Top firms take on $16bn on gas project

Mick Jagger

As energy prices have been hammered in recent weeks, some of Wall Street's biggest players are nonetheless ready to write billion-dollar checks to finance a nearly $16 billion Gulf Coast natural-gas project for Cheniere Energy, according to documents and people familiar with the matter.

The commitments could put banks including JPMorgan Chase , Goldman Sachs , and Morgan Stanley on the hook if the market for a special form of natural gas goes south.

The deal, which could yet fall through as details have not been finalized, involves Cheniere's planned natural gas facility in Corpus Christi, Texas-a gas terminal now under development that is expected to produce as much as 13.5 million tons of liquefied natural gas, or LNG, starting in 2018.

The terminal, which documents estimate will cost $15.5 billion overall, is currently seeking $11.5 billion in a seven-year bank-credit facility that would depend in part on the issuance of new bonds next year and the year after to repay its debt. Private lenders have already provided Cheniere with an initial $2.5 billion in funding to construct the terminal.

Cheniere's push right now on Wall Street is notable because it comes at a time when the energy markets are being buffeted by unusual volatility.

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Since Thanksgiving, crude oil has been trading at multiyear lows, leaving the European benchmark, Brent crude, down some 40 percent on the year in the U.S. That move has raised questions about whether drillers, where prices have also plummeted, will be able to keep operating profitably and continue to repay their debts. Already, major players like ConocoPhillips are trimming their capital spending in anticipation of slimming profit margins.

Liquefied natural gas, the commodity Cheniere-whose stock ticker is LNG as well-is planning to produce, trades on a market separate from oil. But as a commodity, LNG's price can be greatly affected by the price of crude, which is frequently used as a peg for setting overseas prices.

LNG prices have tumbled this year, according to figures from the market-data provider Platts, sinking more than 43 percent in Japan and Korea, a key Asian market, and by more than 40 percent in other global markets.

Today's volatility is "happening at a time where gas prices were already much lower than the same period of last year," said Leslie Palti-Guzman, a senior energy analyst at the Eurasia Group, "so when you add to that glut lower oil prices, it means global gas prices are going to decline even further."

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She added that she "absolutely" expects LNG prices to fall in 2015, both in the "spot," or day-to-day, market, and in the longer-term contract market.

Cheniere, a Houston-based company that in 2012 became the first ever to receive Federal Energy Regulatory Commission (FERC) permission to export LNG from the lower 48 states, has been in the market to raise billions for the development of its Corpus Christi project since at least November, according to deal documents.

By late that month, the company had secured initial commitments from more than 16 major banks to provide up to $1 billion apiece for the planned seven-year credit facility, the documents indicated (although the actual amounts, they noted, might fall closer to the $625 million mark once the deal is consummated). The list of lenders includes Societe Generale, which is leading the financing effort, Credit Suisse, Morgan Stanley, HSBC , Goldman Sachs, Bank of America , and Mizuho, along with more than a dozen others.

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Reached for comment on the expected deal, which people close to it say is hoped to close early in the new year, a Cheniere spokeswoman said, "There isn't any new information to be shared at this time." The financing plans were first reported Nov. 21 by the trade publication Power Finance & Risk.

LNG price estimates compiled by FERC pegged U.S. Gulf Coast prices at $3.72 for December, a level not far off from those of conventional natural gas, which closed on the benchmark Henry Hub market at $3.61 late Monday. Overseas, however, LNG trades at much higher prices, according to FERC charts, particularly in Asia, where it is estimated to be trading at $12 in the spot markets in Korea and Japan. The price tends to be even higher in longer-term contract markets, where companies like Cheniere do business.

But while many LNG contracts are determined in large part by Brent or other global crude markets, Cheniere has the advantage of using the Henry Hub natural-gas price as the basis of its 20-year supply contracts, according to company documents, leaving it less vulnerable to the vicissitudes of the oil market.

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Even if LNG markets don't fall by much, another potential hitch in the Corpus Christi deal would be a downturn in the high-yield debt market, which Cheniere is expecting to tap in order to help repay the banks in its planned $11.5 billion Sabine Pass LNG terminal. In 2015, for instance, Cheniere is expected to issue some $4 billion in bonds, deal documents suggest. In 2016, that figure would climb to $7.5 billion.

Cheniere backers argue that the company, whose shares have enjoyed a massive, 600 percent runup in the past three years, is well-positioned to weather additional volatility in the energy markets.

Bonds associated with its Sabine Pass terminal, a project similar to the Corpus Christi facility that is expected to come online next year, are trading at par, one market participant noted, whereas many other comparable energy bonds are trading below par.

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