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Investors have been patiently waiting for several years for Cheniere Energy (NYSEMKT: LNG) to make good on its promise of exporting liquefied natural gas, or LNG. While the company isn't done building new production trains, the waiting game for commercial operations ended in the second half of 2016. The first two production trains came online and, as a result, revenue exploded from $69 million in the first quarter of last year to over $465 million in the third quarter of the year.
Shares only gained 10% in 2016, but investors are hopeful that it was just the beginning. There are several reasons for optimism, including these three reasons Cheniere Energy stock could rise.
Sabine Pass doubling number of trains this year
The LNG exporter is developing two major projects: the Sabine Pass Terminal and the Corpus Christi Project. Management announced that the first two production trains at Sabine Pass achieved "substantial completion" -- a term that simply means construction and commissioning were completed, and the production units passed tests showing the ability to reliably manufacture product -- in May and September 2016. That led to an enormous jump in revenue in each sequential quarter reported last year and lowered operating losses to just $10 million in the third quarter -- the lowest total in years.
But things are about to get even better.
Cheniere Energy expects the next two trains at Sabine Pass to reach substantial completion in 2017. It's not a perfect gauge for investors, but it took 45 months and 49 months, respectively, from the time construction began on Train 1 and Train 2 to the time each reached the production milestone. If Train 3 and Train 4 take about the same amount of time, or an average of 47 months, then they should both be ready sometime around April. That would double the capacity of the project, lead to another giant leap in revenue, and could result in long-awaited operating income.
Further down the pipeline at Sabine Pass, Cheniere Energy expects Train 5 to reach substantial completion in 2019. Train 6 has earned all of the required regulatory approvals, but management has yet to make the final investment decision. Meanwhile, the Corpus Christi Terminal is expected to support three process trains of equal size to those at Sabine Pass. The first two trains will come online in 2019, while a third is awaiting additional purchase agreements before construction begins. The takeaway: Operations are quickly moving in the right direction.
New pipeline proposal
Cheniere Energy now has the capability to manufacture LNG, but let's not forget that it still needs to secure long-term natural gas supply for up to nine production trains at the Sabine Pass and Corpus Christi terminals. To do so, the company has proposed a new pipeline that will stretch from the Anadarko Basin (which boasts a 50,000 square mile footprint in West Texas, Oklahoma, Kansas, and Colorado) to the Gulf Coast and supply both of its LNG projects. As currently contemplated, the pipeline would carry 1.4 billion cubic feet per day of natural gas.
As with most everything else in the capital intensive industry, the proposed pipeline won't be cheap. But approval, construction, and financing announcements could be more than enough to further de-risk the stock and send shares higher. Management expects formal applications for regulatory permits to be filed this year, while construction could begin in 2018. The good news for investors is that with a pro-business and deregulation-happy administration in the White House, the path to approval -- and perhaps even lower regulatory costs -- appears wide open for Cheniere Energy.
"Favorable" debt maturity schedule
Speaking of capital intensive, investors are probably not thrilled with the company's debt-ridden balance sheet. At the end of September 2016 the debt-to-assets ratio stood at a staggering 84%. Mostly because of its debt, Cheniere Energy is worth negative $1.6 billion on paper! It will need even more financing to complete the three trains currently under construction (Train 5 at Sabine Pass and Trains 1 and 2 at Corpus Christi), begin construction on Train 3 at Corpus Christi, potentially begin construction on Train 6 at Sabine Pass, and build the proposed pipeline.
That's hardly inspiring, but the sliver of good news is that management should still be able to pull off the delicate balancing act. The company will exit 2017 with four production trains in operation, which will help provide cash flow for construction projects and could allow slightly better terms for future financing. More importantly, after a major refinancing in October 2016, no debt matures until 2020.
That's significant because Cheniere Energy expects to have seven production trains operating by the end of 2019. Barring unforeseen risks in a messy world, the company's operational profile in 2020 should allow it to repay and/or refinance its existing debt at or before maturity. Interest expenses will continue to sap the bottom line in the meantime -- accounting for 46% of the net loss in the first nine months of 2016 -- but that's something investors have to live with to own shares of the company.
What does it mean for investors?
Cheniere Energy is now a company with real-world operations that will produce real revenue, which means investors finally have something to analyze and to gauge progress. At an $11 billion market cap, the LNG exporter is trading at just 55% of its all-time high set in 2014. While it won't be easy to nearly double in price overnight or even in just one year, investors have to be encouraged that the stock has the potential to rise from current levels in the long run.
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