Houston based Cheniere Energy Partners has secured a $2 billion equity investment from private equity giant Blackstone Group, which was announced on Monday February 27. Funds will be used to construct a new natural gas liquefaction plant in Sabine Pass, LA, the first one ever built in the continental United States. The plant will chill and compress natural gas into liquid, known as LNG, to be shipped to Asia and Europe where gas prices are high and pegged against oil prices. When natural gas is chilled to negative 260 degrees Fahrenheit it condenses and becomes liquid form which makes it a lot easier to ship overseas to developing nations or areas with no gas.
The US has flooded the market with natural gas in recent years due to the influx of new drilling technologies including improved hydraulic fracturing techniques, or better known as fracking. Fracking consists of high pressure fluid being released into the shale rock to fracture it or create veins which release the gas and oil from the source rock at much greater extraction and recovery rates than other methods. Oversupply has caused natural gas prices in the futures market in the US to drop significantly in the past few years, but global demand has provided new avenues for energy companies to make a profit. Natural gas is currently around $2.50 per million British thermal units on the New York Mercantile Exchange, but global prices can range between $8 and $16 or more in some cases. Companies around the world are looking to buy cheap US gas which gives Cheniere Energy an edge in the global markets due to US regulators giving Cheniere the go ahead to export 2.2 billion cubic feet of natural gas per day for the next 20 years in May of 2011.
Blackstone Group which controls one of the largest private equity funds believes this to be a smart investment due to the fact that Cheniere has long term contracts with international energy companies. Cheniere Energy Partners (CQP) was up $2.80 or 13.4% as of close of trading on Monday to $23.70, while Cheniere (LNG) was up $1.66 or 11.8% to $15.71. A closer look shows CQP 2011 year ending revenues at $283 million which is down from $399 million in 2010. Cheniere reported $2.2 billion of long term debt and plans to raise another $3 billion to build two export facilities.
Global demand may be the only key to Cheniere’s success and for Blackstone to see a return on their investment. Energy companies have scaled back on drilling for gas in the US and as prices drop, so does the bottom line for companies in the gas business. Buying Cheniere stock just because Blackstone has backed them might not work out well for individual investors, but to be sure one should do their homework!
*All Stock Price Data Provided by Yahoo Finance