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

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

FactSet,

a data provider. In the U.S., Henry Hub natural-gas spot prices traded at $9.11 per million BTUs, 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 ranking two notches below investment grade.

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

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

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

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

In September of last year, Cheniere announced it would reduce debt by $1 billion a year. Since then, it has paid down more than $4 billion, it said this week in a revised capital plan. As of June 30, the company’s net debt stood at $27.91 billion, down from $30.2 billion a year earlier, according to S&P Global Market Intelligence, a data provider.

The company this week set a long-term target 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 what free cash remains to debt reduction and the other half to share buybacks, the company said. In other words, Cheniere has set a one-to-one ratio for allocating its remaining cash between the two priorities; that ratio previously stood at four-to-one.

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

Investors have asked the company to fatten shareholder returns at the same time the company is paying down debt, he said. The company’s shares closed at $171.98 Thursday afternoon, up 68% from the beginning of the year.

“They wouldn’t be committing to increasing the buybacks to the level that they are unless they felt really confident that they would get to the investment-grade goal,” said

Sean Morgan,

a research analyst at investment firm

Evercore Inc.

Cheniere says it is now able to finance its capital investments with cash from operations. Some of its competitors also do: the government of Qatar—an important energy producer—as well as companies such as

ExxonMobil Corp.

and ConocoPhillips, Mr. Morgan said. In the U.S., Cheniere’s rivals include smaller LNG project operators, including energy infrastructure companies

Sempra

and

Kinder Morgan Inc.,

he said.

Cheniere’s board authorized the company to buy back up to $4 billion in shares 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 boosted 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 span of $9.8 billion to $10.3 billion in August. The company reported Ebitda of $4.9 billion in 2021.

Cheniere has spent years investing in the natural gas liquefaction facilities—which convert natural gas from gas to liquid form so it can be shipped—that have allowed it to capitalize on current market conditions, said

Jason Gabelman,

a director at

Cowen Inc.

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

Write to Kristin Broughton at [email protected]