Is Cheniere generating enough revenue and cash flow to fund its exploration program?

Not on its own. 2000 revenue was $5.32 million and operating cash flow before working capital changes was $3.15 million, but the company reported only $1.9 million of cash at year-end, and management states that it will need additional capital for drilling, seismic reprocessing (about $8 million), and possible Gryphon capital calls of up to $27.6 million. Management expects to raise funds through a mix of equity, asset sales, partner participation, and debt.

What is the Gryphon transaction and why does it matter to investors?

On October 11, 2000, Cheniere contributed its Louisiana seismic data license, Samson exploration agreement, certain leases including the Shark prospect, and other assets to Gryphon Exploration Company. Warburg Pincus invested $25 million in convertible preferred stock. Cheniere owns 100% of Gryphon's common stock, which converts to a 36.8% effective interest after the preferred converts. Cheniere is a passive investor with no management control, so the value of this stake depends on decisions made by Gryphon's management and on whether Cheniere funds its share of future capital calls.

How much oil and gas does Cheniere actually have proved?

At December 31, 2000, Cheniere's consolidated proved reserves were about 4.7 Bcfe (4.57 Bcf of gas and 19,874 barrels of oil), with a PV-10 of $20.6 million. Including its proportional share of Gryphon's reserves (about 1.7 Bcf of gas and 2,640 barrels of oil), total proved reserves were about 6.4 Bcfe with a PV-10 of $29.8 million. Management cautions that these figures are estimates, that proved undeveloped reserves are less certain, and that Gryphon's share will fall to 36.8% after preferred conversion.

What are the main risks an investor should consider?

The filing lists several: a limited operating history with continued losses, limited proved reserves so success depends on exploration, dependence on additional financing on acceptable terms, high dilution risk (about 2.76 million warrants and 884,236 options outstanding), thinly traded stock (about 72,000 shares per day in 2000), no dividends, control by a small group of principal stockholders, and reliance on partners and a passive Gryphon stake. The company also had only 12 full-time employees and no key-person insurance.

Did the company's stock listing or capital structure change in a way that affects shareholders?

Yes. The company completed a one-for-four reverse split effective October 18, 2000, reducing shares outstanding from about 43.99 million to about 11.0 million. Nasdaq delisted the stock to the OTC Bulletin Board on December 14, 2000, and it began trading on the American Stock Exchange as CXY on March 5, 2001. Several private placements during 2000 and early 2001 added equity at prices ranging from $2.00 to $3.00 per unit, with warrants attached, which dilutes existing holders.

LNG 10-K FY2000 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed April 2, 2001. Cited figures are marked; the original filing is the authoritative source.

Cheniere Energy, Inc. (then trading as CHEX on the OTC Bulletin Board, moving to AMEX as "CXY" on March 5, 2001) reported a 2000 net loss of $780,980,^a or $0.07 per share, on revenues of $5.32 million, up from $1.61 million in 1999 as the company had a full year of production from its West Cameron Block 49 wells.

The company is still a small, pre-revenue-scale exploration story: total assets were $34.7 million^b, almost all of it unproved properties and an equity-method investment in Gryphon Exploration Company, while total liabilities fell to $1.6 million after the company repaid all notes payable during 2000. Stockholders' equity rose to $33.1 million, and the company had only 12 full-time employees. Management's own risk disclosures state that the company has limited proved reserves, depends heavily on the success of exploration, and will need significant additional capital.

The most important investor issue is the funding picture. Cheniere's Gryphon structure, which Warburg Pincus capitalized with $25 million^c in preferred stock on October 11, 2000, leaves Cheniere with a 36.8% effective interest, but Cheniere may need to fund up to $27.6 million of its pro-rata Gryphon capital calls, plus about $8 million for seismic reprocessing and a potential transfer fee of up to $2.5 million. Cash and working capital were modest at year-end ($1.9 million cash, $1.2 million working capital), so the company's ability to meet these obligations depends on new equity, asset sales, or partner funding.

The auditor, PricewaterhouseCoopers, included a going-concern-style emphasis paragraph on the recoverability of unevaluated oil and gas properties, which investors should weigh heavily. The filing also highlights a shift in the business: the company is moving from a standalone producer toward an exploration company that relies on partners and seismic data, with reserves of about 6.4 Bcfe on a total proportional basis (including Gryphon) and a standardized measure of $29.8 million^d. The bottom line is a speculative, early-stage exploration investment whose value is concentrated in unproved Gulf of Mexico acreage, seismic data, and a passive stake in Gryphon, with substantial financing and execution risk.

02—Key points

Key Highlights

2000 revenue rose to $5.32 million from $1.61 million, reflecting a full year of production from the West Cameron Block 49 wells (Redfish, Stingray) that began in September 1999.
Net loss narrowed to $780,980 ($0.07 per share) from $1.75 million ($0.27 per share) in 1999, helped by $1.9 million of capitalized G&A and a $988,548 recovery from management fees.
All notes payable were retired during 2000, leaving no debt at year-end and total liabilities of $1.6 million versus $6.7 million a year earlier.
Investment in Gryphon Exploration Company (36.8% effective interest) carried at $6.6 million; Warburg Pincus invested $25 million in Gryphon preferred stock, and Cheniere may need to fund up to $27.6 million of pro-rata capital calls.
Year-end cash of $1.9 million and working capital of $1.2 million are small relative to committed obligations of roughly $8 million for seismic reprocessing and a potential transfer fee of up to $2.5 million.
PricewaterhouseCoopers' audit report includes an emphasis paragraph noting that recoverability of unevaluated oil and gas properties depends on obtaining additional financing and successful reprocessing and drilling.
Common stock moved from Nasdaq SmallCap to OTC Bulletin Board in December 2000 after a one-for-four reverse split, and began trading on the American Stock Exchange as "CXY" on March 5, 2001; BSR Investments, controlled by the chairman's mother, owns about 11%.

03—Questions

Frequently Asked Questions

Is Cheniere generating enough revenue and cash flow to fund its exploration program?
Not on its own. 2000 revenue was $5.32 million and operating cash flow before working capital changes was $3.15 million, but the company reported only $1.9 million of cash at year-end, and management states that it will need additional capital for drilling, seismic reprocessing (about $8 million), and possible Gryphon capital calls of up to $27.6 million. Management expects to raise funds through a mix of equity, asset sales, partner participation, and debt.
What is the Gryphon transaction and why does it matter to investors?
On October 11, 2000, Cheniere contributed its Louisiana seismic data license, Samson exploration agreement, certain leases including the Shark prospect, and other assets to Gryphon Exploration Company. Warburg Pincus invested $25 million in convertible preferred stock. Cheniere owns 100% of Gryphon's common stock, which converts to a 36.8% effective interest after the preferred converts. Cheniere is a passive investor with no management control, so the value of this stake depends on decisions made by Gryphon's management and on whether Cheniere funds its share of future capital calls.
How much oil and gas does Cheniere actually have proved?
At December 31, 2000, Cheniere's consolidated proved reserves were about 4.7 Bcfe (4.57 Bcf of gas and 19,874 barrels of oil), with a PV-10 of $20.6 million. Including its proportional share of Gryphon's reserves (about 1.7 Bcf of gas and 2,640 barrels of oil), total proved reserves were about 6.4 Bcfe with a PV-10 of $29.8 million. Management cautions that these figures are estimates, that proved undeveloped reserves are less certain, and that Gryphon's share will fall to 36.8% after preferred conversion.
What are the main risks an investor should consider?
The filing lists several: a limited operating history with continued losses, limited proved reserves so success depends on exploration, dependence on additional financing on acceptable terms, high dilution risk (about 2.76 million warrants and 884,236 options outstanding), thinly traded stock (about 72,000 shares per day in 2000), no dividends, control by a small group of principal stockholders, and reliance on partners and a passive Gryphon stake. The company also had only 12 full-time employees and no key-person insurance.
Did the company's stock listing or capital structure change in a way that affects shareholders?
Yes. The company completed a one-for-four reverse split effective October 18, 2000, reducing shares outstanding from about 43.99 million to about 11.0 million. Nasdaq delisted the stock to the OTC Bulletin Board on December 14, 2000, and it began trading on the American Stock Exchange as CXY on March 5, 2001. Several private placements during 2000 and early 2001 added equity at prices ranging from $2.00 to $3.00 per unit, with warrants attached, which dilutes existing holders.

04—Continue

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