In March 2022, Cheniere Energy Partners (NYSE: CQP) entered into an agreement to purchase 140,000 MMBtu per day of natural gas at a price based on JKM for a term of approximately 15 years from the beginning of 2023. The price of JKM increased significantly from less than $5/MMBtu in March 2022 to more than $50/MMBtu in August 2022. In its quarterly financial results, CQP must recognize this gas supply contract at fair value. However, the company cannot recognize the associated LNG sale before commencing the underlying operations. This accounting flaw caused the company to report a net loss of $2.2 billion in the first nine months of 2022. Thus, CQP’s net loss in previous quarters is misleading. As the company begins to sell the LNG associated with its long-term natural gas contract, it will release strong and reliable quarterly results. The CQP is a purchase.
Q3 2022 Highlights
In its Q3 2022 financial results, CQP reported total revenue of $4,976 million, compared to revenue of $2,324 million in Q3 2021, driven by higher LNG revenue and soaring revenue. of regasification. CQP Adjusted EBITDA increased from $738 million in Q3 2021 to $1,471 million in Q3 2022, driven by higher margins per MMBtu of LNG and higher LNG volumes delivered. CQP’s LNG export volume increased from 307 TBtu in the third quarter of 2022 to 366 TBtu in the third quarter of 2023. The company’s cargoes increased by 20% year-on-year to reach 103 in the third quarter of 2022. The CQP loaded LNG volume increased 18% year-on-year to 363 TBtu in Q3 2023. The company’s net profit of $381 million in Q3 2021 turned into a net loss of $514 million in Q3 2022, due to unfavorable non-cash changes in the fair value of commodity derivatives. “Virtually all of the derivative losses are attributable to the fair value accounting of our agreement – Integrated Production Marketing (IPM) with Tourmaline, a natural gas supply contract whose prices are indexed to the Platts Japan Korea Marker (JKM), the company explained.In the third quarter of 2022, CQP recorded $1.3 billion of non-cash adverse changes in fair value attributable to the Tourmaline IMP agreement due to the significant appreciation of forward JKM curves.
Our IPM agreement is structured to provide stable margins on natural gas purchases and LNG sales over the life of the agreement and has a fixed cost component, similar to that of LNG sold under our Long-term, fixed-cost LNG SPA. However, the long-term duration and international pricing basis of our IPM arrangement makes it particularly sensitive to fluctuations in fair market value from period to period. In addition, the accounting requirements prescribe accounting for this long-term gas supply contract at fair value but do not currently permit accounting at fair value for the associated LNG sale, resulting in the inconsistency of the accounting for the purchase of natural gas and the sale of LNG. “, said the company.
Figure 1 shows that the export price of liquefied natural gas from the United States fell from $8.56 per thousand cubic feet on January 31, 2022 to $15.45 per thousand cubic feet on August 31, 2022. Figure 2 shows that the import price of Japanese liquefied natural gas fell from $14.69 per thousand cubic feet on January 2022 to $21.21 per thousand cubic feet on August 31, 2022 and $23.69 per thousand cubic feet on October 31, 2022. According to Figure 3, JKM’s price fell from over $50 in August 2022 to less than $30 in September 2022. Meanwhile, European LNG imports increased at course of the last two months. Additionally, Asian LNG imports increased to over 20 million tonnes in September 2022.
According to the EIA, gross LNG exports from the United States in Q3 2022 were 10.02 Bcf/d and are expected to increase to 11.75 Bcf/d in Q4 2022. The EIA expects US gross LNG exports drop from 11.01 Bcf/d in 2022 to 12.34 Bcf/d. d in 2023. Compared to the first ten months of 2021, Russian gas pipelines to the European Union decreased by 50% in the first ten months of 2022 and will continue to decrease until the end of the year. As the European Union was able to import 30 billion m3 of Russian gas in the summer of 2022 and due to Chinese COVID-19 restrictions which reduced its LNG imports, EU gas storage sites are now 95% full. However, Russian gas pipelines to the EU may cease altogether and China’s COVID lockdowns will eventually end. Thus, the EU will have to increase its imports of natural gas from the United States. “Europe could face a shortfall of 30 billion cubic meters of natural gas during the key summer period to fill its gas storage sites in 2023,” the IEA explained. So, based on LNG prices and LNG demand outlook in 2023 and thanks to its IPM agreement, CQP is well positioned to make huge profits in the near future.
Figure 1 – US LNG export price
Figure 2 – LNG import price in Japan
Figure 3 – LNG imports by Asia versus Europe versus JKM futures price
CQP Performance Outlook
Typically, margin ratios reflect a company’s ability to convert sales into profit by various measures. In this regard, I would review Cheniere Energy’s Gross Margin, EBITDA and Cash Flow Margin terms and compare them to previous years. CPQ’s gross profit margin has been declining since 2020. In detail, after increasing to 0.45 in 2020, its profit margin decreased to 0.34 in 2021 and dropped deeply to 0.13 in 2Q 2022 (TTM) . Moreover, the cash margin indicates the relationship between the operating cash flow and the total revenue of the company. It is evident that the CQP has been able to convert its revenues more slowly than in recent years. Its cash margin plunged 20% to 0.19 in TTM from its amount of 0.24 at end-2021. EBITDA of CQP declined and finally settled at 0.12 in TTM from its previous level of 0.33 at the end of 2021. These figures indicate that Cheniere Energy is unable to convert its income into profits (see Figure 4). However, we know that this decline in the company’s gross profit margin is due to non-cash adverse changes in the fair value of commodity derivatives. With the start of 2023, when the company’s IPM agreement comes into effect, CQP’s gross profit margin, EBITDA margin and cash margin will improve significantly.
Figure 4 – CQP margin ratios
Moreover, the return on assets ratio reflects the profit that a company can generate for each dollar of its assets. CQP’s ROA fell to 0.02 in TTM from its previous level of 0.08 at the end of 2021. Similarly, its return on equity fell to 0.50 in TTM after a boost to 1.86 at the end of 2021. This ratio indicates the company’s net income, which is relative to equity. The return on equity ratio is crucial because it measures the rate of return on the money that has been invested in the business (see Figure 5). Again, because the company was unable to account for the sale of LNG associated with its IPM agreement (due to accounting inconsistencies), its current performance ratios are misleading. However, in the near future, CQP’s rate of return on assets and cash coverage will improve significantly.
Figure 5 – CQP rate of return
In September and October 2022, the price of JKM declined and with the current trend, CQP’s non-cash adverse changes in the fair value of commodity derivatives in Q4 2022 will be lower than in Q2 2022 and Q3 2023. However, CQP’s non-cash adverse changes in the fair value of its commodity derivatives will adversely affect the Company’s financial results in Q4 2022. In 2023, the Company will be able to recognize the associated LNG sales in its financial results. Thus, the company’s net profit will once again become a reliable measure of profitability. The company is well positioned to take advantage of market conditions. I am bullish on CQP.