Cheniere Energy Partners LP

Cheniere Energy Partners reported adjusted EBITDA of $983 million, well above the $870 million PitchBook consensus. Higher volumes and margins drove the outperformance, as global gas supply remains strained by the war in Iran. Bechtel was also contracted for the SPL phase 1 expansion.

Why it matters: Volumes were up 13% year over year. Despite the improved pricing and volumes, targeted distributions for the year remain unchanged as the partnership retains cash for the Sabine Pass expansion. We anticipate the phase 1 expansion to move forward. The project is secured by the necessary contracts to achieve a final investment decision. We see the regulatory process as the only remaining major obstacle, but certain to be cleared in the current environment.

The bottom line: We are slightly increasing our fair value estimate for units to $59 from $58 after refreshing our model. We see units slightly overvalued, trading just in 2-star territory. Our wide moat, Standard Capital Allocation, and Medium Uncertainty ratings are unchanged.

We are raising our fair value estimate to $59 from $58 for Cheniere Energy Partners' units after refreshing our model.

Cash available to Cheniere for distributions is largely secure, as the major source of variability to earnings is tied to paper derivative losses and gains. We expect consistent distributable cash of $1.5 million-$2 million per trillion British thermal units of LNG. Consistent distributable cash will support growing returns as more volumes are produced.

Due to the significant fixed-fee component of contracted LNG volumes, declining natural gas prices generally improve the firm's margins. We assume strip pricing for natural gas in the first two years of forecasting, $3.10 and $3.50/mmbtu for the remainder of 2026 and 2027, respectively. After that, we assume midcycle real prices of $3.70/mmbtu onward.

We award Cheniere Energy Partners a wide moat rating based on its intangible assets. The intangible assets are multidecade agreements that secure 85% of all volumes it produces, with further agreements with the partner's marketing arm securing any produced in excess. LNG production facilities of Cheniere’s scale require strong capital backing, usually secured by large multidecade purchase orders from LNG buyers. The result is a steady business that sits between a diverse set of investment-grade counterparties with limited commodity price exposure.

Investors comparing the MLP subsidiary Cheniere Energy Partners with C-Corporation parent Cheniere Energy should be aware of the differences. First, the MLP only has a stake in the Sabine Pass facility and associated projects. Second, the MLP retains 20% of the profits from the marketing function for volumes from the Sabine Pass facility.

Finally, Cheniere Energy Partners paid Cheniere Energy 64% of total distributions in 2023, despite only having just over 50% of outstanding units. The high proportion of payments is due to the structure of the preferred general partner units and spiking LNG performance. Throughout our forecast, we expect the parent will receive 60% of each year’s distributions. This will hold back market performance of the partnership units, as the preferred units will divert half of any distributions over $2.52 per unit.

Cheniere makes money in two ways. Most of its business is generated by fixed-fee customers, which pay a flat fee per molecule regardless of taking possession and a variable fee of 115% of the Henry Hub benchmark if they do take possession. These customers are locked into contracts lasting more than a decade and generally receive the molecules for less than spot prices. LNG would have to be trading at a substantial, if not unheard of, discount in the spot market for a customer to not take possession. That’s because the purchaser will still be on the hook for the fixed fee. If a customer fails to take possession, Cheniere can sell the commodity on the open market through its marketing arm.

Cheniere’s marketing function generates the remainder of the firm’s revenue. Marketing revenue makes up about 10% of volume but 14% of revenue in a midcycle environment. That’s because buyers looking for LNG on short-term arrangements generally face acute shortages for power generation. LNG tends to be cheaper and cleaner than alternatives like diesel, which makes up for gaps in power demand and supply. While it’s a small part of Cheniere’s mix, marketing injects volatility into the business. However, that volatility tends to benefit Cheniere’s business more than harm it. Cheniere’s marketing unit sold LNG at higher prices than contracted volumes in all but two years since 2016, creating additional value. Even so, Cheniere has sought to reduce its marketed volumes further and produce stable returns throughout the cycle. We think there’s substantial merit to this approach, given the changing dynamics of the industry.

Cheniere spearheaded the last revolution of the LNG industry, decoupling contract terms from diesel- or oil-linked pricing. This allowed for greater certainty when commissioning large LNG production facilities. Accelerated global demand for LNG has also spurred a flurry of interest from buyers to snap up every free cargo, intensified by the loss of Russian gas. Because of these fundamental changes, new competitors have emerged in the US and abroad. So, new supply from unbuilt LNG facilities is vying for the same pool of LNG consumers to secure financing and begin building. Cheniere has an advantage here: It is widely regarded as a dependable counterparty with decades of experience.

The strong demand for LNG means that some projects with less than 90% of contracted capacity, less favorable terms, or less creditworthy counterparties will proceed to production rather than die in the proposal process. This dynamic threatens the spot market, as uncontracted or orphaned volumes are sold at discounted prices as producers seek to recoup the cost of gas, operations, and debt.

Cheniere’s size and reputation in the industry are substantial and it has successfully contracted volumes over multidecade time frames.

The Sabine Pass expansion will offer improved distributable cash flow to the MLP.

The MLP can comfortably generate enough cash to maintain returns without substantial investment.

The MLP structure is out of favor and creates complexities that most investors would prefer to avoid.

Cheniere is structurally inclined to invest in the Corpus Christi facility rather than the MLP’s Sabine Pass.

Increasing project costs with the MLP structure of returns limits the upside for MLP unitholders for new investment in Sabine Pass.