LNG - Cheniere Energy: Growth Projects Remain On Track

2023-09-13 06:03:45 ET

Summary

• Cheniere Energy's long-term contracts set a nice base for the company.
• Despite some near-term LNG demand softness, Cheniere continues to sign new long-term contracts for future capacity.
• The stock remains one of the best plays on long-term LNG demand growth.

Cheniere Energy ( LNG ) has generated an over 10% return since my initial bullish write-up in April , outpacing the S&P 500, and is up over 18% since I reiterated my recommendation in May . Let's catch up the stock.

Company Profile

As a quick refresher, Cheniere operates LNG facilities that liquify natural gas for overseas transport. It operates a natural gas liquefaction and export facility near Corpus Christi that can produce approximately 15 mtpa of LNG. It has a 48.6% ownership stake and the GP interests and has incentive distribution rights (IDRs) in Cheniere Energy Partners ( CQP ), which own the Sabine Pass. That facility is one of the largest LNG production facilities in the world with approximately 30 mtpa of LNG capacity.

Q2 Results

For its most-recent quarter, Cheniere saw revenue plunge -49% to $4.1 billion. That missed analyst estimates calling for revenue of $4.39 billion.

Liquefied natural gas ((LNG)) cargoes fell -4% to 149, while exported volumes dropped -5% to 536 TBtu. LNG volumes loaded were -5% lower to 534 TBtu. Total volumes recognized were 547 TBtu, as it recognized 39 TBtu of volumes loaded from Q1 and had 26 TBtu in volumes that were in transit.

Consolidated adjusted EBITDA for the quarter came in at $1.86 billion down -27% from $2.52 billion a year ago. Distributable cash flow attributable to Cheniere was $1.35 billion, a decrease of -27% from $1.86 billion a year earlier.

Net income attributable to common shareholders came in at $1.37 billion, or $5.61 a share, compared to $741 million, or $2.90 a share, a year ago.

The company bought back 2.3 million shares in the quarter, spending $337 million. It also reduced debt by $200 million.

LNG exports and margins continued to soften this year compared to a very robust 2022, which accounts for the decline in Cheniere's Q2 results. However, with the vast majority of its volumes are sold under long-term SPA or IPM agreements, and the bulk of Cheniere's results remain steady. It should be noted that 2022 was just a robust outlier year in part due to the outbreak of the Russian-Ukraine war, which sent LNG prices margins to the stratosphere, benefiting its CMI Marketing Unit.

Outlook

Looking forward, the company guided for full-year consolidated adjusted EBITDA of between $8.3-$8.8 billion. That was up from prior guidance of between $8.2-8.7 billion and an initial forecast of $8.0-$8.5 billion.

Cheniere forecast distributable cash flow of between $5.8-$6.3 billion. It previously was looking for DCF of between $5.7-6.2 billion and an initial outlook of $5.5-$6.0 billion. Management said the increase was largely due the release of the some cargoes that have been reserved for origination this year and some optimization and subchartering activity.

On its Q2 earnings call , Executive VP and Chief Commercial Officer Anatol Feygin said:

Despite some of the near-term market dynamics discussed earlier, pointing to potentially softened demand for LNG in the front of the curve, we are largely insulated from. Over the last 12 to 18 months, we have witnessed record levels of long-term contracting, particularly for U.S. volumes as the long-term trade outlook continues to call for further growth in LNG supply. In aggregate, the level of long-term Henry Hub linked contract signed in '22 alone far exceeded the total signed over the 6 preceding years combined and the market looks to be on track to potentially repeat this level of contract activity this year. As we previously discussed, we expect demand from China and other fast-growing Asian economies to underpin the next LNG supply wave, representing over 70% of the LNG demand growth through 2040. Asian demand, coupled with Europe's desire to replace Russian supply has driven recent commercial activity. Although Asian customers and portfolio players have been the largest and most active buyers of long-term volumes globally over the past 18 months, European counterparties have certainly stepped up, signing contracts representing over 20 MTPA of which 18 MTPA is tied to U.S. projects or about 1/4 of the total U.S. volumes signed since 2022. At Cheniere, we have signed over 15 million tons of long-term contracts in just the last 18 months, 30% of which are expected to underpin our future growth at both Corpus and Sabine Pass. While mid-scale Trains 8 and 9 are fully commercialized, the origination team is hard at work constructing the portfolio for the SPL expansion project."

After its quarterly report, in late August the company announced that BASF has agreed to purchase up to approximately 0.8 million tonnes per annum of LNG under an SPA. Deliveries will begin in mid-2026 subject to the completion of Train 7 at Sabine Pass. The deal will run through 2043.

Cheniere has been doing a nice job of signing long-term contracts for its future capacity additions for Corpus Christi and Sabine Pass. While the market may fluctuate for the ~5% of volumes it doesn't have contracted out, which actually can move results a lot more than you would think, the long-term story is about getting these projects up and running with the capacity contracted out. On that front, the company is nicely headed in the right direction.

Valuation

Cheniere trades at 7.6x the 2023 EBITDA consensus of $8.7 billion. For 2024, its trades at 10x the 2024 EBITDA consensus of $6.65 billion.

It trades at about 10.9x DCF of $6.05 billion and has a 2023 DCF yield of about 15.6 %.

While 2023 estimates are up, 2024 estimates have come down.

As I've noted before, there aren't really any great comparisons for Cheniere, although Energy Transfer ( ET ) and Enterprise Products Partners ( EPD ) both have export assets. Cheniere should have more long-term growth compared to these two larger, more diversified midstream companies. On a 2023 basis, Cheniere trades at a lower multiple than ET and EPD, but it does trade at a bit of a premium based on 2024 estimates, which would be a more normalized run rate for Cheniere.

Conclusion

Cheniere remains a play on the long-term demand for LNG. While there has been some near-term softness in demand, the company has still been executing long-term contracts on future demand where the additional trains have not yet been built. That helps de-risk these growth projects and sets the company up for solid long-term growth.

Now there is no doubt that 2022 was a particularly robust year for the company on the small percentage of volumes it does not contract out, which also extended into 2023, as it sold much of its open capacity for this year in 2022 when prices and margins were more robust. More normal adjusted EBITDA is low to mid $6 billion for current capacity, while it produced adjusted EBITDA of $11.6 billion in 2022 and is on track for mid $8 billion this year.

The biggest risk to the Cheniere story would be these capacity expansion projects not getting commitments or not getting built for any reason. Weak LNG prices and regulatory issues would be the most likely culprits for any issues stopping or delaying these projects from getting online.

My $225 target is about a 12x multiple on 2024 EBITDA, which I think is appropriate given the company's long-term contracts in place and growth projects. Getting commitments for these projects is a big part of the Cheniere story, and on that end it has been delivering. The stock remains a "Buy."

For further details see: