THURSDAY, APRIL 17, 2008
WEEKDAY TRADER EXTRA
Is Cheniere Energy Running Out of Gas?
By VITO J. RACANELLI | MORE ARTICLES BY AUTHOR
THE WOES OF Cheniere Energy deepened this week, as the stock has lost nearly half of its value since April 9. Shares were trading at 10.39 late Thursday.
Yet it's no time to jump into the shares of this Houston-based developer of liquefied natural gas (LNG) terminals: This stock could yet fall to the single digits, thanks to a darkening outlook for LNG importation, among other problems.
On Wednesday, Cheniere said it was in "advanced negotiations" for a proposed deal with a "major North American" gas marketer to manage the marketing of liquefied natural gas at its Sabine Pass regasification plant in Louisiana.
The proposed deal will eliminate Cheniere's need for capital for the purchase of LNG cargoes, and will allow Cheniere to reduce its investment in its U.S. natural-gas marketing unit.
Cheniere needs to do this because the LNG market has sharply deteriorated in the last 12 months, and that could get worse before it gets better, industry observers say.
Fewer LNG cargoes will be coming to plants like Sabine because of high prices elsewhere, and there's a growing glut of the kind of expensive facilities that the highly leveraged Cheniere has built.
The troubles Cheniere faces -- like a potential cash shortfall, a slowdown in the construction of overseas LNG production plants, and the displacement of LNG cargoes to Asia and Europe -- are potentially more serious than what investors have discounted, even after the latest drop.
Cheniere has other related businesses but its most important asset is Sabine Pass, which is costing $2 billion in the first phase.
Cheniere owns Sabine, which turns LNG back into gas, through a separately traded 91% holding in Cheniere Energy Partners. Sabine will process 2.6 billion cubic feet (Bcf) of natural gas per day at first, and will be expanded to four Bcf.
Cheniere has long-term contracts with Chevron and Total to send through two Bcf of gas, or only 50% of capacity, and that's not likely until next year at the earliest.
"The understanding a few years ago that 'if we build it, the LNG will come' was wrong," says Andy Flower, a U.K.-based independent LNG consultant and industry veteran.
Because of the high cost of liquefaction facilities -- several times that of regas terminals -- new LNG production supply hasn't come online as fast as previously thought and is not nearly keeping up with the regasification plant building, he notes. (see chart.)
Terrell Benke, manager of the upstream and gas group at corporate advisory group PFC Energy, adds that less LNG will arrive because much of that gas is coming from nations where political risk is high --Russia, Egypt, Iran, Venezuela, Nigeria, for example --and many of these nations are oil exporters who are increasingly keeping the natural gas at home to fuel their own growth.
"The average utilization of regas facilities will go down well into the next decade," she predicts. That doesn't bode well for companies like Cheniere.
Moreover, the U.S. Energy Information Administration, in an April report, said it expects LNG imports to drop to 680 Bcf this year, 12% down from last year's 770 Bcf and sharply lower than year-ago 2008 estimates (released in January 2007) of 1,080 Bcf imported this year. The 2009 estimate dropped to 950 Bcf from 995 Bcf.
Here's why: Stacy Nieuwoudt, an analyst with boutique investment bank Tudor Pickering, notes the U.S. has been paying about $8-$9 per million British thermal units (mmBTU) of gas, but it's been above 10 in Europe and in Asia more than twice that at times last winter. So Cheniere, or any company with whom Cheniere might strike a marketing deal, will still find a world price of $13 mmBTU, sharply above the U.S. price, making importation uneconomic in many cases.
Responding by e-mail, Cheniere spokeswoman Kim Hull wrote that there will be approximately eight Bcf per day of new liquefaction capacity online in the next 18-24 months, "and much of that supply will come to the U.S."
But it bears repeating that what LNG arrives in the U.S. will largely be determined by prices elsewhere.
Hull also argues that the overcapacity of LNG regasification facilities in the U.S. won't have a deleterious effect on the ability of Cheniere's or its designated marketer to get LNG cargoes to Sabine.
"LNG receiving capacity is built for peak periods in the market. On a seasonal basis, Sabine Pass LNG and other North American terminals will have either high utilization or low utilization -- this is how the market works."
Bernard Picchi, an analyst with Wall Street Access with a Sell rating on the stock, says the cost cutting announced will at least preserve the company until it can find a buyer, which is the best hope for the stock. In late February, Cheniere began to recognize its problems and said it was considering its options, including possibly selling part of the company.
Yet, if the 11 times Ebitda multiple from a recent sale in the industry is applied to Cheniere, its value would be around $2.5 billion, less than the face value of its current debt, about $2.8 billion. Certainly, Sabine has value, but who's going to pay top dollar for such capacity when so much is coming online? LNG terminal capacity in North America, where LNG regas capacity will jump to 22 Bcf/day next year from 5.8 in 2007, he says.
Picchi doubts "any buyer would be willing to pay Cheniere's current enterprise value of $3.4 billion. "If anything," he says, "potential buyers may be less interested in Cheniere now since the company seems on the verge of committing its remaining 50% marketing capacity to a third party." He puts Cheniere's value at $5-$10 in case of a buyer of Sabine.
Right now Cheniere's stock is still above that, but without huge and quick improvements in the LNG market, the ending to this story could get even uglier.
