Cheniere Energy’s Commodity Price Exposure: Key for Investors?
Cheniere Energy’s commodity exposure
The earnings of midstream companies don’t have much direct commodity price exposure. These companies include larger ones such as Energy Transfer Partners (ETP) and Cheniere Energy (LNG) and smaller ones such as EQT Midstream Partners (EQM) and Antero Midstream Partners (AM).
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The correlation between Cheniere Energy’s stock price and crude oil (USO) resulted in a correlation coefficient of 0.51 over the past year. Natural gas (UNG) and Cheniere Energy have a correlation coefficient of 0.04 for the same period. The correlation between Cheniere Energy and natural has changed to -0.05 over the past month.
A correlation coefficient close to 1.0 might indicate a strong relation between two variables. Global LNG (liquefied natural gas) prices are linked mostly to crude oil prices, which might reflect Cheniere Energy’s high correlation with crude oil.
However, Cheniere Energy shouldn’t have a strong correlation with crude oil since ~87% of capacity for its seven trains is contracted under 20-year SPAs (sale and purchase agreements) at fixed fees. These include five trains at Sabine Pass and two trains at Corpus Christi.
The fixed fee contracts imply that Cheniere Energy loses with the increase in natural gas prices since natural gas is the main input to liquefaction plants.
Uncontracted volumes from the seven trains, or ~4.1 mtpa (million tons per annum), are being sold to Cheniere Marketing customers on a customized basis, including short-term, mid-term, and long-term.
Cheniere Marketing has sold a “significant portion of projected LNG available through 2018.” The contracts are tied to Henry Hub prices and foreign natural gas spot indexes. Under Henry Hub plus fixed fee, there would be negligible natural gas exposure.
In the second type of contracts, Cheniere Energy would be exposed to the spread between global LNG prices and Henry Hub natural gas prices.
Let’s move on now to see if institutional investors are becoming bullish on Cheniere Energy.