Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

If you want to understand why Cheniere Energy just hired Jack Fusco as its new CEO, take a look at this chart. It pertains to 2008 to 2014, when Fusco was chief executive of merchant power company Calpine.

Nothing Wrong With This Picture
Calpine's debt servicing costs dropped and share buybacks jumped under Fusco's leadership
Source: Bloomberg

Cheniere, under its old CEO and founder Charif Souki, pioneered the export of shale gas as liquefied natural gas. Souki, however, did not get to see the first of such cargoes leave the company's facility at Sabine Pass, Louisiana, in February. Two months previously, he had been ousted.

Cheniere had taken on a ton of debt to build its liquefaction plant at Sabine Pass and start work on another one being built in Corpus Christi, Texas.

Loaded
Cheniere Energy's net debt
Source: Bloomberg

Like other leveraged energy companies, Cheniere's shares began to tumble once the bear market in oil got going in the summer of 2014. By the time Souki was shown the door, shares had fallen by about 60 percent. What was worse, at the analyst day in April 2015 -- by which time it was clear energy markets were in serious trouble -- Souki was still talking about further expansion plans, even into upstream E&P assets. A certain Carl Icahn showed up on not too long after this, quickly becoming the largest shareholder. You can probably join the dots after that yourself.

End of Empire
Source: Bloomberg

Cheniere has a good business in what has become a bad industry, at least for now. In most markets, LNG prices are linked to oil. Cheniere has disrupted that to a large degree, operating a tolling model whereby customers contract to use the capacity of its LNG plant to liquefy U.S. gas for export. Cheniere gets a fixed fee, so it isn't directly exposed to the price of gas.

As has been discovered with other supposedly commodity-insulated sectors, though -- here's looking at you, pipeline operators -- Cheniere isn't wholly off the hook. The notion that cheap shale gas would simply flood into more expensive overseas markets such as Europe has been thrown overboard as prices around the world have fallen, erasing the spread once you factor in the cost of liquefying, shipping, and converting the LNG back into gas.

Sea Change
The all-in cost of shipping U.S. LNG to Europe is now around $2 higher than spot gas prices there
Source: Bloomberg, CreditSights, Bloomberg Gadfly analysis
Note: Assumes shipper pays spot U.S. gas price plus a 15 percent premium, $3 tolling fee, and $1.40 of shipping and regasification costs per million BTU.

This doesn't negate U.S. shale exports altogether. LNG demand should continue to grow faster than energy consumption overall. And with the collapse in prices and investment in new projects, the market should rebalance over the next 5 to 10 years. The bigger concern is that, as has been seen elsewhere, customers might seek to adjust the terms of their long-term contracts or renege altogether.

In Cheniere's case, however, that risk looks manageable. Its counterparties include the likes of Royal Dutch Shell, Total, Chevron, Korea Gas Corp., and Spanish utility Union Fenosa. These are good credits, despite their current pressures. Moreover, the flexibility they enjoy from Cheniere's tolling model -- as opposed to the more rigid terms found with most other LNG projects around the world -- is worth hanging onto to take advantage of shifts in global gas prices.

The upshot is that Cheniere needs to focus on managing those risks and capitalizing on its main advantage: It has already built or is building U.S. LNG capacity even as competing projects have been shelved as prices and financing have fallen away. In other words, Cheniere needs someone who will focus on sweating the existing assets to generate cash flow to pay down debt and, eventually, raise shareholder distributions (Icahn is still there). The stock price should follow.

This is why Fusco has been brought in, just as he was at Calpine after it emerged from bankruptcy in 2008. Besides his record at Calpine, he has experience in commodity trading. Most importantly, he has long experience in the utility business, where an almost mind-numbing focus on asset operations and reliability is the holy grail.

That is the opposite of the expansionary tendency that had come to characterize Cheniere. As an added bonus, Fusco's services will almost certainly be cheaper than Souki's: The $18 million or so he earned in his last three full years at Calpine was less than 10 percent of the $200 million-plus Cheniere's ex-CEO was paid between 2012 and 2014.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net