Shipment Delay Adds to Cheniere Energy's Woes

 | Jan 15, 2016 | 12:15 PM EST
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As if it wasn't facing enough trouble due to low energy prices, Cheniere Energy (LNG) is also experiencing technical difficulties.

On Thursday, Cheniere Energy Partners (CQP), a subsidiary of Cheniere Energy, announced that "instrumentation issues" will delay its first liquefied natural gas shipment from one of the company's new Sabine Pass terminals by at least a month. The shipment was expected to occur in late January and will now occur in late February or March, the company said.

While Cheniere sounded an optimistic note when announcing the delay, it could spell future trouble as the company navigates through a difficult market.

The Sabine Pass project was championed by Cheniere Energy's recently ousted CEO Charif Souki, whose exit in December was supported by activist-investor Carl Icahn. Icahn has a 13.8% stake in the company. Given the recent performance of Cheniere and Icahn's other plays in Chesapeake Energy (CHK) and Freeport-McMoRan (FCX), one has to wonder if the activist-investor may want to consider presidential candidate Donald Trump's offer to serve as Treasury secretary.

Cheniere's delay is troubling for a number of reasons. The company's effort to export liquefied natural gas from the new Sabine Pass project has been a costly endeavor whose completion is coming at a time when there is falling demand for natural gas amid slowing growth overseas.

Also worrying, Cheniere isn't alone in developing its export capacity, even though it was the first. 

In the image below, provided by Housley Carr of RBN Energy, there are six export terminals under construction, some of which will be coming online within the next three years. By Carr's estimation, new capacity will be added to an already oversupplied market, which means the U.S. natural gas sector is facing a "rough-and-tumble market."

The glutted market suggests existing contracts could be broken. Even though Cheniere was one of the first to the space, if this delay is met by others, the company could lose its advantage. Although Souki had a somewhat controversial tenure during his last years as CEO, it is worth noting that Cheniere's contracts were secured while he was at the helm.

When Cheniere announced Souki's exit, it said the company planned to "transition into an operating company" with stable cash flows "underpinned by long-term offtake agreements." The company also said it was exploring "a limited number of strategic initiatives within the LNG industry."

This implies the company disagreed with Souki's plans to develop another export facility in Texas, as well as his other entrepreneurial hopes in the energy space. To some, it would certainly appear Souki was biting off more than the company could chew. On the flip side, Souki was the first to focus on exports as natural gas reserves were opening up.

 In a glutted market, existing relationships -- or the ability to quickly secure new ones -- is invaluable, especially as liquefied natural gas buyers are increasingly using spot-market purchases instead of long-term contracts, according to Carr. If true, this puts Cheniere's announced plan to focus on "long-term offtake agreements" at even greater risk.

For Cheniere's sake, it should make sure its "instrumentation issues" are corrected swiftly before they put further pressure on a troubled company operating in a trouble industry.

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