Cheniere Energy Inc. (LNG) signed a second natural-gas supply contract in three weeks, boosting its chances of building the first gas-export terminal in the continental U.S.
Gas Natural SDG SA (GAS) of Spain agreed to buy 3.5 million metric tons of liquefied natural gas a year from Houston-based Cheniere’s proposed Sabine Pass terminal in Louisiana for 20 years beginning in 2017, the companies said in statements yesterday after U.S. markets closed.
Production from shale rock has made the U.S. the world’s largest gas producer and caused prices to collapse 75 percent from 2008’s highs, opening the prospect of ship-bound exports. Yesterday’s deal, following a 20-year contract with BG Group Plc, may help cash-strapped Cheniere attract financing for the first phase of its $10 billion Sabine export terminal, Societe Generale said.
“Cheniere now has an incentive to build it as fast as possible,” said Thierry Bros, a senior analyst for European gas and LNG at Societe Generale in Paris. “The banks will now have secured cash flow” to repay debt on the export facility.
Cheniere fell 1.2 percent to $11.34 at the close in New York, after earlier soaring as much as 12 percent. The shares pared gains after the Industrial Energy Consumers of America urged a Senate panel to consider the potential impact long-term gas exports could have on domestic fuel prices.
The company called the Gas Natural contract “another milestone” for Sabine. The 7 million metric-ton capacity target was met for exports, “which is expected to support the construction” of the first two export lines at the facility, Cheniere said in its statement.
‘Significant Obstacles’ Remain
Cheniere, which originally built Sabine Pass as an import terminal, is looking to switch direction to meet Asian and European demand for imported gas. U.K.-based BG announced its contract on Oct. 26, which pushed up Cheniere’s shares 69 percent that day. Standard & Poor’s last month said that deal by itself probably wasn’t enough to stave off a cash crunch at Cheniere that threatens its ability to continue paying interest to bondholders.
Cheniere’s 2.25 percent convertible bonds that mature in August fell 1.7 cents to 94.25 cents on the dollar, boosting the yield to 11.3 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“The reality is Cheniere faces significant obstacles,” Andy DeVries, an analyst at CreditSights Inc. in New York, said today in a note to clients. With initial construction more than a year away and exports not expected to begin until 2015 at the earliest, DeVries said “it is entirely too early” to recommend buying units of Cheniere Energy Partners LP, the subsidiary that will operate the export plant.
Debt Refinancing Planned
Bros said it was unlikely that U.S. regulators will oppose the Sabine Pass project, given that the pricing used in the Gas Natural deal is fixed to domestic gas prices rather than international crude. As a result, a rocketing crude price in the future won’t tempt U.S. gas producers to stop supplying the domestic market, he said.
“BG and Gas Natural are going to buy LNG under a U.S. price, and sell it under an oil-linked price in Asia,” Bros said. “The price in the U.S. currently is too low, even below production costs right now, and these two contracts may only raise it a little,” Bros said today in an interview.
Cheniere won’t default because it will refinance its debt before a May payment is due, Chief Executive Officer Charif Souki said in an Oct. 31 interview.
The Sabine Pass terminal is set to be the first new North American export project since 1969, when exports from the Kenai terminal in Alaska started.
The contract is a landmark for both companies. Gas Natural, the biggest gas supplier in Spain and Latin America, has never imported from the U.S. and said it hopes to use its nine LNG tankers to deliver the fuel as well to Pacific destinations once the Panama Canal is expanded.
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