Cheniere on the cusp of LNG export boom
The Sabine LNG export terminal approval is a watershed event.
By Aaron Levitt
America's new-found love affair with hydraulic fracturing has unearthed an abundance of natural gas and shale oil.
Inventories of both resources continue to build at a record pace, and the idea of the U.S. breaking the yoke of foreign imported energy suddenly seems to be within reach. With a potential future of "energy independence" within our grasp, investors are finding that a variety of opportunities are starting to present themselves.
In InvestorPlace's series about the country's journey toward energy independence, we've begun examining some of the potential plays and pitfalls along the road. Already, we've taken a look at the most important piece of that puzzle: moving all of that energy around through improved logistics infrastructure. Second, we investigated one potential application for all that natural gas: using it to fill up our tanks.
There's yet another potential use for all of the natural gas -- and it just won a major battle. By exporting our bounty, the U.S. has the potential to improve its trade deficit, create thousands of jobs and generate meaningful taxable profits -- all while reducing our dependency on foreign energy.
For investors, the opportunity to participate in the next step on the road to energy independence could mean significant profits down the road.
A critical approval
The U.S. is now on the cusp of becoming the world's largest exporter of liquefied natural gas, surpassing leading LNG exporters Qatar and Australia by 2017. How's that?
After receiving a license from the Department of Energy back in May 2011, Cheniere Energy's (LNG) Sabine Pass LNG export facility last Tuesday cleared the final stages of government approval -- surviving a backlash from anti-fracking advocates that had threatened to turn Sabine into a political football, much like the Keystone XL pipeline.
The Federal Energy Regulatory Commission OK'd the construction of Cheniere's $10 billion terminal in Cameron Parish, La. The facility, which will chill natural gas down to -260 °F and convert it to a liquid that can be shipped via tankers, opens up the potential for U.S. producers to export natural gas overseas for huge profits.
Construction is expected to begin this year, with partial operations coming online between 2015 and 2016. Cheniere, through its Cheniere Energy Partners (CQP) subsidiary, has lined up $4 billion in loans to help pay for the project. That includes a $2 billion commitment from private equity firm Blackstone (BX).
The Sabine Pass facility was originally built as an import terminal designed to alleviate future projected U.S. natural gas shortages. Insert irony here. Then the shale gas revolution completely changed the equation. The terminal will now compete with LNG producers in places like Indonesia and Yemen as well as Qatar and Australia, which charge customers in Asia as much as 10x the price of U.S. supplies. Prices for natural gas in the U.S. have finally broken the $2 per 1,000 cubic feet mark.
While exporting a vital fuel may seem to run counter to an energy-independent future, it looks like the U.S. can have its cake and eat it, too. Cheniere CEO Charif Souki estimates that the U.S. will be exporting around 4 billion cubic feet per day by 2022. That number should ramp up to as much as 15 bcf a day by 2027. However, the country currently produces over 65 bcf a day.
So, the future export projections are equivalent to only about 15% of current domestic production capacity. Despite the increasing demand for natural gas from the petrochemical industry, power plants and potential compressed natural gas transportation needs, plenty of gas will be available for export.
Not to mention the potential countless job benefits and improved trade balances. Some analysts estimate that exporting around 13 bcf of LNG per day could generate as much as $45 billion annually for the U.S. That certainly goes a long way meeting those goals.
Playing North America's exporting future
Cheniere's first-mover status has without doubt cemented the company as the go-to play in the sector. Shares of the company, which could be had for $4 as recently as last September, are now selling for more than four times that. Following the FERC approval announcement, they hit a four-year high. Not too bad for a company that Standard & Poor's last October said was close to defaulting due to a lack of demand for its gas-importing services.
While the shares still have risk -- and are nowhere near their $40+ level of 2007 -- the recent FERC approval certainly improves Cheniere's outlook. The company has continued to rack up purchase agreements for its gas and remains the top draw in the sector.
However, Sabine's approval could also open the flood gates for other new exporting facilities. Several companies with import terminals are following Cheniere's lead and applying for export permits.
Sempra Energy (SRE) recently announced its plans to develop a $6 billion liquefaction terminal at its existing facility in southwestern Louisiana. Also catching the Bourbon Street bug is Energy Transfer Equity (ETE). The company has filed for federal permission to build an export facility at its import terminal at Lake Charles, La. Given the recent Sabine approval, these companies could see their LNG fortunes rise in the near future.
At the same time, I've already highlighted Chicago Bridge & Iron (CBI) as a top way to play the growing pipeline construction binge and need for improved energy infrastructure. The company also happens to be one of the largest LNG export/import terminal construction companies in the world. Investors could get a two-for-one deal with shares of CBI.
Overall, perhaps analyst Neil Beveridge at Sanford C. Bernstein & Co. said it best when he wrote of Sabine's approval: "The dawn of North American LNG has arrived. North America will become a major new LNG exporting region."
The Sabine Pass endorsement is one of the first major steps in bringing that future to fruition.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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