LNG is Cheniere’s ticker so I shall use LNG for the rest of this article to refer to the product and use the company name Cheniere to avoid mind twisting talk such as LNG makes LNG.
For the most part we are bombarded daily with weather forecasts for Boston and its need for natgas for heating alone and little is said about the enormous, growing demand for its need in LNG form for many applications there and elsewhere. That is reflected in Henry Hub prices rarely staying above $3 per million BTUs in recent years as this Macrotrends chart shows.
It is at that $3 point as I write while spot prices recently for LNG in Asia hit ten times that due to growing demand. After hitting a record $32.50/MMBtu on Jan. 13, less than nine months after plunging to a record low of $1.825/MMBtu, the Platts JKM, the benchmark price for spot-delivered LNG to Northeast Asia, has moderated substantially as the market rolled to March. Platts assessed the JKM at $8.738/MMBtu on Feb. 1. That follows a collapse in 2020 when cargoes were cancelled and almost a panic recently to catch up.
Energy consultancy Wood Mackenzie says the LNG price spike would have long-term ramifications for the industry, from boosting the appetite to invest in future projects to making utilities think long and hard about how to source cargoes long-term.
They estimate that LNG has risen from 11 per cent of global gas supplies in 2010 to 15 per cent today (and it forecasts it will reach more than 20 per cent by 2040).
S&P Global Platts recently said that LNG is one of the world’s fastest growing fuel sources as large Asian economies see it as a route to cutting their reliance on more highly polluting coal at a time when climate change has risen up the political agenda. Sensibly and fortunately the linear, siloed group thinking that much of the western world is trapped in has not yet taken hold with their attitude to, and demand for, natgas. The price spreads are likely to continue to and that will benefit US exporters.
I shall cover demand later but first will mention more about Cheniere Energy (NYSE:LNG).
Cheniere Energy
Today Cheniere is the largest US - and one of the world’s largest - exporters of LNG.
The name will be well known to many and it certainly is to me as it has been my best ever stock market investment. I discovered it at a time when its plans to regassify LNG imported to the US were blown asunder by the shale gas revolution at home. That would have blown asunder the lives and aspirations of most business founders but Cheniere's totally reversed his plans and decided to build LNG for export facilities on the same site instead. I bought in then at $3.42 and took profits later at $40 and $70 as others jumped in.
For various reasons - the virus panic being the most recent - the price rarely went above $55 over the past 5 years but has jumped a bit to around $65 in recent weeks along with the herd rotation into commodities generally. In my view it is headed higher and will stay higher barring some unforeseen event.
Cheniere owns and operates liquefaction projects through its two segments: terminal business and natural gas marketing. It has a combined terminal pipeline length of 117 miles across the U.S. Cheniere is currently planning to expand its marketing division to Singapore, Chile, and the U.K.
The company’s operating income has increased 75.1% year-over-year to $2.36 billion for the nine months ended September 30, 2020, due primarily to increased total margins. Its EBITDA rose 48.5% year-over-year to $2.91 billion over the same period owing to increased revenues from cargoes delivered to customers and to slightly increased margins per MMBtu of LNG delivered and recognized in income. Its net income for the nine months period was $109 million, 137.5% higher than the prior year value.
Analysts expect Cheniere's revenues to rise 15.4% year-over-year to $10.75 billion for fiscal 2021 ended December 31. A consensus EPS estimate of $3.45 for the current year represents a 92.7% improvement from the year-ago value. The company has an impressive earnings surprise history; it beat the Street’s EPS estimates in three of the trailing four quarters.
Cheniere’s POWR Ratings reflect this promising outlook. It has an overall rating of Buy with an A for Trade Grade and Peer Grade, and a B for Buy & Hold Grade. It is currently ranked #10 of 113 stocks in the same industry.
The company website tells the whole about the company including its history.
I want to talk more about the future and the opportunity.
Cheniere has a Corpus Christi terminal with 15 million tonnes annual capacity (Mtpa). It plans to add 10Mtpa in 2021.
Cheniere also has 30Mtpa at Sabine Pass, Louisiana (photo) with five trains each with 0.7Bcf/d. It plans to add 0.7Bcf/d by 2023.
Source: Cheniere Energy
Cheniere has take-or-pay contracts for virtually all the capacity. The rest is available for sale on spot markets and those high prices in Asia will add to profits plus some of that additional output will be reserved for spot sales.
More now on demand and...
The opportunity for people currently powered by pollution
Trucks: Growing fleets of heavy trucks and buses are among many new sources in need of LNG worldwide because existing diesel powered ones are very polluting.
Photo: Volvo
I wrote more on that in the US in this recent article on CLNE. That article had 20,000 page views which shows this is a "time of need" for investors too.
Europe’s largest truck makers - some of those also own top US truck makers - have pledged to stop selling diesel powered vehicles by 2040 by transitioning to cleaner fuels.
Shipping: IMO2020 came into force on January 1, 2020, requiring ships to use cleaner fuels and many are turning to LNG. CMA CGM is the world's 4th largest container ship company and they expect to have 20 LNG-powered ships by 2022, including smaller vessels run by its Containerships subsidiary in northern Europe. Carnival Lines - the world's largest cruise ship company - is changing to LNG powered ships.
Siem Car Carriers’ (SCC’s) Aristotle, the second of two LNG-fueled PCTC (pure car, truck carrier) ships in the SCC fleet (the other is the Confucius), is on her maiden voyage from Emden, Germany to North America. The ship’s first bunkering took on more than 800MT of LNG fuel. Nearly 4800 cars were loaded, bound for Canada, the US and Mexico. The Aristotle operates exclusively for Volkswagen Group.
Ship&Bunker estimates that the 600 ships expected to use LNG would mean a demand of over 3 million tons per year.
And many ports are preparing to welcome them including Florida as it transitions to natgas.
Countries need LNG too...
Taiwan: It’s "time of need" is also political! Taiwan’s state-owned CPC Corp began recently receiving liquefied natural gas (LNG) cargoes from Cheniere under a 25 year deal signed with the U.S. company in 2018, and will get around 30 shipments annually until 2045. Taiwan’s government has viewed the deal as an important part of Taiwan’s efforts to reduce its yawning trade surplus with the United States, which has become a source of tension with Washington!
Korea plans to boost LNG-fired power plant capacity by 43% over the next 13 years while retiring 30 ageing coal plans and converting 24 of those plants to natural gas. The state run utility, Kogas, currently buys 70% of its LNG through long term contracts and its growing need means the rest is being bought in the spot market; in their own words “regardless of price” given that government policy to reduce coal power.
Vietnam has given the green light to AES Corp. (NYSE:AES) to go forward with a project to develop a local $2.8B LNG import terminal and power plant.
Much of the LNG will be imported from the U.S., which wants to narrow its trade deficit with Vietnam. That widened to $44.3B in the first nine months of this year from $33.96B in the same period of 2019.
Delta Offshore Energy has formalised a plan for a $3B agreement with Bechtel Corp., General Electric (NYSE:GE) and McDermott (OTCPK:MDRIQ) for the development of a 3.2-gigawatt LNG power plant in the Bac Lieu province.
Exxon Mobil (XOM -1.8%) and top Japan power generator JERA say they will build a power station and import facilities for the liquefied natural gas to fuel it in the Vietnamese city of Haiphong.
JERA, which is owned by Tokyo Electric Power and Chubu Electric Power, is the world's largest individual buyer of LNG.
Japan has triggered grid stability warnings as power prices rocketed to record highs on LNG fuel shortages and cold weather. Japan is one of the world’s largest importers of LNG. Since the Fukushima disaster nearly ten years ago Japan has not used much nuclear power and only has three out of 33 reactors in operation. It has few domestic energy supplies and is working hard to transition to hydrogen but that will take many years and so imported LNG will be required for many years to come.
India: The most recent air pollution data from the WHO gave India the dubious distinction of having the world's 14 most polluted cities.
In 2019 in New Delhi, when the air quality index hit 1,000 — it should be below 50 — Delhi state chief minister Arvind Kejriwal said the capital had “turned into a gas chamber”. Much of that is caused by coal fired power stations - as is the case generally in India and as power demand increases so does the need for imported LNG to replace coal. High spot prices will add urgency to those talks.
China and Aristotle: China is likely to overtake the US as the world’s largest economy in 2028 according to many estimates, including this one by the Japan Times.
It also relies heavily on coal fired electricity to power its growth. China is one of the oldest civilisations and I do not know what Confucius would have said but more recently Aristotle told us from ancient Athens that “contradictions cannot co-exist”.
The current Chinese premier, President Xi Jinping, has a goal for China to reach net zero carbon emissions by 2060 while all around him new coal fired power stations are being built! China added 38.4 GW of new coal power capacity last year, more than 3x the capacity built elsewhere around the world. Contradictions co-existing?
China Photo: Getty
China’s recovery has been led by the state-dominated industrial sector. Construction demand has spurred a rise in steel, aluminium and cement production of 13, 11 and 10 per cent, respectively, in October, 2020, compared with the same period in 2019. Those sectors are energy intensive thus China accounted for 53 per cent of global coal-generated power in 2020. Use of coal in the rest of the world is estimated to fall by 12 per cent.
At the same time, through January-November, China imported 59.54 million mt of LNG, up 10.6% year on year, the data showed. LNG accounted for 65.8% of the country's total natural gas imports in the first 11 months of 2020, compared with 61.8% in January-November 2019. That was according to Platts calculations based on customs data in Dec 28, 2020.
Some of that is used to fuel vehicles and China now has around 20% of the world’s total of those. I cannot find current figures but from 2000 to 2017, the population of natural gas vehicles (NGVs) in China increased from 6000 to 6.08 million. This rapid growth of NGVs in China was primarily driven by environmental considerations and associated economic incentives.
I doubt President Xi will try to prove Aristotle wrong and a huge conversion of those coal fired power stations to natgas could be the easiest solution for those in coming years, meaning a large increase in imported LNG and more opportunities for Cheniere since China too has a large trade deficit with the US it must reduce.
Similar demand situations can be seen in large European countries like Germany and the UK that are charging ahead with the introduction of electric cars but have insufficient power to recharge them and much of that is coal fired.
That charge leads me to the trap we face with...
The Risks
Siloed thinking is the biggest threat facing Cheniere and LNG generally
I doubt it will appease siloed linear thinking environmental protectors of today but the potential to decarbonise natural gas through CCS - and future use of its hydrogen via existing gas pipeline infrastructure - is also a driver of certainty for natural gas and LNG.
Instead they lump natgas/LNG together with other fossil fuels and all are bad in their minds. A Rethink needed! Hopefully the Biden administration that has climate protection high on its agenda will be lateral thinkers and recognise that the benefits gained from US natgas and LNG far outweigh the negatives. This appointment suggests he is; his pick for energy secretary, Jennifer Granholm, issued resounding support of LNG exports as having "an important role to play" in reducing global GHG emissions...
Fossil fuel facts and consequences
Coal alone. The death rate from coal energy was one of the highest in the world at an estimated 100,000 deaths per terawatt hour, in terms of human and environmental costs. This death rate is based on mining extraction operations as well as the actual use of energy. Air pollution from coal-fired plants has also been of growing concern as it has been linked to asthma, cancer, and heart disease. Burning coal can release toxic airborne pollutants such as mercury, sulfur dioxide, nitrogen oxides, and particulate matter.
Death rates from all forms of energy show natgas even below biomass that environmentalist are promoting!
A bit of lateral thinking would add up the cost of those deaths and ill health to the misery they cause in people’s lives, the strain on healthcare systems and the economic cost. That would make natgas/LNG look clean and very cheap!
A balanced article by Markit on LNG’s Carbon Footprint that tells us LNG is here to stay.
That means Cheniere is here to stay too.
There are some other threats...
Perhaps the biggest internal one is Cheniere’s debt mountain. As of September 30, 2020, Cheniere Energy had $29.963 billion in net debt compared to only $2.347 billion in shareholders’ equity. This gives the company a net debt-to-equity ratio of 12.77. However, Cheniere has take-or-pay contracts for virtually all the capacity. They can simply scale back production and there is very little financial impact. Evidence of this can be seen following the collapse in demand in Asia. Cheniere earned $458 million from cancellation fees paid in April-June for third-quarter cargoes. It earned $53 million in January-March from second-quarter cancelations. I have read no reports of problems servicing the debt and, no doubt, take or pay saved Cheniere during a time that might otherwise have been treacherous.
Externally the biggest current threat is lack of shipping. There has been a panic in recent weeks in Asia to make up for 2020’s cancelled cargoes.
Competitors?
Qatar and Australia are huge LNG exporters but Australia, in particular, has pricing problems due to massive building cost overruns on its LNG export facilities that means few new ones will be built. Other facilities are being built in the US and various parts of the world but they will not be sufficient to meet demand growth so oversupply will not be a threat...
Oversupply?
I cannot find a current figure for actual total worldwide demand but see no short term oversupply threat given this 2018 forecast...
LNG Supply and Demand - Research Gate
The US trade deficit
In 2019, the U.S. trade deficit was $576.9 billion, according to the U.S. Bureau of Economic Analysis (BEA). The U.S. imported $3.1 trillion of goods and services while exporting $2.5 trillion. LNG is one of the US’s fastest growing exports. Given that huge deficit - and too few other things Made in the US helping to reduce it - I doubt the new US administration will want to reverse this. It also employs a lot of people at home on good pay.
Product Prices
Those low Henry Hub prices give the natgas drillers a hard time but the best - such as Antero Resources (AR) - have managed those well and they keep US LNG exports prices lower than those from high cost producers such as Australia.
The Rewards
Photo: Cheniere
Cheniere is in the right place at the right time to benefit from those massive opportunities that run from now and for many years to come. That means....
Higher stock prices
Today Cheniere's share price is approx. $64. In 2014 it hit a high of around $80. That was before they had even started shipping LNG!
If I could get price forecasts right, I would be slightly wealthier now than I am but given the combination of demand, Cheniere’s readiness to satisfy some of that at US low prices and its new production facilities coming on stream during the next two years as world demand continues to increase, I see no reason why $80 will not be easily achievable in coming months.
The year end report - due on Feb 24 - should tell us how close we are to that.
