I recently got an e-mail from one of my Oil & Energy Investor subscribers, who posed a very interesting question. Take a look:
I bought a nice position in Cheniere Energy Partners LP (AMEX: CQP). It is not clear to me if they are in a position to benefit earnings-wise from future expansions of the business. Is a future dividend increase in the cards?
- Harry M.
The broadening initiative to export liquefied natural gas (LNG) from the U.S. to Europe and Asia has put a few companies in the spotlight.
Cheniere is certainly one of them.
With Cheniere, we have both the company pioneering the LNG exports (Cheniere Energy), and the partnership controlling the company's Sabine Pass terminal on the Gulf of Mexico at the border between Louisiana and Texas (Cheniere Partners).
As my Energy Advantage advisory service subscribers will tell you, we're always discussing the new age of natural gas. This includes the impact LNG trade will have on profitability, and the position of Cheniere in this process. And Cheniere Partners is just one of the high dividend/high return stocks I have identified for them.
As you probably already know, LNG is a major remedy for the accelerating glut of American and Canadian unconventional natural gas production, which runs the risk of oversaturating the market and depressing prices.
Exporting the gas, on the other hand, taps into widening international demand and carries the prospect of actually improving profitability for gas producers in North America, even while the domestic need for the energy does not keep pace with rising supply.
In so doing, U.S. and Canadian producers are simply paralleling developments already in place in Australia, New Guinea, Russia, and above all Qatar - the first dominant gas producer in the world to commit all of its exports to LNG shipping.
This worldwide trend has transformed the LNG trade from import to export.
As recently as five years ago, we were still talking about importing more LNG into the United States, as conventional production declined.
Now with shale gas (along with coal bed methane and tight gas), the unconventional sources provide more available gas than we ever imagined.
The issue now is how to export the surplus gas.
Enter Cheniere's Sabine Pass terminal.
Getting the Gas Around the Globe
This terminal is a modular facility that increases its footprint as major long-term contracts are signed.
Cheniere has also received the first blanket permission from the U.S. Department of Energy to export LNG to any country in the world not on a sanctions list. It has responded by lining up big deals with some of the world's largest LNG importers - either for straight sales or contract swaps.
Now the downside to this has been Cheniere's heavy debt load, currently at $3 billion, combined with a price tag more than twice the actual building of the terminal.
Both refinancing the debt and building the facility will require new finance. And that is likely only if contracts are secured.
Of course, several of these have emerged this year. Just last month we got word of a very significant agreement with London-based BG Group Plc, worth $8 billion over 20 years.
Either way, the export of LNG from North America is no longer up for debate.
Canada has already revised the LNG terminal under construction at Kitimat on the British Columbian coast from an import to an export location (siphoning off some of the rising volume from the major Horn River and Montney shale gas plays in northern BC and Alberta).
In the United States, Dominion Resources Inc. (NYSE: D) runs the Cove Point, Md., LNG receiving terminal - the largest on the East Coast. Recently, the company applied to retrofit half of the facility for the export of LNG. Once the upgrades are complete, Cove Point will be the exit point to Europe for rising volume from the Marcellus Shale play.
Here is where the combination of capital appreciation in share value and dividends are likely to make a nice return. It also gets me back (finally) to Harry's question.
A Double Return for Investors
Cheniere Energy Inc. (AMEX: LNG) is a straight share price play. It pays no dividend. However, its value will increase with each major contract Cheniere signs.
And the BG Group contract certainly did that. Cheniere Energy's stock has climbed 85% since the deal was announced Oct. 26 - and has soared 184% in the past month.
Cheniere Partners (AMEX: CQP) has also increased in value, up 27.43% in the last month. But unlike Cheniere Energy, Cheniere Partners also carries a hefty dividend - currently 10.2% annualized.
The high dividend is the result of how the partnership is structured. Under law, Cheniere Partners must pass all profits - without any corporate tax imposed - directly on to the partners.
When the partnership has also spun off an equity issue, the portion of profits represented by the stock comes to shareholders directly as a high dividend.
Take my word for it: The liquefied natural gas export market will only be increasing.
That means playing both ends of the Cheniere picture can provide a nice pop in share value, and a nice dividend.
So yes, Harry, the Cheniere Partners dividend will stay high.
And so long as the partners choose not to issue any additional shares, that dividend should be going up, too.
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About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.