What is Cheniere Energy $LNG?
Cheniere Energy is an energy company that operates in the liquefied natural gas (LNG) industry. It is the leader US LNG exporter thanks to its 2 terminals, Sabine Pass (30MTPA) and Corpus Christi (15MTPA) both located in the Gulf of Mexico.
Its business model relies on long term contracts (10-20 years) with energy companies for a fixed amount of LNG per year. The usual structure of the contracts is based on a fee of $2.5/MMBtu + 115% natural gas price at Henry Hub (spot price).
Additionally, Cheniere launched its Marketing division in 2019. This division does not have long-term contracts with clients. Otherwise, it rents vessels and use them to deliver LNG directly to the customer terminals taking advantage of spot prices.
The structure of Cheniere Energy is a bit complex as it has 100% interest on the Corpus Christi terminal and the marketing division, plus 50.6% interest on Cheniere Energy Partners $CQP which owns 100% of the Sabine Pass Terminal (The rest is owned by Blackstone Group & Brookfield AM).
At the time of this writing, Cheniere has a market cap of $40Bn and $24Bn long-term debt. For comparison, Cheniere achieved an Adjusted EBITDA of $11.5Bn and Distributable Cash Flow of $8.7Bn in 2022
How is Cheniere Energy doing in the current situation?
Cheniere has been hugely profitable in 2022. In fact, it was the best year in Cheniere Energy’s history. Driven by geopolitical tensions, the weaponization of energy, and years of underinvestment in natural gas, Cheniere managed to achieve >$11.54 Bn of Adjusted EBITDA & $8.7 DCF. Also, it was favoured by the incident that keep Freeport close for half of the year
We believe that Cheniere is making a smart capital allocation of these funds. It paid down $5.4Bn debt, used $1.4Bn to repurchase 9.3MM shares, started a quarterly dividend distribution and allocated the rest of it to grow (Stage 3 of Corpus Christi Terminal).
Best of all, it is that despite 2022 being extraordinary, we think that the coming years are going to be very profitable for the company. The reason for that is the problem that the world has with LNG is far to be solved. The delicate European situation and the increasing role of natural gas as the bridge source of energy in the transition from coal & oil to renewable energy in the next 20-30 years will make the LNG industry to have an increasingly important role. And among all LNG players, Cheniere has shown that it is in the best position to take advantage of it. Also, it has recently obtained Investment grade at the beginning of 2023 which will help it to obtain better condition when signing new debt (beware of current market conditions)
As commented before, Cheniere has 45MTPA capacity. However, it is moving fast to double this figure within this decade, in what we believe that it is a very ambitious plan. Although, we have to admin they they have always underpromised & overdelivered in the construction of its 9 operative liquefaction trains. Let’s break this capacity growth into the two Cheniere terminals.
Sabine Pass Terminal
It has 6 operating trains with 30MTPA total capacity. The sixth was completed in February 2022. At the moment, it is in pre-filling process with the FERC to 20MTPA (3 liquefaction trains of 6.5MTPA each). First LNG of the new 20MTPA is expected in 2030
Corpus Christi Terminal
It has 3 operating trains with 15MTPA total capacity plus 7 small trains in construction that will add 10MTPA in total once finished in 2025 (25% completed). Moreover, it has Midscale trains 8 & 9 in prefilling process with FERC (4 MTPA in total). Furthermore, the Stage 4 (all in construction and projected for the near term is stage 3) is in pre-filling process with FERC and it is planned to add another 10 MTPA in the longer term.
Would be interesting to invest in Cheniere?
Today we are going to have a quick look at them to see how replicable the 2022 results are for Cheniere in the future. The simplest way to look at that is to take the them as the result of two variables. Price and Volume. Henry Hub price for 2022 was $6.45MMBtu, much higher than what we can expect in the long run. On the other side, Cheniere loaded 638 cargos in 2022, this volume is expected to increase in the near and medium term as a third of the current capacity is expected to be added in the next 2-3 years.
Cheniere Financial guidance
- Adjusted EBITDA $8-8.5Bn
- Distributable Cash Flow $5.5-6Bn
Run rate (Current 9 trains at HH= $2.25)
- Adjusted EBITDA $5.5Bn
- Distributable Cash Flow $2.8Bn
Run rate (Current 9 trains + 7 trains of Stage 3 at HH= $2.25)
- Adjusted EBITDA $6.7Bn
- Distributable Cash Flow $3.4Bn
We believe that the assumption of $2.25MMBtu for Henry Hub in the coming years is a bit conservative for out macroeconomic outlook. Every $1/MMBtu would increase around $300MM Cheniere margins. However, we also should be aware of the potential natural gas supply limitations in the US as wells as the role of international competitors like Qatar which will add online 32MTPA from 4Q25.
In a napkin calculation, taking out from the adjusted EBITDA 2024 the 49.6% of Sabine Pass (only affect to long term contracts and not to marketing division), and applying a 15 EV/EBITDA multiple, we obtain a target value around $200/share (25% upside from Friday’s close).
As stated, this is not an investment thesis. We are only having a look at the situation of Cheniere and making two quick calculations around it. If in the future we analyse this company, we will develop a proper investment thesis as the other in the website
Disclaimer: we do not have any exposition to Cheniere, neither going to have in the short term. We believe that it is an extraordinary and well-managed company, but at the moment we are looking at companies of much less market cap. However, as the referent in the industry, we usually follow its updates and vision of the market situation.
Note1: This article is the first of a new section that we call “quick investment ideas”, the goal is to comment companies that are not within our coverage universe but we believe that have an interest situation
Note2: Every week we publish investment thesis, macroeconomic articles and comment the market situation in the recently launched blog section. You can follow us to receive an email each Sunday with the publications of the week.
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