Cheniere Energy (LNG)(CQP) just got approval to turn its Sabine Pass terminal into a LNG export facility. This will take a $10 billion investment. The greatest doubt here is: Who will lend it the money?
Why do I ask? Cheniere did what was probably the greatest blunder of the last decade in the natural gas (UNG) market: in the very midst of a temporary boom in natural gas prices that took natural gas $15/mmBTU in December 2005, Cheniere decided to build a facility made for importing natural gas - the Sabine Pass terminal. After years of hard work and monstrous investments - Sabine Pass finally opened … in April 2008. Luckily, natural gas prices were again on a mini-boom, pricing at that time around $11/mmBTU. But we were already in the middle of the natural gas shale boom, and since then natural gas prices did little but fall, and then fall some more, to $2.00 today.
The end result was predictable. $3 billion in debt, $1.26 billion in accumulated losses, negative shareholder equity (source: 10-K). It was perhaps the biggest mistake in the last few decades in this market, made by a starry-eyed company looking at a market beating records to the upside and mired in shortage talk.
So what do they do now? In a market mired in a glut and with talk of endless natural gas supplies, they turn around and decide that now's the time to invest in a $10 billion export terminal. Sure, it seems appealing; natural gas is trading as high as $9.35/mmBTU in Europe, today. But will it last? There could be doubts, not only will demand increase back in the U.S., due to coal substitution, possible uses of natural gas in transportation and increased industrial use, but shale gas wells have very steep depletion rates and their economics might not be as favorable as once though. Natural gas rigs are already being pulled from the market, and it's not impossible that within a few years the market will find equilibrium a lot higher than it presently trades. It would be ironic for Cheniere to do the same mistake, twice (though, truth be said, then it will be able to import or export)
So, who will finance this adventure? Presently, Blackstone (BX) seems to already have signed up for $2 billion, so it's $8 billion to go. The $2 billion will be in CQP units and will be PIK (Pay In Kind) until the terminal opens for business (estimated 2016). A few things about this are amazing:
- It's financing for a project that's betting on one extreme, after the same entity blundered on a bet on the opposite extreme. A long lead-time project betting on the continuance of an extreme observable today all by itself probably has a lower probability of working out;
- PIK is back! Though, truth be said (again), at least in this project it seems to make sense;
- The entity being financed is already in dire straits because of the prior failure. I'm somewhat amazed that they didn't draw up a new entity to take the financing. This means this investment will have both to pay for the prior failure, and for this investment. CQP is already carrying $2.2 billion in debt and a $0.5 billion partner deficit (source:10-K).
Though the resulting terminal will find a way to make money, given that it will have import and export capabilities, this project will probably disappoint if its promoters are expecting natural gas to remain as cheap in 2016 as it is today. For those contemplating investing in the project, it's doubtful that the market won't provide much better opportunities to buy than those that exist today, given the speculation surrounding "an export terminal" when natural gas is so cheap.