Buy high, sell low and guarantee a loss. It's not exactly what Toshiba Corp. planned when it dipped its toes in liquefied natural gas trading.
Yet that's exactly how it turned out, as the Japanese industrial giant capped off its five-year misadventure in LNG late last week by paying ENN Ecological Holdings Co. $806 million to take its interest in a U.S. export venture off its hands. The Chinese gas distributor gets the right to liquefy and sell 2.2 million tons a year at the Freeport LNG plant in Texas, in addition to the cash.
The deal marks Toshiba's second exit from a troubled energy business this year, after it sold claims in its Westinghouse U.S. nuclear unit in January. Toshiba said in a statement that the LNG business was no longer a core focus and it wanted to exit to eliminate the risk from changing market conditions.
"Toshiba benefits by not having to deal with a business they never really felt comfortable with," said Nicholas Browne, an analyst with Wood Mackenzie Ltd. in Singapore. "It's one more item of housekeeping by Toshiba to clean house of long-term obligations and follows the writedown of the Westinghouse acquisition."
Toshiba shares surged 12 percent when the company announced the sale and reinstated dividends.
When Toshiba struck the tolling agreement with Freeport in September 2013, the outlook for profit seemed bright. Gas sold in Asia, mostly linked to $100-a-barrel oil, was priced at a significant premium to U.S. gas made cheap by abundant supplies from shale fields.
Toshiba agreed to contracts that required it to pay for space in pipelines and the liquefaction plant regardless of whether or not it used them. Toshiba never disclosed its costs, but Wood Mackenzie estimated its fixed costs at about $360 million a year, or a $7.2 billion liability for the life of the 20-year contract.
That was fine back then when the profit margin was wide. But in 2014, global oil prices crashed, bringing down the cost of LNG contracts linked to it. For much of the past four years U.S. LNG, after adding in tolling and shipping costs, would have had to be sold at a loss in Asia.
Ironically, as Toshiba completed the deal, U.S. LNG is once again competitive in Asia, thanks to a rally in oil prices. Adding liquefaction, shipping and other costs to a December 2020-delivery U.S. natural gas futures contract, the price is almost identical to the same volume of gas in a typical Brent-linked cargo.
"U.S. LNG can be competitive against LNG oil-indexed contracts," IHS' Chong said. But "commodity arbitrage was a secondary consideration for Toshiba."
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