Energy Transfer (ET 3.06%) has been working to convert its Lake Charles facility in Louisiana from natural gas imports to a liquefied natural gas (LNG) export terminal for many years. The midstream giant has faced many obstacles along the road, which have delayed this project.
However, the master limited partnership (MLP) recently took a significant step in that key project. Moving forward with Lake Charles LNG would meaningfully enhance and extend Energy Transfer's long-term growth outlook, adding a lot more fuel to grow its high-yielding distribution (nearly 8% at the current yield).
A new partner
It was more than 10 years ago when Energy Transfer first proposed converting its existing natural gas import terminal in Lake Charles into an LNG export terminal with nearly 16.5 million tons per year of LNG production and export capacity. It was initially working with BG Group on the project. Global LNG giant Shell (NYSE: SHEL) became its 50/50 joint venture partner in 2016 after closing its acquisition of BG Group.
However, Shell abandoned the project in 2020 due to the pandemic's impact on the global LNG market. That led Energy Transfer to continue developing the project on its own. Shell would eventually return to the project as a customer in 2022 by signing a 20-year sale and purchase agreement for 2.1 million tons of LNG per year.
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Key Data Points
Energy Transfer has spent several years working to receive the necessary government approvals for the project. It has also continued to sign up customers to commercialize the facility. On top of that, it has been looking for new partners to help fund a portion of the project.
After many years and lots of setbacks, Energy Transfer has finally found a partner to help it develop Lake Charles LNG. It announced this week that it had signed an agreement with MidOcean Energy, an LNG company formed and managed by leading institutional investor EIG, to jointly develop the facility. MidOcean Energy will fund 30% of the project cost in exchange for 30% of the LNG production.
A significant milestone
Energy Transfer's agreement with MidOcean Energy is a significant step forward for this project. MidOcean Energy will be an investor in the facility and a meaningful customer, receiving 30% of the LNG produced from the facility, or about 5 million tons per year. It joins the likes of Shell, Chevron, which signed a 20-year deal for 2 million tons per year last December, and other customers in the project. With a significant percentage of the LNG capacity under contract, Energy Transfer should have enough commercial contracts to make a positive Final Investment Decision (FID) on the project.
Meanwhile, MidOcean will finance 30% of the project's multibillion-dollar construction cost. That will reduce the capital outlay required by Energy Transfer. The MLP will likely continue seeking additional financial partners to offload more of the project's costs. Previously, co-CEO Tom Long had stated, "We expect to finance a significant portion of the capital cost of this project by means of the sale of equity in the project to infrastructure funds and possibly to one or more industry participants in conjunction with LNG offtake agreements."
Finally, MidOcean has committed to long-term gas transportation on Energy Transfer's pipelines as part of the deal. That's a big value driver of this project for Energy Transfer. Long has said that "upon completion of the LNG project, we expect to realize significant incremental cash flows from the transportation of natural gas on our Trunkline pipeline system and other energy transfer pipelines upstream from Lake Charles."
Almost ready for approval
With MidOcean on board, Energy Transfer is within reach of making an FID on Lake Charles, which it hopes to do by the end of this year. The project will supply significant future cash flows from its retained stake in the facility and the additional gas volumes flowing through its pipelines to the terminal. That growing cash flow will give Energy Transfer even more fuel to increase its high-yielding payout, making it an even more attractive long-term passive income investment.
