It only took a few weeks for activist investor Carl Icahn to win a couple of board seats at Cheniere Energy (LNG) after disclosing a big stake in the natural-gas producer last month, so why did the hedge-fund macher add to his position?
After all, he already got what he wanted from LNG.
Look no farther than noted short-seller Jim Chanos, who disclosed a big short position in LNG stock last week.
Whether this is a thoughtful chess move on the part of Carl Icahn or just tit for tat, Chanos does make a compelling bear case on LNG stock. But that didn’t stop Icahn from upping his stake in LNG to 9.59% — up from 8.18%.
A first look, LNG doesn’t look like a promising play. Since going public more than 20 years ago, LNG has never — never — turned a profit. Heck, it hasn’t even had operating profits for four years running.
Carl Icahn, of course, sees opportunities where others see garbage, and he’s betting that LNG is about to start pumping out profits along with liquified natural gas.
The company is set to export the first major amounts of LNG by sea as soon as it finishes construction on the necessary facilities. Carl Icahn and others are betting on those exports generating billions of dollars annually.
But Jim Chanos doesn’t see that happening. The founder of Kynikos Associates went on CNBC recently to describe LNG as a “looming disaster.” He may very well have a point.
LNG Stock Is a Bet on Demand
If you thought the supply-demand imbalance in the oil market was bad, the market for natural gas is even worse. Domestic production of natural gas is setting new records very year. The last time natural gas went on this kind of production tear in the early 1970s, it peaked at about 23 million cubic feet. At the end of last year, it topped 27 million cubic feet, and the forecast calls for even more growth.
At the same time, peak U.S. natural gas consumption is forecast to decline year-over-year in 2015 and 2016.
The case for liquid natural gas is even worse, Chanos argues. Demand for LNG isn’t growing. The case for LNG stock hinges on one thing — increased demand. In that way, Carl Icahn is making a pretty simple bet.
LNG stock is down 23% so far this year and 35% from its 52-week high. Returns were dismal even before Chanos announced his short. Given the price action in LNG stock, it looks like the market agrees with him.
That said, it’s far too soon to anoint Chanos the winner. Carl Icahn has his board seats but he has yet to start reshaping the company’s expense structure, cost of capital and executive compensation. More importantly, its Gulf Coast plant isn’t operational yet.
This is a tough call for retail investors. In the short term, LNG stock can bounce around on any word or action from Icahn or Chanos. Longer term, it all depends on demand for natural gas, and two of the world’s best investors have opposite projections.
Faced with such a dilemma, it’s probably best to stay on the sidelines and let the Masters of the Universe duke it out. After all, there are better risk-reward scenarios in the energy sector.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
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