by Travis Johnson, Stock Gumshoe | November 9, 2015 4:54 pm
Several readers have forwarded this latest ad about the “Hackberry Secret” to me, and those who read the Friday File[1] last week might find that we’re covering similar ground here — no surprise, there are likely to be more pitches about this new “Secret” in the months to come.
But is it really a secret? Are there billions of dollars about to be created out of nothing in the bayou swamps?
Here’s how the latest ad for High Yield Energy Report[2]($295/year) opens…
“This dirt-poor bayou town — and several others in the U.S. just like it — is about to become the source of billions in new wealth…
“Here’s how to claim your stake now — before the mainstream press discovers this story — and get paid thousands for the rest of your life”
Sounds interesting, right? Perhaps it’s some secret that folks haven’t noticed yet? Is Angel Publishing[3] out in front of the “mainstream press” in covering this topic?
Well, let’s just see what it is they’re talking about first. More from the ad:
“… the fortunes of Hackberry’s 1,231 residents are about to change… rapidly.
“See, just a few miles further down Main Street on a remote cove by the Gulf is an extremely valuable energy project…
“One that’s being funded by $10 BILLION in private capital… and carefully being constructed under the stern eye of the U.S. Department of Energy.
“It looks like a giant power plant, only it has nothing to do with nuclear power. It has nothing to do with solar[4] power, either.
“When complete, this massive facility will produce a strange liquid that will be shipped to countries around the world.
“It’s an energy source that other nations desperately need… and are paying top dollar for.
“It’s used to produce paper, metal, chemicals, petroleum, stone, clay, glass, fertilizer[5], plastics, antifreeze, dyes, photographic film, and medicine.
“And it will make Hackberry, Louisiana and several other coastal towns just like it the sources of billions in wealth.”
Ah, so now you’ve got a good guess in mind already, I expect — and you’re right, here Keith Kohl[6] is talking about the promise of liquefied natural gas[7] (LNG), and the hoped-for boom from LNG exports as plants are built to allow the US to export natural gas at meaningful scale for the first time.
There are a couple dozen LNG liquefaction plants planned or in the application process in the US, most on the Gulf Coast but also in the Northeastern US and in California… and Canada[8], though probably a few years behind the first US plants, is also trying to develop LNG export capacity to send their gas to Asia[9] from British Columbia.
If you’re not familiar with the process, these are basically massive liquefaction chilling plants (called “Trains”) that take natural gas, purify it, then chill it to turn the gas into a liquid, and pump that liquid aboard massive, chilled and pressurized LNG tankers to be shipped to gasification plants in countries who need to import natural gas, mostly in Europe and Asia. This has been going on for decades, with Qatar and Trinidad being major gas exporters, but it’s been a pretty small market overall — nowhere near big enough to get smooth out the huge global disparities in natural gas prices. The hope, for the prospective exporters in the US, is that new regulations allowing gas export, combined with continued high prices in Europe, Japan[10], Korea[11] and China[12], will allow exporters a long-term arbitrage on natural gas, buying it cheap from the booming US shale fields and selling it in places where prices are dramatically higher.
So the driving force is that arbitrage “profit” — the difference between the price you pay to buy natural gas from a producer in Oklahoma and the price an electric utility in, say, Japan will pay for delivery of that same gas. As long as that profit is below the cost to liquefy, transport and re-gasify the fuel at the other end, you’re making money.
The ad touches on this compared to one competitor, Russia[13]…
“Gazprom — Putin’s energy money wagon — needs to charge about $12 per thousand cubic feet of natural gas just to break even. And it sells it for $16 per thousand cubic feet in Eastern Europe.
“As for America?
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just click here...“The cost to pull gas out of the ground here is as low as just $0.75 per thousand cubic feet.
“Add in the cost of turning it into LNG and shipping it, and that tacks on approximately another $6 to $7… bringing the total cost to between $7 and $8.
“That’s still HALF the price of what Gazprom sells it for.”
I don’t know that this is necessarily accurate these days, though it was probably close a couple years ago — there are lots of different prices reported in the media, of course, and lots of different contracts for gas supply, but the current and near-term expected import prices for Gazprom’s natural gas in Europe are in the $6.50-7 range right now. Gazprom’s export price for natural gas is indexed to the price of oil[14] and has fallen dramatically since last year.
But which particular investment is Kohl teasing here? The promise is lusty, indeed:
“When these ships set sail this year to transport this liquid across the ocean, it will be like watching the first Model T roll off the assembly line… or Neil Armstrong walk on the moon.
“It’s that monumental… and that lucrative.
“But I’m going to show you how to start pulling in thousands in profit NOW, before these ships even chart their course and before these construction projects are even complete.”
Ah, so that gives some indication — “pulling in thousands in profit NOW” narrows it down a little bit. How about more clues?
“The bottom line is that natural gas from the U.S. is heading overseas this year….
“And I’d like to share with you now what could be the most potentially lucrative business in the LNG boom.
“This company owns half of a $12 billion export facility that’s expected to be complete any day now.
“It runs a $300 million series of pipelines that will feed the facility with gas from the region’s rich shale resources.
“And it benefits significantly from increased natural gas production in America….
“… this company already has 20-year contracts in place to supply liquefied gas to several major countries overseas.
“These countries include Spain, Great Britain, India[15], and Korea, with each contract worth billions.
“These long-term contracts will provide investors with stable cash flow for years to come.”
Ah, so there you have it — that pretty much narrows it down to just a couple near-term exporters of LNG… but before we feed the Thinkolator, let’s just get one more clue:
“As Kerrisdale Capital[16] wrote in a note to its clients, this company is:
‘… an attractive investment because it yields a 17.5% dividend viewed as stable over the next 20 years. It has long-term contracts with third party customers under which it receives enough revenue to make its distributions. Regardless of what happens to natural gas prices, its customers must make their contractual quarterly payments.’
“So you can rest easy knowing this company is insulated from any wild fluctuations in gas prices because of its long-term contracts.”
And Kohl says this firm is already making $250 million a year in guaranteed profits from 20-year contracts with Chevron and Total, deals that were made back when the facility was originally built to import natural gas.
So that should get us a definitive answer, yes? Indeed, this is Cheniere LNG Partners (CQP).
Which is, of course, the company I mentioned as a “possibly more conservative play” on Cheniere’s LNG export plants when we published a piece about the parent company on Friday[17]. “More conservative than Cheniere” is not necessarily enough to give comfort to widows and orphans, but this is the MLP that owns part of Cheniere’s Sabine Pass liquefaction plant.
And yes, Sabine Pass should be opening the first train (of six planned) in the next few months, it’s widely expected to be operational before the end of the year. The final train of those six will be under construction for another several years, so it’s a bit of an exaggeration to say the facility is “expected to be complete any day now”, since the economics of the operation don’t really start to look attractive until the whole plant is operational and the kinks have been worked out, probably in 2021 or so.
So this is the MLP that owns part of the Sabine Pass LNG export facility, a facility that should start opening soon and will be fully operational in several years. They have financed the facility with debt, so both CQP and LNG carry large debt burdens, and that debt is backed by pre-sold contracts, so much of the capacity of the plant for many years is already under contract to be sold at whatever the then-current index prices are in their delivery countries, with some held back for sale on the spot market that they hope will be more profitable.
I won’t go into a lot of detail on this, since we went into it some on Friday as well when we covered Oxford Club[18]’s pitch that LNG is the “Fifth Greatest Trade of All Time, but the choice of those two is basically between a MLP with partial ownership of the plant and the pipeline network that supplies the plant, and the operator of the plant and general partner of the MLP which is also developing other projects. The Friday File article was primarily about Cheniere (ticker LNG), since that’s the one that’s got a bunch of high-profile investors (including Carl Icahn[19] on the long side and Jim Chanos[20] on the short side), and this tease is for Cheniere Partners (CQP), which is less volatile because it’s supported by a dividend… but which, of course, will eventually end up being driven by the same market forces as the parent. Cheniere is pretty confident that the business will support a high dividend going out well into the future because of those LNG arbitrage pricing dynamics that should persist, and because of the long term contracts many of their customer have signed, but I don’t know what kind of production levels or pricing are going to be required for growth.
And that Kerrisdale Capital report? Be wary — that’s really about an entirely different company… it’s from 2009, when CQP was part owner of what was still a LNG import facility, with those “take or pay” contracts with Total and Chevron, and it paid a 17% dividend. You can see Kerrisdale’s piece here[21] if you like. Now, CQP is much more adored (not many stocks in any sector are as low as they were in 2009) and the distribution yield is more like 6%. They do still own the gasification import facilities that are under contract to Total and Chevron, I have no idea whether those are actually operating or if they’re just receiving their minimum contractual payments from those partners (there’s no economic reason for them to operate, gas is cheaper in the US than any LNG producer can deliver it here, but sometimes uneconomic things persist for a long time if contracts are in place) … so there is some cash flow coming into the company, but the future viability of the business is all about the construction of the Sabine Pass export facility over the next few years.
The distribution may well be safe as construction continues, but whether or not it grows considerably will probably depend in large part on what the LNG market is like in five years — Jim Chanos thinks it will be weak, with lots of competition from Australia[22] and Africa[23] and elsewhere, and that debt service will suck up most of the cash that the plant generates (CQP has about $11 billion in debt so far, LNG close to another $20 billion). Others, including Carl Icahn and Seth Klarmann, are voting the other way with their investments in the parent (LNG).
So there you have it — this is definitely having a big impact on Hackberry, I’m sure, and on everywhere else that a plant is being built, since these are projects that cost billions of dollars and require big local investments… I don’t know that anyone would agree this is a “secret,” since LNG export was a hot political debate for years and has certainly received a fair amount of media coverage. There is obviously some potential, and LNG shipping and trade is very widely expected to continue to grow… whether it grows enough and is profitable enough to support these highly levered companies going out five and ten years is the question, and it’s one every investor should answer for themselves before putting money to work in CQP or LNG. If you’ve got an opinion to share on this one, I’m sure we’d all be delighted to hear it.
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It is LNG Cheniere Energy
LNG prices are going to steady and rise – Cheniere is only one of the LNG companies set to profit by rise in prices in EU and Asia – take a look at LNGLY on the OTC and LNG on the ASX – LNGLY have patented process for liquefaction and expect to ship LNG in late 2018 – plant is being constructed in Magnolia. Demand for LNG to increase dramatically with Gas to Liquids Gasoline and diesel soon to come into the market with recently proven plant owned by a listed company – ISRAEL COMPANY operating in NY
I will go for LNG, once I find the BOTTOM.
There are a few more companies, so one can make a choice e.g. Sempra though they are far behind Cheniere, they have many projects coming on. Their market cap is more than double.
Natural gas pricing will drive LNG profitability. Just like shale ‘showed’ up in N. America and disrupted pricing, gas exploration and new production is underway big time to service the currently high priced demand in Asia. These US LNG projects are late entries but (currently) enjoy a competitive advantage with cheap gas. My crystal ball is unclear about gas prices longer term.
i believe kinder morgan is getting into the act kmi
Travis – thank you for all you do!
In my experience, the best source of energy markets information is here: https://rbnenergy.com/
The last 30 days of posts are free. $75/month gets you full access to archives and special “drill down” reports. Of course, the LNG export terminals are extensively covered.
Phil
LNG looks attractive on the surface, Cheniere not so much, too much debt. Who knows what the market will be like by the time they are actually ready to ship. We have much the same dilemma in Canada, lots of projects on the drawing boards, huge opposition from indigenous tribes (native lands) re pipelines to provide supply. I consider the risk quite high on both sides of the border. Australian plays might be worth looking at.
Yes. Australia is worth looking at. Barrow Island just off the Northwestern Australian Coast will be online later next year (2016). This is a Chevron backed project.
Also the Gladstone Project is worth a look. (Australia). This facility is complete from the spaghetti feeders from the wells to the hubs and the connecting piping infrastructure to the refinery and harbour at Curtis Island, Gladstone, Queensland.
Yes, Aussie LNG is going to be bigger than US LNG for at least several years — and they have a price advantage because of shorter transit times to Asian customers.
Seems like a pretty dangerous time to be investing in fuels right now, honestly.
If it’s a “Hackberry Secret” then it has to be Sempra. Cheniere’s plant is in Sabine pass. The only LNG play in Hackberry is Sempra Energy.
That part was more about the trend than about the specific company, I expect, the specifics all matched Cheniere, not the (much more diversified) Sempra.
If I’m reading about it it’s already old news.
LNG is a global commodity and thus subject to a global delivered price. The U.S. currently has the lowest cost for the feedstock (the gas delivered by pipeline to the facility) but very high costs in construction and transport ship requirements.
Saudi Arabia, Quatar, and others have failed to get their pipeline through Syria now that Putin has placed aircraft and troops in Syria. Thus they will be able and motivated to undercut U.S. Natural Gas prices as the Saudis have tried with crude oil prices and compete with U.S. LNG on a worldwide basis.
The window for U.S. LNG exports is narrow and the capital costs are high.
STAY AWAY!
Travis, fedwatcher has submitted an email address change.