Don't Ignore Cheniere's Red Flags

| About: Cheniere Energy, (LNG)

Summary

Cheniere Energy posted a huge loss last quarter, which increased from last year, as the company’s interest expenses shot up once again due to more debt.

Cheniere has recently taken on more debt that will increase the pressure on its bottom line going forward, especially as the company will find it difficult to sell LNG abroad.

The price of LNG in Europe has dropped around 40% in the past year due to Russia’s increasing presence in the market.

Meanwhile, Asian LNG prices have declined to 7-year lows on the back of increasing production in Australia, a trend that will continue due to new projects by Chevron in Australia.

Cheniere will find it difficult to crack the Asian and European LNG markets since its landed price of LNG in these markets is way higher than the prevailing spot prices.

Until the end of April, Cheniere Energy (NYSEMKT:LNG) was enjoying strong momentum on the stock market, but this month, the stock has started losing momentum. So far this month, Cheniere shares have declined to the tune of almost 9%, which is not surprising considering that the company missed analysts' estimates on both top and bottom lines a couple of weeks ago for the first quarter.

In fact, Cheniere fell deep into the red with a loss of $1.41 per share, exceeding the analyst estimate by $0.98 per share. This was despite the fact that Cheniere has started its LNG exports from the U.S. to Latin America, Europe, and Asia. In my opinion, the trend of weak results at Cheniere Energy will continue in the future, which is why it will be a good idea for investors to stay away from the stock. Let's take a closer look.

A weak balance sheet and challenging financials

In the recently-reported quarter, Cheniere's loss increased tremendously on a year-over-year basis. The company posted a net loss of $320.8 million, an increase of close to 20% as against last year. The increase in Cheniere's net loss was a result of an increase in the company's interest expenses and higher derivative losses.

In fact, Cheniere's interest outlay increased more than 28% year-over-year to $76 million, while its derivative losses shot up to $180.9 million from $126.7 million last year. For a company that generated just $65.5 million in revenue last quarter, these are huge expenses. Now, it is not surprising to see why Cheniere saw a substantial increase in its interest expenses.

Last year, the company had total long-term debt of $14.9 billion, which increased to $16.3 billion last quarter. Thus, as Cheniere has taken on more debt to finance its terminal construction, its interest expenses have shot up as well. Looking ahead, Cheniere's debt is set to increase further as the company recently announced a $1.25 billion senior secured note offering that's due in 2024 to finance the Corpus Christi project. This offering has been made at an interest rate of 7% per annum, which means that Cheniere's interest expenses will go up by over $21 million on a quarterly basis.

Moreover, after this debt issue, Cheniere will see a further jump in its debt-equity ratio, which is already at alarming levels of 15.29. What's more, despite starting LNG shipments last quarter, Cheniere's LNG revenue did not increase much. In fact, the company's overall LNG revenue went up to just $2.7 million last quarter as compared to $662,000 in the year-ago period. Thus, the increase in the company's interest expense outpaced the growth in its LNG revenue.

Thus, as Cheniere has loaded its balance sheet with debt, the company will continue to see an increase in its expenses. Moreover, it is likely that Cheniere will find it difficult to find buyers for its LNG since the market's conditions have deteriorated, which make it unfeasible for foreign buyers to purchase LNG from Cheniere. Let's see why.

LNG costs are already low in export markets

The price of LNG in export markets that Cheniere is targeting are already on the decline. For instance, in the U.K., the price of natural gas has dropped over 37% in the last year on the back of increasing production from Russia and Norway. As far as the European Union is concerned, the natural gas import price has crashed 44% from last year to $4.13/MMbtu. Looking ahead, it won't be surprising if the price of natural gas in Europe continues to drop as Russia's natural gas is increasingly finding its way into the EU.

For instance, last year, Germany's natural gas purchase from Russia increased by 6 billion cubic meters. Additionally, so far this year, Germany has increased its Russian gas imports by 44%. On the other hand, Italy has increased Russian gas purchases by 43%, while France and Russia have increased imports by 73% and 50%, respectively.

What's more, Russian energy giant Gazprom is capable of increasing its gas volumes into the European market in order to counter any weakness arising out of lower price. On the other hand, the prices of LNG in Asia have also dropped rapidly and are currently near 7-year lows. This month, the spot price of LNG in Asia is down to $4.24/MMBtu.

Going forward, LNG prices in Asia will decline further due to increasing production from Australia. For instance, last month, Chevron (NYSE:CVX) began its LNG shipments from the Gorgon LNG project, which has a maximum annual capacity of 15.6 mtpa. As a result, the price of LNG in Asia will also continue to drop further, making it unfeasible for Cheniere to export its LNG into this market that makes up for 70% of global LNG demand.

This is because despite being the cheapest LNG exporter from the Gulf Coast with a landed price of $7.50-$8.50/MMbtu, its LNG is still expensive when compared to the prevalent prices in Asia and Europe.

Conclusion

Cheniere Energy has taken a lot of debt to build its export infrastructure, but the bad news is that the end market is not in the best shape. The LNG markets are oversupplied, leading to a drop in prices. As a result, Cheniere Energy will find it difficult to find export markets for LNG, and this will create more pressure on the company's financials due to a burgeoning debt. So, in my opinion, it will be a smart idea for investors to stay away from Cheniere given the challenges that it faces going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.