full text: Chenieres are oak groves stranded in swamps. Investors in Cheniere Energy Partners should be careful they don't end up the same way.
Cheniere Energy Partners, or CEP, is a master limited partnership controlled by Cheniere Energy Inc. CEP owns and operates the Sabine Pass liquefied natural gas, or LNG, import terminal in Louisiana. Once highly valued, such terminals are less useful now that shale gas has created excess supply.
Parent Cheniere Energy plans to build a facility alongside Sabine Pass to liquefy gas for export.
This could undermine CEP's value if it ends up helping finance the new plant. CreditSights reckons a one-billion-cubic-feet-a-day liquefaction facility could cost $1.75 billion. Cheniere struggles with existing group debt of almost $3 billion. Similar to what it did with the original terminal, however, it could raise financing backed by customer contracts.
Cheniere has signed memoranda of understanding with potential clients adding up to much more than one billion cubic feet a day of capacity, including several utilities.
It could compete better with new, higher-cost projects being built in Australia. Ultimately, however, a U.S. export terminal looks less like an outlet for a steady stream of gas and more a tool for exploiting brief arbitrage opportunities. There is value in that, but it is hard to see many traders tying themselves into long-term capacity fees for it.
The risk for investors is getting diluted by equity issuance or borrowing at the CEP level to help fund construction. As it is, CEP's cash flow barely covers its $1.70-a-unit dividend. Interest charges eat up 63.5% of estimated annual cash flow of $260 million. Deducting those and operating costs should leave $49 million, CEP says. Dividends on its common units require $44.9 million. Dividends to the general partner units and management fees to the parent eat up several more million.
An added twist is that even if the plant opens, gains for CEP investors look limited. The partnership's structure includes 135.4 subordinated units owned by the parent. These receive no dividend now, but have first call on new cash flows until they match the common units' dividend.
Citigroup estimates a one-billion-cubic-feet-per-day terminal might add a dime to CEP's dividend; hardly life-changing given the risks involved. Yet helped by an influx of new money targeting MLPs in general over the past year, CEP's units have climbed to more than $22 and now yield 7.6%. That is just 1.5% percentage points more than the Alerian MLP index average. Investors are paying too much to participate in Cheniere's uncertain future.