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October 29, 2011

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Cheniere to Export LNG! 2015

On Wednesday, Cheniere Energy, Inc ($LNG) and Cheniere Energy Partners ($CQP) announced that their subsidiary Sabine Pass Liquefaction, LLC has entered into its first liquefied natural gas (LNG) sale and purchase agreement with a subsidiary of BG Group plc, whereby BG Group will purchase LNG from Cheniere (press release).

  • Deal specifics:
    • 0.5 bcf per day, which represents 50% of capacity of first 2 trains of proposed LNG export facility
    • Pricing: 115% of Henry Hub price, plus $2.25 per mcf fee
    • Term: 20 years with 10 year extension

Source: Cheniere Energy, Inc.

This contract with BG Group will help LNG’s efforts to get financing it needs for its proposed LNG export facility.  The company estimates it will need a total of $4.0-$4.5 billion in financing to construct the project.  The current plan is to raise $2.0 billion in equity and fund the remainder with bank / project finance debt.  The market was certainly pleased with this announcement.  LNG finished the week at $11.93 per share, up $5.90, or 97.8%.  CQP, the MLP subsidiary of Cheniere, was up 17% on the week.  In case you were wondering, the chart below is what a double in a week looks like.

Cheniere still won’t generate earnings until 2016, but it’s a step in the right direction in terms of a real natural gas export solution.  LNG’s success hinges on domestic natural gas production remaining high and domestic natural gas prices remaining low.  This deal marks the first real export contract for LNG sourced from North America.
With this contract and the potential for others, exporting LNG seems like it can be as significant a driver of natural gas demand as the potential for regulation of U.S. power plants or natural gas fuel options.  Cheniere’s Sabine pass is the most advanced of the currently proposed LNG projects in the U.S. and Canada.  Below is a chart showing the various projects and their proposed capacity, which altogether totals more than 10 bcf/d. In case you aren’t bcf conversant, the U.S. produces something like 75 bcf/day overall.

Huge natural gas supply and production increases require offsetting huge demand growth.  The combination of demand growth from power generation, transportation and LNG exports could potentially combine to provide the demand growth that causes a material rise in natural gas prices at some point between now and 2015.
Disclosure: The information in this article is not meant to be financial advice, we are not your financial advisor and I am posting my comments for informational purposes only.  No positions in LNG or CQP. 

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