America's LNG Pioneer Is Out -- But Is the LNG Dream Dead for His Start-Up?
When in the coming month Cheniere Energy delivers its first LNG cargo from Louisiana's Sabine Pass LNG terminal in the United States (the first LNG export cargo from the lower 48 in history), Charif Souki, whose vision made it possible, will not be at the LNG terminal to witness the historic event.
Last Friday, when Cheniere's board of directors, of which Mr. Souki was still the Chairman and CEO of the company, was convened at the company's headquarters in Huston, Texas, he was asked to leave the room. He left for home, in Aspen Colorado. Twenty-four hours later he was contacted by his lawyer who told him he had lost his job in the $10 billion company, the first American LNG exporter.
His ousting could be anticipated from the moment it was announced that legendary American investor Carl Icahn bought into the company with about 8% of its shares last August. Mr. Icahn, a tough businessman, nominated two close associates as directors and last week upped his stake to 14%. The increase makes him the biggest shareholder in Cheniere--a company that in 19 years of existence has never posted a profit.
For Mr. Icahn, who according to reports was attracted to the company because of its list of big clients, each of them having already signed a 20-year contract for LNG purchase, it was clear that the company had to change course. Mr. Souki's fate was sealed. He was replaced as CEO by Neal A. Shear, on a temporary basis, while Cheniere is looking for a permanent replacement.
"There is no doubt that Charif Souki has proven that he is a talented entrepreneur but at this time there is also little doubt that the board wished to move the company in a direction that differed greatly from the path Mr. Souki wanted," wrote Mr. Icahn on his website, adding sarcastically, "It is also telling that Mr. Souki sold a great deal of his stock, which made it somewhat easier for him to 'swing for the fences' making it a win-win for Mr. Souki but not necessarily for the shareholders. I thank Mr. Souki for helping to build a great company."
Last January, Mr. Souki sold about one third of his shares in the company, worth $118 million when the average share price was about $67. Last week when he was sacked, the share price stood at $41.07. (According to filings he also sold another 50,000 shares for about $2.3 million.)
During his over 15 years as the company's CEO, Cheniere's share price was volatile. In 2008 it collapsed from $40 to less than $1 following the failure of the first import LNG terminal and the economic crisis. In August 2014 it completed a rebound to $80 and remained at that level until February 2015 when the reality of the new energy prices began to hit and Mr. Souki, a Lebanese immigrant and a former investment banker and restaurateur, sold about one-third of his holdings in the company he co-founded almost 20 years earlier.
How great a company did Cheniere become during Mr. Souki's 19-year tenure as CEO? The answer to that will be decided only in the next few decades--when and if the American LNG revolution Mr. Souki dreamt of becomes a reality and American LNG becomes a major player in the natural gas market. Last weekend it didn't seem likely that that outcome would happen any time soon--hence Mr. Souki's dismissal. It is also telling that in the years 2010-2014 the company posted a cumulative net loss of about $1.7 billion and in the first nine months of 2015 posted a loss of $784 million.
In 2013, Mr. Souki's compensation package in 2013 was $142 million according to Forbes, the highest for a CEO among U.S.-based publicly traded companies that year. The package was quite a handsome one despite the fact, as Mr. Icahn pointed out in his letter, that Cheniere Energy never made a profit during Mr. Souki's years at the helm, as the sole Chairman and CEO of the company.
Mr. Souki made two costly bets that failed during his time with Cheniere: the first one was to import natural gas to the U.S. and the second and more expensive one, exporting natural gas from the U.S. Unfortunately, because of the long lead times in the natural gas business, that are even longer than the energy price cycles, both bets failed spectacularly even before operation of the facilities had started.
In 2001, Mr. Souki took the decision to build an LNG terminal in order to import natural gas into the U.S. It was the first LNG terminal to be built in the U.S. for decades. Mr. Souki built his business plan on pricing arbitrage, exporting cheap natural gas from Qatar and other sources and selling it expensively in the U.S. It was a period when natural gas prices in the US were high and the logic of Mr. Souki's vision was convincing, at least if one ignored the mid-term future.
Luckily for Mr. Souki, he could get financing for only one LNG terminal, not the three he planned. In April 2008, after a $1.4 billion investment, that terminal was inaugurated. A month later it was almost idle. The shale revolution in the U.S. was almost three years old and a glut of natural gas caused prices to collapse and doomed natural gas imports to extinction. Cheniere's business plan was in ruins and the stock crashed to $2 from the height of $40 in October 2007.
Mr. Souki wasn't deterred from a second attempt at the LNG business. This time around he engineered a reversed arbitrage with U.S. gas prices at historic low; he gambled on export of LNG to far away destinations. This time, he was luckier, finding more willing investors, like Blackstone Group LP, which was attracted to his vision and invested $1.5 billion in equity. His ambitious and much more expensive plans that included 2 liquefaction terminal with six trains in Sabine Pass and five trains in Corpus Christi, Texas began to take shape. However what hadn't changed in the natural gas business was the lengthy lead time--or Mr. Souki's run of luck. It took over five years to build the first train of the LNG liquefaction terminal in Sabine Pass and although local natural gas prices in the U.S. came down due to the continued natural gas glut, natural gas prices worldwide also fell dramatically, to a level not much above prices in the American market. The arbitrage gambit lost its lustre. That's not to say that exporting LNG won't be profitable; what it does mean is that margins will probably be lower and profits smaller than forecasted in company's presentations. Now, the new CEO will have to give up on a few of Mr. Souki's ideas for further expansion and investment into creation of a large trading platform in energy and possibly investing in the crude oil export business when the export ban in the U.S. goes away. It also means that the company will have to reconsider adding planned trains in both terminals.
In a presentation to investors in 2013, Cheniere estimated, based on $100 Brent, a $15 MMbtu LNG and a Henry Hub price of $4 MMbtu, a gross profit of $6.65 MMbtu in export to the Americas; $3.15 in export to Europe (based on $12 MMbtu LNG); and $4.40 in export to Asia. A year later the margins were lower at $6.40, $2.90 and $3.90 respectively. In 2015 prices tumbled further and the company estimated an implied margin of $2.50 when LNG is priced at $7.00 MMbtu in Europe and an implied margin of $3.25 MMbtu in Asia when LNG price at $9.00 MMbtu.
Even the latest forecast, which was issued under Mr. Souki, is probably too rosy. In order to keep the company afloat, Cheniere's board of directors decided that the visionary Mr. Souki had to leave. The company currently carries $24 billion in debt. The next CEO will have to concentrate his efforts on running the business as efficiently and as profitably as possible and service the debt: a credit facility of $4.6 billion, due 2020, and a $2 billion note due 2021. Thereafter every year until 2025 either the notes mature or credit facility is due. And since today the margins in Cheneire's presentation seems to be imaginary, Mr. Souki's successor will have to make a few critical investment decisions in the coming months, in order to accumulate billions of dollars to serve the debt.
The Sabine Pass Liquefaction (SPL) is about to start production in train 1 out of six trains. Each train is designed for a production capacity of 4.5 mpta (million tons per annum). Train 2 is expected to start operations by June 2016 and trains 3-4 are under construction and should be operational by mid-2017. NTP for train 5 was issued to Bechtel in June 2015 and construction completion is expected by the end of 2019. This project might either be delayed or abandoned, though according to the latest presentation it has guaranteed annual fixed-fee revenues of $588 million from two 20-year contracts, with Centrica plc. and Total Gas & Power N.A. Train 6 is awaiting a Final Investment Decision (FID), dependent upon obtaining commercial contracts and financial arrangements. Overall SPL has long-term Sale Purchase Agreements (SPAs) for about 20 mtpa in take-or-pay style commercial agreements and annual fixed-fee revenues of about $2.9 billion for 20 years, according to Cheniere's presentation. The overall investment in trains 1-5 is about $11 billion with a production capacity of 22.5 mtpa.
The other LNG project, Corpus Christi Liquefaction (CCL) in Texas, is expected to have, when completed in 2021-2022, 5 trains, each with production capacity of 4.5 mtpa. Trains 1-2 are now under construction and should be operational by Mid-2019, as NTP was issued in May 2015. Those two trains have already guaranteed annual fixed-fee revenues of about $1.4 billion from six customers who signed 20-year contracts, among them EDF, Woodside Energy Trading, Gas Natural Fenosa and others.
Train 3, although it has so far only one $140 million 20-year contract with EDP Energias de Portugal S.A., still has to issue an NTP and might be a candidate for a cancellation. Trains 4-5 in CCL, which are planned to start LNG production in 2021, still have no commercial agreements and no financial commitment making those two also candidates for either a delay or a cancellation.
In 2025 the LNG demand forecast, according to Wood Mackenzie, as presented in Cheniere's presentation, is expected to reach 436 mtpa, an increase of 80% over the 2015 demand of 243 mtpa. Most of the production increase is expected to come from Australia, which will more than triple production to 81 mtpa by 2025 and from the U.S. where, if all projects will be materialized, though that now seems unlikely to happen, of 94 mtpa from just 1.4 mtpa in 2015.
Are those good numbers for Cheniere Energy? That is anyone's guess. The current expectations are for a long-term glut in LNG. Cheniere say that 87%, or 28.2 mtpa, of its LNG volumes from trains 1-6 of SPL and trains 1-3 in CCL, are already sold in long-term contracts. For the rest of the volumes, no long-term contracts are required, according to the company, and those will be sold either under short-term contracts or on a spot basis. That is another policy the new CEO will have to reconsider.
To date, Cheniere has been regarded as a start-up in the energy sector and the compensation for Mr. Souki was based on his success in promoting new initiatives, i.e. getting contracts, arranging financing, overcoming regulatory hurdles and progressing in the construction of new facilities. The bottom line was almost meaningless. All that changed when Mr. Icahn became the biggest shareholder in the company last August.
It is a common wisdom that there are two kinds of CEOs: one the visionary type, who can anticipate the future, lay down business plans and carry them out; and the second one the efficient operator kind, who can monetise the vision. With the delivery of its first LNG cargo in the next month, Cheniere will be entering into the monetising phase, further accompanied by the unknowns of the energy industry. Mr. Souki, who said the board considered keeping him on until the Sabine Pass plant started processing LNG, will now follow proceedings from his Aspen, Colorado home--in among his time spent skiing on the Colorado slopes.
Ya'acov Zalel