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Cheniere Energy Inc. (LNG), through its subsidiary, is currently in the process of developing and constructing the Sabine Pass Liquefaction plant, which will be largest liquid natural gas plant in the U.S. being built for the purpose of exporting liquid natural gas to realize higher prices being offered in markets like Asia. For this purpose, the company has acquired more than $5 billion financing in 2012 to date.

Industry

The U.S. has witnessed a boom in the supply of natural gas in the last few years. This has been made possible with the introduction of hydraulic fracturing and horizontal drilling, which have made it economically viable to produce shale gas. However, this abundance of natural gas has been landlocked in the U.S. due to a lack of liquid natural gas production facilities to export the fuel to markets offering higher prices.

This increased supply and lack of exports has been the reason for the slump in natural gas prices in the U.S. for the past several years; causing prices to drop to $2/mmbtu, the lowest rate witnessed in the past decade.

Liquefied Natural Gas is natural gas converted to a liquid form through a refrigeration process. In a liquid state, Liquefied Natural Gas takes about 1/600th of the volume occupied in gaseous form. It remains in a liquid state at a temperature of -160C* (-260F*) at atmospheric pressure.

The price of liquid natural gas in Asia is approximately $16/MMBTU; the high prices are driven by the strong demand from the region. Export of liquid natural gas is beneficial for the U.S. economy and the producers of natural gas.

Company Overview

Cheniere Energy Inc. is a Texas-based energy company involved in the liquid natural gas business. The company has three business segments, including Liquid Natural Gas Terminals, Natural Gas Pipeline Business and Liquid Natural Gas and Natural Gas Marketing Business.

Cheniere Energy Inc. owns an 88.8% share in Cheniere Energy Partners L.P (CQP), which is a publicly traded company. CQP owns and operates the Sabine Pass Liquefaction plant.

Financial Performance

As can be seen in the table below, Liquid Natural Gas Terminal revenues increased 2% and 58% in 2011 and 2010, as compared to the previous year, which was primarily a result of increased LNG export loading fee revenue. The Marketing and Trading revenues increased 135% in 2010 and witnessed a decline of 29% in 2011 as compared to the previous year. Oil and gas sale decreased 10% in 2011 and remained flat in 2010 as compared to the previous year. Revenues decreased to $71 million in 1Q2012 as compared to $79 million in the same period last year.

2011 ($)

2010 ($)

2009 ($)

LNG terminal revenues

274,272

269,538

170,071

YoY change %

2%

58%

-

Marketing and trading revenues

13,554

19,022

8,087

YoY change %

(29%)

135%

-

Oil and gas sales

2,568

2,858

2,866

YoY change %

(10%)

(0%)

-

Other

50

95

102

YoY change %

(47%)

(7%)

-

Total revenues

290,444

291,513

181,126

YoY change %

0%

61%

-

Source: 10K

As is evident from the table above, LNG Terminal revenues contributed more than 90% of revenues for Cheniere Energy.

2011 ($)

2010 ($)

2009 ($)

Interest Expense

(259,393)

(262,046)

(243,295)

YoY change %

(1%)

8%

-

Net loss

(198,756)

(76,203)

(161,490)

YoY change %

161%

(53%)

-

Net loss per share

(2.60)

(1.37)

(3.13)

Source: 10K

The company has been reporting losses, as can be seen from the table above, due to the company's high interest expense. The company's income showed an improvement of 128% in 2010 as compared to 2009, due to a gain on sale of equity method investment. However, earnings deteriorated by 90% in 2011. The company reported a net loss per share of $0.43 for 1Q2012 as compared to $0.60 for 1Q2011.

Cash Flow and Liquidity Issues Faced by Company

2011 ($)

2010 ($)

2009 ($)

Net cash used in operating activities

(42,764)

(16,920)

(97,857)

YoY change %

153%

(83%)

-

LNG terminal & pipeline construction in process

(8,934)

(4,223)

(112,317)

YoY change %

112%

(96%)

-

Source: 10K

The company's cash flow from operations is in negatives, and after showing some improvement in 2010, it deteriorated again in 2011. As can be seen above, the company's investment in LNG Terminal & Pipeline construction decreased drastically in 2010, while it showed some improvement in 2011; it is still way below the expenditure incurred in 2009.

The decreased cash flow from operations in 2011 was due to the increase in costs incurred to develop the Sabine Pass LNG Terminal. The cash flow from operations improved in 2010, as the company began receiving capacity reservation fee payments from Total (TOT) and Chevron (CVX).

The company issued shares worth about $467 million in 2011 to meet its liquidity requirements. The financial position of the company is weak, nevertheless, LNG's future catalyst is the Sabine Pass Liquefaction plant, as mentioned below.

Sabine Pass Liquefaction Plant

Cheniere Energy Inc. won an approval to build the Sabine Pass Liquefaction plant, which will be the largest liquefied natural gas plant in the U.S. built for the export of excess natural gas, after conversion to liquid natural gas. The total cost of the project is expected to be $10 billion and it will be completed by 2015. The total output of the plant will be 18mtpa.

Sale of $2 billion Equity Stake

Cheniere Energy Partners announced in May that it had decided to sell a $2 billion equity stake to Blackstone ($1.5 billion) and Cheniere Energy Inc. ($.5 billion). The funds obtained from the equity sale are to be used for funding the development and construction of the Sabine Pass LNG liquefaction project, purchase and modification of the Creole Trail Pipeline from Cheniere Energy Inc., and other business purposes.

Lender Commitments for Sabine Pass Liquefaction

CQP announced that it had acquired $3.4 billion in firm commitments for the Sabine Pass Liquefaction project.

Secondary Offering

LNG announced that it was offering 28 million shares through a secondary offering at a price of $14.05/share. It also announced that it would use the proceeds to repay $204.6 million principal amount outstanding of 2.25% convertible notes due on August 1, 2012

Outlook

The company's financial position has improved significantly with the sale of the equity stake and the lender commitments it has gotten for the development and construction of its Sabine Pass Liquefaction plant. The company is expected to benefit significantly through its position to be able to liquefy the cheaply available natural gas in the U.S., and sell it in international markets at a significant premium.

However, the secondary offering by the company to repay convertible notes maturing on August 1, 2012 is a cause for concern.

The company has already signed contracts to sell 90% (16mtpa) of its output of liquid natural gas to buyers in the U.K., Spain, India, and South Korea.

CQP, the subsidiary of Cheniere Energy Inc. that owns and operates the Sabine Pass Liquefaction plant, offers a dividend yield of 7.3%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Buy Cheniere Energy: Natural Gas Exports Present A Huge Opportunity