Cheniere Energy Partners, L.P.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Cheniere Energy Partners, L.P. is a publicly traded limited partnership focused on developing, constructing, and operating the Sabine Pass LNG terminal and the Corpus Christi LNG terminal in Louisiana and Texas.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Cheniere’s core business is the processing and delivery of liquified natural gas (LNG) primarily to global markets and this is a key point in determining its overall performance.

Business Overview:

Cheniere Energy Partners, L.P. (CQP) operates LNG terminals at Sabine Pass, Louisiana, and Corpus Christi, Texas, which it uses for processing, liquefaction, and shipping natural gas. CQP’s revenues primarily stem from long-term contracts with its global customers, which, according to the company, provide a reliable and predictable cash flow. The company’s business model involves the import, transportation, and processing of natural gas, and its subsequent export as LNG.

Revenue Distribution

  • CQP primarily derives revenue from contracted capacity fees at its terminals and from shipping contracts. The company also generates income from selling LNG cargoes which is tied to short-term market prices. In general, CQP is heavily reliant on fee-based revenues and less reliant on commoditized LNG sales.

Industry Trends and Competitive Landscape

  • The global LNG market is experiencing significant growth due to the shift towards cleaner energy sources. Countries in Europe and Asia, especially, are increasing their imports of LNG to meet energy demands and reduce their reliance on coal and oil and pipeline gas from Russia. In that environment, CQP is well placed because its infrastructure can provide the security of supply that many countries need, and as such, demand for LNG is expected to grow rapidly in the coming decade and so too will demand for infrastructure such as CQP’s terminals.
  • Competitively, the LNG industry is capital intensive, making new entrants difficult due to high capital costs. This has led to a few dominant players such as QatarEnergy and Cheniere. The current geopolitical situation also favors companies with strong long term contracts. In addition, the long time lines from inception to operation also favors companies that are already operating terminals.
  • Another consideration comes from the pressure of global emissions reduction targets. The LNG industry is facing pressure to reduce its carbon emissions and to develop clean forms of energy. CQP has stated it is working on various initiatives to reduce its carbon footprint.

What Makes CQP Different?

  • CQP’s terminals are some of the largest in the world, which allows them to achieve economies of scale.
  • The contracts are long term, many contracts span over 20 years. These contracts also guarantee a fixed minimum level of revenue even during periods of low market prices, and provide a stable source of income and cashflow. This reduces risk.
  • CQP is at the forefront of LNG infrastructure and enjoys first-mover advantage.
  • CQP has strong relationships with the major players in the gas industry.

Financial Analysis:

  • Revenue: CQP’s revenues are primarily determined by contracted capacity fees for its LNG terminals and sales of LNG from terminals. The total revenue for FY 2022 was $16.1B, while the previous year the company made revenues of $12.3 billion. This represents a 31% growth YoY.
  • Expenses: In FY 2022, COGS came at $12.5B, total operating expenses at $4.65 billion while operating income came in at $3.95 billion which means an operating margin of about 24.5%.
  • Cashflow: Net cash from operating activities was $8.2B, while cash from financing activities was -$3.7B, and cash from investing activities -$7B. It must be noted that the company spent large amounts of cash on capital expenditures which can be seen in the large difference between operating and investing cash flows.
  • Profitability: CQP’s operating profit margin is roughly 24.5%, but net profit margin is about 10%. This highlights the heavy financing costs the company faces due to the large amounts of debt on its balance sheet.
  • Debt: Long-term debt is a major component of CQP’s capitalization with total debt of about $16.2 billion. CQP has a current interest coverage ratio of 2.7x and an EBITDA interest coverage ratio of 4.4x. This means CQP is taking on quite high levels of debt and could be vulnerable to increases in the interest rate environment, as such a large debt pile makes the company very sensitive to interest rates. However, the credit rating is in investment grade due to steady cash flows and long term contracts.
  • Capital Expenditures: CQP needs to put up substantial amounts of capital expenditure to ensure smooth operations. Most notably in 2022, the total CapEx is $7.1 billion. These capital expenditures include pipeline systems, storage tanks, and other facilities related to the production of LNG.

CQP’s financial results have benefited from increasing global demand for LNG and a rise in prices due to the energy crisis, with the company seeing growth in revenue, EBITDA, and cash flow.

CQP has been a beneficiary of increased demand and price of gas due to the ongoing conflict in Ukraine. This has led to record financial results for the last 2 years.

Moat Rating: 3/5

CQP possesses a narrow moat, mainly due to:

  • Economies of scale: The large-scale of CQP’s infrastructure provides a cost advantage relative to competitors.
  • High switching costs: Given the integration of CQP’s LNG terminals into their customers’ supply chains, these customers are unlikely to switch suppliers easily because the process to do so is long and costly.
  • Government Regulation Significant regulatory hurdles and high capital expenditure required for entering the LNG business which makes it difficult for new entrants. These competitive advantages are indeed durable, but not impenetrable. As LNG becomes more widespread, especially with the current push for clean energy, more competitors might find ways of entering the market.

Although CQP has an advantage due to its scale and contract based revenue model, it faces significant competition from other major energy providers in the industry. However, there are also high barriers to entry which create a moat in the industry and favour larger players such as CQP.

Risks to Moat and Business Resilience:

  • Geopolitical Risks: LNG prices are very susceptible to global geopolitical tensions, and especially as it relates to gas producing countries. If any conflicts occur, this will affect LNG pricing and supply. Furthermore, many contracts for CQP have price mechanisms related to a reference price, so the company will still be tied to these volatile prices.
  • Dependence on specific projects and customers: Most of CQP’s revenues are generated at the Sabine Pass and Corpus Christi facilities, the loss of or underperformance at these facilities may have major consequences on overall earnings and profitability. CQP is also reliant on specific customers with long term contracts, losing one of these customers would have a major impact on operations. However, CQP is diversified across multiple contracts for multiple buyers.
  • Operational Risks: Operating LNG terminals is a complex business, and so it is prone to accidents, and other problems which could limit production, increase costs and create a temporary halt in operations.
  • Technological Changes: As new technologies for capturing and transporting natural gas are discovered, CQP could become less competitive in the industry, especially from smaller competitors or firms that use more innovative methods.
  • Environmental Regulations: There is a very clear trend towards cleaner forms of energy and as such, regulators might place restrictions on the production and transportation of LNG which would lower prices and volume.
  • Capital intensity: CQP has high levels of capital expenditure to keep its facilities functional and relevant in the market. The company is constantly spending money on infrastructure maintenance and expansions to existing infrastructure. This has a major drag on earnings and cash flow and this trend might continue in the long term.
  • High Debt: As mentioned earlier, CQP has high levels of debt which makes it sensitive to changes in the interest rate environment.

Despite these risks, CQP has demonstrated strong business resilience during periods of low demand and adverse market conditions, and has shown that it can bounce back and return to profitability quickly. The strength of their long-term contracts and large operational base allows them to ride out volatility and market shocks and continue to grow.

Understandability: 4/5 CQP’s business model is relatively straightforward, as it provides facilities for LNG processing and transportation. This business model is relatively well understood but when it comes to assessing the value creation through this process, it becomes much more difficult. The complex financial structure, and the contracts that go into a specific price point makes CQP slightly more difficult to understand.

Balance Sheet Health: 3/5 CQP’s balance sheet displays some degree of weakness mainly owing to the large amounts of debt. While manageable, the level of debt makes CQP’s equity more vulnerable to shifts in the market. Overall, CQP faces heavy financial obligations and needs constant reinvestments to improve its operating ability. However, it also has strong cash flows which support its balance sheet and reduce the likelihood of financial trouble.