Sunday, June 21, 2009

Cheniere using futures to stay alive


CHENIERE ENERGY (ticker: LNG) has built up enormous capacity to purchase liquefied natural gas, convert the liquid into gas, and pump the gas into the the US pipeline system. The idea was to buy up cheap liquefied natural gas from say Kuwait and sell it in the US. In the past this capability to convert LNG into gaseous form did not exist in the US on a large scale.

Sabine Pass (Cheniere's LNG facility)


Unfortunately for Cheniere, natural gas prices in the US have collapsed as we discussed (see Sober Look post). At $4/MMBTU, it just doesn't work. So the shares are taking a beating.



Instead the company is deploying another strategy. They buy liquefied natural gas, simultaneously selling it forward in the futures market. Having built up a massive storage capacity, they are able (for now) to store the gas cheaper than the slope of the natural gas curve. Then as the futures contracts mature, they will deliver the gas against their futures position.

US natural gas futures curve


They hope that either the US gas price improves or the futures curve stays steep to keep them going. Predictions of a cold winter, for example will keep a nice slope on the curve. Of course pumping more gas (from imported LNG on top of domestic production) into the US storage system is just to contributing to an already massive US oversupply.

But the natural gas physical market is all about optionality. There are basis options, curve options, and compound options. Cheniere has one more trick up their sleeve. They can buy LNG from abroad, store it, and then sell it back abroad. In effect the US becomes a huge natural gas storage facility for the World. See Reuters story:
Cheniere plans to take advantage of seasonal prices changes in the LNG market by importing the super-cooled gas during summer when prices are low, storing it and then re-exporting when prices are higher, most likely in winter.