Can Cheniere Cross All Hurdles?
Cheniere (ASE: LNG) grabbed the headlines when it clinched a deal with the BG Group to export 3.5 million tons of LNG from its Sabine Pass terminal. The news came as a blessing not only for Cheniere, which had been incurring losses for the past 13 years, but also for the U.S. natural gas industry that has a glut of supply. Now, Cheniere has to find a way to manage the steep cost involved in building the export terminal.
Cheniere Energy Partners (ASE: CQP) , a subsidiary of Cheniere, has hired Bechtel Group to design and build the first phase of the export plant at the Sabine Pass terminal in a contract worth $3.9 billion. After the first phase is completed, the plant will have an annual capacity of 9 million tons. Total cost for the project is estimated to be between $4.5 billion and $5 billion. This will increase the per-ton capacity cost to $555, up by 39% from the company's previous estimates. And the list does not end here.
Cheniere operated an LNG import facility in the U.S., but a glut of supply owing to increased production from shale fields turned it into a loss-making project. Cheniere had to take a lot of debt to sustain the facility and is now reeling under a financial burden. A walloping debt burden of about $3 billion is staring Cheniere in the face, and it includes a payment of $298 million due in May 2012. The company also reported a 19% decrease in cash and near cash equivalents to $131.3 million in the quarter ending Sept. 30.
The silver lining
The Herculean construction cost, coupled with a dip in cash and near cash equivalents, has brought Cheniere on the verge of default and made it absolutely necessary for the company to refinance its debt, especially for the May repayment. Cheniere is banking on the BG deal to secure refinancing. The other good news for Cheniere is that Chesapeake (NYS: CHK) has agreed to supply 500 million cubic feet per day of natural gas to the Sabine Pass project. So, at least now the company has a solid buyer and a supplier in place, which may instill some confidence in investors.
The enormous demand for natural gas from Europe and Asia, along with higher prices compared with the U.S., offer quite lucrative prospects for U.S. natural gas firms. Behemoths like ExxonMobil (NYS: XOM) and Shell (NYS: RDS.A) (NYS: RDS.B) are already toying with the idea of exporting LNG from their North American operations to these two continents. The bumper LNG supplies in the U.S. have put Uncle Sam on the path to becoming a major LNG exporter.
With the U.S. already having enough reserves -- and thus supply -- to cater to international demand after fulfilling domestic needs, more and more export facilities like Cheniere's are expected to emerge. With Cheniere already building one and sitting pretty with a 20-year contract, it is expected to enjoy the first mover's advantage. The only obstacle in its way is the huge debt burden. I am hoping the company is able to cross it. What say you, Fools?
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At the time this article was published Fool contributor Amitabha Chakraborty does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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