2023-06-13 03:51:10 ET
Summary
- Cheniere Energy is a key player in the liquefied natural gas industry, with strong cash flows and a low forward P/E ratio, making it a buy recommendation.
- The company is prioritizing shareholders with share repurchases and debt reduction, while also developing projects like Corpus Christi Stage 3 to drive future growth.
- Risks include project delays, market uncertainties, and maintaining margins, but the overall outlook remains positive for LNG as natural gas demand continues to grow.
Investment Summary
Cheniere Energy, Inc. ( LNG ) is a renowned energy company that specializes in the liquefied natural gas ((LNG)) industry. Their primary expertise lies in the production, liquefaction, and export of LNG, positioning them as a key player in the worldwide energy market. Cheniere Energy operates an exceptional LNG infrastructure, encompassing strategically located liquefaction plants and export terminals along the Gulf Coast of the United States.
Estimates suggest LNG will see a decrease over the coming years but the last earnings report had other things to suggest. The company raised its full-year guidance and now sees distributable cash flows of $5.7 - $6.2 billion, driven by the stronger productions and constructions of the Corpus Christi Stage 3 project is developing ahead of schedule. Tailwinds seem to amount to the company and I am here for it. With a very low FWD p/e of under 5, I think even if there is a slight decrease in revenues in the coming years, the downside is still quite limited and shareholders can benefit from the dividend and buybacks still. LNG is rated a buy from me.
Strong Cash Flows Heavily Benefits Shareholders
As mentioned in the first part, LNG is raising its guidance for 2023 and sees the FCF growing at a steady rate. I think LNG has proven itself prioritizing shareholders as they diverted $450 million to the repurchase of shares. If kept up nearly $2 billion would be used in 2023 for it, decreasing the outstanding shares by around 5 - 6%. But what is more impressive is that LNG actually still managed to buy back this significant amount of shares and will use nearly double that capital to pay off long-term debts.
With $2.9 billion in distributable cash flows for the quarter, it left LNG with a lot of freedom to spend it where necessary. The long-term debts now sit around $24 billion which is a lot I have to admit. But I think for 2023, LNG will be able to pay down nearly $2 billion in long-term debts thanks to their cash flows, if they divert the same percentage of FCF as in Q1 of 2023. In fact, the FCF and cash are actually enough to pay off all current liabilities for the company if they so choose to, which further highlights the solid state of the financials of the company. A company can have a large amount of debt, as long as they prove themselves able to handle it without it spilling over into other areas of the business.
Driving the FCF further is the many projects that LNG maintains. The Corpus Christi Stage 3 is developing ahead of schedule and I think that once completed it will be a major beneficiary to the cash flows for the business. But it's not expected to be completed until late 2025, so in the meantime, the focus will be on maintaining what they already have. The outlook for Liquified Natural Gases remains very strong and by 2050 the exports are estimated to grow 152%. In the coming quarters, LNG will need to show themselves able to capture this growth.
Risks
The most prominent risk I see with LNG right now is delays in the projects they have underway. I think a lot of the long-term potential of LNG lies in the completion and leveraging of these projects to help grow FCF.
Besides that, the natural gas market is still experiencing a lot of uncertainty as the sentiment around is quite pessimistic. With uncertainties also come inconsistent volumes and I think that could hurt LNG a fair bit. Estimating FCF potential would be very fiddly if the volumes aren't stable. So far the volumes for LNG are continuing upwards which is comforting.
Financials
Taking a look at the financials LNG has as I mentioned before a large portion of long-term debts on its balance sheet. Nearing $24 billion it's over half the market cap of the company right now. With almost $3 billion in cash that also means LNG has a debt/cash ratio of over 8 right now, which I find quite high. But thankfully LNG has been able to sustain its cash flows and even buy them up to help make the long-term debts less of an issue. Diverting nearly $900 million or 30% of the FCF in Q1 for the reduction of debt makes me confident they won't see any significant challenges in paying it down. This also heavily mitigates the risk of share dilution for the company.
Looking at the inventories of the company it has been decreasing heavily which I find reassuring as it means they keep a tight ship and aren't building up a large inventory which rather than a benefit could quickly turn into a liability if the market demand shifts and volumes sink.
I think it should be said that LNG has a lot of pressure to maintain the margins right now. A common metric I look at is the net debt/EBITDA ratio, which for LNG sits at 2.82 currently. It's still under my threshold of 3, but if there is a slip up I think LNG will need to adjust the amount of capital they are spending to boost the value of shareholders, like dividends and buybacks. If the company becomes too leveraged with debt I think it would justify a very small multiple and that would hurt the long-term outlook I have for them as I see the growth and demand for liquefied natural gases to be the primary tailwind for an investment case here. If LNG becomes overleveraged it would present them with much less opportunity to make significant investments like the Corpus Christi Stage 3.
Valuation & Wrap Up
With an FWD p/e of just under 5 and a decent history of buying back shares and distributing g a dividend one might ask what the downside from here is. For me, the risk is that LNG fails to grow margins efficiently and also experiences a decrease in volumes. That would help justify the low multiple and might even cause the share price to plummet. But it's a risk I think is worth taking as natural gas will continue to be a necessary part of our energy generation. With LNG being so established as well they offer a solid entry opportunity into the industry.
Estimates are rather pessimistic about the outlook for LNG and their earnings, but I remain confident in that they will be able to execute on their raised guidance for the year and grow on that momentum in 2024 as well. With the signing of purchasing agreements, LNG is making sure they will have revenues coming in but are still somewhat at the mercy of what prices the market sets. Right now I see LNG being at a good risk/reward point and will as a result rate them as a buy.
For further details see:
Cheniere Energy: Solid Business Delivering Value To Shareholders