Behind the Cheniere Probe

Some disclosure weirdness surrounded its December 2004 stock sale.
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Cheniere Energy

(LNG) - Get Report

, whose partnership with one of the world's biggest oil companies has helped its shares quadruple in less than a year, is finding that life in the spotlight can be difficult.

Last week, the Houston-based gas infrastructure concern told investors that the

Securities and Exchange Commission

had formalized an investigation of a 10-month-old deal with

Chevron

(CVX) - Get Report

that brought the company to the market's attention.

The company has done little to clarify the nature of the probe. But it isn't hard to see what might have piqued the SEC's interest.

Cheniere, which has lost money every year since coming public, saw its stock march from below $10 to nearly $40 starting last fall, when word broke that Chevron had taken a shine to a liquefied natural gas terminal it was building at Sabine Pass, La. The run began Nov. 9 after Cheniere said it was in negotiations with the oil giant for both an investment in the terminal and a contract to use it.

Its stock having nearly doubled, Cheniere announced after the close on Dec. 8 that Chevron had declined to make the equity investment. At the same time, Cheniere priced a 5-million-share follow-on stock offering at $30 a share. The stock had closed earlier that day at $28.25 and opened the next day about $2 lower.

Buyers in the 5-million-share offering probably looked fleeced until it emerged several days later that Chevron, while declining the equity investment, planned to go ahead with the terminal contract, agreeing to take 700 million cubic feet at Sabine Pass for 20 years. The stock jumped above the $30 offering price on the news and hasn't looked back since.

So what's bothering the government?

The SEC has said little about its probe. In its release last week, Cheniere said the agency's interest related to its "agreements and negotiations with Chevron USA, the company's December 2004 public offering of common stock, and trading in the company's securities."

Still, some peculiarities are evident in the events of early December.

Cheniere's Dec. 8 press release made reference to a letter received from Chevron in which the oil company said it had decided against the equity investment. But in a filing with the SEC made a day later, Cheniere appended the letter itself, which turned out to include a sentence from Chevron saying "we will nonetheless have a long and mutually prosperous relationship through our role as a capacity holder in the terminal."

The letter from Chevron was dated Dec. 6, two days prior to the stock offering. In its SEC filing, however, Cheniere said the letter was received on Dec. 8, after the market closed.

Five days later, on Dec. 13, Cheniere announced publicly that it had reached a 20-year capacity holding agreement with Chevron.

After that, Cheniere shares rallied back up 16% in unusually heavy trading.

Cheniere included a copy of another letter from Chevron in a Dec. 13 SEC filing. Unlike the letter of five days earlier, this one had the words "hand delivered" printed in bold on the top. The last line read: "As we've said before, we look forward to a long and constructive relationship with Sabine."

Audie Setters, vice president of international marketing and business development at ChevronTexaco Global Gas, who sent the two letters, was not available for comment. Linsi Crain, a spokeswoman for the company, said Chevron does not comment on ongoing investigations.

Analyst Phil Johnston at J.P Morgan and Steve Enger at Petrie Parkman & Co. declined to comment on the investigation. Both investment banks participated as underwriters for Cheniere's stock offering.