Cheniere CFO Aims for Investment-Grade Credit Rating as Natural-Gas Prices Soar

Cheniere Energy Inc.’s CFO is working toward an investment-grade credit rating next year as the largest US liquefied natural gas exporter pays off its debt and benefits from rising prices of energy.

Houston-based Cheniere this year expanded capacity with a new production line completed ahead of schedule, while also managing to ramp up production at existing facilities, said Zach Davis, chief financial officer. That allowed the company, which normally sells under contracts, to sell on the spot market in Europe, where prices have risen this year following the Russian invasion of Ukraine.

Spot prices for natural gas on the European Energy Exchange traded Thursday at 63.75 euros per million British thermal units, about the same amount in dollars, compared with 19.3 euros a year ago, according to FactSet.,

a data provider. In the US, Henry Hub natural gas spot prices traded at $9.11 per million BTU, up from $5.66 a year earlier, FactSet said.

Cheniere currently has a BB+ credit rating from S&P Global. Inc.,

one notch below investment grade and a Ba2 from Moody’s Investors Service, this classification two notches below investment grade.

Zach Davis, CFO of Cheniere Energy.


Cheniere Energy Inc.

The company expects to reach investment grade next year based on its current rating and financial position, Davis said. “We’re right on the cusp of getting there,” he said.

An investment-grade rating would give long-term investors and customers confidence that the company can survive volatility in commodity markets, Davis said. A high credit rating also allows businesses to lower their costs of debt.

Higher natural gas prices have been a boon to Cheniere’s finances, prompting her to accelerate plans to pay down debt. The company, which took on billions of debt in recent years to expand production at plants in Louisiana and Texas, generated $5.17 billion in cash from operations in the first six months of 2022, compared with $1.37 billion a year. previous. Total revenue in the same time period rose to $15.49 billion from $6.11 billion.

“These are unsustainably high market prices and we expect things to stabilize a bit over time,” Davis said, commenting on current market conditions. Europe is facing high natural gas prices heading into winter after Russia cut deliveries to the region and countries pledged to limit their consumption of Russian gas following the country’s invasion of Ukraine.

In September of last year, Cheniere announced that he would reduce the debt by one billion dollars a year. Since then, he has shelled out more than $4 billion, he said this week in a revised capital plan. As of June 30, the company’s net debt was $27.91 billion, down from $30.2 billion a year earlier, according to S&P Global Market Intelligence, a data provider.

This week, the company set a long-term goal of maintaining a ratio of net debt to earnings before interest, taxes, depreciation and amortization of four times. The ratio was 3.5 times as of June 30.

After paying dividends and making growth-related capital investments, Cheniere plans to allocate half of the remaining free cash to debt reduction and the other half to share buybacks, the company said. In other words, Cheniere has established a one-to-one ratio to allocate his remaining cash between the two priorities; that ratio was previously four to one.

“We think it threaded the needle to get us to where we needed to be on the leverage metric, but giving us more than enough capacity to be quite significant on the buyback,” Mr. Davis said, discussing the revised ratio.

Investors have asked the company to increase shareholder returns at the same time the company pays off debt, he said. Shares of the company closed at $171.98 on Thursday afternoon, up 68% from the beginning of the year.

“They wouldn’t commit to raising buybacks to the level they are unless they felt really confident they would hit the investment-grade goal,” said Sean Morgan, a research analyst at investment firm Evercore. Inc.

Cheniere says he can now finance his capital investments with cash from operations. Some of its competitors do too: the Qatari government, a major energy producer, as well as companies like ExxonMobil. corporation

and ConocoPhillips, Morgan said. In the US, Cheniere’s rivals include operators of smaller LNG projects, including energy infrastructure companies Sempra and Kinder Morgan. Inc.,

he said.

Cheniere’s board has authorized the company to buy back up to $4 billion worth of stock over the next three years, adding to the company’s existing authorization of about $500 million remaining, the company said this week. The company also increased its dividend by 20%, to $1.58 per common share.

The company raised its 2022 guidance for adjusted earnings before interest, taxes, depreciation and amortization to a range of $11 billion to $11.5 billion, from a previous range of $9.8 billion to $10.3 billion in August. The company reported an Ebitda of $4.9 billion in 2021.

Cheniere has spent years investing in natural gas liquefaction facilities, which convert natural gas from gas to liquid so it can be shipped, that have allowed him to capitalize on current market conditions, said Jason Gabelman, director of Cowen. Inc.

“It’s easy to take for granted the fact that a unit is up and running and capable of delivering strong margins,” said Mr. Gabelman, noting that the company’s investments in new capacity have come online on time and within the budget.

write to Kristin Broughton at [email protected]

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