Cheniere Energy Inc. last Wednesday said its marketing subsidiary was in advanced negotiations to reach an outsourcing deal with a major North American natural gas marketing firm to manage the throughput of liquefied natural gas (LNG) and the downstream gas market for LNG cargoes delivered for Cheniere Marketing's account at the Sabine Pass LNG terminal in Cameron Parish, LA.
The arrangement is subject to the negotiation and execution of definitive agreements and approval of the parties' boards of directors, said the Houston-based developer of LNG projects.
The proposed arrangement would eliminate Cheniere's need for capital for the purchase of LNG cargoes and would allow Cheniere to reduce its investment in its U.S. gas marketing unit, as well as reduce overhead costs while maintaining its current strategy of securing LNG supply for U.S. gas markets, the company said.
"It has become evident to us that the capital markets are currently very difficult. This proposed strategic arrangement will allow us to receive large quantities of LNG without putting strain on our balance sheet," said Cheniere CEO Charif Souki. It also "will allow us to reduce our overhead considerably, conserve our liquidity and focus on maximizing the value of our terminal and pipeline."
Under the arrangement, proceeds from the sale of regasified LNG from the Sabine Pass terminal will be used in part to reimburse Cheniere for certain costs, including Cheniere Marketing's terminal use agreement, the tariff of the related Creole Trail Pipeline and LNG cargo origination efforts, with the remaining proceeds to be shared by both parties, according to Cheniere Energy.
Concurrently, the completion of construction on the initial phase of the Sabine Pass terminal and the associated Creole Trail Pipeline, which will serve the terminal, has allowed Cheniere Energy to begin a cost and staff reduction program, which calls for layoffs of approximately 200 employees. When completed, the company estimates it will have about 80 employees at the Sabine Pass terminal and 80 employees in its corporate office in Houston.
Cheniere also announced the departure of President Stan Horton effective immediately. "Given the successful completion of construction at Sabine Pass Phase I and Creole Trail Pipeline and the reduction in staff, [he] has decided that this was a good time to leave Cheniere and pursue other interests," the company said.
Following Cheniere Energy's outsourcing announcement, Standard & Poor's (S&P) Ratings Services placed its 'B' corporate credit rating on Cheniere Energy and its 'BB' senior secured rating on subsidiary Sabine Pass LNG on CreditWatch with negative implications.
The CreditWatch warning reflected the potential for the ratings to be lowered if Cheniere Energy's cash flow projections go down considerably as it shares expected proceeds from the marketing activities with [an outside] gas marketing company," S&P analyst Williams Ferara wrote.
"While the arrangement will reduce Cheniere's liquidity and working capital requirements, it will also diminish the company's ability to produce cash flows sufficient to satisfy its debt obligations," Ferera said. The company had about $2.76 billion of total debt outstanding as of December 2007, S&P said.
Cheniere Energy's stock price took a substantial hit after it announced the outsourcing arrangement, falling from a close of $16.06 last Monday to $10.88 near the end of trading Friday. Concerns are mounting that the company might not be able to meet its debt obligations in light of the scarcity of LNG supply expected at its terminals.
Cheniere's Sabine Pass LNG terminal received its first shipment on April 11 (see related story). The initial cargo came more than three years after the Federal Energy Regulatory Commission (FERC) approved the project (see NGI, Dec. 20, 2004). The Celestine River tanker carried 145,000 cubic meters of LNG from Nigeria up the Sabine-Neches Channel near Port Arthur, TX, to the Sabine Pass terminal.
The LNG shipment will be used in the terminal's "cooldown" process, which cools the facility to its normal operating temperature. In March FERC granted Cheniere's request to accept cargoes for testing. Cheniere also received authorization for commissioning activities at Sabine Pass and to put its Sabine Pass pipeline segment into service in advance of the rest of the new Creole Trail pipeline (see NGI, March 24). In October 2007 FERC approved the merger of affiliates Cheniere Creole Trail Pipeline and Cheniere Sabine Pass Pipeline into a single line that would serve two Cheniere LNG terminals in Cameron Parish: the Sabine Pass LNG terminal and the Creole Trail LNG terminal (see NGI, Jan. 21).
Sabine Pass LNG will be the largest LNG receiving terminal in North America by regasification capacity at 4 Bcf/d and will have 16.8 Bcf of LNG storage capacity with two berths capable of handling the largest LNG vessels. It is located about 3.7 miles from the open waters of the Gulf of Mexico.
Sabine Pass is one of three LNG receiving terminals that Cheniere Energy is currently developing as part of an LNG network in the South. Creole Trail and Corpus Christi are the two other terminals currently under construction.
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