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Morningstar | Cheniere Is a Leveraged Play on Chinese Demand for U.S. LNG

Cheniere is well-positioned to be the exporter of the incremental liquefied natural gas supplied to the global market over the next few years, particularly as demand ramps up from China. Cheniere should have 31 million to 34 million metric tons per year on line in 2020 and 40 million to 44 million by 2022. We expect the bulk of Chinese LNG demand growth to be met by U.S. gas supply, given our marginal long-term forecast of $3 per thousand cubic feet for U.S. gas, and the U.S.' ability to increase gas and therefore LNG supply significantly. That said, volatility in the market should provide ample opportunities for Cheniere to take advantage of wide LNG differentials at different hubs around the world, given its access to growing U.S. supply and the very stable cash flows brought in by its Sabine Pass and Corpus Christi trains. Notably, with the recent volatility in shipping prices, Cheniere remains well-positioned. Historically, its SPA contracts were signed on a free-on-board basis, meaning the customer is responsible for shipping costs. However, it also has signed delivered ex-shipping contracts recently, meaning Cheniere is responsible for shipping, so it has procured a mix of short- and long-term vessel charters to protect its contract economics. Cheniere can assign these DES contracts to its marketing operations, which provides flexibility in terms of where to source the LNG from, potentially improving overall economics.Cheniere is ready to add more capacity as opportunities arise, with an expansion being reviewed by the Federal Energy Regulatory Commission. The FERC application is for Cheniere's effort to develop smaller and more modular trains that might be more easily contracted and constructed and consists of four trains with capacity of 9.5 metric tons per year. We think the wave of cash becoming available in 2020 is more likely to be devoted to higher distributions and dividends as well as funding expansion efforts. With a recent surge in new final investment decisions in the LNG industry, it's looking like a second wave of LNG efforts will be coming on line in the early 2020s.