Cheniere Energy Inc. (NYSE:LNG) is thriving while the storms of September are hurting many oil and gas players. Bloomberg New Energy Finance sees exports of Liquified Natural Gas (LNG) rising steadily to Asia and Cheniere, whose stock symbol is also LNG, says its export terminal at Sabine Pass, on the Texas-Louisiana line, is fully operational.
Cheniere’s construction of its export terminal was one of the big stories of the early decade’s oil and gas boom, promising to create vast export markets to satisfy what seemed insatiable demand. But the demand proved satiable, with prices of landed imports falling by half across Europe and Asia since then.
This has had a predictable impact on LNG stock. Shares that traded at about $80 per share just two years ago now fetch just $42. This despite the fact that the company is finally making money, at least on an operating basis. Cheniere Energy had operating income of $241 million for the quarter ending in June, on revenue of $1.241 billion, although it still reported a net loss. Comparisons to last year look like those of an Internet start-up (revenue for the previous June quarter was just $177 million).
Cheniere Energy raised its full year guidance on reporting that number, but progress is slowing as the plant reaches capacity, with revenue for the September quarter estimated at $1.26 billion
Is That All There Is?
Skeptics are asking if there will ever be enough profit to cover the huge debt created by the terminal. At the end of June Cheniere Energy said it had $24.654 billion of long term debt on $26.660 billion in assets. But that ratio, too, is due to improve with continuing operations. The real question is whether Cheniere Energy can keep getting margins sufficient to beat its running costs for freezing natural gas and taking it across oceans.
Success would be important for all natural gas producers, with Henry Hub spot prices still hovering around $3 per mcf, compared with $6 per mcf at the height of the boom in 2014. Back then, however, exporters were making $10 per mcf on gas landed in Japan. Now the margin is closer to $3 per mcf. Thus, the depressed price of Cheniere stock.
But the Bloomberg report shows better times may be ahead for exporters like LNG. Of the 14 analysts now following the stock 11 have it on their buy lists. Most are expecting it to finally report positive net income for 2018, with a mean estimate of 96 cents per share of net income, or about $225 million.
Cheniere Energy: Weighing the Risks
There are, of course, risks to LNG stock. While the rate of debt accumulation is slowing, Cheniere is still borrowing money, hoping to complete a second terminal in Corpus Christi, now more than half complete. Once that is done it could provide the same kick to revenue and earnings Cheniere saw at Sabine Pass. In any case, it’s a doubling down on the gas export thesis.
The assumption is that U.S. supply will remain strong an Asian and European margins remain high. A lower dollar helps here, cutting the price of gas in those currencies. But supplies are also subject to change, as fracked wells deplete far more quickly than conventional wells, and fracking can be done in many places.
China, one of Cheniere’s primary export markets, is undergoing its own fracking boom right now. Much of that is focused on the mountains of If China’s natural gas boom peters out, Cheniere stock could blow past its past highs. But that’s not certain.
The Bottom Line
Cheniere Energy stock is still a riskier play than most analysts believe. As fracking becomes a global phenomenon margins could be pressed. But if the global natural gas play, driven by a desire to reduce greenhouse gas production, continues at its present pace, today’s Cheniere investors could be big winners.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in LNG.