By Renee O'Farrell
Natural gas may be at all-time lows, and that may be affecting the share price of the companies that specialize in that commodity, but that doesn't mean all stocks in this industry are bad bets. In fact, now could be a good time to buy in if you are prepared to hold the company for a couple years.
On May 4, Cheniere Energy Partners (CQP), a subsidiary of Chienere Energy (LNG)- which I will refer to here as "Cheniere Partners- reported a first quarter earnings loss of $56.4 million, or 43 cents a share. In comparison, the company lost $39.8 million or 60 cents a share in the same quarter last year. Cheniere Partners' revenue also fell, going from $79.2 million in the first quarter last year down 11% to $70.5 million this year. "The company blamed its results on liquefied natural gas terminal and pipeline development expenses and lower natural gas marketing and trading expenses," reports the Associated Press. "The quarter included development expenses of 17 cents per share, primarily related to the development of a new gas terminal."
While I am not particularly bullish on Chienere Partners, I am interested in its parent company Cheniere Energy. Here are five reasons why:
Internal Developments: Cheniere Energy has had some important developments so far in 2012. In January 2012, the company repaid the entire outstanding balance of the 2007 Term Loan due May 31, 2012 using a portion of the net proceeds from the public offering of common stock in December 2011. Later on, "in March 2012, [it] sold 24.2 million shares of Cheniere common stock in an underwritten public offering for net cash proceeds of approximately $351.9 million. [It intends] to use the net proceeds from the offering for general corporate purposes, including repayment of indebtedness," according to a recent press release. Then, "in April 2012, Scorpion Capital Partners, L.P. exchanged all $8.4 million of its portion of the 2008 Loans for 1.7 million shares of Cheniere common stock and $1.4 million in accrued interest."
Subsidiary Developments: There are some encouraging developments on subsidiary Cheniere Partners' horizon. "Federal regulators last month approved the construction of Cheniere's Sabine Pass LNG terminal in Cameron Parish, La. It represents the first large-scale natural gas export facility in the U.S., highlighting the rapid shift under way for a country suddenly rich in the natural resource. The company expects it to be operational as early as 2015." According to its quarterly results release, the approval entitles Cheniere Partners' subsidiary Sabine Pass Liquefaction, LLC to develop up to four modular LNG trains. Also, in April 2012, Cheniere Partners engaged eight financial institutions to structure and arrange up to $4 billion of debt facilities. "The proceeds will be used to pay for costs of development and construction of the Liquefaction Project, to fund the acquisition of the Creole Trail Pipeline from Cheniere and for general business purposes." Obviously, Cheniere Energy will benefit from these developments.
Natural Gas Prices: Right now, the U.S. is nearing its natural gas capacity and natural gas prices are at a 10-year low, but that doesn't mean natural gas prices will stay depressed - and Cheniere Partners isn't the only company betting that natural gas prices will go up. Exxon Mobil (XOM) is the largest natural gas producer in the country, yet it is still ramping up its production. In fact, Exxon is planning to invest $37 billion in natural gas production annually for at least the next several years (read our coverage of Exxon here). Already, natural gas is starting to rebound in price.
Pricing: Cheniere Energy is currently trading at $16.55 a share. While analysts are expecting negative earnings for the next couple years, the company is priced impressively low given analyst outlook on its share price. There are those that predict Cheniere Energy will be trading at $26 a share in the next year. In comparison, rival Boardwalk Pipeline Partners (BWP) is trading at $27.74 a share. Analysts give the company a mean one-year target of $29.50. Boardwalk does pay a dividend, and a sizable one at that - $2.13 a share or 7.70% yield - but analysts are recommending Boardwalk as a hold and I agree its outlook is not encouraging.
Hedge Fund Interest: Many top hedge funds are bullish on Cheniere Energy. Hedge funds may not always make the best decisions but they do have loads more resources than your average investor, so when several are buying into a position, it is generally a good thing. During the fourth quarter, Steve Cohen's SAC Capital Advisors upped its position in Cheniere Energy by +439% (check out SAC Capital's top picks). Phill Gross and Robert Atchinson's Adage Capital Management, Dmitry Balyasny's Balyasny Asset Management and Doug Silverman's Senator Investment Group are also bullish about the company. All three initiated new positions in Cheniere Energy during the fourth quarter.