Why Cheniere Energy Is Looking Better

| About: Cheniere Energy, (LNG)

Houston-based Cheniere Energy (NYSEMKT:LNG) is, to some people, one of the best value plays in the natural gas sector based on its superior prospects in LNG distribution. In addition, a few key developments have alleviated the funding issues that many investors were concerned about. I've personally become more bullish on the company as well, especially with the latest dip.

On May 15th, it was officially announced that Blackstone (NYSE:BX) bought $2 Billion in equity from Cheniere to aid in the completion of the Sabine Pass LNG terminal in Louisiana, which is set to become the largest receiving terminal in the world by regasification capacity. This the last in a string of deals (which began in October 2011) that have guaranteed funding for the Cheniere's huge project in Sabine Pass.

Cheniere Energy was trading at about $4/share in October 2011, which was largely due to capitulation induced by the 2011 Europe-crash that made the funding of any large projects much more difficult than usual. The combination of better market conditions and the progress in funding for the Sabine Pass project has sent the shares soaring, with the latest peak being just under $19/share. Now that we've had another crash in the market, and now that the stock is at a nice, even $15/share, are we going to see another attempt to knock out $20/share? It's very possible with recent developments.

Based on its last quarterly report (released on May 4th), the company stated that BG (NYSE:BG) has increased the size of the two companies' Sale and Purchase Agreement to a total of 5.5 million tons per annum. Another SPA agreement was made with Korea Gas Corporation (KOGAS) to the tune of 3.5 million tons per annum. When including GAIL Ltd. and Gas Natural Fenosa, the cumulative secured amount of exports from the Sabine Pass terminal approaches 16 million tons per annum. This is encouraging, and will likely prevent the stock from dropping anywhere near its old levels, especially considering the company's now-secured financing.

By 2016, we expect two of the four trains at the Sabine Pass terminal to become operational (with trains 3 and 4 coming online in 2018), which should begin to unlock huge cash flow for Cheniere Energy Partners (NYSEMKT:CQP).

One nagging problem that many bears are picking at is the long-term thinning of Cheniere's margins through a reduction in the price differential in natural gas around the world. The entry of other LNG exporting companies will eventually help the convergence as well, although it will take a very long time. Since it has moved so quickly in developing the Sabine Pass project, Cheniere's window of explosive profits (based on current divisions in natural gas prices) explains why some bulls are pricing the stock as high as $60/share.

As of now, US natural gas is trading at an incredibly low $2.57/MMBtu spot due to a multi-year supply shock, which is a fraction of the price fetched in the EU and Asia. As mentioned, Cheniere is in a prime position to gain from this price gap once Sabine Pass becomes fully operational, since natural gas producers in the US will be eager to sell their huge NG production. The holy grail of any business intermediary is huge, reliable volume and favorable price spreads - something that Cheniere should theoretically have for quite some time if nothing changes.

Since Cheniere has already sealed much of its business with its current 20-year contracts, the profits already exist on paper and create severe undervaluation of LNG stock. This explains why analysts have an average target price of $26/share in just a year from now, and why volume has been so high since October 2011. It also severely diminishes the chance of bankruptcy, since those future profits on the contracts can be used to encourage additional loaning.

A month ago, I wrote a piece on Cheniere that concluded that it was a little overextended. Now that the stock has dropped about 16%, and now that the $2 Billion deal with Blackstone is set in stone, I think the long side has gotten a lot sweeter. I think the next headline out of Europe that sends all the high-beta stocks plummeting may be the ideal opportunity to start a long position in LNG. I also wanted to mention that 11.6% of shares remain short (compared to 12.5% short on April 30th), which is a huge opportunity for a short squeeze if we do test $20/share again.

If you're a yield-lover, you might want to consider just buying shares in Cheniere Energy Partners instead, because it offers an enormous 7.3% yield and generally mimics the price action of LNG. It might prove the better buy if shares stay range-bound until the opening of the Sabine Pass terminal.

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