Global Infrastructure Partners (GIP) has agreed to buy a 25 percent stake in Freeport LNG Development for $850 million, securing a key position in the midstream energy infrastructure sector as the US transforms itself into a major natural gas exporter to global markets.
The New York-based fund manager will purchase the stake in the Texas-based liquefied natural gas (LNG) developer and operator from a consortium of investors led by Hastings Funds Management (USA) and Zachry American Infrastructure, it said in a statement.
The shale gas boom in the US has seen domestic natural gas prices being suppressed, prompting many firms to consider chilling the gas into a liquid and transfer it to other regions where demand is rising sharply.
For utilities in Asia and other buyers of LNG, US LNG is attractive because it is indexed to Henry Hub prices as opposed to oil-linked prices. It provides a diversification of supply geographically, politically and from a price indexation perspective.
Freeport LNG Development is an LNG receiving and regasification terminal near Freeport, Texas. The Freeport LNG project was approved by the US Department of Energy last year to export LNG to other countries.
It was the second such export facility to receive a green light – Cheniere Energy's Sabine Pass facility in Louisiana won approval in May 2011.
The deal comes as Freeport gets closer to breaking ground on the construction of three liquefied plants and after it secured 20-year long-term contracts with utilities and major oil companies including Osaka Gas, Chubu Electric, BP Energy Company, Toshiba Corp and SK E&S LNG.
GIP said it expects the transaction to close in the fourth quarter of this year. The investment will come from its second fund, Global Infrastructure Partners II, which became the largest-ever infrastructure fund when it closed on $8.25 billion in 2012.
The fund manager, which bought the 25 percent stake without going through an auction process, has made investments in other energy companies including the likes of Chesapeake and Ruby Pipeline.
One reason why GIP considers the Freeport deal attractive is that there is no commodity risk and hence no exposure to the volatility of global commodity prices – in turn translating into stable returns for investors.
Hastings said the total gross proceeds from the Freeport LNG investment, including the sale of the 25 percent interest to GIP and the remaining interest in Freeport LNG, are expected to exceed $1.1 billion and represent a multiple of 5.5 times gross return on the initial equity investment for the investors.
At the time of the original investment, the scale of US exports and the ability of Freeport to secure 20-year contracts with large customers was not envisaged. GIP believes it will get an attractive return based on the value of those contracts.
In 2013, GIP made an investment in senior secured PIK notes, which are secured by an equity interest in Freeport, according to its website.