A head start lets company catch up

HOUSTON — Before Cheniere Energy became the darling of the energy industry — the company with the inside track to exporting America’s natural gas — there was failure.

The year was 2008, and Cheniere’s stock price was approaching $40 then, just as it was prior to last week, when it reached a record high of $44.90 on Friday.

The plan in 2008 was to import natural gas into Cheniere’s new $2 billion Sabine Pass terminal in Louisiana.

And then it all went south. The shale gas boom began and U.S. natural gas prices fell from close to $13 per million British thermal units in June 2008 to less than $4 a year later, evaporating any market for more expensive imported gas. Cheniere’s stock price fell to about $1, inspiring widespread speculation about the Houston-based firm’s possible bankruptcy.

But in the midst of those dark days, as the company laid off workers and took additional loans to keep the business running, Cheniere hatched a plan that has rocketed it to the forefront of America’s energy boom. The company sought to become America’s first exporter of natural gas.

Five years later, with a $12 billion transformation underway at the Sabine Pass facility, Cheniere has investors’ attention. The company’s stock price has more than doubled so far this year as long-term contracts from overseas buyers of natural gas have guaranteed a revenue stream of about $2.9 billion annually for 20 years.

“From here on, it’s either good or better,” Cheniere CEO Charif Souki said in an interview.

The company’s rebound has been dramatic. Not only has it survived, but it has pushed forward the first export project of its kind in the United States ahead of much larger competitors, said Matthew Phillips, an analyst for Clarksons Capital Markets.

“It’s pretty unbelievable the transition they’ve managed to pull off,” Phillips said.

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Exxon Mobil’s effort

Exxon Mobil Corp. and Qatar Petroleum are among the massive companies trying to build facilities to export natural gas from the United States. Each of those firms has revenue far exceeding the $266 million that Cheniere pulled in last year through its aging import contracts. Exxon Mobil, the world’s largest publicly traded oil and gas company, had $225 billion in revenue last year.

“They’re swimming in the deep end of the pool here,” Phillips said. “All the major oil companies, they’re all developing competing projects and Cheniere is not a big company. So they’ve got some powerful competitors.”

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What has given Cheniere the advantage so far has been its early choice to get into the export business, said Connie Hsu, an analyst for investment research firm Morningstar.

Cheniere applied in 2010 for a federal permit to export natural gas to countries with which the United States has no free trade agreement. It received the permit in 2011, two years before any other project.

“Cheniere had a head start to be able to sell their capacity to customers because they were the only ones who had the opportunity,” Hsu said.

Europe and Asia

Because it acted early, Cheniere was able to sell contracts to eager buyers of natural gas in Europe and Asia. Those companies have agreed to pay Cheniere a fixed amount to reserve portions of Sabine Pass’ capacity to liquefy natural gas for export by tanker, regardless of whether they decide to actually buy gas.

That means that even if natural gas prices surge in the United States or fall worldwide, reducing the cost advantage of U.S. gas, the overseas buyers will still have to pay the fixed rates, amounting to about $2.9 billion annually, the company says.

If Cheniere’s customers choose to request natural gas shipments, Cheniere’s contracts will give it a 5 percent profit on each unit of natural gas that it buys, liquefies and ships to its customers, the company says.

Those solid cash flow expectations have investors flocking to the stock.

“I think the 2008 experience probably made them more risk-averse, or just aware of how things could be totally inverted,” Hsu said. “That’s likely helped them to shape the contract structure today.”

The company, which has $5.6 billion in long-term debt, also has plans to expand and is currently seeking customers for a $12 billion export terminal it plans to build in Corpus Christi. Cheniere also wants eventually to expand its export capacity at Sabine Pass. But it is trying to get higher rates from new customers and so far has faced tough competition from other projects that have been approved for exports, Phillips said.

Cheniere on Wednesday signed its first contract to ship natural gas from its Corpus Christi site to an Indonesian state-owned energy company called Pertamina. The 20-year deal reserved just 0.8 million tons per year out of the facility’s planned capacity of 13.5 million tons per year, but it will guarantee Cheniere at least $139 million annually once it starts operating. The deal, which could begin paying off in 2018, sent Cheniere’s stock price surging to a record high last week.

Cooling units

Cheniere is now building the enormous Sabine Pass cooling units that will chill natural gas to minus-260 degrees Fahrenheit, turning it to a liquid that can be loaded into tankers and shipped overseas. Each of the units is the equivalent of a 1,000-ton conditioner, Cheniere’s chief financial officer, Davis Thames, said at a recent conference.

“It’s got the condensers, it’s got the evaporators, it’s all basically the same kit, it’s just very large,” Thames said.

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But even as the company doubles down yet again on liquefied natural gas, Souki is not sure how it will work. The CEO, whose 2012 compensation of $57.5 million was the highest in Houston and more than Exxon Mobil CEO Rex Tillerson’s $40.3 million, said uncertainty will always remain in the energy business.

“We are in an industry that is fascinating but is also incredibly volatile,” Souki said. “It changes very, very quickly. So we make decisions that are supposed to last for 20, 30, 40 years in an industry that changes almost every five years. So you expect that you’re not going to get it right. And if it looks right at a certain given time it probably will be proven wrong in the not too distant future.”

Too great to ignore

Asked if he worries that it may all go wrong again for Cheniere, Souki said he is prepared for the worst. “Let me say that I’ve been paid to recognize that it could be that way,” he said.

He added that despite the unpredictability involved with energy investments, the opportunities are too great to ignore.

“We almost have no choice but to be involved in the changes,” Souki said. “If it weren’t us, it would be somebody else.”