CHENIERE ENERGY INC LNG S
November 26, 2010 - 3:54pm EST by
Siren81
2010 2011
Price: 6.20 EPS $0.00 $0.00
Shares Out. (in M): 56 P/E 0.0x 0.0x
Market Cap (in $M): 345 P/FCF 0.0x 0.0x
Net Debt (in $M): 670 EBIT 0 0
TEV ($): 1,015 TEV/EBIT 0.0x 0.0x
Borrow Cost: NA

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Description

 

Cheniere Energy, Inc., common stock is a likely terminal short with identified catalysts and multiple ways to win. A borrow is available in reasonable size at rates of about 4-5%.

By the company's own estimates, cash burn is $50mm/yr, total liquidity is $80mm and there is over $750mm of secured debt due in the next two years. Cheniere's stock has more than doubled in the last month on the hope that the company can build a plant to export liquefied natural gas (LNG). However, even if Cheniere can somehow restructure the $750mm of debt and obtain the required permits, contracts and over $3b of financing required to build export capacity, there is still little value left for common stock holders.

Company description
Cheniere Energy, Inc., owns 41% of the common interests and 100% of GP and subordinated equity of Cheniere Energy Partners, as well as the Creole Trail gas pipeline. Cheniere Energy Partners is a publicly traded (AMEX: CQP) MLP that owns the Sabine Pass LNG facility. Sabine Pass is the largest LNG receiving terminal in the US, with regasification (import) capacity of 4.0 Bcf/d and LNG storage capacity of 16.9 Bcf. Creole Trail is a 94-mile gas pipeline that connects to Sabine Pass and is effectively dormant. At current gas prices it is not economical for the US to import LNG, so CQP's only income is derived from capacity contracts with Chevron and Total, which require payment regardless of usage. These contracts provide for ≈$250mm of revenue per year.

Liquefaction
When Sabine Pass was conceived several years ago, most people assumed that the US would always need to import natural gas in order to meet the country's energy needs. Fast forward to today and this is clearly not the case. Rather, the US has an excess supply of gas, making LNG imports uneconomical. In response to this problem, Cheniere has proposed building a facility to turn natural gas produced in the US into LNG (a process called liquefaction) for export to Europe and Asia, where gas prices are higher and are linked to oil costs. Liquefaction is a complex process that requires purifying natural gas and cooling it to -161 °C. As such, permitting and construction of these facilities takes about 5yrs and costs several billion dollars.

Cash flow from a possible liquefaction project would accrue to the Cheniere Energy Partner's subordinated equity and thus create value for Cheniere Energy, Inc. The market is clearly excited about the liquefaction project, as evidenced by the recent stock price movement. However, a closer look at the numbers shows that the value of this project is not nearly as great as market prices imply. As shown in figure 1 below, even using rather aggressive assumptions the unlevered liquefaction project barley generates a positive NPV at a 10% cost of capital.

Figure 1: Liquefaction Expansion Economics ($mm unless otherwise indicated)

Assumptions

             

Project capex (1)

              3,000

Project Cash Flows

Cost of capital

10%

 

2011

2012

2013

2014

2015

2016+

mmBTU / Day capacity

      1,032,000

Revenue

0

0

0

0

      311

      622

mmBTU / year capacity

  376,680,000

Op costs

       

        45

90

Revenue per mmBTU (2)

 $ 1.65

Pre-tax income

       

      266

      531

Annual revenue

                  622

taxes

       

         -  

         -   

Opex & maint per mmBTU(3)

 $0.24

FCFF

0

0

0

0

      266

      531

Operating costs/yr

90

Perpetuity value (terminal yr)

0

0

0

0

266

  5,311

Tax rate (4)

0%

Project PV

$3,163

         
                 

(1) Please see Appendix A

               

(2) High-end of company provided range of $1.40 - $1.75

           

(3) Average O&M costs for 4 ton trains, plus adjustment for US labor costs and inflation

         

Source: http://www.zeuslibrary.com/lng/analysis/20091230_Cost-of-Liquefaction-Part-3.asp

         

(4) Assumes accelerated D&A + NOLs shield all taxes

           

 

Of course this all assumes that Cheniere can actually complete this project. Thus far, Cheniere does not have FERC approval, does not have contracts with customers and has not given any indication how they plan to raise $3 + billion.  A recent Citigroup report stated: "ENN seems skeptical about if an agreement can be reached. The concern is that the PRC Government, which has planned over 10 LNG terminals... might be reluctant to approve other import sources."  I think its important to remember just how far in the future this project truly is and that signing a MOU is much different than a true contract.

Capital Structure / Cash Flow
Cheniere's capital structure is complex. I would refer you to page 30 of the company' recent investor presentation (link below) for an illustration.

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDAxMzg1fENoaWxkSUQ9NDA4Nzk4fFR5cGU9MQ==&t=1

As shown on page 28 of this presentation, Cheniere Energy, Inc., burns $45-$55mm per year. As of September, there is about $82mm of cash at the parent. The company's 12% convertible PIK notes are putable in August 2011 when the face value will be about $275mm. These notes are secured by Cheniere's CQP common stock. Even if Cheniere can redeem the PIK notes with remaining liquidity and a sale of the CQP shares, the company would be left with no cash flow or liquidity to deal with the $502mm of debt due in 2012. Thus creditors will likely end up owning the remaining assets, leaving nothing for equity.

As a side note: On Thursday, Moody's downgraded the Sabine Pass ("OpCo") bonds to B2 and placed the credit on review. A central reason given for this downgrade was the high risk of default at Cheniere Energy, Inc. when the PIK notes become putable.

Even in a "best case"... this stock is overvalued
So let's assume everything goes right for Cheniere; operationally, the liquefaction project is built on time, at a cost on the low end of estimates, and the company signs contracts at the high end of projections. On the financing side, the company retires the PIK notes with the CQP shares and remaining cash and raises $500mm of equity (85mm shares) to retire remaining debt on terms that are not punitive to current equity holders. In this highly unlikely case, the value of the liquefaction project would be split among 141mm shares, creating a fair value of ≈$4/share. This scenario is detailed in figure 2 below.

Figure 2: Cheniere is overvalued under optimistic assumptions (in millions)

Current shares

55.6

 

Shares required to raise $502mm

85.2

 - $6.20 stock price and 5% underwriter discount

Total shares after equity raise

140.8

 
     

Value of sub equity from liquefaction project

600

 - Value under aggressive assumptions.  See Appendix B

Value of GP shares

0

 - Assumes all GP cash flow is required to cover G&A

Total value

600

 
     

Total value / share

 $  4.26

 

 

Management
Cheniere is effectively controlled by Chairman/Founder/CEO Charif Souki. Mr. Souki is a former investment banker (perhaps not surprising after looking at the capital structure) described by many in the industry as a better salesmen and financial engineer than businessman. Certainly, much of Cheniere's communication surrounding the liquefaction project is aggressive and potentially misleading (although not to the point of being dishonest). Given that the liquefaction retrofit is the only source of equity value for Cheniere Energy, Inc., and the company needs to raise equity to survive, it is not surprising that management would aggressively "sell" this project.

Other risks
Cheniere has 2Bcf/d of unused import capacity. Given the industry utilization rate of <10% and the historically wide spread between US and European gas prices (currently about $4/mmBTU), it is reasonable to assume this capacity is worthless for the foreseeable future. That said, gas markets are highly volatile and the risk of this capacity becoming valuable is >0%. However, any "tail risk" here can be cheaply hedged using US/UK gas swap futures, or deep out-of-the-money calls on gas prices, or by the owning of other stocks that would benefit from higher US gas prices.

This stock price is highly volatile. It is highly possible that Cheniere could announce more progress toward the liquefaction expansion which sends the shares temporarily higher.

 

Appendix A- What will the Liquefaction Plan Cost?

I believe the capital cost of Cheniere's liquefaction facility is about $3-$4B (≈$400-$500/ton), based on conversations with experts in the industry and comparable projects. A number of government and private reports cite capex requirements of about $600-$700/ton.1,3 The projection for InterOil's Papua New Guinea plant of a similar size to Cheniere's is $6B.4 Cheniere's retrofit could cost less, however, as certain storage and marine infrastructure is already in place. However, these costs represent less than 25% of total project costs and Cheniere's project will have much higher labor costs than those of comparable plants in developing economies.2

In company presentations, Cheniere shows "comparable" projects in the $200-$300/ton range. However, such comparisons are not appropriate, as these projects were started nearly 10yrs ago5 when capital costs were about half what they are now.1 Costs today are largely unchanged from 20082.

The Freeport, TX terminal undertaking a similar (if slightly larger) retrofit to Cheniere. In a press release announcing the project the Freeport cited "over $2 billion of direct investment".  Some have interpreted this to mean that the total project will cost $2b. However, I believe there is some confusion between total capex and "direct investment" which refers to only a portion of total costs.

Sources:

  • (1) From August 2007 report by the California Energy Commission: "Norway's Snohvit, Russia's Sakhalin II projects and a new Iranian North Pars construction bid are reported in the trade press to have costs in the range of $1,000 to $1,222 per ton of liquefaction capacity. A reasonable range of costs for these projects in a year 2000 construction environment might have been $250 to $300 and with the 2007 costs utilized in this study $450 to $575. (After completion of this report for the Energy Commission, Jensen Associates updated their cost estimates as part of their ongoing consulting work. The 2007 costs are now $600 to $650 instead of $450 to $575.)"
  • (2) From conversation with head of LNG projects at a major EPC firm
  • (3) June 2008 report by ICF international for Jordan Cove Energy project, L.P.
  • (4) From InterOil's website: "The proposed LNG plant is a two train plant with a nominal 4 million metric ton per annum processing capacity for each train. The mid-point of current cost estimate for the two-train plant is approximately $6 billion, and first LNG production is anticipated in 2014/2015"
  • (5) http://abarrelfull.wikidot.com/elng-idco-lng-terminal , http://abarrelfull.wikidot.com/darwin-lng-terminal

 

Appendix B - Equity value of the Liquefaction Project

In a "best case" scenario, I believe a 100% debt financed liquefaction project could create at most $600mm of equity value. Details are below:

Assumptions

 

2011

2012

2013

2014

2015

2016+

Project capex (1)

              3,000

Revenue

0

0

0

0

      311

      622

Financing cost (2)

10%

Op costs

0

0

0

0

        45

90

mmBTU / Day capacity

      1,032,000

EBITDA

0

0

0

0

      266

      531

mmBTU / year capacity

  376,680,000

Financing costs

         -  

    (300)

    (300)

    (300)

    (300)

    (300)

Revenue per mmBTU (3)

 $ 1.65

Pre-tax income

         -  

    (300)

    (300)

    (300)

      (34)

      231

Annual revenue

                  622

taxes

0

0

0

0

0

0

Opex & maint per mmBTU(4)

 $  0.24

Cash flow to equity

         -  

    (300)

    (300)

    (300)

      (34)

      231

Operating costs/yr

90

Perpetuity value

         -  

    (300)

    (300)

    (300)

      (34)

  2,311

Tax rate (5)

0%

             

Cost of equity

10%

Equity Value Created

$605

         
                 

(1) Please see Appendix A

               

(2) Assumed cost of debt given credit risk of Cheniere's counterparties, construction risk and likely PIK component

   

(3) High-end of company provided range of $1.40 - $1.75

           

(4) Average O&M costs for 4 ton trains, plus adjustment for US labor costs and inflation

         
Source: http://www.zeuslibrary.com/lng/analysis/20091230_Cost-of-Liquefaction-Part-3.asp
         

(5) Assumes accelerated D&A + NOLs shield all taxes

           

Catalyst

 Upcoming Debt Maturities:
August 2011 - $275mm secured PIK debt
May 2012 - $298mm secured term loan
August 2012 - $204mm unsecured convertible bonds

Confirmed details of the liquefaction capex / contracts are provided

    sort by   Expand   New

    Description

     

    Cheniere Energy, Inc., common stock is a likely terminal short with identified catalysts and multiple ways to win. A borrow is available in reasonable size at rates of about 4-5%.

    By the company's own estimates, cash burn is $50mm/yr, total liquidity is $80mm and there is over $750mm of secured debt due in the next two years. Cheniere's stock has more than doubled in the last month on the hope that the company can build a plant to export liquefied natural gas (LNG). However, even if Cheniere can somehow restructure the $750mm of debt and obtain the required permits, contracts and over $3b of financing required to build export capacity, there is still little value left for common stock holders.

    Company description
    Cheniere Energy, Inc., owns 41% of the common interests and 100% of GP and subordinated equity of Cheniere Energy Partners, as well as the Creole Trail gas pipeline. Cheniere Energy Partners is a publicly traded (AMEX: CQP) MLP that owns the Sabine Pass LNG facility. Sabine Pass is the largest LNG receiving terminal in the US, with regasification (import) capacity of 4.0 Bcf/d and LNG storage capacity of 16.9 Bcf. Creole Trail is a 94-mile gas pipeline that connects to Sabine Pass and is effectively dormant. At current gas prices it is not economical for the US to import LNG, so CQP's only income is derived from capacity contracts with Chevron and Total, which require payment regardless of usage. These contracts provide for ≈$250mm of revenue per year.

    Liquefaction
    When Sabine Pass was conceived several years ago, most people assumed that the US would always need to import natural gas in order to meet the country's energy needs. Fast forward to today and this is clearly not the case. Rather, the US has an excess supply of gas, making LNG imports uneconomical. In response to this problem, Cheniere has proposed building a facility to turn natural gas produced in the US into LNG (a process called liquefaction) for export to Europe and Asia, where gas prices are higher and are linked to oil costs. Liquefaction is a complex process that requires purifying natural gas and cooling it to -161 °C. As such, permitting and construction of these facilities takes about 5yrs and costs several billion dollars.

    Cash flow from a possible liquefaction project would accrue to the Cheniere Energy Partner's subordinated equity and thus create value for Cheniere Energy, Inc. The market is clearly excited about the liquefaction project, as evidenced by the recent stock price movement. However, a closer look at the numbers shows that the value of this project is not nearly as great as market prices imply. As shown in figure 1 below, even using rather aggressive assumptions the unlevered liquefaction project barley generates a positive NPV at a 10% cost of capital.

    Figure 1: Liquefaction Expansion Economics ($mm unless otherwise indicated)

    Assumptions

                 

    Project capex (1)

                  3,000

    Project Cash Flows

    Cost of capital

    10%

     

    2011

    2012

    2013

    2014

    2015

    2016+

    mmBTU / Day capacity

          1,032,000

    Revenue

    0

    0

    0

    0

          311

          622

    mmBTU / year capacity

      376,680,000

    Op costs

           

            45

    90

    Revenue per mmBTU (2)

     $ 1.65

    Pre-tax income

           

          266

          531

    Annual revenue

                      622

    taxes

           

             -  

             -   

    Opex & maint per mmBTU(3)

     $0.24

    FCFF

    0

    0

    0

    0

          266

          531

    Operating costs/yr

    90

    Perpetuity value (terminal yr)

    0

    0

    0

    0

    266

      5,311

    Tax rate (4)

    0%

    Project PV

    $3,163

             
                     

    (1) Please see Appendix A

                   

    (2) High-end of company provided range of $1.40 - $1.75

               

    (3) Average O&M costs for 4 ton trains, plus adjustment for US labor costs and inflation

             

    Source: http://www.zeuslibrary.com/lng/analysis/20091230_Cost-of-Liquefaction-Part-3.asp

             

    (4) Assumes accelerated D&A + NOLs shield all taxes

               

     

    Of course this all assumes that Cheniere can actually complete this project. Thus far, Cheniere does not have FERC approval, does not have contracts with customers and has not given any indication how they plan to raise $3 + billion.  A recent Citigroup report stated: "ENN seems skeptical about if an agreement can be reached. The concern is that the PRC Government, which has planned over 10 LNG terminals... might be reluctant to approve other import sources."  I think its important to remember just how far in the future this project truly is and that signing a MOU is much different than a true contract.

    Capital Structure / Cash Flow
    Cheniere's capital structure is complex. I would refer you to page 30 of the company' recent investor presentation (link below) for an illustration.

    http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDAxMzg1fENoaWxkSUQ9NDA4Nzk4fFR5cGU9MQ==&t=1

    As shown on page 28 of this presentation, Cheniere Energy, Inc., burns $45-$55mm per year. As of September, there is about $82mm of cash at the parent. The company's 12% convertible PIK notes are putable in August 2011 when the face value will be about $275mm. These notes are secured by Cheniere's CQP common stock. Even if Cheniere can redeem the PIK notes with remaining liquidity and a sale of the CQP shares, the company would be left with no cash flow or liquidity to deal with the $502mm of debt due in 2012. Thus creditors will likely end up owning the remaining assets, leaving nothing for equity.

    As a side note: On Thursday, Moody's downgraded the Sabine Pass ("OpCo") bonds to B2 and placed the credit on review. A central reason given for this downgrade was the high risk of default at Cheniere Energy, Inc. when the PIK notes become putable.

    Even in a "best case"... this stock is overvalued
    So let's assume everything goes right for Cheniere; operationally, the liquefaction project is built on time, at a cost on the low end of estimates, and the company signs contracts at the high end of projections. On the financing side, the company retires the PIK notes with the CQP shares and remaining cash and raises $500mm of equity (85mm shares) to retire remaining debt on terms that are not punitive to current equity holders. In this highly unlikely case, the value of the liquefaction project would be split among 141mm shares, creating a fair value of ≈$4/share. This scenario is detailed in figure 2 below.

    Figure 2: Cheniere is overvalued under optimistic assumptions (in millions)

    Current shares

    55.6

     

    Shares required to raise $502mm

    85.2

     - $6.20 stock price and 5% underwriter discount

    Total shares after equity raise

    140.8

     
         

    Value of sub equity from liquefaction project

    600

     - Value under aggressive assumptions.  See Appendix B

    Value of GP shares

    0

     - Assumes all GP cash flow is required to cover G&A

    Total value

    600

     
         

    Total value / share

     $  4.26

     

     

    Management
    Cheniere is effectively controlled by Chairman/Founder/CEO Charif Souki. Mr. Souki is a former investment banker (perhaps not surprising after looking at the capital structure) described by many in the industry as a better salesmen and financial engineer than businessman. Certainly, much of Cheniere's communication surrounding the liquefaction project is aggressive and potentially misleading (although not to the point of being dishonest). Given that the liquefaction retrofit is the only source of equity value for Cheniere Energy, Inc., and the company needs to raise equity to survive, it is not surprising that management would aggressively "sell" this project.

    Other risks
    Cheniere has 2Bcf/d of unused import capacity. Given the industry utilization rate of <10% and the historically wide spread between US and European gas prices (currently about $4/mmBTU), it is reasonable to assume this capacity is worthless for the foreseeable future. That said, gas markets are highly volatile and the risk of this capacity becoming valuable is >0%. However, any "tail risk" here can be cheaply hedged using US/UK gas swap futures, or deep out-of-the-money calls on gas prices, or by the owning of other stocks that would benefit from higher US gas prices.

    This stock price is highly volatile. It is highly possible that Cheniere could announce more progress toward the liquefaction expansion which sends the shares temporarily higher.

     

    Appendix A- What will the Liquefaction Plan Cost?

    I believe the capital cost of Cheniere's liquefaction facility is about $3-$4B (≈$400-$500/ton), based on conversations with experts in the industry and comparable projects. A number of government and private reports cite capex requirements of about $600-$700/ton.1,3 The projection for InterOil's Papua New Guinea plant of a similar size to Cheniere's is $6B.4 Cheniere's retrofit could cost less, however, as certain storage and marine infrastructure is already in place. However, these costs represent less than 25% of total project costs and Cheniere's project will have much higher labor costs than those of comparable plants in developing economies.2

    In company presentations, Cheniere shows "comparable" projects in the $200-$300/ton range. However, such comparisons are not appropriate, as these projects were started nearly 10yrs ago5 when capital costs were about half what they are now.1 Costs today are largely unchanged from 20082.

    The Freeport, TX terminal undertaking a similar (if slightly larger) retrofit to Cheniere. In a press release announcing the project the Freeport cited "over $2 billion of direct investment".  Some have interpreted this to mean that the total project will cost $2b. However, I believe there is some confusion between total capex and "direct investment" which refers to only a portion of total costs.

    Sources:

    • (1) From August 2007 report by the California Energy Commission: "Norway's Snohvit, Russia's Sakhalin II projects and a new Iranian North Pars construction bid are reported in the trade press to have costs in the range of $1,000 to $1,222 per ton of liquefaction capacity. A reasonable range of costs for these projects in a year 2000 construction environment might have been $250 to $300 and with the 2007 costs utilized in this study $450 to $575. (After completion of this report for the Energy Commission, Jensen Associates updated their cost estimates as part of their ongoing consulting work. The 2007 costs are now $600 to $650 instead of $450 to $575.)"
    • (2) From conversation with head of LNG projects at a major EPC firm
    • (3) June 2008 report by ICF international for Jordan Cove Energy project, L.P.
    • (4) From InterOil's website: "The proposed LNG plant is a two train plant with a nominal 4 million metric ton per annum processing capacity for each train. The mid-point of current cost estimate for the two-train plant is approximately $6 billion, and first LNG production is anticipated in 2014/2015"
    • (5) http://abarrelfull.wikidot.com/elng-idco-lng-terminal , http://abarrelfull.wikidot.com/darwin-lng-terminal

     

    Appendix B - Equity value of the Liquefaction Project

    In a "best case" scenario, I believe a 100% debt financed liquefaction project could create at most $600mm of equity value. Details are below:

    Assumptions

     

    2011

    2012

    2013

    2014

    2015

    2016+

    Project capex (1)

                  3,000

    Revenue

    0

    0

    0

    0

          311

          622

    Financing cost (2)

    10%

    Op costs

    0

    0

    0

    0

            45

    90

    mmBTU / Day capacity

          1,032,000

    EBITDA

    0

    0

    0

    0

          266

          531

    mmBTU / year capacity

      376,680,000

    Financing costs

             -  

        (300)

        (300)

        (300)

        (300)

        (300)

    Revenue per mmBTU (3)

     $ 1.65

    Pre-tax income

             -  

        (300)

        (300)

        (300)

          (34)

          231

    Annual revenue

                      622

    taxes

    0

    0

    0

    0

    0

    0

    Opex & maint per mmBTU(4)

     $  0.24

    Cash flow to equity

             -  

        (300)

        (300)

        (300)

          (34)

          231

    Operating costs/yr

    90

    Perpetuity value

             -  

        (300)

        (300)

        (300)

          (34)

      2,311

    Tax rate (5)

    0%

                 

    Cost of equity

    10%

    Equity Value Created

    $605

             
                     

    (1) Please see Appendix A

                   

    (2) Assumed cost of debt given credit risk of Cheniere's counterparties, construction risk and likely PIK component

       

    (3) High-end of company provided range of $1.40 - $1.75

               

    (4) Average O&M costs for 4 ton trains, plus adjustment for US labor costs and inflation

             
    Source: http://www.zeuslibrary.com/lng/analysis/20091230_Cost-of-Liquefaction-Part-3.asp
             

    (5) Assumes accelerated D&A + NOLs shield all taxes

               

    Catalyst

     Upcoming Debt Maturities:
    August 2011 - $275mm secured PIK debt
    May 2012 - $298mm secured term loan
    August 2012 - $204mm unsecured convertible bonds

    Confirmed details of the liquefaction capex / contracts are provided

    Messages


    SubjectCQP to build facility?
    Entry11/28/2010 11:13 PM
    Membernha855
    I gave you a very low rating because my understanding is that CQP will be the entity building the facility and not LNG. Based on LNG's oqwnership of subordinate interests in CQP, it will disproportionately beenfit from any incremental cash flows at CQP making this a very dangerous short. Please let me know if you disagree with my understanding that CQP will be the entity building the trains.

    SubjectRE: CQP to build facility?
    Entry11/29/2010 09:28 AM
    MemberSiren81
     You are correct - CQP will build the facility and value will accrue to LNG via CQP's subordinated equity... This was my understanding when I went short LNG
     
    In no way does this make LNG a "dangerous short" or invalidate anything in my write-up:

    - Current cash flow is highly negative and not going to improve. Cash flow from liquefaction would not be realized for 5yrs. LNG has $750mm of debt due in 2yrs and minimal assets to cover these maturities.   

    - The CQP sub equity secures these upcoming debt maturities and thus will likely be owned by creditors

    - Even if LNG can somehow raise equity to take out their debt (1.5x the current market cap) ... the equity value created by this liquefaction project (even in an absolute best case) is less than the current stock price

    - The liquefaction project is far from a "done deal" and a lot can go wrong (notable raising $3B+ with no current cash flow to service this)

    Please let me know if you think I am missing anything

    SubjectRE: RE: Today's move
    Entry01/03/2011 03:18 PM
    Membersnarfy
    No worries.  Maybe the trading robots are to blame.  This is crazy.

    SubjectRE: RE: RE: Today's move
    Entry01/03/2011 03:23 PM
    Membercasper719

    They announced a plan to build a rare earth mine this morning.


    Subjectthoughts on quarter/update?
    Entry03/03/2011 11:09 AM
    Membertyler939
    Any updated thoughts would be appreciated, particularly on timeline.  Thanks

    SubjectRE: thoughts on quarter/update?
    Entry03/14/2011 09:56 AM
    MemberSiren81
    Sorry to be boring, but despite all the volatility, there's really no change to the thesis. LNG has $74mm in cash which should last them another year. D-day remains 1h 2012.

    Perhaps one interesting point is that mgmt said capex for the liquefaction project is about $3B (my research says the right number is closer to $4B, but we can give them the benefit of the doubt). With this capex figure its pretty easy to run the numbers and see the value of this project (IF it ever happens) - and the value created is small at best....


    SubjectThoughts on today's news?
    Entry05/21/2011 07:26 AM
    Membermm202
    Didn't seem overly important to me (as I understand it, this approval was expected...the company just expected it late in the year. So....what's the big deal?) but curious to know your take. TIA.
    MM

    SubjectRE: Thoughts on today's news?
    Entry05/23/2011 01:29 PM
    MemberSiren81
    This news was entirely expected. If you look at the earnings release from May 6th, they say the DOE export authorization is 'pending'. Very surprised the stock is up this much.

    No change to the thesis. They have enough cash to make it a year (maybe). I still think the stock is a $0, but there a certain amount of reflexivity here - meaning that if they can issue enough equity at $11/share to take out the 2012 maturities, its possible the stock is worth something <$0. I view this as an unlikely, but not impossible scenario.

    I actually think there's a reasonable chance they get the export terminal built. Even so, there's still no possible value for the HoldCo equity. I recently spoke with a couple of contacts who are working on other LNG export projects in the US.  They said there is 'no way' the terminal costs $3b to build and the right number is at least $4b and possibly a good bit higher. At these capex levels the economics change dramatically.

    Hope this helps.


    SubjectThe Citi Report
    Entry05/23/2011 07:22 PM
    Memberdr123

    Has anyone taken a look at the Citi report for 5/23?

     

    Looks like he derives the PT by taking the average of 4 valuations: NAV, DCF, P/E, and EV/EBITDA multiples.  Among all sorts of issues with the liquefaction DCF and earnings estimates (CapEx below the company's already low guidance, operating margins above guidance, etc.), did anyone else notice that the unit count in the CQP model used to arrive at the NAV was off?  (NAV was the only method yielding a PT in excess of the current share price)

     

    -          On p4 he mentions the assumption that approximately $1.0 billion of equity will be raised at the CQP common unit level.

    -          In Figure 4 on p4 he shows $600 million LP Equity raised in 2012 and $450 million in 2013.  While no pricing is given I assume it's at his $20 target for 52.5 million CQP units issued.

    -          The 2012-13 issuing of CQP units constitutes ~66% dilution to the outstanding common units (and an approximately 192% increase in the number of units), yet there is no record of the issued units in the CQP Income Statement (Figure 12, p8) or CQP Distribution Model (Figure 13, p9).

     

    So the CQP common unit distribution estimates post-2013 that are the basis of the NAV valuation do not account for 66% dilution assumed as part of financing.  Adjusting for the "missing" dilution, requires a corresponding 66% decline in CQP distributions in 2012-2013 and helps converge the price target to that of the other approaches.

     

    This seems so egregious I feel like I should be missing something.  Did anyone else read the report or have a relationship with Citi and have thoughts?

    SubjectRE: The Citi Report
    Entry05/24/2011 10:17 AM
    MemberSiren81
    Clearly there are numerous errors in this report (and other reports from the same analyst). Besides those mentioned, there are two others I'd point out:
    • In addition to the $50mm/yr HoldCo is currently burning (as Snarfy mentioned), LNG has to cash pay the 12% term loan beginning in January 2012. This is another $35mm/yr the company doesn't have
    • Check out page 31/32 of LNG's most recent proxy http://www.sec.gov/Archives/edgar/data/3570/000119312511115311/ddef14a.htm. You'll see that management gets a direct (and significant) 'cut' of the liquefaction contracts. I've never seen anything like this. Thats additional $$ that's not going to shareholders

    SubjectConoco/Bechtel Liquefaction CapEx Announcement
    Entry08/04/2011 05:46 PM
    Memberdr123

    Those still following this vigorous stock may find it worthwhile to review the latest Australian LNG CapEx announcement since this project uses the same technology and contractor that LNG was citing as a justification for why their CapEx was going to be <1/2 the cost of comparable recent projects:  http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/8172379.  A detailed presentation by Origin Energy is available at:  http://www.originenergy.com.au/files/APLNG_FID_Presentation.pdf

    The highlights:

    -          Construction will take place 2011-2016

    -          Total capacity of 9mtpa (2 trains) (Compared to 1-4 train 3.5mtpa/train Sabine Pass plan)

    -          Total CapEx $20Bn, including $2.5Bn contingency:

    o   1st train plus infrastructure for the 2nd train:  $14Bn, including $1.7Bn contingency

    o   2nd train (with infrastructure present):  $6Bn, including $.8Bn contingency

    -          So the cost for the 2nd train, net of contingency and infrastructure comes out to: $5.2Bn/4.5mtpa = $1,156/ton.  Quite a bit away from the $400/ton estimated by LNG's management for Sabine Pass.

    The above estimates are for 50/50 upstream/downstream cost split including some E&P component necessary to start LNG exports (say the first bunch of CBM wells necessary for the start-up).  Per the NR and the presentation, infrastructure costs for the 2nd train are incurred by the 1st one but perhaps a bunch of CBM wells and some gathering infrastructure are not included.  Even with a generous $1Bn in upstream expense attributed to the 2nd train the cost is still $4.2Bn/4.5mtpa = $933/ton.

    Australian labor and project management markets are hot.  The consultants we use estimate 50-60% of the budged as "materials" and 40-50% as "labor" with labor costs in Australia at most 30% above the US.  With an additional adjustment for that one still gets >$700/ton cost for the Conoco/Bechtel trains in the US.  With this level of CapEx even at $2.50/Mcf capacity fee (LNG has recently changed their presentation and strategy in this area as illustrated by the latest presentation) there is no value left for the equity at a full 4-train development, according to my estimates.

    I am curious if anyone sees issues with the above estimates...


    SubjectRE: Conoco/Bechtel Liquefaction CapEx Announcement
    Entry08/11/2011 01:31 PM
    MemberSiren81

    I agree with your assessment. I've spoken with an analyst working on a different brownfield liquefaction retrofit in the US who confirms this view.

    As another data point, if you look at the Angola LNG project which is also a ConocoPhillips / Bechtel project the estimated cost is $8-10b (see article below)--despite being a smaller project than Cheniere's 1st 2-trains  and in an area with much lower unit labor costs.

    http://af.reuters.com/article/investingNews/idAFJOE56J0CM20090720?pageNumber=1&virtualBrandChannel=0

    Cheniere's retrofit could cost less because certain storage and marine infrastructure is already in place. However, these costs represent less than 25% of total project costs and Cheniere's project will have much higher labor costs than those of comparable plants in developing economies.

    Furthermore, on the $2 - $3 capacity change. Per the company, this is really $2 $2 capacity charge was for 'normal' contracts and the $3 charge is for customers that include a force majeure clause


    SubjectStress-testing the short thesis
    Entry08/19/2011 01:49 AM
    Memberdr123

    I am trying to stress-test the short thesis to see what could possibly create material value for the equity.  My top guess is ultra-low-cost debt helping them along with the NPV given the project's sensitivity to the discount rate.  For instance, at $750/ton capital cost, $2.50/Mcf margins (slightly above guidance), and 5% cost of debt seem sufficient to get the equity above water for a 4-train development.  This may be unrealistic but could someone with 5% cost of debt be seduced?  Can folks think of other scenarios / leverage points that could conceivably derail the thesis?

     


    SubjectRE: Stress-testing the short thesis
    Entry08/22/2011 09:07 AM
    MemberSiren81
    When calculating possible equity value you need to make sure to include the "incentives" management gets from converting MOU's into contracts. If you've not looked at this issue, check out the 'Long-Term Commercial Bonus Pool' in the document below. These incentives are not a small number (close to <$150mm if my math is correct) and received my management before the company sees any cash from the contracts. I find this compensation structure both excessive and highly unusual.

    http://www.sec.gov/Archives/edgar/data/3570/000000357011000033/ceicompform8k.htm

    Also - 5% is unreasonable IMO. Lowest I could see that going is 7% (but I'm not a project financing expert).


    SubjectRE: RE: Stress-testing the short thesis
    Entry08/22/2011 02:25 PM
    Memberdr123

    Siren and Snarfy, Thanks for your input.

    Snarfy, I agree re CHK or any other "intention to enter into a discussion over a MOI for a firm commitment"-type NR being the main trading risk with this stock.  I am wondering what could fundamentally create equity value rather than simply pump it.  I doubt even Aubrey would be that aggressive.  Plus CHK has plenty of liquids plays to pump these days.  Do you think someone would be reckless enough to make an equity investment in LNG when they can wait a few months and get in on a restructuring or invest in the other terminals at (I assume) a discount to the replacement cost?

    Siren, I have been incorporating the incentive plan that you pointed out.  Thank you for catching that.  My numbers are close to yours with the leakage to management in the $150-200 million/train range for capacity fee in the $2.50-3.00 range.  I also agree with your cost of capital observations but maybe in the current rate environment things could get weird?

    I am just fearful of getting complacent with this short so am searching for any sources of upside...


    SubjectRE: Revised pricing?
    Entry10/17/2011 04:16 PM
    Memberdr123
    Siren actually caught this change right around the time it came out (see 8/11 post).  I confirmed the interpretation with some industry folks but just in case have been modeling up to $3.00/Mcf pricing under the old terms and at $800/tpa CapEx still see trouble getting anything for the equity.
     
    "
    Furthermore, on the $2 - $3 capacity change. Per the company, this is really $2 $2 capacity charge was for 'normal' contracts and the $3 charge is for customers that include a force majeure clause 
    "
     

    SubjectCheniere and BG
    Entry10/26/2011 09:32 AM
    Memberdr123
    Is it a good or a bad thing that the capacity charge was not disclosed?  Anyone care to speculate as to the charge?


    Cheniere and BG Sign 20-Year LNG Sale and Purchase Agreement
    Wednesday, October 26, 2011 08:00:00 AM

    HOUSTON, Oct. 26, 2011 /PRNewswire/ -- Cheniere Energy Partners, L.P. ("Cheniere Partners") (NYSE Amex: CQP) announced today that its subsidiary, Sabine Pass Liquefaction, LLC ("Sabine Liquefaction"), has entered into its first liquefied natural gas ("LNG") sale and purchase agreement ("SPA") with BG Gulf Coast LNG, LLC ("BG"), a subsidiary of BG Group plc, under which BG has agreed to purchase 3.5 million tonnes per annum ("mtpa") of LNG. Sabine Liquefaction is planning to develop the ability to produce 9 mtpa of LNG in the first phase of its project at the Sabine Pass Terminal owned by Cheniere Partners. On May 20, 2011, Sabine Liquefaction received authorization from the U.S. Department of Energy to export up to 16 mtpa of LNG destined to all countries with which trade is permissible.

    Under the agreement, BG will pay Sabine Liquefaction a fixed sales charge for the full annual contract quantity and will also pay a contract sales price for LNG purchases based on the applicable Henry Hub index traded on the New York Mercantile Exchange. LNG will be loaded onto BG's vessels. The SPA has a term of twenty years commencing upon the date of first commercial delivery, and an extension option of up to ten years. LNG exports are expected to commence as early as 2015. The SPA is subject to certain conditions precedent, including but not limited to Sabine Liquefaction's receiving regulatory approvals, securing necessary financing arrangements and making a final investment decision to construct the liquefaction facilities. 


    SubjectRE: Cheniere and BG
    Entry10/26/2011 09:50 AM
    Memberdr123
    Nevermind.  Looks like the charge is $2.25 -- way to low to leave any value for the equity.  No wonder they did not put it in the NR:
     
    Under the SPA, in summary and subject to the more detailed provisions and conditions set forth therein:
       
    Sabine Liquefaction will sell and make available for delivery, and BG will take and pay for, cargoes of liquefied natural gas (“LNG”) with an annual contract quantity of 182,500,000 MMBtu (equivalent to approximately 3.5 million tonnes per annum (“mtpa”).
       
    BG will pay Sabine Liquefaction a fixed sales charge of $2.25 per MMBtu for the full 182,500,000 MMBtu annual contract quantity regardless of whether BG purchases any cargoes of LNG. The fixed sales charge will be paid ratably on a monthly basis, and 15% of the fixed sales charge will be subject to annual adjustment for inflation.
       
    BG will also pay Sabine Liquefaction a contract sales price for each MMBtu of LNG delivered under the SPA. The contract sales price will be equal to 115% of the final settlement price for the New York Mercantile Exchange Henry Hub natural gas futures contract for the month in which the relevant cargo is scheduled.
       
    BG will have the right to cancel all or any part of a scheduled cargo of LNG by a timely advance notice, in which case BG will continue to be obligated to pay the full monthly fixed sales charge but will forfeit its right to receive the cancelled quantity and will not be obligated to pay the contract sales price for the forfeited quantity.
       
    BG Parent has irrevocably guaranteed BG's payment obligations under the SPA.
       
    The LNG delivery, payment and related provisions of the SPA will have a 20-year term, commencing on the date designated for the first commercial delivery of LNG. BG will have the right to extend the 20-year term for an additional period of up to 10 years.
       
    The obligations of Sabine Liquefaction to proceed with the liquefaction project under the
       
    SPA will become effective when the following conditions have been satisfied or waived:
       
    ?
    Sabine Liquefaction has received all regulatory approvals required for construction and operation of its first LNG liquefaction train and related facilities in Cameron Parish, Louisiana;
       
    ?
    Sabine Liquefaction has secured the necessary financing arrangements to construct and operate its first liquefaction train and related facilities;
       
    ?
    Sabine Liquefaction has taken a positive final investment decision to proceed with construction of its first LNG liquefaction train and related facilities;
       
    ?
    Sabine Liquefaction has in effect certain other agreements facilitating the actions contemplated by the SPA; and
       
    ?
    specified regulatory authorizations are in effect permitting Sabine Liquefaction to export LNG from the United States.



    1



       
    Sabine Liquefaction will designate the date for the first commercial delivery of LNG within the 180-day period commencing 50 months after the date the preceding conditions have been satisfied or waived. 

    SubjectRE: Anyone want to trade valuation models?
    Entry10/31/2011 11:49 AM
    MemberSiren81
    Let me revist all the numbers and get back to you... will share my model when its ready

    SubjectRE: Anyone want to trade valuation models?
    Entry10/31/2011 01:00 PM
    Memberdr123
    Snarfy,

    While my model is no non-marketable work-in-progress excel mess, I will attempt to clean it up when I get a chance and post it.  A couple of quick observations re your model that jumped out at me:
        Existing debt – This could be debated based on how much of the existing debt one believes the existing gasification contracts cover.  You estimate that the enterprise has ~$500mil of existing debt.  This seems way too low given all the debt at the subsidiaries.  For instance, at 10x EBITDA the Chevron and Total regasification contracts are worth ~$1,700mil vs. $2,200mil of debt at the Sabine Pass LNG, L.P. level alone.  I get >$1,700mil in the value of existing claims senior to LNG common equity, ~1,300mil of this is debt.
        Total margin – You seem to be assuming that the company contracts out the entire capacity.  This is not practical for a bunch of reasons (and a very easy way to blow up) and they were previously planning to contract out <90% (3.5mtpa out of the nameplate capacity of 4 in the previous presentations).  In the current presentation (http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTA3Nzg1fENoaWxkSUQ9LTF8VHlwZT0z&t=1) they still seem to assume that T 1&2 will yield ~1Bcfpd (3.5mtpa) of contracted capacity.  Using these figures I get total margin ~$830mil vs. your $935mil.

    My guess is the above two points are the main sources of divergence between our models.

    SubjectRE: RE: Anyone want to trade valuation models?
    Entry10/31/2011 02:02 PM
    Membersnarfy
    Thanks.  Good catch on the utilization rate.  Going from 100% contracted to 90% gets me very close to your $830mm margin number and has a big impact on the value per share. 
     
    Existing debt - my thinking was that it would be conservative to assume LNG is able to refinance or pay off the holding company debt and avoid bankruptcy, therefore avoiding a situation where the liabilities of CQP step in front of the equity of LNG.  In other words, I assume that outside bankruptcy the assets of CQP are enough to satisfy the liabilities of CQP.  Is that a reasonable way to think about it?
     
    Clearly then, the holdco has to issue a ton of stock to pay off its debt, or pray for mercy from its lenders.
    I think it was mentioned earlier that Perry holds the 9.75% term loan due May 2012 that is collateralized by the CQP subordinated units (the "prize" asset if the liquefaction project goes to plan).  They seem to hold the trump cards.  Is there any incentive for them to accept an outcome other than full cash repayment at maturity?

    SubjectRE: RE: RE: Anyone want to trade valuation models?
    Entry10/31/2011 03:29 PM
    Memberdr123

    “I assume that outside bankruptcy the assets of CQP are enough to satisfy the liabilities of CQP.  Is that a reasonable way to think about it?”

    I think you are being very generous to the equity.  It’s cool to be conservative but this assumption does substantially detract from the attractiveness of the short and remove one of the key overhangs for their muddling through:

    Chevron and Total contracts provide ~$215mil in annual EBITDA until 9/30/2028.  Of this $56mil is available for distributions and $23mil was paid out in 6mo ending 6/30/2011.  There’s $2,215mil of existing notes outstanding with the 2016 7.5s yielding ~8%.  Very generously using the lowest coupon rate (7.25%) as the discount rate, NPV of the existing contracts’ is ~$1,900mil.  Add the leakage through the distributions and quite a bit of capital needs to be raised just to make the senior secured creditors whole.  With 2013 maturity this is not the most pressing need, it should weigh on any serious financing.  Would you be lending these guys money for liquefaction when the secured creditors may walk away with the asset in a couple of years?  Seems that at the very least the company needs to raise additional capital to remove this overhang.

    Given the lack of upside in the current model on the overhang of secured creditors, I don’t see an incentive for the convert to demand anything other than cash, which the company seems to be taking the first steps towards raising with  their ongoing “Strategic Equity Offering (SM)” with Miller Tabak.


    SubjectCapex = $4.5 - $5B for 1st 2 trains
    Entry11/07/2011 10:33 AM
    MemberSiren81

    From today’s 10-Q:

    Sabine Liquefaction has engaged Bechtel Corporation ("Bechtel") to complete front-end engineering and design work and will negotiate a lump-sum, turnkey contract based on an open book cost estimate. We currently estimate that total construction costs will be consistent with other recent liquefaction expansion projects constructed by Bechtel, or approximately $4.5 billion to $5.0 billion, before financing costs, for the first two LNG trains. We have additional work to complete with Bechtel to be able to make an estimate specific to our site and project. Our cost estimates are subject to change due to factors such as changes in design, increased component and material costs, escalation of labor costs, cost overruns and increased spending to maintain a construction schedule.

    At this price I’m getting to a fair value of approx. $7-$8/share IF everything goes right for these guys (and clearly there is a lot that can go wrong). While I’m wary of ‘thesis drift’, I’m still short given the current situation…


    SubjectRE: Capex = $4.5 - $5B for 1st 2 trains
    Entry11/07/2011 01:21 PM
    Memberdr123

    $5.0 billion for 2x 4.5 mtpa trails comes out to $555/tpa.  2x 4 mtpa trains come out to $625/tpa.  I get very similar fair value to yours using 7% cost of debt and 10% cost of equity on the above CapEx estimates.

    While these figures are materially higher than the "official"/presentation figure of $400/tpa, they seem in-line with the $600-650 the company has been feeding the street recently.

    I have been unable to find a single recent comparable ConocoPhillips-Bechtel liquefaction expansion project announcement with estimates <$750/ton.  Would love to hear if anyone was able to find these?

    Not sure how the company will bridge the gap (attribute the remainder to financing cost?  contingency costs?  claim higher nameplate capacity while keeping the same contracted volume?) but at least in recent months they have moved half-way to reality.

     

    SubjectCreole Trail Pipeline
    Entry11/07/2011 07:20 PM
    Membersnarfy
    Will making the pipeline bi-directional require a material amount of capex, and are you guys modeling any value for it?
     

    SubjectRE: Creole Trail Pipeline
    Entry11/08/2011 10:01 AM
    MemberSiren81
    There is some capex, but not much. I was saying $100mm

    SubjectRE: RE: Creole Trail Pipeline
    Entry11/08/2011 12:45 PM
    Memberdr123

    Agreed with Siren re reversal -- the cost of compressor stations (a few $mil/pop) is a rounding error relative to the other issues.  I am also not sure what value the pipeline has beyond sourcing NG for the liquefaction and helping earn the contracted margins, so am not modeling any additional value for it.
     


    SubjectRE: RE: RE: Creole Trail Pipeline
    Entry11/08/2011 01:35 PM
    Membersnarfy
    Thank you both.  Just want to make sure I'm not missing anything major.

    SubjectRE: RE: RE: RE: Anyone
    Entry11/20/2011 09:05 PM
    Membersnarfy
    Thanks for sharing that.  Did she indicate if the new junior CQP equity would rank above or beside the subordinated CQP units owned by LNG?

    SubjectRE: RE: RE: RE: RE: Anyone
    Entry11/21/2011 09:50 AM
    Membermr35
    Not explicitly, but what she did say is that it will be structured/priced to yield a target IRR based on the distributions from the export project. So since it is a psuedo direct equity into the export project I would think it will have to be above the subordinated units to hit the IRR number. 

    SubjectRE: RE: RE: RE: RE: RE: Anyone
    Entry11/21/2011 01:54 PM
    Membersnarfy
    Nice.  Yeah, I don't see how the bull arrive at view that holds more upside from here.
    Pricing over $2.25/mmbtu? Seems like the stock is driven by day traders with Pavlovian reactions
    to the various press releases.  I'm wary of another runup on the heels of a second contract signing
    before the end of the year - and you know management wants to get it it done right away to start the vesting of the incentive plan - but after that the rubber meets the road with the secondary offerings and debt maturities. 

    SubjectRE: RE: RE: RE: RE: RE: RE: Anyone
    Entry11/21/2011 04:23 PM
    Membermm202
    You nailed it snarfy.  New deal announced.  
     

    SubjectRE: RE: RE: RE: RE: RE: Anyone
    Entry11/21/2011 05:23 PM
    Memberdr123
    Does anyone else find it humorous that Cheniere will be trying to raise project financing at ~6.5x 2016 EBITDA in the current credit environment with the entire corporate family tree trading >8x 2016 EBITDA while a utility counterparty (GAS SM) is at ~6x T12M EBITDA?

    I’m still perplexed by the $550/tpa announced CapEx -- unlike that of any recent comps (the ones from early 2000’s included in the co’s presentation don’t count), but without an actual contract to study and look for buried bodies have to assume this is solid and apologize if I hosed anyone with my $750/ton floor estimate.


    SubjectRE: RE: RE: RE: RE: RE: RE: RE: Anyone
    Entry11/21/2011 05:36 PM
    Membermr35
    They did get a bit more- 2.49/MMBTU. 
     
    So they have contracted out 7/9 mtpa for the 1st 2 trains. Even assuming 90% capacity utilization they are holding 12% back. So say LNG exports 50-60 million MMBTU themselves- that could be quite substantial if they can find someone to fund an internal trading operation. I saw one estimate that BG could make over $5 an MMBTU with their deal at current gas prices. Add back $2 of LNG margin and that is $7 an MMBTU or $350 million. Even if they pull that off (and it is highly sensitive to NA nat gas prices staying so low) I am still getting a $10-12 stock. So this is certainly priced to perfection, but maybe that is one source of upside people are speculating on. 

    SubjectRE: RE: RE: RE: RE: RE: RE: RE: RE: Anyone
    Entry11/21/2011 11:56 PM
    Membersnarfy
    Good point on people speculating around the 12% of capacity LNG could hold back to trade with for itself.
    If you were running LNG though why would you leave it uncontracted?  Seems like it would decrease their chances of survival.

    SubjectUncontracted Capacity
    Entry11/22/2011 12:47 AM
    Memberdr123

    Or it could be quite the opposite – the optimal way to keep the hope of LNG equity alive while selling shares:  Contracting the remaining 10% would remove the residual element of uncertainty but also optionality from the valuation of the company.  It would become an even easier exercise to determine what, if any, the value of LNG common is.  If I were in CEO’s shoes in this particular situation and had a “strategic at the market equity offering” going while credit markets were locked-up, I’d probably do the same to maximize the chance of survival.

    Put differently, the value of the call option (LNG equity) is maximized by expanding the period of uncertainty around the value of the enterprise as well as the magnitude of such uncertainty – very shrewd.  Just like the oil and gas promoters who never seem to drill their most attractive targets / are always 6mo away from a major catalyst.

    Luckily for the short thesis, existing debt maturities and project financing needs severely limit the duration of these games.  I just don’t think the co can sell enough equity with the promise of 2016 LNG trading profits to make up for the lack of borrowing capacity and liquidity, or the current credit environment.


    SubjectRE: Uncontracted Capacity
    Entry11/22/2011 10:35 AM
    Membersnarfy
    It's a masterful promotion, no doubt about it.  For this CCC-rated company it's finance or die, but he's got shareholders treating LNG like it's MSFT and they just need to roll a little bit of commercial paper.
     
    I am short the piss out of this stock now.  I don't see how the bulls can get any more excited.  It's priced like COD is tomorrow and all the big hurdles are behind it, not in front of it.
     
    There was a surprisingly rational piece about LNG on Seeking Alpha the other day.  My Google News alerts picked it up.  The author suggested basically that European banks are the ones who lead this kind of project financing.  Is it reasonable to think about the common equities of those banks as an upstream risk indicator for LNG given what's happening in Europe?
     
     

    SubjectRE: RE: Uncontracted Capacity
    Entry11/22/2011 02:02 PM
    Memberdr123
    That article is very similar to how we are thinking about it.  I would look at the likes of the DB thread or the equities of utility-like/non-cyclical European businesses with short-term refinancing needs for an illustration of what LNG is up against.  If that market is in fact shut down (Check out the chart of LNG’s advisor, SocGen), the borrowing capacity provided by the contracts is not going to matter and LNG would have done well to keep even more capacity uncontracted to create further theoretical equity upside.  With the contracts in place, we think the short has gotten very significantly less risky.  The one huge positive for the company was the CapEx announcement that, while well in excess of the numbers in their presentation, is still an outlier from the comps.


    SubjectRE: RE: RE: Uncontracted Capacity
    Entry11/30/2011 11:35 AM
    Membermr35
    Souki was interviewed on Cramer recently and played the uncontracted capacity as his trump card. He called it 700-800 million in additonal revenue at current prices- which is probably in the ballpark although that seems to assume they run at 100% of capacity. It is really a sly move as without the additional EBITDA from the excess capacity LNG equity is probably worth less than $5 even if the project gets built given the dilution. But with all the leverage they will be using if they can get 700 million in revs from the excess capacity then there is value to LNG equity. Of course that assumes everything goes right for them in terms of getting financing to pay off the LNG level debt and build the project, getting the project built, and the spread between NA and intl nat gas holding. But it is not a totally implausible story and I am worried Souki will be able to sell it to get the financing they need. 
     
     

    SubjectRE: RE: RE: RE: Uncontracted Capacity
    Entry11/30/2011 01:27 PM
    MemberSiren81

    Souki also said they need $2B of equity at the project level. That’s a lot of sugar, before any equity needed to refi holdco. There are still multiple things can go wrong here and it doesn’t take much to seriously hurt the holdco equity.


    SubjectRE: RE: RE: RE: RE: Uncontracted Capacity
    Entry12/01/2011 06:15 AM
    MemberBiffins
    Can anyone answer some questions I have on this.
     
    1. Will the new equity be raised by issuance of new subordinated units? If so, will they be parri passu with the current 133m sub units LNG have in CQP? If so, and ($2b at $16 CQP price would be 125m sub units) Why should anyone participating in a new issuance allow so much of the value drain to the old sub units. The return on equity for the new participants would be really low. 
     
    2. Will the Total and Chevron contracts be restructured with them being effectively released from them when the new Liquifaction facility commences. One would assume so since if the pipeline is reversed they would not be able to import gas anymore if market conditions allow during the remainder of their contract. Will they restructure for just a payment etc?
     
    3. Why would the current common unit holders in CQP, which currently have a cash stream coming from the Total/Chevron contracts allow this revenue stream to diminish and then share returns with the participants in the new equity raising. This could lower the returns for current common unit holders.
     
    4. What are the options for the current bond holders at CQP. What incentive do they to refinance the 7.25% bond due Nov 2013. Already the Total/Chevron contracts are not enough to pay them back. They would need the BG/Natural Fenosa contracts to pay them back but it could mean releasing Chevron/Total from contract. 
     
    5. How do payments on the 2% GP units scale up if/when the liquifaction facility starts running. How do the old sub units factor into the distributions.
     
    Sorry for so many questions. It's a messy situation and trying to get my head around it. 

    SubjectRE: RE: RE: RE: RE: RE: Uncontracted Capacity
    Entry12/01/2011 09:49 AM
    Membermr35
    I'll take a crack at some of these. 
     
    1. CFO briefly discussed the structure of the new equity issue at the RBC MLP conference. She said they will be issuing a new class of units at the CQP level. They will be structured to yield a target IRR based on distributions from the export project so I assume that means they will rank ahead of the subordinated units (and the common units for that matter) in terms of those distributions. They will rank below the common units in terms of getting distributions from the Total/Chevron contracts so basically they will not be receiving any cash until the export project launches. That answers 3- the new equity will be structured to not receive any of the distributions from the import contracts. 
     
    2 is an interesting question. Don't know. I assume they have some way around this as they will kill the distribution to the CQP common if Total and Chevron are released. 
     
    4. I'm assuming you mean the bonds on the Sabine Pass OpCo level? That is a good question and at least in theory should make debt financing on the export project more difficult. 
     
    5. There is a distribution schedule for the unit classes in the CQP filings. The GP units % take scales quickly and they could get a nice take if the export project gets built- although have to factor in that the new unit class at CQP will probably rank ahead of everyone. 
     
    Any guesses on what type of IRR the new equity class will demand? That will have a big impact on how much the LNG sub and GP units get diluted. 

    SubjectRE: RE: RE: RE: RE: RE: Uncontracted Capacity
    Entry12/01/2011 10:55 AM
    MemberSiren81

    I’ll help with #2&#4…

    2. The Total and Chevron contracts will not change.  The pipeline will be bi-directional and Cheniere will leave their import capacity untouched. Sabine Pass has 4Bcf/d import capacity. The Total and Chevron contracts cover 2Bcf/d of this capacity and the liquefaction will cover the other 2.

    4.  You bring up a very good (and misunderstood) point. The OpCo bonds will need to be refi’d beginning in 2013, but the TUAs only extend to 2029… so they’ll have to do some type of amortizing mortgage bond, but I don’t think there’s enough cash flow to get this done.  So that’s more cash that will have to come from somewhere or else risk a default.


    SubjectRE: RE: RE: RE: RE: RE: RE: Uncontracted Capacity
    Entry12/01/2011 11:56 AM
    MemberBiffins
    Thanks for those answers, but that just leads to more questions.
     
    If the current common units (i.e. current owners of CQP units) will be junior to these new units issued to financed the liquifaction facility (as mr35 said), and the refinancing of the Sabine Pass bonds leads to some kind of ammortizing mortgage bond on the remaining cash flows in the import contract (as siren81 said), how can distributions be maintained to the common units from the import contracts? In that case isn't the CQP US EQUITY also a great short on top of the LNG US EQUITY short? Infact it might be a better short than the LNG short since they get no upside unlike LNG which has some upside from spare capacity and GP units scaling.
     
    And ofcourse if the the new units rank senior to the common units, then LNG itself suffers as well. It also owns 10.9m of the total 26.4m common units. It's upside will be only from the GP units and depending on how much equity return the new units equity holders demand could limit the upside for LNG. 
     
    So at the moment the trades look like
     
    Short - Sabine Pass Bonds (current price 99.8) (not enough cash from import contracts to repay bonds)
    Short - CQP equity - (current price 16.1) common units can't get paid from import contract post bond refinancing and won't see upside on export contract
    Short - LNG equity - (current price 9.8) massive cost escalation and financing and delay risk on project. no upside from common units in CQP. Upside on GP units could get limited by new unit holder demands. Liquidity requirements due to continuing cash burn leading to further dilutive equity issues. Refinancing risk upcoming on ammortizations.
    Short - LNG convert - (current price 91.5) LNG doesn't have cash to repay and there's refinancing risk as the issues in the capital structure are appreciated/realized.
     
    And within these trades Short LNG seems best risk reward? I think Short CQP looks good too if the current common units don't get to see any upside from export contracts. 

    SubjectCQP Short
    Entry12/01/2011 01:15 PM
    Memberdr123

    We have thought hard about the CQP Equity short and would appreciate any help with the following concerns:

    It seems that CQP units may do well in the outcome we see as most likely:  In the current European credit environment LNG may not get any project financing at the target valuation at all.  In this case LNG goes to ~0 but with the clouds of messy dilution and structural uncertainty having cleared, CQP may revert to trading based on yield (unless the new assets holders find a way to hose them).  Given how plenty of other energy-related yield vehicles trade at 5-7% yields regardless of the underlying NAV and the finite lives of the underlying assets, I could see CQP trading > $25/sh very easily if the current plans are derailed.  This is also why I am not sure about the upside in Sabine Pass Bond short.  Put differently, in a world without CEO talking about raising $2bn in equity in the CQP structure, why can’t CQP trade like BPT?


    SubjectRE: CQP Short
    Entry12/01/2011 02:27 PM
    Membersnarfy
    There are something like 35 quarters worth of 42.5 cent CQP distributions remaining until the existing gasification contracts run out.   At a 7% discount rate the NPV is 11.32 per unit assuming the liquefaction plant doesn't get built and provide further distributions, compared with the current quote of 16.02.
     
    Seems like under that circumstance it might be a long, not based on fundamentals but on retail investors overlooking the terminal value shortfall and instead valuing it based on current yield?
     

    SubjectBiffins - LNG convert
    Entry12/01/2011 02:31 PM
    Membersnarfy
    Why not buy some LNG converts to hedge a bit of the LNG common short instead of shorting them both?
    I would do it, but Interactive Brokers can't hold those bonds because they're not eligible
    for electronic book entry.

    SubjectRE: Biffins - LNG convert
    Entry12/01/2011 04:51 PM
    Memberconway968
    If one is bearish on LNG, I don't see how it would make sense to buy the convert b/c if something goes wrong with the refinancing, these converts are probably a zero, given that they sit at the very bottom of the cap structure.  That's a lot of downside to risk for 10 points of upside. 
     

    SubjectRE: RE: CQP Short
    Entry12/01/2011 05:50 PM
    Memberdr123

    Declining / fixed lifetime assets inside yield vehicles make one hell of a short when the timing is right.  The implosion of various Canadian trusts once the deal pipeline was severed and the underlying declines became evident was very graphic.  However, I can’t think of cases where retail holders have efficiently priced / anticipated the distribution shortfall ahead of time.  So if LNG’s project financing efforts fail CQP may not be a good short until 2019.


    SubjectRE: RE: Biffins - LNG convert
    Entry12/02/2011 05:46 AM
    MemberBiffins
    Why would Sabine Pass bond holders refinance those bonds with the same bullet structure and financing rate when they know there's not enough money left for them. The only reason CQP is not hitting the distribution test ratios is due to harakiri regarding the 250m payment to and back from Cheniere Marketing.
     
    Just to clarify on that comment, as far as I know, this is how the cash flow operates in CQP.
     
    Sabine Pass Annual Cash Flows ($ m):
     
    Chevron/Total TUA: 250
    Other services: 7
    Operating Costs: -46
    Debt service: -165
    Actual Sabine Pass Free Cash Flows: 250 + 7 - 46 - 165 = 49.
     
    Cash flow from CQP: 250m.
     
    Total Sabine Pass Declared Cash Flow: 250 + 49 = 299.
     
    Dividends to CQP = 299.
     
     
    CQP Cash Flows: 

    Dividend from Sabine Pass: 299.
    Payment to Sabine Pass: 250,
    Payment for unit distributions = 299 - 250 = 49.
    Total GP and common units = 3.3 (GP) + 10.9 (common with LNG) + 15.5 (common listed in CQP) = 29.7.
    Distributions = 49/29.7 = 1.7 per year.
     
     
    Now obviously you see the 250 going to and fro between CQP and Sabine Pass. That money doesn't exist and never changes hands and only exists as an accounting trick to justify Sabine Pass hitting its covenant tests.
     
    Sabine Pass FCCR test (must be above 2.0x)
     
    Declared Sabine Pass Operating Cash Flow = 299 + 165 = 464. 
    Debt Service = 165.
    FCCR test = 464/165 = 2.8x
     
    In reality it should be Operating Cash Flow of 49 + 165 = 214, and FCCR test value of 214/165 = 1.3 and a fail of the test and Sabine Pass bond holders then stopping all distributions to CQP common units.
     
    Now hedge fund Centrebridge Partners took up a position in the bonds and took Sabine Pass to court over this matter to try and stop the distributions but lost the case as apparently this accounting shenanigan was declared legal because of the original contract agreements.
     
    Centrebrige claimed
     
    "Centerbridge principally alleges in the Letter that the affiliate payments received by Sabine Pass from Cheniere Energy Investments, LLC ("Cheniere Investments"), a wholly owned subsidiary of Cheniere Energy Partners, L.P., under the Terminal Use Agreement between Sabine Pass and Cheniere Investments are not revenue of Sabine Pass under United States Generally Accepted Accounting Principles ("GAAP"). Therefore, 

    Centerbridge alleges that Sabine Pass recorded revenue and earnings in 2010 on a basis that is not in accordance with GAAP and that, consequently, Sabine Pass reported financial statements that are materially false and misleading in violation of the terms of the Indenture. Centerbridge alleges that Sabine Pass is in default under the terms of the Indenture. If an event of default had occurred and were continuing, the maturity date of the Notes could be accelerated, in which case the Notes would be repayable at par."
     
    All of which is IMO true but they still lost the case in court.
     
    So basically the Sabine Pass bondholders are getting screwed due to this accounting shenanigan. Which leads me to believe they would not agree to refinancing the bonds come 2013 unless there is some major revision to the terms and maybe even some ammortizing schedule instead of bullet payment. Note that there are $2.2b of bonds outstanding. At the moment the 7.5% debt service on them costs $165m but if you add an ammortizing schedule on top of it, or increased interest payments instead of the 7.5% because of the fact that covenants tests are being breached by accounting shenanigans, then there's no $49m per year left for distributions to the common units.

    And in that case CQP common units are worth zero. 
     
    That was what I meant by the short CQP thesis and I'd love to understand why anyone thinks the Sabine Pass bonds would be refinanced at the same interest rate with a bullet payment which allows continued drain of the bondholders money to the common units in distributions. 
     
     
     
     
     

    SubjectRE: RE: Biffins - LNG convert
    Entry12/02/2011 11:20 AM
    MemberSiren81

    I’ve thought about various other trades or cap structure arbs here, but I agree with Conway / Dr123… why get cute when you can just short the equity?


    SubjectRE: RE: RE: Biffins - LNG convert
    Entry12/02/2011 02:25 PM
    Memberdr123

    I don’t disagree with your figures and math but I do not think they necessarily preclude Sabine Pass bonds from being refinanced in 2013 on attractive terms depending on the relative strength of management’s vs. bondholders’ negotiating positions.  If management plays hardball a bondholder may be presented with two options:  refinance at the old terms and hope to dump the bonds later / pray that management can find some money over the next few years via an exciting business plan vs. take over the asset and deal with it without the creative leadership of the current CEO.  I’m not sure which of the two options I would pick as a bondholder.  The cliché “if you owe a bank a billion dollars they have a problem” comes to mind.  We’ve seen other cases where management bullied bondholders into a crappy refinancing / workout while preserving junior claims in recent years.

    What makes the LNG equity short different is the need to bring in significant new money from new investors rather than make existing bondholder hostages an offer they can’t refuse.


    SubjectRE: RE: RE: RE: Biffins - LNG convert
    Entry12/02/2011 02:30 PM
    MemberBiffins
    Well the LNG equity also suffers if the Sabine Pass bondholders manage to block distributions from Total/Chevron's contracts. They also have common and GP units getting part of the distribution. So my discussion about the viability of a CQP short only reinforces the LNG short. 

    SubjectRE: RE: RE: Biffins - LNG convert
    Entry12/02/2011 02:44 PM
    Membersnarfy
    I agree with you guys about the converts.  I should have been more articulate in replying to Biffin's table laying out what action to take with each of the securities in the capital structure. 
     
    I was just trying to say that while I agree with the general notion that it is overvalued and his labeling of it as a short in concept, if I did anything with it in real life I might actually go long a bit of it instead of shorting it because I think LNG common equity is more a vulnerable short and has a deeper borrow, so the role of the converts would simply be as a modest hedge. 
     
    But yes, that would be getting too cute.

    SubjectMgmt vs. bondholders negotiating positions
    Entry12/02/2011 02:59 PM
    Membersnarfy
    dr123:  good point about the bank having a problem if you owe them a billion.
     
    Would management's Long-Term Commercial Bonus Pool survive a bankruptcy filing?
    Just trying to think about how credible thre threat from management to hand over the keys
    to bondholders would be.  Seems like given the 5 year vesting horizon of the Bonus Pool,
    they'd be  leaving a lot of money on the table if they if they got thrown out.
     
     

    SubjectRE: RE: RE: RE: RE: RE: RE: Uncontracted Capacity
    Entry12/12/2011 06:05 AM
    MemberBiffins
    "2. The Total and Chevron contracts will not change.  The pipeline will be bi-directional and Cheniere will leave their import capacity untouched. Sabine Pass has 4Bcf/d import capacity. The Total and Chevron contracts cover 2Bcf/d of this capacity and the liquefaction will cover the other 2."
     
    Given that Cheniere has just signed a contract with Gail about using the capacity on train 4 to export as well does this mean that import capacity will no longer be available for Total and Chevron? Will they be released from their contracts?

    SubjectRE: RE: RE: RE: RE:: Uncontracted Capacity
    Entry12/12/2011 03:38 PM
    MemberSiren81
    No. Trains 1-4 are a total of 2bcf/d...

    SubjectRE: RE: RE: RE: RE: RE: RE:: Uncontracted Capacity
    Entry12/13/2011 01:21 PM
    MemberSiren81

    That is correct. I understand the cost for trains 3&4 would be similar…


    SubjectBig secondary announced
    Entry12/13/2011 04:30 PM
    Membersnarfy
    33 million shares through Credit Suisse.   On the 82.8 million shares out that'll put the count at 115.8 million, an increase of 28.5%.  Citi's model only has the share count reaching 92.4 million by 2017.  Finance or die.
     
    The company wants to get its financing commitments nailed down by the end of the year.  I wonder if lenders have been telling them they need to add this liquidity in order to get those commitments.  It seems awfully soon to be selling stock to fund the May maturity.
     
    Something about the GAIL deal feels weird to me.  Anyone else have any thoughts on it?

    SubjectRE: Big secondary announced
    Entry12/13/2011 05:00 PM
    Memberdr123

    I will respectfully differ with your math:  33mil on 82.8mil shares outstanding is ~39% increase (~46% with over-allotment).

    This could be driven by project financing issues, or just a replay of their June 2011 offering:  get some positive news into the market to juice the stock and opportunistically sell equity when you can rather than when you need to (at which point the company could be in a death spiral).  Needless to say, if project financing was a low-risk high-certainty undertaking they would want to wait to raise LNG equity until after the appropriate NRs.


    SubjectRE: RE: Big secondary announced
    Entry12/13/2011 05:15 PM
    Membersnarfy
    my math sucks. sorry.  multi-tasking.

    SubjectRE: RE: RE: Big secondary announced
    Entry12/14/2011 09:45 AM
    Membercasper719
    Dont mention it.
    -Mark Benioff
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