LNG

Cheniere Energy, Inc. - 10-K Summary (Year Ended Dec 31, 2001)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2001. Cheniere Energy, Inc. is a Houston-based company engaged in oil and gas exploration and development, primarily in the Gulf of Mexico, and the development of a liquefied natural gas (LNG) receiving terminal business. The company utilizes a regional seismic data approach to generate drilling prospects, often partnering with industry players to fund drilling costs. A significant portion of the company's value and future strategy is tied to its investment in Gryphon Exploration Company (Gryphon), an unconsolidated affiliate formed in 2000 to fund exploration on a large seismic dataset.

Key Financial Metrics

Note: The company had no outstanding debt obligations as of December 31, 2001.

Material Changes vs. Prior Period

• Significant Net Loss Increase: The net loss widened significantly from $0.78 million in 2000 to $11.67 million in 2001. This was primarily driven by a $5.13 million ceiling test write-down on oil and gas properties, a $2.97 million equity loss from the unconsolidated affiliate (Gryphon), and increased general and administrative expenses.
• Revenue Decline: Revenues dropped by approximately 55% due to a sharp decline in production volumes (558,422 Mcfe in 2001 vs. 1,482,117 Mcfe in 2000) resulting from the natural depletion of producing wells at West Cameron Block 49. This was partially offset by higher average gas prices ($4.48/Mcf in 2001 vs. $3.79/Mcf in 2000).
• Operating Cash Flow Reversal: The company shifted from generating $5.2 million in operating cash flow in 2000 to using $2.2 million in 2001, reflecting the decline in production revenues and increased operational costs.
• Equity in Affiliate Loss: The equity share of Gryphon's losses increased to $2.97 million in 2001, largely due to accrued preferred dividend arrearages ($3.06 million) owed to Gryphon's preferred stockholder (Warburg), despite Gryphon reporting a small net income of $84,000.

Guidance, Outlook, and Risks

• LNG Terminal Development: Management is focusing heavily on developing an LNG receiving terminal in Freeport, Texas. The company has secured lease options and is pursuing regulatory approvals (FERC). Estimated costs for the two-year period ending Dec 31, 2003, are approximately $8 million. Construction could commence as early as 2003 if financing and permits are secured.
• Liquidity and Going Concern: The filing includes a "substantial doubt" regarding the company's ability to continue as a going concern. The company has a working capital deficit of $530,242 and an accumulated deficit of $18 million. Future operations depend on raising additional capital through equity offerings, asset sales, or debt.
• Gryphon Capital Calls: Cheniere declined to participate in $30 million of capital calls made by Gryphon in 2001, funded entirely by Warburg. This reduced Cheniere's effective ownership interest in Gryphon from 36.8% to 20.2% (as-converted). Further dilution is expected if Cheniere does not fund future capital calls.
• Asset Sales: In March 2002 (subsequent to year-end), the company signed an agreement to sell its producing oil and gas properties for $2.35 million to improve liquidity.
• Risks: Key risks include the failure to secure financing for the LNG project, inability to obtain regulatory permits, volatility in oil and gas prices, and the uncertainty of finding new reserves through exploration.

Investor Verification Checklist

• Capital Adequacy: Verify the company's ability to raise the estimated $8 million required for LNG development and cover ongoing operating losses.
• Gryphon Ownership Dilution: Monitor Cheniere's declining ownership stake in Gryphon (dropped to 13.7% as-converted in March 2002) and the impact on the value of this major asset.
• LNG Permitting Status: Track progress on FERC applications and site lease options for the Freeport terminal, as this is the primary long-term growth driver.
• Asset Sale Closing: Confirm the closing of the $2.35 million sale of producing properties and the actual cash proceeds received.
• Seismic Data Value: Assess the commercial viability of the remaining seismic data assets and the success of farm-out arrangements to fund future drilling.