Wednesday, November 19, 2014

Why Cheniere Energy Is Insulated From the Oil Price Slump

This article was originally published by TheStreet on October 17, 2014
NEW YORK (TheStreet) -- Cheniere Energy (LNG) , the first U.S. company to receive regulatory approval for export of liquefied natural gas to countries that do not have a free trade agreement with the U.S., is largely protected from tumbling oil prices. Yet its stock has suffered along with other energy shares in response to weakening oil prices.

Cheniere stock may be being penalized for the company's investments in infrastructure as well. Houston-based Cheniere is spending more than $30 billion on building two facilities at Sabine Pass, La., and Corpus Christi, Tex. Those facilities house a total of nine LNG trains, or processing plants, and can be used to ship 40.5 million tons of fuel each year. The first four trains at Sabine Pass have already received regulatory approval, while the final two are forecast to get the green light by 2015, the company said in a presentation last month.
As for its Corpus Christi plans, Cheniere has received an encouraging response from the regulatory agency last week, saying that the plant won't have any significant negative impact on the environment.
Cheniere expects to begin construction in Corpus Christi in the beginning of 2015, the company's spokesperson said in an email to TheStreet. It expects to start up the nine trains gradually through 2016, beginning with the first two trains at Sabine Pass in 2015.
Yet Cheniere stock has fallen more than 20% from its 52-week peak in September. Shares are still up 58% for the year to date, closing at $68.20 on Thursday.
Goldman Sachs analyst Steve Sherowski said in a report that the price dip was due in part to "fundamental concerns" over the impact of weakness in "lower crude-linked LNG prices on marketing margins." Oil futures for Brent and WTI crude have fallen by more than 13% each over the last four weeks, touching multi-year lows. Crude oil futures even touched prices below $80 a barrel briefly on Thursday.
Oil price fears, however, might be overblown in this case. Cheniere's spokesperson said the company is largely insulated from commodity price risk, as a majority of its volumes are underpinned by 20-year agreements.
Sherowski agrees and has estimated that around 70% of Cheniere's proposed "capacity is committed to under long-term take-or-pay contracts."
Cheniere's Asian and European buyers, such as Korea Gas and Total (TOT) , are expected to continue purchasing LNG to meet the growing demand at home. 
The global demand for LNG imports is forecast to grow by 4.7% per year, equivalent to 17 million tons per year, between 2012 and 2030. Most of this growth, Cheniere said in the presentation, will come from Europe and Asia, where combined demand is set to double between 2015 and 2030.
To profit from this trend, Cheniere -- as well as its peers Dominion Resources (D) and Sempra Energy (SRE) -- have received regulatory approvals to export LNG. But Cheniere has the "first mover advantage," Sherowski said. Dominion's Cove Point LNG terminal and Sempra Energy's Cameron LNG facility could begin operations by as early as 2017, giving Cheniere a two-year head start.
That said, even if a contracted buyer decides not to purchase natural gas, Cheniere's spokesperson said, that buyer will still be contractually obligated to pay the fixed fee. In a typical contract, Cheniere prices its output at 1.15 times the Henry Hub-indexed gas price, as well as a fixed fee and shipping charges.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.