The United States is the world’s top producer of natural gas (NGU24) by far, thanks to the shale revolution of the past 20 years.
Demand for gas globally is strong, and the importance of LNG (liquefied natural gas) is growing particularly fast. In its 2024 energy outlook, BP PLC (BP) said that LNG demand had risen at eight times the rate of natural gas consumption in the past five years. The soaring demand was driven by the fast-growing Asian economies, and disruptions to Russian LNG pipeline deliveries.
BP predicts that the volume of LNG traded annually will go from 600 billion cubic meters (bcm) to 800bcm by 2030, and reach 950bcm by 2040.
One of the primary beneficiaries of this trend is Cheniere Energy (LNG). It is the fourth-largest LNG exporter in the world on its own, behind only the countries of Qatar, Australia, and Indonesia, according to an analysis by Bernstein Research.
Let’s take a closer look at the company.
Cheniere Energy: The LNG Giant
Cheniere's operations include approximately 45 million tons per annum (MTA) of liquefaction capacity across two major sites located on the U.S. Gulf Coast – Corpus Christi and Sabine Pass.
With nine liquefaction trains, the company is focused on optimizing and expanding these existing assets. A project to add an extra 10 million tons is in the works, which is set for commissioning at the end of 2024.
The company’s operations consist of buying natural gas from the North American market, processing it into LNG, and giving customers the option to load the end product onto their vessels at its terminals. It can also deliver the LNG to regasification facilities around the world.
Unlike some companies fully exposed to the floating spot price for LNG, Cheniere is largely protected from the worst swings in the market.
That’s because the company sells about 90% of its LNG volume under long-term “take-or-pay” style contracts for which it charges a fixed liquefaction fee. This creates a stable EBITDA that is reliable, even in times of oversupply. It sells the remaining volumes at spot rates, which can lead to some volatility in profits.
When international gas prices were high in 2022 and 2023, Cheniere’s excess earnings allowed the company to accelerate its debt paydown. It put its huge cash flow from 2022 and 2023 to good use - investing in new capacity, increasing returns to shareholders, and knocking around $9 billion off its net debt pile. This advanced the company's efforts toward an investment grade rating on its debt.
Cheniere’s business model has made it a steady grower in recent years. Its take-or-pay EBITDA went from under $3 billion in 2019 to over $5 billion last year, and will climb over $7 billion by 2028, according to Bernstein forecasts.
The actual profit line has been more volatile as LNG prices ebb and flow. In 2022, the scramble for LNG shipments sent the company’s cash profit soaring above $11.5 billion. However, this did drop in 2023 as supply and demand was near equilibrium. Annual cash profits should come in around $7 billion in the second half of the decade. But that could change drastically to the upside if prices surge due to geopolitics.
LNG Stock is a Buy
It has been a wild ride, though, for loyal shareholders, with Cheniere suffering multiple near-death experiences since the 1990s. Shareholders that stuck with Cheniere have made out like bandits – the shares traded under $1 in 2008, putting the market cap at a mere $48 million.
Today, Cheniere is a $41.9 billion market capitalization company that reported net income of $880 million in its latest quarter.
On June 24, the aforementioned Bernstein Research initiated coverage on Cheniere Energy with an “Outperform” rating and a price target of $217.00. The firm highlighted the company as a top player in the natural gas export market, emphasizing its status as the largest exporter of U.S. LNG and one of the most significant globally.
Cheniere's business model, with its reliance on take-or-pay contracts, is a significant part of the firm's thesis. According to Bernstein, these contracts alone could justify a valuation of around $200 per share. Additionally, the firm pointed out Cheniere's ability to sell uncontracted volumes at spot rates, which can lead to variable EBITDA based on international price difference between the price of natural gas in the U.S. versus the international price.
"Having largely met their debt target, we believe Cheniere will reach a free cash flow inflection point in 2025 and be able to pay out close to $20/share, even as they fund growth capex for Corpus Christi stage 3," said the Bernstein analysts.
Cheniere Energy remains an opportunity for investors. Its long-term growth story, enviable client base, and enormous scale make Cheniere too good to pass over.
Buy LNG stock anywhere below its 52-week highs around $187.
