LNG - Cheniere Energy: Taking To Hold As Stock Closes In On Price Target (Rating Downgrade)

2023-11-28 07:52:09 ET

Summary

• Cheniere Energy's Q3 results showed the steady nature of its business, as nearly 90% of volumes are contracted out.
• Cheniere's expansion projects are progressing well, and it expects to start producing LNG from its CCL Stage 3 project sooner than originally projected.
• However, following a solid performance, the stock is now pushing close to my fair value target price.

Back in April , I wrote that Cheniere Energy (LNG) was a solid play on the long-term volume growth of LNG, placing a “Buy” rating on the stock. More recently, in September , I wrote that despite some near-term LNG demand softness the company was still able to sign new long-term contracts for future capacity that it was building out. The stock has returned over 20% since my initial write-up, outpacing the 10% gain in the S&P. Let’s catch up on the stock after it reported its Q3 results earlier this month.

Company Profile

As a quick reminder, Cheniere operates a natural gas liquefaction and export facility near Corpus Christi and owns a stake and the GP interests, and has incentive distribution rights (IDRs) in Cheniere Energy Partners ( CQP ). CQP in turn owns the Sabine Pass, which is one of the largest LNG production facilities in the world.

Q3 Results

For its most recent quarter, reported earlier this month , Cheniere saw revenue plunge -53% to $4.16 billion. That topped analyst estimates calling for revenue of $4.07 billion.

Liquefied natural gas ((LNG)) cargoes fell -3% to 152, while exported volumes dropped -2% to 545 TBtu. LNG volumes loaded were -2% lower to 548 TBtu. The total volumes recognized were 545 TBtu, as it recognized 26 TBtu of volumes loaded from Q2 and 29 TBtu in volumes that were in transit.

Consolidated adjusted EBITDA for the quarter came in at $1.66 billion, down -40% from $2.78 billion a year ago. Distributable cash flow attributable to Cheniere was $1.17 billion, a decrease of -43% from $2.04 billion a year earlier.

Net income attributable to common shareholders came in at $1.70 billion, or $7.03 a share, compared to -$2.39 billion, or -$9.54 a share, a year ago.

The company bought back 2.2 million shares in the quarter, spending $357 million. It also reduced debt by $50 million. At the end of October, Cheniere also increased its dividend by 10% to 43.5 cents a share.

Approximately 89% of Cheniere’s volumes in the past quarter were sold under long-term SPA or IPM agreements, and thus were not impacted by any LNG price volatility in the quarter. Last year, 82% of its volumes came from these contracts, so it had more spot rate exposure. Along with that, the onset of the Russian-Ukraine war saw LNG prices surge, benefiting its CMI Marketing Unit. As such, the EBITDA that Cheniere was able to generate last year and into Q1 of this year was very much an outlier.

Overall, the company’s results were pretty much in line with expectations. Volumes were down slightly, although its facilities appear to be running well for the most part.

Meanwhile, Cheniere continues to execute its capital allocation plan, which saw it buy back shares, pay down debt, and increase its dividend. The company has nearly $20 billion in net debt, and normalized EBITDA is around $6.4 billion, which would be about 3x leverage, which isn’t too high given the predictable nature of 90% of the company’s EBITDA.

Outlook

Looking forward, the company reiterated its full-year guidance calling for consolidated adjusted EBITDA of between $8.3-$8.8 billion. The company had raised its guidance in the prior quarters, and its initial forecast was for an EBITDA of $8.0-$8.5 billion.

Cheniere also reiterated its forecast for distributable cash flow of between $5.8-$6.3 billion. Its initial outlook was for DCF of $5.5-$6.0 billion.

For 2024, the company said that only 2% of its production capacity is uncontracted. As such, the bulk of its revenue will come from fixed-fee take or pay contracts.

The company noted that its CCL Stage 3 project was now 44.1% complete. It said the project is now months ahead of schedule and it thinks that it could have its first LNG production by the end of 2024. It expects all 7 trains of the project to be substantially complete by the end of 2026.

In conjunction with its earnings report, Cheniere also announced a sale and purchase agreement ((SPA)) with Chinese firm Foran Energy. Foran will purchase approximately 0.9 million tonnes per annum (mtpa) once the second train of the Sabine Pass Liquefaction Expansion Project (SPL Expansion Project) is complete. The contract runs for 20 years. It is the first SPA signed for production from the second train of the SPL Expansion project. Notably, this project has not yet begun construction and it is still in the pre-filing review process with FERC (Federal Energy Regulatory Commission)

Discussing the future of LNG on its Q3 earnings call , Chief Commercial Officer Anatol Feygin said:

“The market's heightened focus on long-term energy security has led to significant long-term LNG contracting in the past 18 or so months. These contracts signal the need for further investment in liquefaction capacity and serve to underpin some of the recent project FIDs. As a result, we now see a significant amount of new capacity currently under construction. While this is expected to help reverse the systemic market tightening that has resulted from the curtailment of Russian volumes over the last 2 years, we believe that further LNG supply is needed to fully meet demand in 2028 and beyond which we expect to be fulfilled with some of the proposed pre-FID export projects, of course, including our own expansion plans at Sabine Pass and Corpus Christi. The concentration of FID is taking place this year next along with the start of delayed projects in East and West Africa, should help make LNG more accessible to price-sensitive markets while also making the industry more resilient in the fact base of supply disruptions or major geopolitical upsets, such as those threatening the market balances today. And just as liquefaction development has been active this year, the same is true for the regas side of the business. Market players continue to develop import capacity across Europe and Asia which in total is expected to increase by 50% by 2030. We continue to forecast healthy demand for LNG over the coming decades with Europe sustaining its growth through the midterm and Asia driving future growth over the long term. “

The big driver for Cheniere is its expansion projects, and on that front, it appears the company is making good progress. It now expects its CCL Stage 3 project to start producing LNG sooner than projected and to start making a meaningful contribution to 2025 results. This project is at its fully-owned facility in Corpus Christi.

At the same time, the company continues to sign contracts for future demand for its planned expansion at Sabine Pass, which is owned by CQP. The outer-year demand outlook for LNG continues to look solid, and the company has been doing a good job of getting long-term contract commitments in place for its planned expansion.

Completing projects on time and on budget and signing up customers to future capacity should be the biggest driver for Cheniere moving forward. The biggest risk to Cheniere would be project delays and cost overruns and not finding customers willing to commit to long-term contracts for future capacity buildouts, thus stalling growth.

Valuation

Cheniere trades at 7.9x the 2023 EBITDA consensus of $8.7 billion. For 2024, it trades at 10.8x the 2024 EBITDA consensus of $6.4 billion.

It trades at about 18x 2024 DCF of $3.8 billion and has a 2024 DCF yield of about 8.9%.

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. ET trades at 7.1x 2024 EBITDA and EPD trades at 8.9x 2024 EBITDA.

I think 11-12x 2024 EBITDA is close to the high end of where Cheniere should trade, limiting the upside to between $184-$210.

Conclusion

My Cheniere thesis has been playing out well, as the company continues to post steady results while its growth projects continue to come along nicely, and it signs up more future capacity for long-term contracts. However, given the rise in the stock price, its potential upside is now more limited.

As such, I’m going to lower my rating on the stock to “Hold.”

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