2023-04-19 06:28:42 ET
Summary
- Over the long run, Cheniere is a volume play on continued LNG growth.
- While the company had unprecedented 2022 results driven by LNG prices and margins, ~95% of its volumes are contracted out long term.
- The company has expansion plans that will continue to grow its capacity in later years.
While the company's 2022 numbers were inflated due to strong prices and margins from the small percentage of its production that is not on long-term contracts, Cheniere Energy ( LNG ) remains one of the best ways to play the trend on growing global liquid natural gas demand.
Company Profile
Cheniere is a liquid natural gas ((LNG)) focused energy company. It operates facilities that liquify natural gas for overseas transport that is later turned back into natural gas through a regasification process.
The company owns and operates a natural gas liquefaction and export facility located near Corpus Christi, Texas. The facility has three operational trains that are able to produce approximately 15 mtpa of LNG. It also has three LNG storage tanks with combined capacity of approximately 10 Bcfe and two marine berths that can each accommodate vessels with capacity of up to 266,000 cubic meters. The company also owns a 21.5-mile natural gas pipeline that connects to several interstate and intrastate pipelines.
It also owns and operates the Sabine Pass LNG Terminal in Cameron Parish, Louisiana through its 48.6% ownership stake in Cheniere Energy Partners ( CQP ). The company also owns the GP interests and has incentive distribution rights (IDRs) in CQP.
Sabine Pass is one of the largest LNG production facilities in the world with six operational trains that have an aggregate approximately 30 mtpa of LNG capacity. It also has five LNG storage tanks with combined capacity of approximately 17 Bcfe and three marine berths that can each accommodate vessels with capacity of up to 266,000 cubic meters for two of the berths and 200,000 cubic meters for the third. The facility also has 4 Bcf/d of regasification capacity and a 94-mile pipeline that connects to several interstate and intrastate pipelines.
Opportunities and Risks
Cheniere generally has a pretty steady business, as it has contracted out about 95% of its anticipated production capacity through long-term SPAs and IPM agreements. Its SPAs are take-or-pay agreements where its customers have to pay a fixed fee to Cheniere whether they take delivery of LNG cargoes or not. Under its IPM agreements, natural gas producers sell it natural gas at global LNG index prices, less a fixed liquefaction fee, shipping and other costs. At the end of 2022, these contracts had a weighted average life of 17 years, creating a lot of visibility for the firm.
The IPM agreements come with come with commodity price exposure, which Cheniere hedges out. Its Cheniere Marketing International ((CMI)) subsidiary, which handles the ~5% of production that is not on long-term contracts, also has commodity and margin exposure as well. The company has said that every $1 MMBtu increase in CMI margin normally adds $300 million in EBITDA, but it has already sold much of its open capacity for 2023, so it's down to $50 million for the rest of this year. Its current guidance for the year assumes a CMI run-rate of $2.00-$2.50 MMBtu.
2022 was actually an unprecedented boon for its CMI unit, as LNG prices soared and margins expanded as a result of the Ukraine-Russian war and subsequent reduced flows of natural gas to Europe from Russia's Nord Stream pipeline. Cheniere originally projected 2022 EBITDA of between $5.8-6.3 billion, but it came in at a whopping $11.6 billion. For 2023, the company is forecasting EBITDA to come down to $8.0-8.5 billion, but still remain robust.
On its Q4 earnings call , CFO Zach Davis said:
2022 was an unprecedented year with EBITDA and DCF approaching double and triple our respective 9 Train run rate guidance levels for those metrics. 2023 is shaping up to be another incredible year with guidance ranges multiple billions of dollars above the run rate levels for both, thanks to proactive management of our open capacity despite a higher contribution from long-term contracts in 2023. Our focus remains on achieving the 2020 vision of generating over $20 billion of cash and over $20 DCF per share, and our expectation on accomplishing that plan hasn't wavered despite the moderation in near-term prices, highlighting the stability and visibility of our long-term cash flow profile.
With regard to open capacity, we have less than 70 TBtu of unsold LNG remaining, 20 of which are reserved for long-term origination and we currently forecast that a $1 change in market margin would impact EBITDA by approximately $50 million for the balance of 2023. The marketing team has done an excellent job proactively selling our open capacity since November from 150 TBtu, which has allowed us to come out with this guidance range of over $8 billion today and keep us on track with our 2020 vision."
Cheniere's biggest growth opportunity, however, is expansion to meet the growing global demand for LNG. The company is looking to expand both its Corpus Christie and Sabine Pass facilities. The board approved FID for its Corpus Christi Stage 3 Project last June. The project will add over 10 mtpa of LNG of production capacity through the construction of seven midscale trains. The project is expected to be substantially completed between the second half of 2025 and the first half of 2027.
The company has also started to look at expanding Sabine Pass, and has hired Bechtel do FEED work. Cheniere is looking to expand its capacity by over 20 mpta through three trains with expected capacity of ~6.5 mpta each. It is also looking to add 2 LNG storage tanks, each with capacity of 220,000m.
When looking at risks, delays and cost overruns on these large projects is first and foremost. Getting regulatory approval for new LNG facilities is not easy, but fortunately for Cheniere these are expansions what tend to be a little easier. Construction costs are also on the rise with inflation, and any significant increase could always lessen the viability of the project. Thus far, the company has not experienced any of these problems in the past.
Cheniere and CQP also carry a good amount of debt. The company had over $23.5 billion in net debt on its balance sheet at the end of 2022. It should generate over $5 billion in operating cash flow, which should allow it to pay down some of its debt.
Valuation
Turning to valuation, Cheniere trades at 7.9x the 2023 EBITDA consensus of $8.38 billion. For 2024, its trades at 9.3x the 2024 EBITDA consensus of $7.09 billion.
It trades at about 11.5x DCF of $5.75 billion, and has a 2023 DCF yield of about 15.7%.
There aren't really any great comparisons for Cheniere, but it looks to trade at a comparable valuation to Energy Transfer ( ET ) and Enterprise Products Partners ( EPD ), both of which have export assets. Cheniere should have more long-term growth compared to these two larger, more diversified midstream companies, however.
Conclusion
Cheniere is a nice play on the LNG market and the stock is trading at a reasonable price. Its numbers last year are overinflated due to the usually strong LNG margins it got on a small percentage of its production, but longer term this is largely a volume story backed by very long-term contracts.
The company with continue to grow with expansion, and appears to be one of the best-situated companies to take advantage of long-term LNG demand. As such, I think the stock is a "Buy." I see upside to $225, which is an 11x multiple of 2024 EBITDA.
For further details see:
Cheniere Energy Remains A Strong Play On LNG Growth