LNG - Cheniere Energy Set To Ride The LNG Wave Higher

2023-09-12 09:06:40 ET

Summary

• Cheniere Energy is a dominant player in the global LNG industry, with two LNG facilities in the US and the potential to produce 45 million tonnes of LNG per year.
• The demand for LNG is growing globally, particularly in Europe and Asia, and Cheniere Energy is strategically positioned to meet this demand.
• Despite challenges in the second quarter, Cheniere Energy has raised its guidance for the year, highlighting its robust financial position and strong outlook.

Introduction

In the realm of energy investments, few stories appear as compelling as that of Cheniere Energy (LNG). Over the past few years, this liquefied natural gas producer has been there ready to respond to changes in the market and help keep the lights on across Europe and the world.

Over the past five years shareholders have been rewarded with a 150% rise in share price, but in the past year the share price has only risen 1.7%. With dividends, share buybacks and impressive earnings reports, let me explain why I believe Cheniere Energy is a strong buy.

Company Overview

Founded in 1996, Cheniere Energy is a Houston based energy company at the forefront of the global liquefied natural gas ((LNG)) industry. It has rapidly emerged as a dominant player in the LNG industry being the largest producer of LNG in the United States and second largest in the world.

It operates two LNG facilities in the United States: Sabine Pass in Louisiana which opened in 2016 and Corpus Christi in Texas. With nine liquefaction units in operation, the company has the potential to produce approximately 45 million tonnes per annum of LNG.

Expanding LNG Demand

Liquefied Natural Gas has become an indispensable part of the global energy landscape, and Cheniere Energy is strategically positioned to ride this wave of soaring demand. The LNG map is truly global, with multiple markets developing new LNG import capacity.

In Europe, demanding is growing as they urgently replace gas previously transferred through pipelines from Russia. Here, gas is also seen as a transition fuel as they move away from coal to renewable energy solutions.

Across Asia, a parallel narrative unfolds. As the region's economy continues to grow, demand for energy is only increasing. LNG is seen as the emerging fuel of choice to meet this surging appetite for energy, and as such, there has been a substantial uptick in long-term contracts for LNG to meet this demand.

The global LNG landscape is on the cusp of a significant expansion. From 2022 to 2024, the number of markets with LNG import capacity is projected to rise from 46 to 55. This expansion entails the development of over 380 megatons of regasification capacity across the world. It is a testament to the growing recognition of LNG's role in achieving energy security, sustainability, and economic growth. The trajectory of LNG demand is undeniably upwards and Cheniere Energy stands ready to meet and drive the surging demand for LNG.

What is Cheniere Energy doing to meet demand?

Cheniere's strategic assets include the Corpus Christi LNG Terminal, with a production capacity exceeding 25 million tons per annum (mtpa). Currently, three trains at this facility are operational, with contracts in place with long-term buyers. Simultaneously, the Sabine Pass Liquefaction Terminal, with a total production capacity of around 30 mtpa, plays a pivotal role in Cheniere's strategy with 6 trains operational and most contracts with long-term buyers have already commenced.

To meet the anticipated demand, Cheniere's strategy extends beyond its existing infrastructure. Currently, the company is in the process of expanding the Corpus Christi LNG terminal, which, when complete, will add over 10 mtpa to its production capacity. There are also plans to expand Sabine Pass with up to 20 mtpa additional capacity but this plan is still very much in the early stages.

Q2 Results

Cheniere Energy delivered an exceptional performance in the second quarter of 2023, exceeding expectations, despite a lower price for LNG. Net income leaped to $1.37 billion from $741 million in the corresponding quarter of the previous year, but it is important to note that this leap is largely due to a gain of $782 million on the company's derivatives portfolio.

Despite the growth in earnings, second quarter revenues did decline compared to the previous year, with a reduction of nearly 50% to $4.1 billion. This was driven by a fall in volumes of 5% attributed in part to maintenance outages and a fall in the US average natural gas price by 63% year-on-year the quarter.

Despite the challenges faced during the second quarter, management raised its guidance for the year. Adjusted EBITDA is now forecast to be between $8.3 billion and $8.8 billion, up from $8.2 billion to $8.7 billion. Additionally, distributable free cash flow for the year is estimated to be $5.8 billion to $6.3 billion, compared to the previous range of $5.7 billion to $6.2 billion. These optimistic projections underscore the company's robust financial position and strong outlook.

Valuation

To value Cheniere Energy, I employed an EV/EBITDA method for the period to 2027. I used managements midpoints in their forecast for EBITDA this year. We assume Cheniere continues buying back its shares at a rate of 2.5% of shares a year, reducing the share count from 241 million currently to 218 million shares. We assume that debt is paid down at a rate of $1.25 Billion annually with cash amounts remaining constant.

Deciding on an EV/EBITDA multiple to use was difficult but I settled on a multiple of 11.5, which is just below the company's average multiple over the previous five years.

For future revenue I used analyst estimates found on Seeking Alpha and for calculating EBITDA, used an EBITDA margin of 33% which is the average margin over the years 2017 to 2023.

Performing the calculations, implies a market cap of $58 billion at the end of 2027. With an estimated 218 million shares outstanding, this corresponds to a price target of $267, an upside of 65.83% from current prices, resulting in a CAGR of 12.7% in 51 months.

Risks To Consider

When investing in Cheniere Energy, I have two main risks I believe it is important to consider.

Firstly, the weather. Cheniere Energy's operations remain vulnerable to weather related disruptions, particularly from hurricanes impacting its two facilities on the Gulf Coast. A hurricane could lead to a weather related shut down as it passes or a longer shut down if significant damage occurs. In both scenarios there would be disruption to LNG production and additional costs for the company both from repairing damage and the need to ensure it still meets its contractual commitments.

Secondly, the price of LNG. Although the long-term outlook appears to be positive, the price of LNG is extremely volatile, influenced by global energy demand, geopolitical events and supply dynamics. Cheniere Energy is protected somewhat from these price fluctuations by long term contracts that provide revenue stability, however a drop in prices on the spot market could impact its earnings on any sales to the spot market. It could also influence the prices it charges for long term contracts as they come up for renewal.

Conclusion

Cheniere Energy stands at the forefront of the LNG industry with demand only set to grow. The company's extensive portfolio of long-term contracts provides a secure revenue stream, laying the groundwork for continued expansion and profitability.

Cheniere's commitment to meeting growing demand is evident through its ongoing expansion projects and infrastructure investments. This proactive approach ensures the company's readiness to serve the escalating global need for LNG.

In addition to its strong outlook, Cheniere boasts attractive earnings and robust free cash flow, making it an enticing investment opportunity. As the world's energy landscape evolves, Cheniere Energy is well-poised to play a pivotal role, making it a strong buy.

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