Volatility in Cheniere Energy Continues

Jun. 1.11 | About: Cheniere Energy, (LNG)

The wild ride at Cheniere Energy (NYSEMKT:LNG) continued Tuesday night and into Wednesday, as the company announced an equity offering of 8.7 million shares. Underwriters have the option to sell an additional 1.3 million shares to cover any over allotments, and funds raised will be for general corporate purposes. Wednesday morning the size of the offering was raised to 11 million shares, priced at $10.35. Shares have been moving heavily all year on various news stories from debt problems to natural gas demand to approval to export natural gas from Louisiana. Now with shares in LNG falling 9% on news of the equity offering, investors should take a minute to look back on the year the stock has already had.

  • Shares started rallying from below $3 in mid-October, as the company continued to position itself to be allowed to export liquefied natural gas [LNG] from its Sabine Pass LNG terminal. Currently, the facility is only used to import LNG, and the terminal would need to be expanded in order to export. The company could use export commitments to help secure funding for the expansion.
  • On March 8, Cheniere plummets after it emerges that Centerbridge Partners, a hedge fund, accuses Sabine Pass of defaulting on terms of its debt. Cheniere denies the claims, and has filed suit against Centerbridge. Shares, which had been above $10 to start March, close at $6.25. A few days later, the disaster in Japan raises the prospects of an expansion of global LNG demand. Shares are above $8 a week after the crisis begins.
  • The Energy Department gave Cheniere approval on May 20th to export LNG from Sabine Pass. Cheniere will have to build an export terminal, estimated to cost nearly $6 billion , and Cheniere estimates to begin exports by 2015. Shares spiked 30%, back over $10 on the news.

So where does this leave Cheniere now? The equity offering will raise more money than the company lost in 2010, but not nearly enough to cover the expansion of Sabine Pass. While it makes sense for the company to take advantage of a strong stock price to raise capital, the company's large losses make more substantial equity offerings between now and 2015 likely. The company is now banking on natural gas supplies remaining tight in other countries and prices remaining low in the US for the foreseeable future, after betting on the opposite scenario when it built the import terminal at Sabine Pass. The company's business prospects are tied to the difference between US and world prices over the coming decades, a hard to predict spread the firm has already gotten wrong once. Should the techniques used in US drilling unlock new reserves of natural gas in other nations over the next decade, Cheniere could be left with little demand for its multibillion dollar Sabine Pass facility.

With profitability still at least 5 years away, and a multibillion dollar construction project being planned, Cheniere is a very speculative company. The wild swings in the share price makes shares in LNG an interesting trading vehicle, but as a long term investment, investors can find better names. The price of natural gas has been historically hard to predict, and should prices fall to US levels in the rest of the world via hydraulic fracturing, Cheniere's terminals would be of little use. Cheniere is an interesting name, but there is too much time between now and the prospects of profitability to justify jumping in here. After a huge run from $3 in October to $11 today, the quick money has been made in Cheniere.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.