Why did Cheniere's revenue fall so sharply in 2002?

Revenue dropped to $239,055 from $2,372,632 because Cheniere sold its two producing wells at West Cameron Block 49 in April 2002 for net proceeds of about $2.24 million. Production fell to 94,441 Mcfe from 558,422 Mcfe, and the average gas price declined to $2.58 per Mcf from $4.48. The company has since shifted its strategy toward generating prospects and selling them to industry partners for fees and carried interests, which generates little reported revenue.

What is Cheniere's main asset value now, and how is it reflected in the financials?

Much of the value sits in the Gryphon Exploration investment, which is accounted for under the equity method. Cheniere's share of Gryphon's losses reduced its carrying value to zero in 2002, so the balance sheet understates the economic interest. Cheniere reports a 9.3% effective interest (after preferred conversion) and, on a proportional basis, Gryphon's proved reserves were about 29.7 Bcfe with a PV-10 of roughly $106.9 million before conversion adjustments, versus Cheniere's own proved reserves of about 1.36 Bcfe and PV-10 of $5.1 million.

How will Cheniere fund the LNG terminal development?

The company says it will need additional equity or debt financing and has not yet secured it. Its plans include selling partial interests in LNG projects, as shown by the Freeport transactions, which brought in $5 million in installments plus cost recoveries and the $2.33 million sale of a 10% interest. It is also negotiating a partnership with Sherwin Alumina for a 33% interest in the Corpus Christi project in exchange for funding the first $4.5 million of development costs, targeted for completion by April 15, 2003. Management acknowledges that financing terms and timing cannot be assured.

What are the biggest risks for investors?

Key risks include the company's early-stage status with a history of losses and limited proved reserves; dependence on FERC and other permits that management estimates may take two to three years; uncertainty about whether LNG will become competitive in the U.S. market; the need for substantial capital, including potential capital calls from Gryphon that Cheniere may not fund; significant dilution from outstanding warrants (2,593,521) and options (1,983,611), and the possibility of additional share issuances; reliance on key personnel without employment contracts; and control by principal stockholders, including BSR Investments with about 10% ownership. The company also has no derivative hedges, leaving it exposed to natural gas price volatility.

LNG 10-K FY2002 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 2003. Cited figures are marked; the original filing is the authoritative source.

Cheniere Energy's 2002 10-K shows a company in transition from a small Gulf of Mexico oil and gas explorer toward developing liquefied natural gas (LNG) import terminals.

For 2002, the company reported a net loss of $5.63 million^a ($0.42 per share) on revenues of just $239,055, down sharply from $2.37 million in 2001, as it sold its only producing wells (West Cameron Block 49) in April 2002 and ceased direct drilling participation. General and administrative expenses were $3.48 million, with a growing share tied to LNG terminal development. The company had $590,039 in cash, a working capital deficit of $1.41 million, and total assets of $21.06 million, of which the largest components were unproved oil and gas properties ($16.75 million) and an equity-method stake in Gryphon Exploration Company, whose investment basis was reduced to zero.

The central investor question is financing and execution. Cheniere's core oil and gas value is now concentrated in its roughly 9.3% effective interest in Gryphon, which it did not fund during 2002 as Warburg, Pincus provided $30 million^b in capital calls and Cheniere's stake fell from 20.2% to 9.3%. Management acknowledges it will need substantial additional capital, estimated at about $3 million per year per terminal, and that the company has limited proved reserves (1.36 Bcfe on a company-owned basis, plus a larger Gryphon share).

The company is also heavily reliant on a small number of holders and has limited trading liquidity. The main near-term positive is the February 2003 Freeport LNG transaction, under which Michael S. Smith's entity acquired a 60% interest in the Freeport project, with Cheniere retaining 40% and receiving $5 million^c in installments plus cost recoveries of about $1.74 million.

Cheniere then sold a further 10% interest for $2.33 million^d on March 1, 2003, reducing its retained stake to 30%. These transactions reduce Cheniere's cash burden for the Freeport terminal, though the company still needs regulatory approvals (FERC filing targeted for March 2003) and financing before construction. The Sherwin Alumina memorandum of understanding for a 33% stake in a Corpus Christi project, if finalized by April 15, 2003, would provide further development funding.

02—Key points

Key Highlights

Net loss narrowed to $5.63 million ($0.42/share) in 2002 from $11.67 million ($0.89/share) in 2001, which included a $5.13 million ceiling test write-down; 2002 results were also affected by a $2.18 million equity loss from Gryphon and a $1.61 million G&A reimbursement tied to the Freeport sale.
Oil and gas revenues fell to $239,055 from $2.37 million after the April 2002 sale of West Cameron Block 49 wells, leaving the company with no working-interest production and only overriding royalty interests in six wells.
Freeport LNG transaction closed February 27, 2003: Cheniere retained 40% of the partnership, received $5 million in installments and up to $9 million in project funding commitments, and sold an additional 10% interest for $2.33 million on March 1, 2003, leaving a 30% retained stake.
Balance sheet is thin: cash of $590,039, working capital deficit of $1.41 million, and total assets of $21.06 million, with no long-term debt but a $750,000 short-term note (later cancelled in March 2003).
Gryphon investment was reduced to zero carrying value; Cheniere's effective ownership fell to 9.3% after declining Warburg-funded capital calls totaling $30 million in 2002, with potential further dilution to about 8%.
Going-concern doubt was raised by the prior auditor for 2001, and the company's stock trades thinly (about 17,000 shares per day on the AMEX), with the ticker changing from CXY to LNG effective March 24, 2003.
Management estimates LNG terminal development will require about $3 million per year per terminal, and approvals may take two to three years; the company has 14 full-time employees and reports no material legal proceedings.

03—Questions

Frequently Asked Questions

Why did Cheniere's revenue fall so sharply in 2002?
Revenue dropped to $239,055 from $2,372,632 because Cheniere sold its two producing wells at West Cameron Block 49 in April 2002 for net proceeds of about $2.24 million. Production fell to 94,441 Mcfe from 558,422 Mcfe, and the average gas price declined to $2.58 per Mcf from $4.48. The company has since shifted its strategy toward generating prospects and selling them to industry partners for fees and carried interests, which generates little reported revenue.
What is Cheniere's main asset value now, and how is it reflected in the financials?
Much of the value sits in the Gryphon Exploration investment, which is accounted for under the equity method. Cheniere's share of Gryphon's losses reduced its carrying value to zero in 2002, so the balance sheet understates the economic interest. Cheniere reports a 9.3% effective interest (after preferred conversion) and, on a proportional basis, Gryphon's proved reserves were about 29.7 Bcfe with a PV-10 of roughly $106.9 million before conversion adjustments, versus Cheniere's own proved reserves of about 1.36 Bcfe and PV-10 of $5.1 million.
How will Cheniere fund the LNG terminal development?
The company says it will need additional equity or debt financing and has not yet secured it. Its plans include selling partial interests in LNG projects, as shown by the Freeport transactions, which brought in $5 million in installments plus cost recoveries and the $2.33 million sale of a 10% interest. It is also negotiating a partnership with Sherwin Alumina for a 33% interest in the Corpus Christi project in exchange for funding the first $4.5 million of development costs, targeted for completion by April 15, 2003. Management acknowledges that financing terms and timing cannot be assured.
What are the biggest risks for investors?
Key risks include the company's early-stage status with a history of losses and limited proved reserves; dependence on FERC and other permits that management estimates may take two to three years; uncertainty about whether LNG will become competitive in the U.S. market; the need for substantial capital, including potential capital calls from Gryphon that Cheniere may not fund; significant dilution from outstanding warrants (2,593,521) and options (1,983,611), and the possibility of additional share issuances; reliance on key personnel without employment contracts; and control by principal stockholders, including BSR Investments with about 10% ownership. The company also has no derivative hedges, leaving it exposed to natural gas price volatility.

04—Continue

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