01—Abstract
Summary
Summary of the 10-K filed November 27, 1996. Cited figures are marked; the original filing is the authoritative source.
Cheniere Energy, Inc. (ticker CHEX, OTC Bulletin Board) is a very early-stage, pre-revenue oil and gas exploration company that became public on July 3, 1996, when its operating subsidiary, Cheniere Energy Operating Co. (formerly FX Energy, Inc.), reverse-merged into Bexy Communications, Inc. For the fiscal year ended August 31, 1996, the company reported no revenue, a loss from continuing operations of $79,097,a and a total net loss of $286,819 ($0.03 per share), including $207,722 of losses from discontinued television production and health information operations.
It has not established production or booked proved reserves. Its total assets were $5.15 millionb, consisting mainly of a $4.0 million investment in a 3-D seismic joint venture, against total liabilities of $718,855 and shareholders' equity of $4.43 million. The core asset is a right to earn up to a 50% participation in a 3-D seismic joint venture with Zydeco Exploration covering roughly 255 square miles in the Louisiana Transition Zone.
The venture's permits currently cover about 84% of the survey area, and the company has paid $6 millionc toward seismic costs. The company's own disclosures are candid that it lacks sufficient capital for its remaining commitments, which are at least $8 million and due in monthly installments from late November 1996 through March 1997. Failure to make the November 1996 payment on time would trigger a 'Discontinuance' that would sharply reduce the company's prospect interest.
Management says it intends to fund these payments through equity sales, borrowings, or sales of part of its interest, but there is no assurance of success. For investors, this filing describes a speculative, development-stage equity story rather than an operating business.
Value depends on successful financing, permit completion, seismic results that yield drillable prospects, and a possible Offshore California acquisition (Poseidon Interest) that remains under a non-binding letter of intent and would not be developed for at least five years. The company also has concentrated insider ownership (management and affiliates hold roughly 27%d as a group, and BSR Investments holds 24.5%), a thin equity base, and a history of late payments to its joint venture partner.
02—Key points
Key Highlights
- Pre-revenue company: no revenue from continuing operations in FY ended August 31, 1996; net loss of $286,819 ($0.03/share), including $207,722 in discontinued-operations losses.
- Balance sheet is mostly a single asset: $4.0M of $5.15M total assets is the investment in the 3-D Joint Venture, and cash was $1.09M against liabilities of $718,855.
- Core project: right to earn up to 50% of a 255-square-mile 3-D seismic program in West Cameron Parish, Louisiana, with permits covering about 84% (210 sq mi) of the survey area.
- Funding pressure: $6M paid to date with roughly $8M+ still due in $2M installments from November 1996 to March 1997; the company states it does not currently have sufficient capital to cover these payments.
- Discontinuance risk: a missed payment within 30 days would cap Cheniere's prospect interest (e.g., 22.2% in the illustrated example) and lets the partner recoup funds from Cheniere's revenue share.
- Early-stage diversification attempt: non-binding Letter of Intent to buy Poseidon's 47% working interest in undeveloped Bonito Unit reserves offshore California; development would not occur for at least five years.
- Concentrated ownership and capital structure: insiders and affiliates control roughly 27% of shares, BSR Investments holds 24.5%, and the stock trades on the OTC Bulletin Board at $2.125–$6.00 bid/ask range since July 1996.
03—Questions
Frequently Asked Questions
Does Cheniere Energy generate any revenue or have proved reserves?
No. For the fiscal year ended August 31, 1996, the company reported zero revenue from continuing operations and has not yet established oil and gas production or booked proved reserves. Its only revenue-generating activities were from the discontinued television production and health information business, which contributed $42,258 and $7,500 in revenue over the periods before disposal.
How is the company going to fund its remaining commitments to the 3-D Joint Venture?
Management says it intends to fund future payments through equity sales, further borrowings, and/or sales of portions of its interest in the 3-D Joint Venture. However, the filing explicitly states the company does not currently have sufficient capital to meet these payments, and there is no assurance any of these sources will succeed. The company has in the past missed payments and obtained waivers and amendments, but cannot guarantee that this will happen again.
What happens if Cheniere fails to make a scheduled payment to the joint venture?
If a payment is not made within 30 days of its due date, a 'Discontinuance' occurs. Cheniere's obligation to make further payments ends, its prospect ownership is limited to its contribution divided by twice total seismic costs (for example, 22.2% if it contributed $6M against $13.5M of costs), and Zydeco may recover funds it advances from Cheniere's share of revenues, with interest at prime. If Cheniere has funded $8M or more, it keeps a vested 25% interest. The November 1996 payment is specifically flagged as one whose failure would trigger a Discontinuance.
What is the potential upside from the Louisiana Transition Zone project?
The company believes the Louisiana Transition Zone has significant undiscovered reserves, citing more than 3 tcf of gas produced from Miocene-age reservoirs in fields overlapping the survey area, and an analog 1989 3-D survey to the south that yielded about 320 bcfe from four discoveries. The survey is also located within existing pipeline infrastructure. However, the filing repeatedly cautions that the survey's scope depends on obtaining permits, that results are uncertain, and that the company has no proved reserves to show for the investment yet.
Who controls the company and are there related-party arrangements investors should know about?
Insiders hold a significant stake: William Forster beneficially owns about 26.8%, and all directors and officers as a group own roughly 27.3%. BSR Investments, Ltd., which holds about 24.5% of shares, is controlled by an immediate family member of director Charif Souki, who has consulted for BSR. Forster and Souki receive no salary, but the company pays $4,800 per month for an apartment they use in Houston, and it subleases its headquarters from Zydeco, the joint venture partner. Investors should weigh this concentration of control and these affiliated arrangements.
04—Continue