Updated from 10:33 a.m. ET to include Thursday share performance and additional analyst commentary
NEW YORK (TheStreet) - Energy Transfer Equity (ETE) may be the best way for investors to put their money behind the export of liquefied natural gas produced in the United States, as geopolitical tensions flare up between Russia and North Atlantic Treaty Organization members over Russia's occupation of Crimea.
Russia's invasion of Crimea, a region of the Ukraine that borders the Black Sea and is predominately made up of Russian speakers, has brought to the forefront some geopolitical issues that have been dormant since the dissolution of the Soviet Union. Europe's reliance upon Russian natural gas, which accounts for between 10%-to-30% of some countries' energy, is an unsettling current running through the Crimean provocation.
But those geopolitical rumblings have presented an opportunity for U.S.-based companies that aspire to liquefy and transport the glut of natural gas being drilled in the United States.
Cheniere Energy (LNG), Cheniere Partners (CQP) and Cheniere Energy Partners (CQH) -- three companies affiliated with the development of the Sabine Pass natural gas export facility -- have seen strong stock market performance amid Russia's Ukrainian flare-up. Sabine Pass is the first LNG project to be approved by both the Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC). With the financial support of minority investor Blackstone Group (BX), parts of the facility are poised to come online in late 2015.
Other projects including a liquid natural gas facility in Corpus Christi, TX are now moving through the process of regulatory approval, with analysts handicapping their eventual success. For years, however, Cheniere's set of limited partner and general partnership units have been the de-facto way for investors to put their money behind LNG transport.
Cheniere Energy, the 60% owner the Sabine Pass LNG terminal, has seen its stock rise over 100% over the past 12-months.
Other pipeline giants tracking on Cheniere Energy's heels into the market for LNG transport may present a better risk-reward over the next 12-to-18 months, as they play catch-up.
Energy Transfer Equity may be the best opportunity for LNG transport-focused investors over the next year, Abhiram Rajendran, an analyst at Credit Suisse, said during a Monday telephone interview. The company is further behind Cheniere Energy and its LNG export ambitions currently reside within a larger pipeline company that holds general partner agreements with a subset of MLP's. In coming quarters, that may prove to be an opportunity for investors.
Energy Transfer Equity is in the process of spinning its Lake Charles, La. export terminal to a publicly traded master limited partnership. The company has already signed up British energy giant BG Group to jointly develop the export facility, called Trunkline LNG, which could be used to export up to 15 million metric tons of LNG per year. Currently, Trunkline is an import facility that receives fees from BG Group for LNG imports to the U.S.
When Energy Transfer Equity's Lake Charles facility is spun off into a master limited partnership, the import business will initially support the MLP. That spin-off is expected by analysts to occur in the summer or fall of 2014.
Energy Transfer Equity will own 60% of the Lake Charles project, while the company's pipeline MLP, Energy Transfer Partners (ETP), will own 40% of the project. Given Energy Transfer Equity's general-partner interests, the company may disproportionately benefit from Lake Charles.
If Energy Transfer Equity can navigate the approval process for its LNG export business with FERC, the export side of the business will eventually be dropped down to the Lake Charles MLP, possibly sometime in mid-2015, according to Credit Suisse's Rajendran.
BG will pay Energy Transfer for the export facility on a "tolling basis" for 25 years and has an option to extend that contract at a fixed rate.
The oil giant will be responsible for construction management, operations, and will bear the cost of gas procurement from Energy Transfer's pipeline business. Financing for the project mostly lies with Energy Transfer, with costs expected to be in the range of $11 billion, according to Rajendran, who expects financing to be split 75% debt, 15% third party equity financing, and 10% from the company's cash flows.
The project development agreement between BG Group and Energy Transfer Equity, however, has a final investment decision slated for 2015, meaning that there is some uncertainty.
Bank of America Merrill Lynch analyst Gabe Moreen said in a recent client note Lake Charles could drive increased distributable cash flow growth for Energy Transfer Equity through rising cash flows, distributions from limited partner interests such as Energy Transfer Partners and a LNG MLP IPO.
The Ukrainian LNG Export Spotlight
The crisis in the Ukraine may further underscore the strategic imperative of U.S. LNG exports, and solidify confidence in the Lake Charles project, Rajendran said. In a sum-of-the parts analysis, Rajendran values Energy Transfer's Lake Charles project at $6-to-$7 a share and gives the facility a 75% probability of success, pending further regulatory approvals. The analyst expects Energy Transfer to file for LNG export licenses in the next month.
"It can increase the push on government agencies such as the DoE and FERC to push through more export licenses," Rajendran said of the Ukrainian crisis. Credit Suisse counts Energy Transfer equity as one of its "focus list" stocks and gives the company a $52 a share 12-month price target. Cheniere Energy is also rated 'outperform' at Credit Suisse.
Energy Transfer Equity shares have gained 11% year-to-date and were near five-year highs at $45.58 in Thursday morning trading.
For BG Group, deterioration in many of the company's global oil and gas operations may underscore its efforts to move to the North American market through the company's partnerships with Energy Transfer.
BG Group recently warned on its profitability in Egypt amid unrest in the region and analysts expect uncertainty on some of the company's core businesses in Australia and Brazil.
Kingdon Sees Opportunity
Philip Hilal of hedge fund Kingdon Capital Management highlighted Energy Transfer Equity as a top pick at a February investor conference, and cited positive catalysts for the pipeline giant such as its Lake Charles LNG export facility.
At the Harbor Investment Conference, Hilal valued Energy Transfer Equity at $60 a share and noted that public shareholders may not fully value the company's soon-to-be spun Lake Charles assets.
Since Hilal's presentation, Energy Transfer shares have outperformed the S&P 500, especially as geopolitical tensions between Russia and NATO escalated in late February and early March.
Energy Transfer Equity shares rose 13 cents in Thursday trading, as stocks around the world plummeted on an escalating crisis between Russia and Ukraine. Shares in the company closed at $45.53.
-- Written by Antoine Gara in New York