Cheniere to Benefit from US Department of Energy Export Rule Change
05/30/2014 5:20 pm EST
On the news of the rule change, this leading energy company's stock has, once again, moved above MoneyShow's Jim Jubak's target price, so he's raising it again, as of today, May 30, 2014.
The US Department of Energy has changed the rules on how it awards general export permits for liquefied natural gas (LNG). The effect of the rules is to delay permits for companies that aren't yet deep into the process. That makes shares of early movers more valuable since they will have longer to exploit huge price differentials between domestic prices for natural gas and the price of liquefied natural gas delivered to markets in Japan or Korea.
Cheniere Energy (LNG) is the only company, so far, with an actual permit for unlimited exports and, as a company with a second application very close to the finish line, is a big beneficiary of the changes.
Just in case you were wondering why the stock rose 7% yesterday, May 29, and is up another 8.8% today.
Cheniere Energy is a member of my Jubak's Picks portfolio.
It also hasn't hurt that today, May 30, Cheniere announced a 20-year purchase agreement with Iberdrola (IBDRY:OP), Spain's biggest utility, for 400,000 metric tons of LNG a year, from Train 1 of Cheniere's second proposed plant at Corpus Christi, Texas. The agreement would see Iberdrola's purchases double when Train 2 starts up at Corpus Christi. (Cheniere says that it expects to have all the permits for Corpus Christi in hand so it can begin construction in 2015 with production from Train 2 to begin in 2019. Cheniere expects to begin production from its first and fully permitted Sabine Pass facility in the fourth quarter of 2015.)
The rule change from the Department of Energy would postpone any permit decision by DOE until after projects have passed environmental and other reviews by the Federal Energy Regulatory Commission (FERC). Previously, DOE had awarded its permit after a review of economics of the plant (including a review of any contracts with customers and a decision allowing that more LNG exports would be in the public interest) and then a company would submit a permit request to FERC. The FERC review is much more time-consuming than the DOE permit process. At this point, DOE has awarded seven export licenses. Only one of those permitted facilities—Cheniere's Sabine Pass facility—has also received approval from FERC. Six other facilities have received a conditional DOE export license but don't yet have FERC approval.
Since companies will still have to win approval from both DOE and FERC, the total process won't actually take much longer, but by putting the lengthier and more expensive FERC process first, the change will make it harder for companies to demonstrate to Wall Street—and to prospective customers—that its plans are viable. And that will delay these companies' ability to raise capital. (Not a small issue when the FERC process alone can cost $100 million.)
If all the plants submitted to DOE for approval were to get the go ahead, they would have the capacity to export 36 billion cubic feet of natural gas a day. That's roughly half of total US production. In that context, anything that delays when some of this capacity might come online, or makes it likely that some of the proposed plants won't get built, is a big deal for early movers such as Cheniere Energy.
On the news, the stock has moved above (again) my $63 target price. As of today, May 30, I'm raising my target price to $70 a share by September 2014.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of Cheniere Energy as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund's holdings almost totally to cash.