Cheniere Offers Potential Yearly Returns Of 14.5% For The Next 7 Years

Key factors

• Contracted business – predictable cash flows for 18 years
• Free cash flows finally kicking in by 2021 – lowering debt and increasing dividend in the mid-to-late 2020s is the focus
• Risk – competition, natural gas prices, environment, trade issues with China (the key for LNG), high on the cost curve
• U.S. oil and natural gas shale outlook

Cheniere Energy (LNG), with its stock ticker NYSE:LNG, is all about natural gas and more precisely liquefied natural gas, or LNG. A look LNG’s stock price will immediately tell you the sector is volatile and cyclical.

Seth Klarman, one of the value investors I respect the most, founder of the Baupost Group, had Cheniere Energy make up about 25% of his portfolio back in 2014. He sold the position off over the last few years, but now that the stock price is much lower, it is a great time to see whether there is still value within LNG stock. There is always a cycle within the sector, so one has to find the long-term average intrinsic value and then buy low and sell high, or value the likely dividends coming over the next two decades as the investments subdue and free cash flows are finally created.

LNG stock price analysis and ownership structure

Cheniere stock price had some wild rides in the past, going up 40 times from 2010 to 2014, only to drop 70% in 2016, rebound and then drop again during the March 2020 COVID-19 sell-off. Important to note here is that Cheniere was an LNG importer prior to 2010, then switched to exporting as shale production turned the table in the sector. Many thought that it will go bankrupt after 2009, which is the reason for the low stock price around 2010. Few believed the export bet Cheniere was making.

(Cheniere Energy stock price – LNG stock price chart)

However, Cheniere survived, is finishing with its investment cycle and might represent a good investment opportunity. I love highly volatile stocks in sectors with positive tailwinds because the positive long-term demand growth gives me a margin of safety and I can take advantage of the volatility.

The key is to see how strong are the fundamentals and whether it is possible to double down when other investors are selling in panic. Historically for LNG stock, buying low has been a good case and those that were greedy when others were fearful, or better to say, given LNG’s stock price chart above, in panic, have been well-rewarded.

My goal with this LNG stock analysis is to better understand the LNG and natural gas markets, plus to get a good grasp of the risk and reward of investing in Cheniere.

LNG stock analysis content:

• Stock price overview
• Business overview
• Company fundamentals
• Stock valuation
• Stock investment outlook – risk and reward

Cheniere ownership structure

The company’s corporate structure complicates things a bit, as things are not really straightforward.

(Cheniere corporate structure – Source: Cheniere Energy Investor Relations)

Cheniere is listed as a corporation and owns 50.6% of Cheniere Energy Partners, which is a limited partnership where 49.4% is owned by the Blackstone Group.

Cheniere stock – NYSE: LNG

Cheniere Energy Partners L.P. stock – NYSE: CQP

(Cheniere energy corporate structure – Source: LNG Q2 2020 Financial Report)

The most important thing is that CQP owns 100% of Sabine Pass, so that value has to be halved if you own LNG stock or you can own only CQP.

Blackstone has agreed to sell an estimated 42% stake in Cheniere Energy Partners to its own infrastructure affiliate (Blackstone Infrastructure Partners) and Brookfield Infrastructure Partners for $7 billion, in line with the market capitalization, as it is just a related-party transaction.

Perhaps the easiest way to understand the separation between the above, LNG has a market capitalization of $12 billion, which includes 50% of Sabine Pass and 100% of Corpus Christi. Cheniere Energy Partners L.P. has a market capitalization of $17 billion, which should be a result of different taxations and due to the distribution – the market loves dividends, no matter how irrational they might be. CQP’s dividend yield is 7.5%, while LNG stock doesn’t pay a dividend.

Company business overview

Cheniere is a natural gas liquefier from the US.

LNG’s two facilities are in Texas: Sabine Pass and Corpus Christi. Current capacity is 45 mtpa, while new trains should bring it up to 60 mtpa, and then possibly 70 mtpa by 2025.

(Cheniere business overview – Source: Cheniere Investor Presentation)

The foundation of Cheniere’s business model are long-term contracts, where the average remaining contract life is 18 years and 85% of capacity is contracted. In 2020, 95% of its capacity has been presold. However, for the recent Train 3 at Corpus, over two-thirds of the contracted liquefaction capacity was sold to unrated…