Peters & Co. event. "In three to five years, when LNG really starts to pick up in North America, I think you'll see another renaissance in natural gas prices."
"China is going to consume just about all the natural gas that the world can give them. They've only got maybe (one billion cubic feet per day) of LNG now, but they're looking to put in 10 and even grow from there," said Graham.
"I think it's going to be very robust. I think it's going to have a tendency to pull oil prices down, and have a tendency to pull natural gas prices up. It does look quite likely that maybe a few years outbound, I think the forward curve will start to reflect LNG over the next couple of years and things will get a bit more robust soon."
ECA has enterprise value of $20.6 billion , a yield of 4.3%, a revenue growth of -0.3%, a ROE of 1.38%, a five-year dividend growth rate of 31.6%, a five dividend average of 3.9%, has total 3 year return of -19% and has been paying dividends since 1960.
- Price to sales 1.83
- Price to tangible book 0.92
- Price to cash flow 3.70
- Price to free cash flow -5.90
- 5 year sales growth -16.91
Chesapeake Energy (CHK)
The Cheniere deal should be a godsend to domestic shale gas production companies in the U.S; CHK is one of the most active in this area. It has operations in over 15 states and even though its an independent its by no means small. The company owns an interest in almost 46,000 wells of which approximately 39,000 were primarily gas produces. It has an average daily production of 2.6 billion cubic feet and 14.2 trillion cubic feet of reserves.
CHK has a yield of 1.5%, an enterprise value of $27.13 billion a revenue growth of 54%, a quarterly earning's growth rate of 65%, a ROE of 9.46%, a five-year dividend growth rate of 7.9%, a five dividend average of 1.42%, has total three year return of 50% and has been paying dividends since 1997. It has an operating cash flow of $4.87 billion and revenue of $10.88 Billion.
- Price to sales 1.41
- Price to tangible book 1.16
- Price to cash flow 4.90
- Price to free cash flow -1.40
- 5 year sales growth 6.10
Golar LNG Ltd. (GLNG)
As one of the world's largest independent owners and operators of LNG carriers, GLNG stands to benefit as demand for its services will increase in the years to come. They developed the world's first Floating Storage and Regasification Unit based on the conversion of existing LNG carriers and leads the industry with committed projects.
LNG shippers stand to benefit from growth in LNG regardless of the source; their function is to simply transport the product from the seller to the buyer. It has a fleet of 13 ships, of which four are Floating Storage & Regasification Unit (FRU); the nine vessels listed below are currently under dedicated time charter or available for spot employment. The FRUs are essentially existing LNG carriers that were converted into floating terminals that can be situated offshore or at a new or purpose-built jetty/pier. These floating terminals receive LNG from offloading LNG carriers and the LNG and the onboard regasification system provides gas send-out through flexible risers and pipeline to shore.
GLNG has a yield of 2.5%. an enterprise value of $27.13 billion a revenue growth of 10.4%, a very strong quarterly earnings growth rate of 232% , a ROE of 9.46%, a five-year dividend growth rate of 92%, a five dividend average of 7.2%, has total 3 year return of 500% and has been paying dividends since 2007. It has an operating cash flow of $161 million and revenues of $283 million. It recently announced a special dividend of $0.30 which was 3 cents higher than the last payment of 27 cents.
- Price to sales 15.58
- Price to tangible book 6.40
- Price to cash flow 58.80
- Price to free cash flow 23.30
- 5 year sales growth 4.35
While CQP will have to wait until 2015 to start reaping in the benefits of the above deals, investors still get paid a very handsome dividend to wait with the potential of locking in rather large capital gains as the stock could potentially trade north of 25 by then. As natural-gas prices are low, it is fair to assume that they will start to trend higher by 2015.
Cheniere started paying dividends in 2007; its first payment of $0.028 was made in April 2007, and after that the payment rose to $0.425 and has remained constant over the years. Despite the fact that its original business model to import natural gas into the US was destroyed, it never reduced these payments and sports one of the highest yields in the industry. With these signing of several new multibillion dollar deals and with another LNG plant scheduled to be build in Texas, the long-term outlook for this company looks very bright. The ideal strategy would be to wait for strong pullbacks to open up new positions.
All graphs were sourced from dividata.com
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is very important that you check the finer details, do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies: Let the buyer beware.