Cheniere Energy: An MLP for Global LNG

10/17/2019 5:00 am EST

Focus: ENERGY

Tom Hutchinson

Editor, Cabot Dividend Investor

Natural gas production exploded 50% during the energy boom. But it was too much too fast and the country didn’t know what to do with all that gas. Oversupply caused a huge drop in price, recalls Tom Hutchinson, income expert and editor of Cabot Dividend Investor.

The price of natural gas in the U.S., which averaged around $8 to $10 per MMbtu (million British thermal units) last decade, fell to just about $2 per MMbtu by early 2012 and is still under $3 as I write.

As a result, many wells were shut down. Production slowed. We became the largest natural gas producer in the world without even really trying. Meanwhile, the rest of the world is dying for the stuff.

According to the IEA, China will account for 40% of global natural gas demand growth between now and 2024. In other places in Asia as well as Europe, natural gas is the most in-demand fuel source, often selling at prices four or five times higher than U.S. gas.

It doesn’t take a genius to realize that we should sell our abundant, cheap natural gas to those places. But that is easier said than done. You see, natural gas is normally transported via pipeline. But building pipelines across the oceans is impractical today.

In order to export the stuff it has to be converted to liquid form (LNG), loaded onto tankers and shipped overseas. But this country didn’t have the massive liquefaction facilities and export terminals necessary to do the job, because until recently we just imported natural gas.

But things are changing. Cheniere Energy Partners (CQP) is a Master Limited Partnership (MLP) that owns and operates this country’s first and largest liquid natural gas (LNG) terminal, Sabine Pass in Louisiana.

It also operates regasification facilities and the Creole Trail Pipeline, which connects the terminal to third party gas suppliers. The U.S. Gulf coast is an ideal location with access to deep-water ports and pipelines to deliver gas.

CQP is an MLP of parent company Cheniere Energy (LNG), which owns several other facilities and markets LNG worldwide. CQP only operates Sabine Pass and its support facilities. It’s important to note that CQP only collects fees for the service of LNG processing as well as ship loading and unloading. It has zero exposure to volatile commodity prices.

It can be a great story. And LNG exports can be booming. But if commodity prices move the wrong way a company in the business can perform poorly. CQP is a pure play on the growth of U.S. natural gas exports and benefits solely and directly from the strong and growing demand. And LNG is the world’s fastest growing commodity.

CQP opened the first LNG terminal in 2016. That’s when the first train was operational. A train is industry jargon for a facility that turns natural gas into liquid form. CQP now has five trains up and running with one more on the way in the next year or two. CQP currently delivers to 31 countries and also has plenty of available land for future expansions.

As an MLP, CQP pays a strong quarterly distribution with a current yield of 5.35%. But the payout has grown 8.8% over the last three years and should continue to grow in the future. The formula of steady revenue from existing customers and growth from expanding facilities is working well.

Revenue has grown by an average of 187% per year for the last three years and the stock has returned an average of over 20% over the last three years while its peer group has averaged just 2.74%. Yet the stock still sells at valuations below the five-year average.

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