CQP - Upside Potential For Cheniere Energy Partners: LNG Demand And Sabine Pass

Summary

• Cheniere Energy Partners offers natural liquefied gas to various integrated energy companies in the United States and internationally.
• Cheniere owns Sabine Pass, a gas liquidization and export plant located in Louisiana, which is considered one of the largest plants for its production capacity and infrastructure worldwide.
• I believe that it is the right time to have a look at the company’s business model. Cheniere Energy Partners will most likely enjoy demand for LNG.

Cheniere Energy Partners, L.P. ( CQP ) will most likely enjoy demand for LNG thanks to the gas liquidization and export plant Sabine Pass. Besides, new commercial agreements, more increasing distribution channels, and long-term contracts could accelerate FCF growth. In my view, even considering risks from the total amount of debt, Cheniere Energy Partners appears undervalued.

Cheniere Energy: Impressive Results Not Only Because Of The Payment From Chevron

Cheniere Energy Partners offers natural liquefied gas to various integrated energy companies in the United States and internationally. The liquefied gas transported around the world is later converted to gas to be introduced into the supply lines for homes, businesses, and industries.

Cheniere owns Sabine Pass, a gas liquidization and export plant located in Louisiana, which is considered one of the largest plants for its production capacity and infrastructure worldwide. It also owns a 94-mile supply pipeline, connecting the plant to distribution lines in the region.

All of Cheniere's operations are encompassed in a single reportable segment. These operations include gas liquidization facilities, transportation and distribution supply, and regasification plants. Under its ownership are six liquidation plants and two marine berths (with a third one under construction).

In my view, it is worth noting that Cheniere Energy’s product is a clean product because its combustion does not generate as much air pollution as that of gasoline. This is an important point in terms of the company's future projections, taking into account a global trend towards the use of clean energy and the transformation of the energy generation bases.

I Expect Beneficial Results In 2022

I believe that it is the right time to have a look at the company’s business model. Let’s keep in mind that in the nine months ended September 30, 2022 , the company reported $12 billion in total revenue, close to 102% more sales growth than that in the same period in 2021.

The recent increase in EBITDA is also quite impressive. We are talking about an EBITDA increase of close to 58% in the last nine months. The amount of LNG exports increased significantly. The number of cargoes increased by 19% with the LNG volumes loaded increasing close to 20% in the same period.

The company provided some explanation with regards to the recent impressive results. First, the company received a payment of $765 million due to the early termination of the Terminal Use Agreement between Sabine Pass LNG, L.P. and Chevron ( CVX ). Besides, increase in margins and more volumes of LNG delivered also contributed to the beneficial results. In my view, if LNG continues to become popular, I would expect further revenue growth in the long term.

The increase in Adjusted EBITDA was primarily due to increased margins per MMBtu of LNG, and to a lesser extent from increased volumes of LNG delivered. Adjusted EBITDA was also positively impacted by the recognition of a portion of the $765 million lump-sum payment to be made by Chevron U.S.A. Inc. during calendar year 2022 related to the early termination of the Terminal Use Agreement between Sabine Pass LNG, L.P. and Chevron. Source: Quarterly Press Release

Besides, it is also worth considering that Cheniere Energy Partners, in the most recent quarterly report, reconfirmed its full year 2022 distribution guidance. Management appears quite optimistic.

Reconfirming full year 2022 distribution guidance of $4.00 - $4.25 per common unit. Source: Quarterly Press Release

Balance Sheet

As of September 30, 2022, the company reported cash equivalents of $988 million, restricted cash and cash equivalents of $195 million, and trade and other receivables worth $805 million. Accounts receivable stood at about $447 million with advances to affiliates of $150 million, inventory of $241 million, contract assets of $387 million, and total current assets of $3.373 billion.

Property, plant and equipment stood at $16.827 billion with an operating lease assets of $91 million, debt issuance cost of $9 million, and derivative assets of $33 million, which implied total assets of $20.5 billion. The asset/liability ratio is not above one, which does not look ideal. With that, the company generates significant FCF growth, and reports a lot of property, plant and equipment, and so I don’t think investors will care that much about the company’s financial statements.

The list of liabilities includes accounts payable of $31 million, accrued liabilities of close to $1.657 million, and accrued liabilities-related party of $8 million. Current debt stands at $1.498 billion with deferred revenue of $162 million and current derivative liabilities of $1.157 billion. The long term debt stands at $15.699 billion along with an operating lease liability of $82 million and a finance lease liability of $18 million.

Cash Flow Modeling

Financial analysts are expecting 2024 net sales of $11.627 billion, an EBITDA close to $3.766 billion, operating profit of $3.143 billion, and an operating margin of 27%. 2024 net income would be close to $2.204 billion with 2024 free cash flow of $3.062 billion and 2024 FCF margin of 26.30%.

In my view, if Cheniere Energy successfully maintains the current level of operations, and increases production to the extent possible, we will likely see FCF growth. Besides, new commercial agreements with outsourced companies in its production lines, increasing distribution channels, and long-term contracts could accelerate revenue growth, and could enlarge FCF margins. My numbers for future cash flow statements are shown below. I believe that I am significantly more conservative than other financial forecasters. I assumed 2030 net income close to $2.340 billion, a depreciation and amortization expense of around $583 million, and amortization of debt issuance cost of $23 million. I also foresee a loss on modification or extinguishment of debt worth $213 million. Total losses on derivatives would be close to -$69 million with total gains on derivatives of $2 million, 2030 net cash provided by settlement of derivative instruments of -$44 million, impairment expense and loss on disposal of assets of $17 million, and changes in accounts and other receivables of -$518 million.

Besides, changes in accounts receivable would be close to -$17 million with changes in inventory of -$171 million, changes in accounts payable and accrued liabilities of $1.025 billion, and changes in deferred revenue of $36 million. Finally, net cash provided by operating activities would stand at $3.405 billion.

My results would also include 2030 FCF of $3.390 billion and a net present value of future FCF close to $17.634 million. With an EV/FCF ratio close to 17x, I obtained a terminal value of $58.649 billion and a NPV of terminal value close to $33.131 million. Let’s note that I assumed a cost of equity of 10.20% with a tax rate of 27% and a cost of debt of 5%, which implied a WACC of 7.40%. Finally, I obtained an enterprise value of $50.765 billion, equity of $29.418 billion, and a fair price of around $61 per share.

Risks

In relation to the risks for Cheniere Energy Partners, we can highlight, on the one hand, the financial risks. If management fails to pay its obligations, then the company’s EV/FCF would decline. As a result, the stock price would most likely decline over time.

Our ability to refinance our indebtedness will depend on our ability to access additional project financing as well as the debt and equity capital markets. A variety of factors beyond our control could impact the availability or cost of capital, including domestic or international economic conditions, increases in key benchmark interest rates and/or credit spreads, the adoption of new or amended banking or capital market laws or regulations and the repricing of market risks and volatility in capital and financial markets. Our financing costs could increase or future borrowings or equity offerings may be unavailable to us or unsuccessful, which could cause us to be unable to pay or refinance our indebtedness or to fund our other liquidity needs. Source: 10-k

There is also the possibility that the offer of liquefied gas to generate energy is not adopted in the United States and internationally. Besides, new technologies could alter the operations of Cheniere. In addition, no operation is completely insured when it comes to high-risk transport, and any complications in this regard could negatively impact the image of Cheniere Energy.

Conclusion

Cheniere Energy Partners will most likely enjoy demand for LNG in the next decade. I believe that the company is well positioned to benefit from the LNG market growth thanks to the gas liquidization and export plant Sabine Pass. New commercial agreements with outsourced companies, increasing distribution channels, and long-term contracts will most likely bring FCF growth. In my view, even considering the risk from the total amount of debt and potential new regulatory frameworks, Cheniere Energy Partners appears undervalued.

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