At first glance, Cheniere Energy Partners, LP (CQP) seems to exhibit little to get an income investor excited. The quarterly distribution gives a current yield of 6.8%, but the rate per unit has not changed in the five-year history of the partnership. MLP stocks with 7% yields are not difficult to find, and many have a history of increasing distribution rates. However, Cheniere is taking the first steps to reverse its business model to take advantage of the significant shift in natural gas production and prices in the U.S.
The assets of Cheniere Energy Partners consist of 100% ownership of the Sabine Pass liquid natural gas - LNG - terminal. Cheniere Energy Partners was spun off by Cheniere Energy (LNG) in 2007 to own the LNG terminal, which was under construction at the time. The Sabine Pass LNG terminal became operational in 2008. The terminal was built to receive, store and re-gasify liquid natural gas being imported into the U.S. Cheniere Energy owns the Cheniere Creole Trail pipeline, which connects Sabine Pass to the national natural gas pipeline network. Cheniere Energy also owns the general partner interest and 84% of the L.P. units of Cheniere Energy Partners.
It took until the end of 2009 for Cheniere Energy Partners to reach a cash flow generation level that covered the quarterly distribution. Long-term contracts with major energy company partners have resulted in relatively steady revenue and cash flow for the company - which has been reflected in the steady 42.5 cent quarterly distribution.
Shifting Gears from Import to Export
The whole business idea behind the Sabine Pass LNG terminal - importing LNG to cover expected natural gas supply needs in the U.S. was upended by the shale gas production growth in the U.S. over the last half-decade. Bringing in LNG from Australia or Europe is no longer a profitable business. The U.S. now has excess production capacity of cheap natural gas.
In mid-2010, Cheniere Energy put plans in motion to convert the Sabine Pass terminal from a LNG re-gasification facility for imported LNG to a gas liquefaction facility for the export of LNG out of the U.S. Final approval for the construction of the first two of four liquefaction trains was just issued in August 2012. The complete conversion project is expected to cost $5.6 billion and the first LNG from Sabine Pass will be ready for export in 2015.
Long Term Potential - If it Works
The new business paradigm for Cheniere is that the world will need/want more clean burning natural gas as facilities currently burning coal or crude oil based fuels convert to natural gas. Outside of the U.S. natural gas fetches significantly higher prices than the U.S. market rate. Liquefying the cheap U.S. gas and shipping it out to places where they pay four to five times as much makes a lot of sense.
Cheniere Energy Partners plans to spend $5.6 billion to build the four gas liquefaction trains on the Sabine Pass site. When the full facility is up and running - expected in 2017 - the terminal is forecast to generate EBITDA of $2.8 billion per year. For comparison, the partnerships best revenue year to date was $417 million in 2009. As construction gets under way in the second half of 2012, Cheniere has about 90% of the future LNG production already contracted out. The Sabine Pass natural gas liquefaction facility will be the first one in the U.S.
Processing inexpensive U.S. natural gas to high value LNG and shipping it around the world seems like a winning formula for Cheniere Energy Partners. The challenge when looking at CQP as an investment is the long timeframe before the fruits of spending $5-billion-plus will be realized. This company is not a $30-billion company backed by a $40-billion parent like Kinder Energy Partners (KMP). If Cheniere is not able to get the new facility built as planned, the results could be bad for investors.
Cheniere Energy Partners should be viewed as a speculative investment - one that pays a 6.7% dividend while you wait. You can see from the two-year price chart - since the new project was announced - the share price has swung significantly. It is very probable that opportunities will arise when shares of CQP can be had for less than $20 between now and 2015. If the company's projects start to experience delays or cost overruns, it will be time to dump the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.