The Long Case for Cheniere Energy

Cheniere Energy (LNG) has had a spotty record of expectations versus performance over the past few years. I believe this liquefied natural gas terminal, exploration and transmission company operating primarily in the Deep South and Gulf of Mexico is ready to lurch higher, maybe even doubling it's stock price into 2010. My opinion runs contrary to most analysts. In fact, the stock has performed poorly for months, down from $43.60 per share in July to a recent quote of $28.75.

Why am I optimistic? Global liquefaction growth is poised for acceleration. Global liquefied natural gas supply growth over the next five years will likely reach 15% annually (to hopefully match demand) which is double the growth rate of the past five years. Environmental Greens love liquefied natural gas as an alternative energy source that can stand on its own without a subsidy.

US imports of liquefied natural gas could triple by 2010 and LNG has a large and well-placed storage capacity to hold this commodity during seasonal price adjustments (more profit for Cheniere Energy). As liquefied natural gas demand is rising quickly internationally, the era of this gas product being cheap is over, based upon elementary supply and demand studies. Cheniere is poised to profit from this, as their large expenditure on infrastructure in all areas of receiving and transporting liquefied natural gas is close to completion. Asia and Europe have liquefied natural gas challenges that are not being addressed - Asia has little storage capacity when viewed on both an absolute basis and as a percentage of demand, and Europe's liquefied natural gas reservoir is depleted and poorly managed (Russia's output from Gazprom was actually down last year) and the EU market structure for the commodity is overly regulated, discouraging infrastructure and storage initiatives,thus Cheniere Energy will store the product and market it to the EU and Asia at a profit.

Seasonally, Cheniere has the ability to store the gas and sell it at high price points worldwide and in the US, generally in the first and fourth quarter, as the commodity is driven by heating needs (except in Japan, where it is steady year around). In effect, Cheniere acts as a sponge, absorbing seasonally high output during periods of low demand and then squeezing it out at peak.

In addition to developing, constructing owning and operating a network of three large liquefied natural gas receiving terminals, Cheniere Energy owns natural gas pipelines, a business to market liquefied natural gas company and is engaged in the Gulf of Mexico prospecting for oil and gas.

On Monday, LNG announced that it is going to look for ways to enhance shareholder value, which will likely include bringing in partners to take a stake in one or more of its terminals and absorb some operating costs as the large infrastructure expenditures are controlled. I view this as a positive, not dilutive, scheme. Hopefully, LNG will follow through on this promise.

I owned and sold LNG a while ago at a profit. I am looking at this stock to purchase again with a longer time frame in mind. For a variety of reasons, you may wish to examine this company as an addition to your alternative energy or pure energy portions of your speculative portfolio.

Full Disclosure: The author does not presently own Cheniere Energy.

Comments

[TAS]

LNG announced lower than expected earnings today. No surprise coming from Cheniere at this stage. The long term premise remains valid.

[ProTrader]

This is a must buy while its cheap. Looks like everything Cheniere has been saying over the years is coming true.

[Polo19]

How about 18$ still like it?

[TAS]

Yes. But I still have not added it to my Speculative Portfolio. Lots of opportunities elsewhere to date.

[User 128410]

Does your long view take into consideration credit rating agency GimmeCredit's note of warning about Cheniere, saying the Energy Information Administration prediction of a 24 percent cut in 2008 LNG imports and forecasts that regasification capacity will grow to three times import levels by 2010 is troubling, particularly for stockholders?

blogs.chron.com/newswa...

[TAS]

The currect price of this stock speaks for itself. The article was a long view, certainly longer than 2010. That said,the currect collapse in share price was a surprise to me. A big surprise. My bad for now!

[your_avid_investor]

$5 is a great entry point as a speculative play for this kind of stock. The only downside from here on forth is the company's ability to stay solvent. Long term debt maturity is not until 2010 and then again 2016. Any earnings considerations for this company would be exclusively to the upside (see above article). It is difficult to imagine that at the current price ($5) any earnings consideration for this company can be factored into a further downward move. This makes for a great and simplified speculative play: If the company stays solvent for the next year or two, the stock will move higher. This is a great alternative energy play, and a great speculative play, offered at a bargain price. I will buy this stock all the way down to $3.00. Any stock move lower than that, I would assume insolvency, and probably liquidate my position at a loss.

[your_avid_investor]

One additional note to keep in mind. Souki Charif, current CEO of LNG, sold nearly 3 million company shares between April 15 and April 23 this year, netting well over $30 million on the sale. This type of insider trading undoubtedly contributes to the extremely negative outlook for the company as well as the depressed stock price. In addition to the awful balance sheet (see cash position, long term debt, negative equity, etc.) recently reported insider trading calls for stronger discipline and extreme caution when approaching this speculative play.

[your_avid_investor]

Stock is currently approaching $3. It amazes me that an alternative energy stock such as LNG is trading as if it is insolvent. Maybe investors are trading down the stock as a signal that this stock will not survive the credit crises. What amazes me even more is that brokerage and financial stocks are trading up (as the did in the last few days) when we are in the midst of a severe credit crunch or revaluation of credit worth. What can possibly lie in the future earning power of theses financials in comparison to that of a struggling alternative energy company. This kind of irrationality in the markets makes me hold on to my LNG position and even consider a further downward move by LNG as an even greater buying opportunity.