Cheniere Energy (LNG) Has Fallen 23% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Horizon Kinetics top stock picks. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its investment thesis on Cheniere Energy Inc. (NYSE:LNG) stock. Cheniere Energy Inc. (NYSE:LNG) is a liquefied natural gas company.

In July 2019, Horizon Kinetics had released its Q2 2019 investor letter. Cheniere Energy Inc. (NYSE:LNG) stock has posted a return of -22.7% in the trailing one year period, underperforming the S&P 500 Index which returned 16.0% in the same period. On a year-to-date basis, Cheniere Energy Inc. (NYSE:LNG) stock has fallen by 22.2%.

Let’s take a look at comments made by Horizon Kinetics about Cheniere Energy Inc. (NYSE:LNG) stock in the Q2 2019 investor letter.

“Cheniere Energy was formerly an oil and gas exploration company. Around 1999, it abandoned its oil and gas drilling strategy in favor of building a liquefied natural gas terminal on the Gulf Coast – management at the time believed that the abundance of the natural gas reserves held within the United States could position it as a large net exporter of liquefied natural gas.

Over the course of the next two decades, Cheniere managed to navigate the quite cumbersome regulatory and permitting process. Eventually, permission was granted, and construction of the Sabine Pass facility commenced. Yet, given the immense capital requirements of the export facilities, Cheniere financed construction mostly through debt. Since a number of years were required to complete the construction, during which no operational revenues were produced, the incremental debt continued to accumulate, leaving it as a highly leveraged company.

However, the debt obligations (in particular, the interest payments on the debt) can be predictably managed through the structure of the revenue stream. The company’s shipments are based on contracts that generally extend 20 years. They allow for a fixed annual fee to be paid, in addition to a variable rate that is based on the prevailing Henry Hub natural gas spot price. The fixed payments are essentially a non-refundable deposit paid to Cheniere regardless of the volume shipped. The variable payments, of course, depend on the quantity of LNG shipped to each customer, and are structured such that Cheniere collects a price equal to 115% of the Henry Hub price – meaning, it should never be forced to deliver LNG at below market prices. In essence, there is a highly predictable, programmable element to the company’s forward earnings and cash flow, to a degree rarely encountered.

Currently, Cheniere operates six natural gas liquefaction terminals, or trains (five at its Sabine Pass, Louisiana facility and one at the newly constructed Corpus Christi, Texas facility). Production capacity for 80%-95% of its total shipment volume at most locations already has been secured under contracts lasting at least 20 years. In 2018, the company generated $8 billion in revenues and $1.2 billion of net income.

Given the abundance of natural gas being produced in the United States right now, Cheniere has embarked upon an expansion strategy, which will consist of three additional trains at a new export facility in Corpus Christi, Texas (strategically located near the Permian Basin). Commercialization of two of these trains is expected to occur in 2019, with the total project reaching completion in 2021. Based on current plans, the company will have nine full-size trains operating overall, as well as several smaller trains at the Texas location.

Cheniere is in the middle of a long-term growth expansion that will add significant capacity in coming years (and quite a bit in 2019 alone). It currently has $32 billion in total assets (and $28 billion of debt). One way to roughly estimate the earnings power of this balance sheet is to compare the returns of the oil/gas pipeline companies – a somewhat similar set of regulated energy companies with long-term revenue contracts. Based on a sample of the largest pipeline operators, the after-tax return on assets is in the range of 3%-10%. If Cheniere can only earn a 6% ROA, it would generate over $7/share of net earnings. At a low multiple of 12x, the share price would be $89, which is a significant premium over the current price.

Additionally, only half of the company’s assets are actually operational, while the balance still represents construction-phase projects. Based on income recorded in 2018 relative to the operational assets, the longer-term ROA (when all construction is finished and the assets are mobilized) might be closer to 8%. This would suggest a share price of roughly $120, which is twice the current price.”

Cheniere LNG Tanker Shipping Ship Liquid Natural Gas Vessel Fuel Carrier

Oleksandr Kalinichenko /

Our calculations showed that Cheniere Energy Inc. (NYSE:LNG) isn’t ranked among the 30 most popular stocks among hedge funds.

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Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.