Long: Cheniere Energy (LNG) Current Price: $ 39.24 Target Range: $59 - $70
Presentation by:
Yunus Jaffrey
Jason Odom
Ken Wang
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Agenda Company Background
LNG Market
Certainty of Business Model
MLP Structure
Valuation
Risks
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Company Background
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Cheniere Energy Houston-based energy company operating in
Liquefied Natural Gas (LNG) related businesses
Owns and operates Sabine Pass, one of only two terminals authorized in the U.S. to export LNG
Other Business Units: Creole Pipeline, Cheniere Marketing, and Corpus Christi LNG Terminal
Uniquely positioned to capitalize on the emerging U.S. energy renaissance
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LNG Market
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Supply and Demand
Surging U.S. natural gas output combined with export constraints have pushed down domestic prices relative to international markets
Global consumers are eager to gain access to U.S. supply
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Cheniere will be a major beneficiary of the U.S. Export Story
Sabine Pass is one of only two facilities in the U.S. to receive DOE approval to export LNG to both FTA and Non-FTA countries
Cheniere’s operations in the Gulf Coast have significant resource access and cost savings advantages
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Certainty of Business Model
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Cheniere has a highly predictable revenue and cost structure
1.03b MMBtu currently contracted for 20 years to investment-grade customers:
BG Energy, Korea Gas, and Total SA
Capital expenditure financing already secured through long-term debt/loans with set interest costs
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Corpus Christi: Further Upside Corpus Christi facility pending full non-FTA
export and construction approval
Three additional LNG trains to be built
Two LNG tanker berths
Based on Sabine Pass and other recent approvals, we believe Corpus Christi facility will be approved by 2014
In our view, Corpus Christi will represent approximately $10 -$14 of upside for LNG shares
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MLP Structure
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Cheniere and CQP (MLP) Cash Flow Structure
Quarterly distributions of cash flow
GP and LP structure similar to hedge funds
GP takes greater percent of the profit as distributions increase
MLP Distribution Structure
Quarterly Distribution/Unit Marginal % Interest Distributions
From To Limited Partner General Partner
Tier 0 $0.00 $1.70 98% 2%
Tier 1 $1.70 $1.96 98% 2%
Tier 2 $1.96 $2.12 85% 15%
Tier 3 $2.12 $2.55 75% 25%
Tier 4 $2.55 - 50% 50%
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Valuation
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Sabine Pass Brownfield Projects Have Cost Advantage Relative to Competitors
Brownfield projects (highlighted below) converts existing infrastructure into liquefaction facilities Enjoy lower cost relative to greenfield projects
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Market misevaluates discount rate and likelihood of regulatory approval
Sell-side analysts using 9% or higher WACC
We believe this is too high given Cheniere’s predictable cash flows and costs
Possible reasons for high WACC
Uncertainty around regulatory approval
Corpus Christi approval timeline
Emerging nature of US LNG exporting
Alternative approach
WACC similar to cost-of-debt for a yield-like instrument
WACC based on conventional comps computation
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Target Price: $59 - $70 Corpus Christi is likely to
be approved by regulatory agencies and start production by 2018
Sabine Pass brownfield projects provide significant cost advantage
LNG is a yield instrument due to the predictable nature of cash flows and GP interest
Share Contribution Under Street Assumption
Share Contribution
Business Unit Street Assumptions Bull Case
Cheniere Energy Partners LP (MLP) 17.06$ 28.46$
General Partner Ownership 8.63$ 14.46$
Cheniere Marketing 3.36$ 4.65$
Corpus Christi Terminal 9.90$ 22.84$
Cheniere Energy (LNG) Share Price 38.95$ 70.42$
Sensitivity Analysis
Corpus Christi Project Probability
0% 20% 40% 60% 80% 100%
5.0% $58 $64 $70 $76 $82 $88
5.5% $53 $58 $64 $70 $76 $82
6.0% $48 $53 $59 $65 $70 $76
6.5% $43 $49 $54 $60 $66 $71
7.0% $40 $45 $51 $56 $61 $67
7.5% $37 $42 $47 $52 $58 $63
8.0% $34 $39 $44 $49 $54 $60
8.5% $31 $36 $41 $46 $52 $57
9.0% $29 $34 $39 $44 $49 $54
9.5% $27 $32 $37 $42 $46 $51
10.0% $25 $30 $35 $39 $44 $49
WA
CC
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Risks
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Risks Environmental opposition
Regulatory changes
Long-run changes in global LNG prices
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The UVA Honor Code
The University of Virginia,
and the Darden School of Business, abide by an Honor Code, which applies to this competition.
By participating in this competition, you affirm that you have abided by the competition rules and have not lied, cheated, or stolen in the preparation or
delivery of your pitches.
For more information about the UVA Honor Code, please see the below link:
http://www.virginia.edu/uvatours/shorthistory/code.html
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Appendix
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Cheniere Structure
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Management Expertise Visionary management: when the NG market
shifted in 2008, Cheniere CEO Charif Souki had just spent $2b building Sabine Pass as an import facility. Faced with a dire situation, Souki instead began converting the facility to an export terminal, gaining a significant lead on rivals.
First-mover advantage
Significant management holdings of LNG (~12%) and CQP (~43%)
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Sabine Pass Is Only U.S. Terminal With Full Regulatory Approval
Both the DOE and the FERC must approve LNG export projects
Only after FERC approval does the DOE review an application
Corpus Christi project is 4th on DOE list
Expected approval by 2014
Sabine Pass 5th and 6th liquefaction terminals are 5th on DOE list
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DOE and FERC Timeline Sabine Pass terminal only project fully
approved for full exportation
Corpus Christi project expected to be approved in 2014
U.S. DOE Applications for LNG Exports
Order To Be Processed Company DOE Approval FERC Approval
- Cheniere Sabine Pass T1-T4 Yes - 8/7/2012 Yes
- Freeport LNG Pending Yes
- Lake Charles Exports Pending No
- Dominion Cove Pending Pending
1 Freeport LNG Expansion No No
2 Cameron LNG No No
3 Jordan Cove Energy Project No Pending
4 LNG Development Company No Pending
5 Cheniere Corpus Christi No Pending
6 Cheniere Sabine Pass T5-T6 No Pending
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Regulatory Uncertainty 2011: Sabine Pass 1-4 liquefaction facilities were approved in 2011
Shortly thereafter political debate if U.S. should export gas
DOE halts approval process
2011: DOE commissions NERA to study economic effects of exportation of natural gas
Late 2012: NERA publishes report in full support of exportation
2013: DOE approves Freeport LNG export project In decision DOE writes: “The market, not government, should determine
the price and other contract terms of imported or exported natural gas.”
Market believed DOE would only approve exports totaling 6.0 bcf/d. Current export approval level is 6.37 bcf/d
6.0 bcf/d was only the “low” export case set by the NERA study
We believe DOE will accelerate projects approvals to a pace of one per 45-90 days and there will be no bcf/d export cap level
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Comparables Comparable Cos Trading
Multiples Implied Total
Enterprise Value Implied Equity Value
Multiple of Projected Fins.
(2020) x Low High = Low High - Net Long-Term Debt = Low High
Pure Play
Revenue $6,730 0.52 8.4 $3,500 $56,532 $5,574 ($2,074) $50,958
EBITDA $4,710 11.96 46.87 $56,332 $220,758 $5,574 $50,758 $215,184
Net Income* $2,043 22.58 152.12 $46,131 $310,781 $5,574 $40,557 $305,207
Book Value** $2,235 1.67 3.44 $3,732 $7,688 $5,574 ($1,842) $2,114
All Comps
Revenue $6,730 0.52 19.7 $3,500 $132,581 $5,574 ($2,074) $127,007
EBITDA $4,710 11.96 46.87 $56,332 $220,758 $5,574 $50,758 $215,184
Net Income* $2,043 22.51 152.12 $45,988 $310,781 $5,574 $40,414 $305,207
Book Value** $2,235 1.67 3.44 $3,732 $7,688 $5,574 ($1,842) $2,114
Average Implied Value (Pure Play) $27,424 $148,940 $21,850 $143,366
Average Implied Value (All Comps) $27,388 $167,952 $21,814 $162,378
*Net Income calculated using DCF EBITDA and interest charges, 5% estimated D&A, and 35% statutory tax rate
**Calculated using BV as of 11/12/2013
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Shale Revolution: Unprecedented U.S. natural gas production growth in the last 5 years
Shale production technologies have allowed the U.S. to tap into significant domestic oil and natural gas resources
U.S. production has outpaced domestic demand, putting the U.S. on the path to become a net exporter of LNG in the next decade
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US Natural Gas Production (trillion cubic feet)
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Sources Slide 6, 7, 9, 12, 21, 24: Cheniere October 2013
Corporate Presentation
Slide 14: ITG Investment Research: “LNG: DOE Gives Markets a Chance”. 6/17/2013.
Slide 27: EIA: “Annual Energy Outlook 2011”
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