Is Cheniere Energy Overheating Again?

Dec. 9.13 | About: Cheniere Energy, (LNG)

Back at the end of March, Stone Fox Capital suggested that Cheniere Energy (NYSEMKT:LNG) was overheating and investors should be careful buying the stock. The stock quickly surged above $27.50 with numerous technical indicators flashing an over bought condition. The stock spent the next five months fractionally above or below that level.

The company is part of a group of high profile stocks attempting to benefit from low natural gas prices. The group includes the likes of Clean Energy (NASDAQ:CLNE) and Westport Innovations (NASDAQ:WPRT) that have had drastically different stock results over the last couple of years with Cheniere dramatically outperforming the group. Ironically neither stock has actually benefited from the advantageous situation yet due to the lengthy period it has taken to complete infrastructure projects.

Cheniere is developing a liquefaction project at the Sabine Pass LNG terminal in LA via the 60% owned subsidiary Cheniere Energy Partners (NYSEMKT:CQP) and facilities near Corpus Christi to allow for the export of LNG. The stock has recently surged to nearly $45 and could be reaching another overheated situation with the stock surging nearly 60% in the last three months and 200% in the last year. Does Cheniere offer any value with the completion of the major liquefaction projects still years out?

Indonesia Deal

The primary reason for the surging stock price this past week was the deal with Pertamina in Indonesia for exporting LNG from the Corpus Christi project. The main excitement for investors was the first deal outside of the Sabine Pass and the attractive pricing. Investors though need to keep calm considering the expected completion date for the Corpus Christi project is still over four years away.

The long-term fixed contracts do provide investors a level of comfort that doesn't exist in investing with Westport Innovations that must still sell new engines or Clean Energy that has long-term supply contracts for CNG or LNG, but no where near the 20 year length of Cheniere.

This particular deal involves supplying Pertamina, an Indonesian state-owned energy company, with 0.8 million tones per annum (mtpa). The purchase price for LNG will be on a FOB basis indexed to the monthly Henry Hub price plus a fixed component. The market was excited due to the higher $3.50/MMBtu compared to previous deals at a fixed rate of $3.00/MMBtu. On the flip side though, the variable component was only an 11.5% premium on any natural gas it liquefies and ships, down from the standard 15% in previous contracts.

One major point investors appear to have missed is that the size of the contract was significantly lower than previous deals. The prior smallest deal was for 1.75 mtpa with Centrica. Cheniere still requires substantial deals to contract the 13.5 mtpa capacity for the three trains at the Corpus Christi Liquefaction Project. Even more interesting was the note that the contract could end up filling the Train 6 production at the Sabine Pass leaving the Corpus Christi project with zero customers. See below table with scheduled target dates for both LNG facilities and related commercial agreements:

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Slipping Price Advantage

The biggest concern with exporting LNG outside of regulatory issues is the net difference or savings that customers can obtain from the low cost domestic supplies and the high cost international rates. Even with the initial exports for Cheniere nearly two years away, the net difference has dropped dramatically in the last year. According to the slide below from an October presentation, the net difference per MMBtu for Asia has dropped from $5.55 a year ago to only $3.90 this year. Even more concerning is that Europe has plunged to only $2.90 from $4.30 last year. Part of the culprit is a $1 increase in natural gas costs at the Henry Hub, but the other difference is including the 15% LNG cost and liquefaction fee that increased $0.50 over last year.

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The concerning part to LNG buyers and investors should be the dramatic drop in difference in prices. Investors also need to keep an eye on the international prices that could plunge once the US starts exporting LNG. As the US exports natural gas, domestic prices could rise completely eliminating the difference. With take or pay deals, Cheniere might have an ideal situation regardless of any price swings that could make exporting LNG less feasible in the future.

Massive Gains

The below chart highlights the vast discrepancy between the different domestic stocks expected to take advantage of the vast domestic supplies of natural gas. Over the last couple of years, Cheniere Energy has seen gains of nearly 400% while Clean Energy and Westport Innovations can't seem to gain any traction.

LNG Total Return Price Chart

LNG Total Return Price data by YCharts


Due to the lengthy period it has taken for Cheniere, Clean Energy, and Westport to complete projects to take advantage of lower domestic natural gas prices, neither company is generating any profits. Cheniere has soared due to signing numerous 20-year LNG supply agreements, but the high costs of liquefaction and shipping could eventually unravel the benefits of exporting in favor of domestic uses. In this light, investors might want to book profits in Cheniere by year-end and transfer those gains into the underperforming stocks of Clean Energy and Westport Innovations.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLNE over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.