|Shares Out. (in M):||125||P/E||0.0x||0.0x|
|Market Cap (in $M):||1,044||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||2,700||EBIT||0||0|
Short LNG (Cheniere Energy, Inc) - $8.38
Long CQP (Cheniere Energy Partners ) - $17.21
LNG was written up a little over a year ago. Since then, there have been several significant developments and, with LNG now sporting a market cap north of $1B, I believe now is an opportune time to put on a position of short LNG and long CQP.
Cheniere’s primary asset is the Sabine Pass LNG terminal in Cameron Parish, Louisiana, which can receive, regassify, and store 4 Bcf/d of imported LNG. In 2004, Cheniere secured two Terminal User Agreements (TUAs) with Chevron and Total to provide 1 Bcf/d capacity on a renewable 20-year term for $125m each ($250m total). Based on these commitments, Cheniere was able to raise capital to fund construction, with the terminals completed and first revenue hitting from the contracts in April and July of 2009.
The original business strategy was to import LNG to feed the US’s growing energy needs. 50% of capacity was contracted on a long-term basis with the idea that $250m would be sufficient to cover overhead and debt service. The remaining 50% was contracted to another division, Cheniere Marketing, via an agreement called the Variable Capacity Rights Agreement (VCRA) that would capitalize on increasing demand for LNG by selling its capacity on a spot basis.
Fast forward from 2004 to today and innovations in shale drilling have made importing LNG into the US akin to selling ice to Eskimos.
Cheniere’s stock fell off a cliff as it became apparent that their only revenue would be from the Total and Chevron contracts, leaving no opportunity for growth and negative cash flow on a consolidated basis.
Cheniere could either restructure or seek growth through other avenues. In May 2010 they revealed a plan to do the latter by building a new facility that will enable Sabine Pass to liquefy natural gas and export it to arbitrage low domestic prices with higher overseas prices.
Cheniere has a complex structure and I suggest you take a look at an IR presentation as a visual can be helpful: http://phx.corporate-ir.net/phoenix.zhtml?c=101667&p=irol-presentations
In the current state, revenue is generated by the Sabine Pass facility which is 100% owned by Cheniere Energy Partners LP, a publicly traded MLP (ticker: CQP). CQP has a three-tier share structure: Common Units are first in line for distributions up to $0.425 / quarter. Once the Common are satisfied, Subordinated Units receive distributions up to $0.425. General Partner Units receive all distributions along with the other classes and will receive an increasing proportion of distributions on a tiered schedule if distributions increase above $0.489 per share.
Cheniere Energy Inc, the holding company (ticker: LNG), owns ~40% (12m) of the Common Units, with the balance owned by the public (19m). The Subordinated Units (135m) and General Partner Units (3.4m) are 100% owned by LNG.
LNG receives funds via distributions from its holdings of Common and GP Units. Current cash flow is insufficient to provide any distributions to the Subordinated Units. LNG also has some minor assets that add ~11m (i.e. a Management Services Agreement through which funds flow directly from Sabine to the holding company without going through the MLP structure).
Below is an illustrative cash waterfall:
*Note that LNG just raised $330m in equity, likely to pay down $298m outstanding on the 2007 Term Loan maturing in May 2012. The same may be done for the $204m Convertible Note due August 2012. Run rate interest cost would be reduced accordingly.
Present course should result in a worthless LNG as it would have negative cash flow each year and liabilities in excess of its assets. As a result, management is pursuing the above-mentioned Liquefaction project.
The Liquefaction plan is similar to the original construction of the Sabine Terminal: secure long-term fixed contracts with sound counterparties and use these as the basis to raise capital to fund construction. The goal is to build four liquefaction trains with construction staggered for two at a time (two trains provide 8mtpa capacity), with the first set completed in late 2015.
Capacity for the initial phase has already been contracted out. Cheniere has signed Sale and Purchase Agreements (SPAs) with BG and Gas Natural Fenosa for 3.5 mtpa each on a 20 year basis. Cheniere also signed an SPA with GAIL India on similar terms for one of the second phase terminals, while also providing for 0.2 mtpa from the first two terminals until the second phase is completed.
The economics for the first phase look like this: BG and Fenosa are contracted for 182,500,000 MMBtus each. BG’s capacity charge is $2.25 / MMBtu and Fenosa’s is $2.49, providing revenue of $865m. Including the smaller portion contracted to GAIL at a $3.00 charge adds $31m to for a total of $896m.
Construction costs are estimated to range from $4.5B to $5B. Management has indicated they will finance this with 60% debt raised at the Liquefaction facility level and 40% equity raised at the CQP level.
Importantly, management has indicated that they will issue a new class of shares at the CQP level. The reason for this is that they cannot issue additional CQP shares and maintain the current distribution. CQP’s current annual distribution of $52.7m takes up all available free cash. Diluting CQP would do severe harm to CQP as well as to LNG, which relies on its distributions. Likewise, issuing new Subordinated Units isn’t palatable as the old units would unfairly share the economics of the Liquefaction facility with the new units.
I speculate the new share class will be akin to existing CQP common units: they will be paid a distribution that meets a target return with some type of provision that waterfalls excess cash to current Common and Subordinated Units. If a 12% return is targeted, a $2b equity outlay in 2012 would require annual distributions of $375m from 2016 through 2035.
Phase 1 Liquefaction Cash Waterfall
*From proxy: “The Long-Term Commercial Bonus Pool will equal 11% of Margins generated from any contract entered into by the Company with a term of four years or more.”
This remaining $116m would flow through the earlier waterfall, providing a ~100% contribution to LNG since it would flow solely through the Subordinated Units, leaving no leakage to the publicly held CQP shares.
However, you can see that adding $115m in 2015 to the current cash flow deficit does not exactly support a current market cap in excess of $1b.
Second Phase & Excess Capacity
The current share price is clearly not based on the economics of the existing facility and initial phase of the liquefaction project. Shareholders must be hoping that two other sources of revenue work out. First, there’s the second phase of the Liquefaction facility. If they sign another contract on similar terms as the GAIL contract ($3.00 capacity charge), the second phase would yield $1,095m in revenue. However, even this doesn’t lead to an amazing IRR to LNG at current prices, especially when considering the successful completion of the second phase is anything but a sure thing (financing for the first phase hasn’t even been received yet!)
The second source of revenue is to sell excess capacity on a spot basis (e.g. the first phase is 80% contracted. Cheniere could conceivably contract out an additional 10% on a spot basis). On Cramer, the CEO quoted this potential at $700-800m given today’s prices. The true potential revenue is totally unknowable as it depends on the spread between domestic and foreign natural gas prices in 2016 and beyond. Could the same thing happen that occurred to the Sabine Receiving Terminal as shale developments in Europe and Asia bring down prices and make the long-distance transportation of LNG uneconomical? Who knows? What type of discount rate would you apply to this?
Short LNG / Long CQP
These concerns about future revenue bring me to why I favor a position of Short LNG / Long CQP. Although I believe LNG is overvalued on its own right, I’m concerned that management’s skill at raising capital and promoting their story of unquantifiable future revenues in a hot sector could make this a long and frustrating short. Take a step back and consider what they have built to date: they have turned $250m of recurring revenue and a story into a structure that supports over $3b in debt and over $1b in equity market cap!
There are two key events on the horizon: 1) successfully raising capital for the Liquefaction project and 2) successfully refinancing $550m of the Sabine senior secured due Nov 2013. If they trip on either of these hurdles, a short LNG position would work wonderfully. However, I believe there is a significant chance they get through both of these hurdles and the story drags on for an uncomfortably long time.
If you are short LNG / long CQP, you get paid to wait by collecting the 10% CQP distribution that feeds LNG’s value. I see potential scenarios playing out as follows:
The liquefaction project is successfully financed. The promise of future cash flow via the VCRA enables the 2013 Sabine maturity to be refinanced. LNG steadily loses value due to equity issuance to fund its annual deficits until 2016 as well as the August 2012 maturity. Any construction cost or time overruns accrue in your favor by hurting LNG’s value while CQP’s distributions remain tied to the Total and Chevron contracts which are unaffected.
Cheniere fails to successfully finance the Liquefaction project. The 2013 Sabine maturity is not refinanced as revenue from the existing contracts is insufficient. LNG and CQP are both zeros, but you collect the distribution until default is triggered in late 2013. You may even be able to get out of CQP at an inflated price as it is primarily retail-owned, a group not known for seeing the impending end of long-running distributions.
You receive a negative return as LNG steadily outperforms CQP up to 2016 and all the promises about significant revenue from excess capacity prove true.
|Subject||The Long-Term Commercial Bonus Pool|
|Entry||12/22/2011 12:58 PM|
Thank you for the thorough write-up. I am still going through it but have one initial observation:
|Subject||RE: RE: The Long-Term Commercial Bonus Pool|
|Entry||12/23/2011 09:40 AM|
I agree that dilution is potentially worse than modeled.
|Subject||Bloomberg commands for LNG|
|Entry||01/09/2012 06:18 PM|
What commands do you guys use on Bloomberg to look up LNG spot prices or curves for different regions?
I want to be able to see LNG prices for places like Japan or Europe. Thanks.
|Subject||Sempra is a long?|
|Entry||01/23/2012 02:51 PM|
The stock is $56. They are going to do a liquefaction facility too. If SRE's stock price reflected the same value for its liquefaction prospects as LNG's does, by my crude math it would be $8 higher, or 14%.
For now it's trading in line with peer utilities on a P/B basis with a growing 3.6% yield.
They just got a DOE permit to export 1.7 Bcfd to nations we have fair trade agreements with (not a big number of countries, but hey). Cheniere's permits cover 2.2 Bcfd from memory. They are further along in the process, so maybe give them some credit for that, but their ability to finance is a significant hurdle.
In stark contrast, access to attractively priced capital is not one of Sempra's great concerns in life.
Sempra's original underlying business was San Diego Gas & Electric. They subsequently acquired SoCalGas, the gas utility in Los Angeles. Both are easily best of breed on virtually every count. Management is good. Earnings are decoupled from demand. Fuel and energy costs are a straight pass-through to ratepayers. There are some other factors that also make them superior.
They are issuing long-term debt consistent with their authorized capital structure at rates well below the cost of debt they are authorized to recover. Shareholders keep the delta. This will end in 2013, but in the mean time they will build a big kitty of found money. Management will want to find a way to do some accounting manuevers so that benefit works its way through the income statement gradually rather than having a big earnings bump in 2012. But the substantial benefit will be there.
They have a pipelines and storage business. They're okay I guess. Those non-utility businesses aren't any worse than other non-utility businesses owned by the large integrated peers. They might be better.
I don't think SRE's stock price is getting credit for LNG export potential. Trading at ~1.6x book, in line with the group.
Assuming a 10x EBITDA multiple for the earnings from Cheniere's LNG import contracts, I estimate almost 60% of their enterprise value, or $2.5 billion, is due to the earnings potential of the export business.
If Cheniere deserves that much credit, then why not Sempra?
|Subject||RE: Sempra is a long?|
|Entry||01/23/2012 08:46 PM|
I would put my money on investor segmentation as an explanation for the divergence. Very few names manage to get fully priced on estimated earnings 5-10 years down the road since projections of this range are practically impossible for all but the most tractable businesses and IMO most “normal” investors justifiably assign near-0 value even to utility-like projects more than say 3 years out. LNG is a member of the even more exclusive club than manages to be overpriced on such metrics. In the similar instances that I can think of investors were playing for takeout/scarcity premium/sexy secular story: select development-stage oil sands, solar companies, miners, and (until recently) natural gas resource play stocks have been some examples of this and all ended in tears. Just because LNG is trading at a funny valuation does not mean that anything else should, not unlike the valuation of FSLR at $300/sh of SPWR at $120/sh did not really indicate that the fair value of a solar panel/module manufacturing business is 10-20x book.
|Entry||01/24/2012 12:00 AM|
CQP sold off 10% today (1/23)
If LNG issues subordinated units to fund LNG liquification trains is that not the best outcome for CQP.
CQP is subordinated to the project level debt at Sabine Pass which is tied to TUA from 2 majors.
If additional subordinated and project level is issues for liquification trains - CSFB assumes $2 bil. of subordinated units. The the current CQP units have an additional security (subject to priority of project level debt) in case LNG ever files for bankruptcy.
Given LNG tight cash flow profile - it is unlikely to issues as regular CQP units outside of the current 11.2 mil. public float to minimize cash payments to unit holders.
Am I missing anything in that the best outcome for CQP holders is LNG issues subordinated units, invests billions in liquification plants and issues more equity converts at LNG level.
|Entry||01/24/2012 11:14 AM|
bruno677: I agree. After the selloff late yesterday I thought for sure it was somebody trading ahead of an announcement for a secondary offering, but then nothing. I happened to get lucky shorting a bit in the morning at 21 and covering at 19 1/2 towards the close. I'll take it, but WTF.
dr123: I agree. Investor segmentation seems like the best explanation.
max78: That presentation is brazen. The promotion is running at full tilt. These guys would be highly effective if they applied their marketing skills to running a SuperPAC.
|Entry||01/24/2012 12:34 PM|
i went from a long cqp/short lng trade to long both (on just a fear of being killed by bullish clueless street research) and am now long cqp and bought into weakness below 19.50
i dont think anyone on the street understands this structure - I know when you dig into it and I have dug pretty deep in 2008 in this name - the ceo is not the master of structures but of buying any product pitched by the first banker to walk thru this door and adding strucures on top of structures.
i cannot figure out how they are going to raise $2 bil in equity to then raise another $3bil. in project level debt to build a liquidifcation facuility
- subordinated cqp units - but who buys mlp units with a current cash flow stream
my fear in a short trade in either cqp or lng is a major buys lng to access the option
cqp is all retail held and I think the vol is basically hf guys who are long lng trying to figure out or assuming dilutions to raise $2 bil.
i dont see the mlp market funding $2 bil. of new cqp units - there are 19 mil. cqp units out there - 380 mil. of value - the new 2 bil. dilution would be 5 times the units out there in public float - add a pik feature or discount feature as proposed by csfb and there woiuld be zero retail interest for it
what ever they figure out or try to figure out how to raise $5 bil will be what drives this trade in cqp and lng
|Entry||01/24/2012 03:30 PM|
Perhaps this was yet another instance of market segmentation where the more level-headed investors in CQP got spooked by the CHK NR / the performance of NG while the investors in LNG continued to have a good time in their own world?
|Subject||RE: RE: RE: CQP|
|Entry||01/24/2012 08:41 PM|
I completely agree with the LNG short thesis. My concerns are with the CQP long portion as it has the potential to dilute the return from the LNG short, or worse, in some interesting scenarios.
|Subject||RE: RE: RE: Update|
|Entry||02/28/2012 12:40 PM|
|Subject||RE: RE: RE: RE: RE: RE: Update|
|Entry||02/29/2012 02:12 PM|
Biffins, I have little basis for speculating re any potential changes in the scaling structure. If the history is any guide, we will have a hard time finding information until it shows up in the filings and I don’t imagine the structure getting more favorable for Cheniere given the leverage that Blackstone appears to wield, so this does not seem like a major uncertainty.
|Subject||RE: Model update|
|Entry||03/08/2012 04:06 PM|
|Subject||RE: RE: RE: Model update|
|Entry||03/09/2012 03:59 PM|
Docstoc.com was reluctant to let me download the document unless I trusted them with my CC (no option to use PayPal or Google as an intermediary was provided) or gave them access to my FB account with permission to (among other things): post to FB as me, post status messages, notes, photos, and videos on my behalf, and access my data at any time. I spent way too much time as an engineer to be keen on any of the above. For anonymous sharing of large data files I usually create a dummy Google or other cloud accounts or use the likes of now defunct Megaupload: DepositFiles, RapidShare, etc. but these may be widely blocked these days.
|Subject||RE: RE: RE: RE: Model update|
|Entry||03/09/2012 04:14 PM|
I hear you. That Facebook stuff is creepy. I'll figure out an alternative way to post it.
|Subject||RE: A potentially dramatic finish to the week|
|Entry||03/14/2012 02:10 PM|
Thank you for these insightful details. While the environmental opposition and the efforts by NG consumer lobby to torpedo the project were known, the magnitude of the issues you pointed out was a surprise to me (http://money.cnn.com/2012/03/14/news/economy/sabine-pass-natural-gas/, http://www.lnglawblog.com/02092012sabinepasslng2/). I’d love to see the list of recent funders of the Gulf Coast Environmental Labor Coalition...
|Subject||RE: RE: A potentially dramatic finish to the week|
|Entry||03/14/2012 04:04 PM|
Thanks for the links. Wouldn't surprise me if the GCELC had the support of a group with a name like "Americans for Affordable Energy" which was really just made up of a few companies like Dow Chemical and CF Industries, but then again I am more cynical than the average bear.
Tomorrow's FERC meeting starts at 10am Eastern if I remember right.
By the way, thanks for highlighting the Section 382 ownership change issue. In fact Cheniere did trigger an ownership change in 2010 Q3 which affects $855 million of the $1.045 billion of Federal NOLs I estimate they have. Using August 31, 2010 as the change in ownership date (simply the midpoint of the calendar quarter), their closing share price of $2.89 that day on the 57.6 million shares outstanding at that time placed a market value of $166.5 million on the equity.
Multiplying that equity value by the IRS's long-term tax exempt rate of 4.01% on that date I estimate they will be able to utilize a maximum of $6.7 million per year from that tranche of NOLs. With a 20 year carryforward limitation it looks like they'll be unable to use them beyond 2030. In my model that leaves $748 million of the NOLs unused. Yikes!
This has a dramatic impact on the value of the stock. When I was growing up I had a stereo in my room with an equalizer. If you treat the assumption deck in my model like an equalizer and move all the settings up to the most optimistic levels, after accounting for last night's secondary I am now getting a value of $9.72 per share on the contracted revenues alone. If you enable the arbitrage revenue feature, hold today's current domestic vs. intl gas spreads constant indefinitely into the future and assume 97% plant utilization, I get a value of $15.64 per share.
That's pretty good music. Maybe not as good as my old Paula Abdul tape, but still not bad.
|Subject||RE: Liquefaction not approved today|
|Entry||03/15/2012 12:05 PM|
I’m still in a mild state of disbelief over the original EPC cost estimates. Since that time the world has changed quite a bit: With 8 US liquefaction projects targeting the Atlantic basin and 7 US and Canadian projects targeting the Pacific basin by 2020 and with the cost index is in the uptrend, I suspect Bechtel has significant bargaining power in re-negotiations that would result from the delay.
|Subject||Cheniere Export Authorization Volume Mystery|
|Entry||03/28/2012 12:23 PM|
Cheniere Export Authorization Volume Mystery
After snarfy’s exposure of some interesting headwinds for the project at the FERC, I have been doing more reading on the issue: Does anyone have a second opinion on whether Cheniere actually has the approval to export in excess of 16mtpa from Sabine Pass? On p5 of the latest presentation they discuss “additional long-term contracts for ~2.0 mtpa winter volumes.”
It appears that the existing approval only covers 16mtpa: On 5/20/2012 Cheniere received authorization to export 803Bcf/yr / 2.2Bcf/d / 16mtpa / 4mtpa/train (the original nameplate capacity):
“Under the order, Sabine Liquefaction received long-term, multi-contract authority to export on its own behalf, or as agent for others, up to the equivalent of 803 Bcf per year (approximately 16 million metric tons per annum (“mtpa”)) of domestically produced natural gas as LNG. The authorization commences the earlier of the first export or five years from the date of issuance of the authorization. The authorization is conditioned upon the satisfactory completion of the FERC review process and upon Sabine Pass commencing export operations within seven years of the issuance of the order.”
The signed “definitive commercial agreements” add up to precisely 16mtpa. It sounds like the Energy Department will not be approving additional exports for some time. From the 3/28/2012 DJ Newswire:
“ The Energy Department--which has to approve natural-gas export plans, in addition to FERC--is studying the impact of exporting U.S. natural gas. The first part of the study was finished earlier this year. A second part of the study will be finished by the end of the summer,
Once the study is finished, "the department will then take time to review the results and develop a path forward for making public interest determinations for the pending export applications," Gibbons said. "No timeline has been set for making those determinations."”
So it seems that at present Sabine Pass does not have the authorization for exports above 16mtpa and the decision would have to wait until studies and reviews are completed, together with half-dozen competing projects.
|Subject||RE: RE: Cheniere Export Authorization Volume|
|Entry||04/13/2012 09:46 AM|
Indeed, though a question remains whether they will be authorized to export 16mtpa (specified in their application and contracted), or 18mtpa (claimed as the export volume in their investor materials). While this will not matter for the stock price direction in the short term, it ought to matter a lot for those considering funding the remainder of the equity/debt portions of the project.
|Entry||04/17/2012 10:58 AM|
given that lng has permints, blackstone backing and bank finance - charif survived
what is lng worth ?
|Subject||RE: RE: valuation|
|Entry||04/17/2012 02:30 PM|
I get roughly similar numbers given similar assumptions. Not to beat a dead horse of assumptions, but among other things:
|Subject||RE: RE: RE: valuation|
|Entry||04/17/2012 02:55 PM|
Just to clarify on the arbitrage revenue - shouldn't they be able to make money that way (assuming the spreads remain wide) during the period of time between when the first two trains come online and when the Phase 2 trains come online?
The way I was thinking about it after your comments the other day, they have 16 mpta authorization, the first two trains give them 9 mpta of capacity, but only 7.7 mpta of that is contracted out, so until the Phase 2 trains come online, thus using up the full 16 mpta authorization, they should be able to use that 1.3 mpta of unused capacity to make money from arbitrage (simplistically assuming 100% of nameplate utilization).
|Subject||RE: RE: RE: RE: RE: valuation|
|Entry||04/17/2012 04:19 PM|
For Phase 1 I am getting to a bonus pool of $290 million.
For Phase 2 I am getting to a bonus pool of $394 million.
The difference is largely driven by the higher average pricing of the contracts in Phase 2.
Assuming a payout allocation of 25% cash and 75% equity for each Phase, that leads me to
$513 million of stock issuance. On the current share price of $17.60 I get
dilution of 29.1 million shares.
|Subject||RE: RE: RE: RE: RE: RE: valuation|
|Entry||04/17/2012 06:00 PM|
Snarfy, good point re interim arbitrage revenue while trains 3 and 4 are under construction, though the impact only appears significant in the scenario where phase 2 does not get funded or is severely delayed – not exactly a positive outcome.
|Subject||RE: RE: RE: RE: RE: RE: RE: RE: valuation|
|Entry||04/17/2012 09:15 PM|
I'm curious why we would be coming to similar bonus pool dollars but a materially different amount of share issuance. What were you referring to in the 8-K?
|Subject||RE: RE: valuation|
|Entry||04/19/2012 05:24 PM|
On a stand-alone basis it is hard to judge the value and you are probably right about BV being a reasonable estimate in a Venezuela scenario that for now appears to be playing out. Here are some reasons why folks may find YPF attractive still. Further down the road, this turns into PDVSA/PEMEX or Petrobras/Ecopetrol. There could be reasons to own YPF in both cases:
- In a Venezuela scenario AR will ultimately have to go after all the other player in the country as production and investment collapse, imports grow further, require burning more (foreign) furniture to keep the house warm. YPF has ~30% downside to BK and will likely ultimately be worth more in arbitration (see HNR/VZ arguments) but some micro-caps have downside essentially to 0. So there may still be a decent pair trade here.
- If this was a rational and calculated effort to grab Vaca Muerta before it got so big AR couldn’t get away stealing it, AR now has what it wants and the next step will be cooling the tempers, trying to pay off REP, and shopping the assets around to attract investments. In this scenario there is short-term upside from AR offering something closer to the value REP will ultimately get in arbitration (based in part on the recent offers and previous sales of YPF interest) to make them go away and get out of the way of shopping the assets around. There could be longer-term upside depending on the entity at which the Chinese capital that is being talked about gets invested and whether it provides some cover for the minority investors. For instance, if the Chinese take the Eskenazi and REP stakes, things get interesting.
Perhaps we can frame the discussion in terms that will appeal to both points of view: Snarfy built a very thorough framework for valuing LNG under whatever assumptions one chooses. One can characterize the default assumptions chosen as a P5 scenario (LNG shares have 5% chance of being worth more and 95% chance of being worth that or less). Incorporating the most clear objections to the default assumptions to get to a P50 estimate using Snarfy’s model, the conflict appears largely resolved:
- CQP cost of debt = 9.0% given 18.0% cost of CQP equity implied by the deal (probably still generous).
- LNG cost of equity = 15.0% given 18.0% cost of CQP equity implied by the deal (probably still generous).
- 60% debt for T3-T4
- $600/ton CapEx for T1-T2, $700/ton CapEx for T3-T4
- 1/1/2016, 1/1/2017 start-up (already a Q behind the schedule for T1-T2 and only now getting around to shopping the debt around for T1-T2)
- No arbitrage revenue (no current authorization and no material interim volumes assuming T3-T4 constructions).
Result: $6.26/sh DCF
|Subject||RE: RE: RE: valuation|
|Entry||04/19/2012 05:25 PM|
(Apologies for accidentally pasting my YPF reply below in addition to the LNG stuff)
|Subject||RE: RE: RE: valuation|
|Entry||04/19/2012 06:48 PM|
Yeah, something in the single digit range seems realistic. It occurs to me that the financing commitments should occur soon, which will trigger formation/funding of the bonus pool. At that point I would think an 8-K will be filed. Hopefully that will blow people's minds. I mean really, a $700 million bonus pool?
That's Compensation Hall of Fame material.
A couple other points:
1. I see that Sempra is putting out capex numbers on a per ton basis that are similar to Cheniere's for their liquefaction project, although theirs will be based on a technology from Air Products as opposed to ConocoPhillips.
Sempra is saying $5-6 billion for 12 mpta, or $458 per ton when taking the midpoint.
2. Interesting article in the Journal today about Dow's new facility south of Houston. It mentions
the competition this will create for labor and materials in the region. The onshoring of gas-fueled manufacturing could turn this into a serious problem for Cheniere.
|Subject||RE: RE: RE: RE: valuation|
|Entry||04/20/2012 04:34 PM|
|Entry||05/31/2012 08:26 PM|
A lot has happened here in the last few weeks. Spent some time on this and would love for someone to tell me where I'm wrong, but I'm coming up with LNG being worth $40/share in 2017.
Once they close the bank deal (this month), Trains 1&2 are fully financed (they will have raised $6.5b). Trains 3&4 will sign another fixed-price EPC contract with Bechtel and will be financed around year-end. Key risk here is costs on Train 3&4 (see assumptions below) and any overruns beyond what i've got below.
Pro forma for the equity deals, LNG is unlevered (~$220mm in net cash) and CQP is unlevered (~$400mm in net cash with gross cash of $6.3b).
When trains 1-4 are built (~2017), net debt will be ~$10.5b. My assumptions: 1) $2.5b for each train vs. guidance of $2.25-$2.5b and Bechtel contract of $1.95b; 2) capitalized interest based on indicative pricing on the debt deals they are currently doing; 3) $1.0b contingency for overruns (~10%). I also assume they issue an incremental $1.0b in equity at CQP and raise any remaining funds in bank debt similar to what is being raised to fund trains 1&2.
Shares outstanding by 2017: ~555mm (based on 3.5% PIK in Blackstone/LNG Class B equity and incremental $1.0b equity raised @ $20/share).
EBITDA will be ~$2.7b. EBITDA - interest - capex will be ~$1.9b. On 555mm shares and after going through the LP/GP splits, a $2.00 dividend can be supported by $1.1b in distributions. A $2.50 dividend can be supported by $1.5b in distributions. At a 7% dividend yield, CQP = $29-$35/share stock.
A simplier way of getting there: 10x EBITDA = $27b EV less $10.5b net debt = $16.5b market cap / 550mm = $30/share.
LNG will own ~240mm shares (of the 550mm) in 2017. That puts their stake worth $7.2b ($33/share to LNG) on the current 216mm LNG shares (assuming 30mm shares issued to management). As I mentioned above, LNG is now unlevered ($220mm net cash) and FCF positive so won't need to raise additional capital between now and 2017.
LNG will also have two other sources of value:
1) GP stake: At those $2.00-$2.50 CQP dividend levels, LNG's GP stake earns $10-100mm in GP distributions. 12-15x = $120mm-$1.5b (up to $6/share)
2) Merchant optionality: at $90 oil, 15% LNG/oil ratio and $5.50 gas, the 2.0mm mtpa merchant capacity will generate ~$200mm in EBITDA to LNG. So maybe worth another $1.0b let's say ($4-5/share).
Total: $40/share in 2017.
Anyone see any flaw in this?
|Subject||RE: LNG thoughts|
|Entry||06/02/2012 11:45 AM|
A few initial thoughts:
I am modeling 46 million LNG common shares issued to satisfy the long-term commercial bonus pool, not 30 million.
If you're going to put an EBITDA multiple on 2019 run-rate earnings and work backwards, seems like you should take out the NPV of cash payments for the bonus pool. I am at +$500 million undiscounted. (Maybe you already have that in the high level numbers you're communicating.)
The window to earn arbitrage trading profits for their house account will only last for the two year period between the Phase 1 and Phase 2 trains coming online. I am modeling a cumulative total of $1.2 billion of cash gross margin from arbitrage over those two years, rather than $200 million on an ongoing basis.
In your CQP gross/net cash numbers of $6.3b/$400m pro forma the equity deals, did that also take out the $2.2 billion of existing secured debt?
I haven't updated my model for the Temasek/RRJ investment and updated Blackstone terms, but I'm using more optimistic construction cost assumptions than you and I was getting to a mid-teens share price. I wasn't even modeling anything for maintenance capex.
I'll try to update my model this weekend and post it so we can compare notes.
|Subject||RE: LNG thoughts|
|Entry||06/03/2012 11:09 AM|
Perhaps this is obvious: Even assuming a highly theoretical scenario where over 5 years things go perfectly and glossing over the issues with getting to your 2017 $40/sh valuation, deriving the current value is not obvious: Blackstone units are structurally senior to LNG common and the alleged plan calls for 3.5% quarterly (15% annual) PIK (though closer reading reveals that Blackstone has not committed to anything yet). The implied cost of LNG common is thus >15%. $40/sh in 2017 discounted to the present at 15% is ~$18/sh, Discounted at 20% it is ~$13/sh. So one could argue that the markets are currently discounting something close to your view.
Working through Snarfy’s (heroically comprehensive) model from earlier on this thread and keeping in mind Biffins’ and others’ observations regarding the very generous default assumptions should illustrate the main sources of delta.
The above questions are all theoretical until we get some actual project financing. I am puzzled by how such negotiations and the supposed “setting of the rate” are consistent with the recent non-plan insider sales and the absence of any official disclosure:
- On 5/17 Souki sells 130K shares (18% of his position) outside of a plan, presumably while not in possession of any material non-public information.
- On 5/24 LNG “Announced Launch of New Credit Facilities” (the text revealed that they had a plan to have a meeting with bankers on 5/29 to syndicate these). Perhaps this was not a material event.
- On 5/25 Souki sells 100K shares (17% of his position) outside of a plan, presumably while not in possession of any material non-public information.
- On 5/29 “BN 05/29 19:47 Cheniere Energy Sets Rate on $2 Billion LNG Project Loan” story on BBERG – no filing or NR from the company and the story credits an anonymous source – weird. One would certainly expect this to be a material event worthy of proper disclosure and a block on sales, if true.
- On 5/29 LNG files a new presentation without mentioning the credit terms.
Assuming the sales have been properly executed, how could any material progress on financing have been made?
|Subject||RE: RE: LNG thoughts|
|Entry||06/03/2012 02:15 PM|
The bonus pool is being renegotiated right now with the board. The company seems to be guiding investors to 25-30mm to be issued.
What is the $500mm of future undiscounted bonus pool? I thought the 25-30mm share award covered the bonus pool. Is there anything further?
Yes $2.2b sr sec debt is in $400mm pro forma net debt at CQP. They started with $2.1b net debt ($2.2b secured less ~$100mm cash). Add to that $6.5b of funds raised and $4.5b of debt incurred to raise the funds ($2.0b of equity from Blackstone and LNG, $2.5b term loan A, $2.0b in the two tranches of term loan B). Take out the $300mm cash paid to LNG for CTPL.
Ultimately CQP is only going to be ~4x levered (~$10.5b net debt on $2.7b EBITDA assuming $1.0b of future equity issued) so there will be plenty of room to refinance the existing $2.2b sr. secured. EBITDA = $2.7b and interest expense will be ~$750mm = $2.0b of distributable cash before debt amortization. If we assume they'll need to amortize ~$250mm/year (x 20 years = $5.0b of debt amortized, leaves $5.5b of net debt on CQP when the contracts expire in 20 years), that would leave $1.75b that could be paid in dividends. If you assume they pay out only $1.5b on total LP/GP distributions, that works out to be $2.50/share distribution at both CQP and LNG.
When I take $40/share for LNG and discount it back 5 years at 12%, I get $23. In the numbers, I've included all the dilution from the Blackstone/LNG Class B PIK, the management share award (@ 30mm shares), etc.
The insider sales are interesting - any chance he's doing these now to keep the LNG stock price down while they negotiate their options award w/the board? LNG is done raising capital and he's about to have a huge amount of shares issued to him. The lower the stock price the better b/c it will optically look a lot better.
|Subject||RE: RE: RE: LNG thoughts|
|Entry||06/04/2012 02:21 PM|
“Add to that $6.5b of funds raised and $4.5b of debt incurred to raise the funds ($2.0b of equity from Blackstone and LNG…”
“LNG is done raising capital”
It seems a little premature to speak of these funds as having been raised, contrary to the titles of the recent NRs. While the title of the 5/15 NR was: “Cheniere Agrees to Sell $2B of Equity for Sabine Pass Liquefaction Project”, the reality of the associated 8-K is that “The Blackstone Unit Purchase Agreement may be terminated by either the Purchaser or the Partnership … if a funding notice has been delivered and the Purchaser has not funded within eleven business days thereafter”. So far the only funding that has occurred with some consistency is LNG share issuance following these kinds of NRs...
Moreover, any material undisclosed progress in raising debt would prevent insider transactions.
“When I take $40/share for LNG and discount it back 5 years at 12%, I get $23”
Given that the objective metric of the Blackstone proposal suggests 15% cost of equity senior to LNG common, and the cost of equity implied in the current international utility valuations, not sure what is the support for the 12% discount rate.
“The insider sales are interesting - any chance he's doing these now to keep the LNG stock price down while they negotiate their options award w/the board?”
Per the 04/17/12 post by rookie964 the bonus pool share issuance price appears to have already been determined. Even if it were not, there are much easier ways to talk down the stock (that also do not assume insider trading on the part of the management): how about not issuing NRs that are designed to create an overly optimistic pictures of the capital raising progress.
|Subject||My new valuation model|
|Entry||07/15/2012 10:04 PM|
This took a ridiculous amount of time to update and refresh.
I have updated it by incorporating the new terms of Blackstone's investment spelled out in the 8-K filed May 15, 2012. This one is also more tightly constructed and comprehensive than my prior models. If the models I see in the various sell-side reports are representative of what the broader investment community is using, then I think this valuation tool is an advantage over 99% of the market.
Let me know if you have any problems downloading it.
--LNG is worth $17 max using a very bullish set of assumptions
--CQP is worth $25 under the same assumptions
--LNG's value can deteriorate quickly if you relax those assumptions
--LNG gets a 3% cut of CQP's capex during construction, which goes some way to support liquidity and mitigate the negative effects of potential cost overruns on the equity value during Phase 1
--LNG is trading at 6.8x 2019 EBITDA
--Revenue from arbitraging regional gas spreads is now more impactful to LNG's equity value than previously because of the new way the cash flows get shared between LNG and CQP
--If you took arbitrage revenue out of the valuation LNG would be worth $2 less per share, so regional spreads (vs. Japan) need to stay high to justify the current stock price
--Since LNG doesn't need to do any more secondary offerings a rising stock price no longer has a reinforcing and positive impact on value
|Subject||Another secondary offering announced|
|Entry||07/16/2012 04:50 PM|
for 20 million shares plus a 3 million share over-allotment. I thought they were done selling stock, but apparently not. Maybe the next secondary will be to get some walking around money.
|Subject||RE: Another secondary offering announced|
|Entry||07/17/2012 12:29 PM|
snarfy - thanks for this. I unfortunately can't access your detailed model but have built my own. I'm coming up with a very different conclusion, would love pushback.
The deal today was done b/c Creole Trail is staying at LNG (was slated by Blackstone to be sold to CQP for $480mm). After this deal, LNG is unlevered and has $340mm of net cash. They will need to spend $90mm to reverse Creole Trail so this takes net cash down to ~$250mm. LNG is FCF breakeven going forward (G&A offset by management fee income from CQP). It is likely that incremental capital will be used to support the equity sliver for trains 3/4.
Trains 1/2 are now fully financed and the financing turned out to be very favorable - $3.6b was raised in the bank market at L+350. Together with the $2.0b of Blackstone/LNG funded equity, they have $5.6b raised. From what I can tell the only remaining issue is the banks are requiring a formal FERC denial of the Sierra Club request which seems to be likely within the next few weeks. Then it funds and Trains 1/2 get built.
Trains 3/4 will require similar financing and assuming this deal sets the market/precedent i don't see any reason why it shouldn't be funded on the same terms. We have assumed ~$3.5b in bank, $1.0b in high yield, $1.0b in equity.
Once trains 1-4 are built out (online 2016-2017/2018), CQP will generate ~$1.9b in distributable cash. Assuming they amortize ~$300mm/yr of their $10b in net debt, they will be able to support a ~$2.70/share distribution to LP holders based on the fully-diluted number of CQP shares (assuming full dilution on the Blackstone/LNG Class B units). This yields ~$600mm pre-tax to LNG (on their LP stake).
Other cash flow sources:
GP stake: ~$180mm pre-tax (after running the $1.6b of dividends through the waterfall).
Merchant piece: ~$190mm pre-tax at $80 oil / $4.50 gas / 14% LNG pricing to oil (~$11/mcf)
Creole Trail: $80mm EBITDA (staying at LNG, why they had to do deal today)
Total: $1.05b pre-tax. After tax ~$850mm (assuming 20% b/c they will have large tax shields passed on from CQP).
LNG will have ~245mm fully-diluted shares outstanding pro forma for today's offering and ~25mm shares awarded to management. That implies ~$3.45/share in distributable after-tax cash flow. At a 7% yield that implies a $50 stock by ~2016/2017 (4-5 years out).
If I discount back by 12% per year = $28/share.
Seems pretty asymmetric at this point.
I also don't understand the argument for LNG being worth less than $2/share in your downside case - they have a $250mm in net cash and a pipeline asset worth $480mm = $703mm / 245 s/o = $3/share before you consider their equity interest in CQP (including the $500mm they have invested alongside Blackstone in the Class B shares). What is the argument for why CQP has no equity value, esp to Class B shareholders?
Thanks for thoughts.
|Subject||RE: RE: Another secondary offering announced|
|Entry||07/17/2012 02:20 PM|
Jso, given that Snarfy has made another heroic effort in modeling this complex business with lots of hidden variables (some leading to substantial equity value leakage), and given the number of elements missing from quick stab at valuation you take below (some discussed below on this thread), perhaps it is most efficient for you to bring up the issues you see with Snarfy’s model. I had no problem downloading, then opening it, but if you have issues maybe he will be nice enough to zip it to present GOOG Docs with a binary file that it will not monkey-around with? Some of the adjustments to make Snarfy’s model less aggressive have been brought up below by Biffins and me.
|Subject||RE: RE: RE: Another secondary offering announced|
|Entry||07/17/2012 06:13 PM|
jso1123: I'll try to upload a zip file when I get home from work.
Here are the main differences I'm seeing between our two models:
1. I am arriving at CQP full run rate distributable cash flow of $1.7 billion while you are at $1.9 billion,
although interestingly I get to a $700 million full run rate of pre-tax cash flow to LNG on their LP stake while you are at $600 million.
2. I am arriving at ~$400 million GP distributions to LNG while you are at $180 million pre-tax
3. For arbitrage income, I have LNG (Cheniere Marketing, LLC) generating $580 million of pre-tax cash annually in the 2 years between when Phase 1 and Phase 2 come online, of which they pay $170 million in each of those years to CQP, but I am not modeling any income after that since they would exceed their export authorization (assuming the take or pay counterparties use their volumes, which by definition they should if the regional basis differentials are high enough to offer the arbitrage opportunity in the first place).
Are you modeling that $190 million indefinitely?
4. I am modeling tax rates of 35% federal and 8% state (Louisiana), but I adjust them for the NOLs and depreciation tax shields on the CQP distributions. That works out to 32% effective tax rate on a full run rate after the NOLs are burned off. Maybe I should be modeling the company as a Texas taxpayer for state purposes and using a 1% rate?
5. You are modeling 25 million shares awarded to management whereas I am at 47 million.
Is the 25 million share grant an adjusted number management is guiding to, and are you modeling anything for the cash portion of the bonus pool?
Just to clarify on the $2/share comment: I'm not LNG is worth less than $2/share, I am saying if you take the arbitrage income out of the valuation then the stock would be worth $2 less than it otherwise would be.
Any chance you could post your model? It would be great to be able to compare, although I appreciate you might not be able to.
|Subject||RE: RE: RE: Another secondary offering announced|
|Entry||07/17/2012 06:32 PM|
I went through the model, thanks snarfy, a lot of work went into this and thanks for sharing it. Ironically we come out in largely the same place (you are at $3.15/share in distributions at LNG, I am at $3.50/share). Here are a couple things I noticed in the model that I think you missed (my apologies if they are in the model and I actually missed them):
1) CQP makes money on the gas margin (they capture 5-6% of the 15% mark up on Henry Hub as gross margin)
2) You provide no cash flow for the merchant capacity for either CQP or LNG - at current oil/gas spreads that is ~$600mm to split b/t CQP and LNG. On normalized numbers ($80 brent, $4.50 HH) I calculate ~$190mm to split b/t them.
3) You are using a 33% tax rate at LNG but they are going to have significant NOLs plus CQP passes through their depreciation shield to the LP/GP unit holders so LNG will benefit from that too. We are using a 20%.
So I guess we agree on the model but disagree on the conclusion - if LNG will be paying a $3.00-$3.50 distribution that is largely contracted, why won't it trade at 3-8% yield like the comps? Even at 8% that implies a $40 stock.
I think the discussion on the equity price of the Blackstone deal that dr123 brings up is a bit of a red herring for the following reasons:
- The cost of the equity is factored into the share dilution which gets to the $3.00-$3.50/share distribution
- Private equity is always more expensive than public, Blackstone got a better price b/c they are de-risking the situation and putting their name on it
- Even if I use a 15% discount rate on a $50 target price (discounted back 5 years) I get a $25 stock today that compounds at 15% a year.
What's the downside? Once Sierra Club ruling happens, this is getting built and it's fully financed. It's going to happen and it's fully contracted.
|Subject||RE: RE: RE: RE: Another secondary offering|
|Entry||07/17/2012 06:40 PM|
Mgmt guiding investors to 25-30mm shares (it's being negotiated now, will be resolved in next few weeks)
On merchant, the have authorization for 16.0mm tpa to non-FTA countries, but remaining 2.0mm tpa can be marketed to FTAs (Korea being most important one). Obviously the way this works is they sell their 2.0 mmtpa into Korea and whoever they displace (European, Asian, Australian oil & gas co) sells their cargos elsewhere at the same price and LNG pays them some spread to compensate them. This is easy to get around for small volumes like this (<5% of the global market).
I would love to post model but we can't for compliance, i apologize b/c you have been generous to post yours.
So what is the bear case from here? I just don't see it if we are arguing about what discount rate to use (12% or 15% like Blackstone). For me biggest issues are:
1) getting Sierra Club issue behind them
2) getting financing for trains 3/4
3) cost overruns (I think risk here is quite low)
|Entry||07/17/2012 07:17 PM|
Nice, I'm glad you were able to get it open. Thanks for taking the time to go through it.
1. I need to double check how/if I've dealt with the gas margin
2. I do have merchant income built in. Look in the "Annual Modeling" tab starting with row 352.
Are we in agreement that after all 4 trains are built they will not have spare capacity under their export authorization? This would be a giant swing factor with respect to value.
3. I have modeled the NOLs and depreciation shield, although this discussion has got me wondering if applying 8% Louisiana state income tax rate is proper as opposed to using a 1% rate for Texas. Shit.
Btw I also need to look at including earnings from Creole Trail but it's probably a good sign that we're getting such similar #s for LNG's after-tax cash flow per share.
To my way of thinking the stock is pricing in the execution of a $10 billion capital project on time, on budget, with the second half of it yet to be financed, and partly relies on current regional gas spreads holding constant for several years.
If Europe melts down or the credit markets weaken the equity is vulnerable. If gas spreads compact either from overseas LNG supply coming online or Henry Hub rising a buck or two due to production rationalization that could shave material value off the stock. If a hurricane hits they're in big trouble partly from physical property damage but mainly from construction delays. Time is of the essence. With a high cost of equity the time value of money eats value in a real way. The project is competing for labor and materials with substantial projects in the region. Cost inflation is a pain point. Souki's fitness as a steward of public capital is questionable, although having Blackstone on the scene will put a leash on him to some extent, and I have to respect what he's been able to accomplish so far with this project.
The comp plans are outrageous. He'll dilute the shit out of shareholders without thinking twice.
I think the vast majority of people on the other side of the short trade have no idea what they own due to the complexity of the corporate structure and the cash distribution schematics. (You are an obvious exception. I don't mean any of this to sound argumentative towards you. I really appreciate this constructive dialogue.) Yes, Blackstone is involved, but they are getting very special terms. The sell side analysts who cover this are morons (although the Barclays guy seems reasonable). And Cramer. just kidding.
So the stock's upside from here is that it accretes upwards at its cost of capital, and the downside is potentially huge.
To my way of thinking LNG's upside seems like what you could get from an undervalued but growing blue chip like MSFT (assuming I've got the valuation right, which we can debate) and the downside seems like that of a biotech with two drugs where one could very well fail.
|Subject||jso1123 - reply to your 6:40 PM message|
|Entry||07/17/2012 07:26 PM|
I started writing the other message before I saw your message at 6:40.
No worries about sharing your model. I hear you with the compliance issues.
Good point about Korea, but why is it necessarily safe to assume Cheniere's cargos
will be the ones winning that business? The export facilities in western Canada
should have a transportation cost edge and presumably their wellhead gas prices
won't be much different. I haven't looked at their economics so I'm really just thinking
out loud here.
|Entry||07/17/2012 07:33 PM|
I agree on risks between now and raising capital for trains 3/4. Once that is done, i think the risks are reasonably minimal:
- Contracts are turnkey/fixed price
- Bechtel has built a large number (I think ~40%) of global LNG facilities and everyone has been delivered on time (not necessarily on budget)
- Degree of difficult here is much lower than other LNG projects: 1) no upstream part of the project; 2) port already built/dredged; 3) standard, commoditized LNG technology; 4) building in the US and even better in Louisiana (friendly state); 5) US has no labor issues (high unemployment, wages low) and it's easy to solve stuff. Compare that to building in Nigeria, Papua New Guinea, Russia, etc where you are importing and housing all your skilled labor.
Bechtel btw built SPLNG and it came in on-time/on-budget despite hurricane Katrina hitting it.
|Subject||RE: RE: RE:|
|Entry||07/18/2012 09:36 AM|
Biffins summarized some of the remaining issues very well on 3/14/2012:
Also Sabine Pass refinancing will almost certainly be more expensive than the original financing.
Also equity/debt issuance for Trains 3 and 4 might be affected by any issues that surface for Trains 1 and 2, but that's speculative.”
Allow me to drill into a few of these and other issues further: One way we look at it is under perfectly favorable scenarios it (on average) compounds at ~15% annually over the next 5-6 years, yet faces a number of sources of 50-100% downside with lower-risk peers (international utilities) currently trading ~6x EBITDA generally (a level of little, if any, value for LNG common) without anywhere near the comparable financing and execution risk. Some of this is likely “scarcity premium” given limited ways to play NA liquefaction that may quickly dissipate under an adverse shock:
- Spain/Euro: The credit profile of the revenue for Train 2 is a relatively junior derivative of Spanish sovereign. Beyond the theoretical possibility of the capacity payments being made in pesetas down the road making for a very interesting model indeed, Spanish government has been changing remuneration scheme for utility projects and generally looking for change under seat cushions. Fenosa is a private company so hard to look into, but their public information discusses some of the issues with tariff reductions. Public Spanish utilities are trading <5x EV/current EBITDA vs. Cheniere, which at least partially is a derivative, ~10x theoretic future one, with material incremental risks. In a world where things go perfectly well for Cheniere and it compounds at 15%/yr from here, some lower-risk longs exposed to similar factors can be expected to double. Related but less significant credit concerns apply to India.
- General macro: Plenty of utility-type strongly cash-flowing business with substantial re-financing risk over the next few years and/or exposure to peripheral Europe/Asia are trading <5x EV/EBITDA and single digit P/E multiples. It is very difficult to find a hedge for these at anywhere near LNG’s valuation. The Blackstone deal looks pretty efficient or even cheap in the current environment and probably reflects the basic reality of the high cost of project financing in the current environment, especially given the level of incremental uncertainty and macro risks Cheniere is exposed to relative to the alternative uses of capital.
- Project risk: Australian and other expansion projects (discussed way earlier in this and past LNG threads) where new trains (in some cases also built by Bechtel) are being added share the positive characteristics of Sabine pass, arguably carrying less risk since they are tack-on additions to existing liquefaction facilities: “1) no upstream part of the project; 2) port already built/dredged; 3) standard, commoditized LNG technology;” 4) building in Australia (or other friendly/low commodity and energy cost locales), yet such expansion projects generally faced substantially higher costs/massive overruns. In general, I can’t think of a comparable project being built on budget anywhere in the world in the past 5 years (and would appreciate examples to the contrary). Projecting the historic precedents it is not difficult to envision 30-50% cost overruns. Note that this is compounding as these issues will affect the cost of equity and debt financing for trains 3 and 4 plus capital providers may choose to see how construction of trains 1 and 2 are going given the novelty of this project, introducing additional delays and further dilution from the Blackstone PIK compounding.
- Misc. issues: The state of tax assets given potential change of control, insufficient authorized export volumes for arbitrage trading post-train 4.
|Subject||RE: RE: RE: RE:|
|Entry||07/18/2012 10:28 AM|
Fair points. A couple of thoughts:
- The comparison to Spanish utilities and their valuations seems too derivative to me to be relevant honestly. The asset is in the US and it's held by a US MLP that is owned by US MLP investors. I think that is the appropriate comp group
- Once they finance trains 3/4, i don't really see multiple sources of downside, i just see one - cost overruns. The plant is tolled w/take or pay contracts
- So drilling into cost overrun risk, I would argue that Australia is an extremely difficult place right now to build b/c of the massive boom in mining capex (combined w/all the other oil & gas projects) in a country with 25mm people. Truck drivers in Australia right now are getting $200k+ (been a bunch of articles about this in the last 6 months). Also keep in mind that all the Aussie infrastructure work happens in very remote areas relative to population and infrastructure. There is a huge E&C worker shortage, and this has been the big reason for the overruns. My understanding is that E&Cs aren't doing turnkey projects there, similar to what they all did in the oil sands in 2004-2008 - labor costs were spiraling and E&Cs refused to do anything except cost plus deals. Compare that to the US where we have a sizeable unemployment problem amongst a population of 300mm people. I think labor issues here are significantly easier to manage. You're building this in Louisiana with close proximity to population and infrastructure.
Lastly and probably most importantly on cost overrun risk, I think Blackstone would have done extensive due diligence on this before they committed $1.5b in equity. They aren't perfect but they are diligent and saavy so I put a lot of stock in that.
Thanks for the thoughts here.
|Subject||RE: RE: RE: RE:|
|Entry||07/18/2012 10:38 AM|
Here are a couple of good articles on Bechtel and LNG in Australia. The problem w/costs in Australia is clearly the labor shortages, the large volume of projects simultaneously in the region, and the strong Aussie dollar. I think the US is a significantly more benign environemnt for building right now.
|Subject||RE: RE: RE: RE: RE: Another secondary offering|
|Entry||07/18/2012 12:25 PM|
Thanks for the ongoing dialogue. You raise good points. A few other questions if you don't mind.
1. How much of a fee are you modeling that Cheniere would have to pay to displace cargoes headed for Korea in order to get that merchant income?
2. What are the drivers of that fee?
3. What are you modeling for transport costs to Korea now, and do you have a view on how much those costs would drop after the Panama Canal expansion project is complete?
|Subject||RE: RE: RE: RE: RE: RE: Another secondary offering|
|Entry||07/18/2012 05:34 PM|
Haven't dug into it in detail honestly but have to imagine it's an easy trade to do given that they sell a liquid global commodity. Seems like a arb someone will close for a modest spread.
|Subject||RE: European Exposure, etc.|
|Entry||07/20/2012 06:29 PM|
“The comparison to Spanish utilities and their valuations seems too derivative to me to be relevant honestly. The asset is in the US and it's held by a US MLP that is owned by US MLP investors. I think that is the appropriate comp group”
|Subject||RE: I'm out|
|Entry||09/12/2012 10:44 AM|
They had their analyst day yesterday in Houston, I went. If you haven't had the chance, pull the presentation and go through it. They laid out the distributable cash that CQP and LNG will generate under the economics of trains 1-4 and it's pretty astounding. LNG is going to generate $4.00/share pre-tax distributable cash assuming no merchant contribution and $8.00/share pre-tax at current spot economics (which obviously book ends the extreme bull case b/c it's unlikely current spreads are sustainable). No taxes will be paid until 2021-2022. If you tax effect those numbers, that gives you a distributable cash range of $2.80-$5.60.
Their comps trade at 3-4% cap rates (WMB, OKE, KMI, etc - all the c-corps that own MLP GPs). Those same cap rates imply a $70-$180 stock in 2016/2017. Now to be clear I don't think that is likely but even if you used a 6% cap rate on the absolute low-end of their distribution ($2.80/share) you get $47. Stock is at $16. Why isn't this a screaming long?
Thanks for any thoughts.