Cheniere Energy: Profits Likely To Fall As LNG Prices Collapse

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liquefied earthy state LNG proscription tanker ship, bluish oversea and sunny entity background


The world value of liquefied earthy state has soared precocious arsenic galore regions fell into chronic shortages pursuing accumulation cuts successful 2020. This rumor was worsened past twelvemonth arsenic Russian state flows to Europe fell and will apt remain permanently depressed owed to nan increasingly controversial demolition of nan captious Nord Stream pipeline. These catalysts person benefited nan largest US liquefied earthy state exporter Cheniere Energy (NYSE:LNG), which traded astatine its highest value ever pursuing Nord Stream 1's demise past autumn and remains adjacent its highest valuation.

LNG is simply a comparatively costly power banal aft much than doubling since 2019. The semipermanent summation successful US LNG export levels and nan important value spread betwixt nan US and Eurasian earthy state prices person boosted nan company's prospects. Last year, Cheniere exported astir 70% of its full accumulation to Europe amid nan utmost value spike successful nan continent. Although European earthy state prices person declined considerably, they're mostly expected to stay elevated owed to nan nonaccomplishment of Russian state capabilities (regardless of sanctions/war). Thus, LNG is expected to gain an EPS of astir $17.7 this year, giving it an charismatic guardant "P/E" of ~8.9X. However, its 2025 and beyond EPS statement EPS estimate is ~$9.6, giving LNG a overmuch higher semipermanent guardant "P/E" valuation of ~15.3X.

Many investors are willing successful Cheniere owed to its valuation and imaginable for further benefits from accrued capacity and potentially permanently higher European demand. Due to nan broader geopolitical business regarding Russia and China (a awesome LNG importer), galore uncertainties whitethorn negatively aliases positively effect nan company. Of course, Cheniere besides faces its ain risks owed to its higher indebtedness leverage and expanding accumulation costs. Overall, I judge it is imaginable that LNG banal is simply a spot overvalued coming and whitethorn diminution this twelvemonth arsenic exuberance fades.

A Sharp Reversal successful Prospects

Last year, investors and traders flooded into LNG to capitalize connected nan value spike successful liquefied earthy state and nan important summation successful demand. Cheniere is seen arsenic a institution that offers a beardown hedge against cardinal geopolitical consequence factors since its prospects summation arsenic Europe becomes much reliant connected US earthy gas. While each of these factors use nan company, investors whitethorn overestimate nan effect and long of nan catalysts. Further, contempt precocious prices past year, Cheniere suffered grounds losses complete nan past twelvemonth owed to a monolithic unrealized devaluation of its derivative hedging positions.

The value of liquefied earthy state collapsed complete nan past fewer months for a assortment of factors, including weaker Asian request and a crisp autumn successful European earthy state prices. At nan aforesaid time, US earthy state prices person fallen by complete 75% arsenic accumulation grows and lukewarm upwind spurs a glut. In my view, US earthy state prices are now a spot oversold and are apt adjacent minimum levels. The aforesaid is apt valid for European earthy state prices, which person fallen moreover faster than US prices complete caller months. See below:

EU Nat Gas value down complete 80% since highest successful 2022

European Natural Gas Price (TradingEconomics)

As European and US earthy state prices decline, LNG prices person begun to fall. Although nan information is considerably lagged, it appears to "spread" betwixt US prices, and nan liquid value has besides compressed significantly, threatening Cheniere's profitability. See below:

ChartData by YCharts

The compression successful nan dispersed betwixt liquefied state and US pipeline state prices apt stems from nan simplification successful nan dispersed betwixt US and EU prices. EU earthy state remains considerably much costly astatine astir $13-$14/MMBTU (converting to US units), aliases astir $11.5 higher than US prices. However, EU prices were successful nan $50-$70/MMBTU scope for overmuch of past twelvemonth aliases astatine slightest $40-$60 supra US prices. That immense dispersed spurred tremendous request for US liquid state imports into Europe. Still, request is acold lower, fixed EU state retention levels are seasonally very precocious (primarily owed to weather).

In nan contiguous term, Cheniere's prospects are weakened owed to 2 cardinal factors. Firstly, highly lukewarm wintertime upwind has importantly decreased world earthy state depletion this season. Secondly, important maturation successful EU state imports from Norway and nan Middle East. The first rumor has had nan astir important contiguous effect but will apt slice and whitethorn reverse next period owed to stratospheric warming that could origin rapid utmost upwind cooling early adjacent month. However, nan 2nd rumor whitethorn person a much important semipermanent effect connected Cheniere.

Simply put, liquefying earthy state is simply a highly inefficient and costly measurement to move nan commodity. It is useful arsenic a short-term measurement countries tin usage to offset acute upwind shifts aliases impermanent proviso issues. Still, it is not an effective semipermanent power solution owed to its costs (and power needs). I judge it is inaccurate to presume Cheniere will use from imperishable EU LNG demand. Indeed, Europe's LNG imports fell during astir of 2022 aft nan first spike. See below:

EU LNG Imports elevated but declining

EU US LNG Imports Monthly (European Council)

Europe imports astir of its gas, half of which utilized to come from Russia. Imports from different nations person made up for nan diminution successful Russian gas, but US LNG only accounted for astir 13-14% of Europe's monthly full state successful 2022 (following nan extremity of Russian sources). While US supplies are essential, Norwegian and Middle Eastern imports are acold much important and will apt beryllium Europe's semipermanent solution since they are cheaper than liquefied gas.

The Bottom Line

In my opinion, Cheniere's stock, LNG, is overvalued today, fixed nan alteration successful its macroeconomic fundamentals. 2022 was expected to beryllium an fantabulous twelvemonth for nan company, but instead, it suffered much utmost losses owed to its derivatives exposure. While galore investors constitute those disconnected since they're not realized losses, they person substantially accrued Cheniere's full liabilities to a staggering $48B, causing its book worth to go highly negative. See below:

ChartData by YCharts

Cheniere is highly leveraged, pinch ~$27B successful financial indebtedness and antagonistic EBITDA. Even utilizing its 2020 EBITDA was positive, its debt-to-EBITDA ratio coming would beryllium around 9X, which is very precocious - peculiarly considering nan cyclicality of nan LNG business. Many investors spot nan banal arsenic a "growth opportunity" owed to its "long-term" capacity maturation plans, but its accelerated maturation will beryllium debased since its CapEx level successful 2022 was nan lowest successful years (~$1.5B vs. $3-$6B pre-pandemic). The institution is still expanding astatine a humble pace, but its maturation requires immense superior to finance infrastructure, creating indebtedness maturation and a deficiency of dividends (typically precocious for a banal for illustration Cheniere).

Further, 2023 and 2024 whitethorn not beryllium arsenic beardown arsenic galore suspects since nan caller compression successful earthy state spreads should negatively effect its profitability. While this could extremity if nan upwind normalizes, nan truth remains that Europe (and Asia) likely cannot become limited connected liquid state imports owed to nan important prices and costs involved. Liquid earthy state is besides not arsenic "environmentally friendly" arsenic "normal" earthy state owed to nan immense energy costs of compressing and transporting it (among others). While US regulators are seemingly preferential to LNG, EU regulators are little truthful owed to nan precocious costs and ambiance initiatives.

In nan agelong run, aft nan existent volatility fades, Cheniere is expected to make an EPS of around $9-$12 per stock annually. This gives LNG a longer-term guardant "P/E" valuation of 12-16X. In my view, that is simply a relatively precocious figure, fixed nan industry's important cyclical vulnerability and nan company's immense liabilities. The banal does not look truthful overvalued that it is simply a short opportunity, but I would not beryllium amazed to spot it yet diminution backmost beneath $100 this twelvemonth arsenic exuberance surrounding European imports fade. That diminution would springiness nan institution "P/E" valuation person to 10X, a overmuch much sensible fig fixed nan stock's high-risk profile.

This article was written by

Harrison Schwartz floor plan picture

Harrison is simply a financial expert who has been penning connected Seeking Alpha since 2018 and has intimately followed nan marketplace for complete a decade. He has master acquisition successful nan backstage equity, existent estate, and economical investigation industry. Harrison besides has an world inheritance successful financial econometrics, economical forecasting, and world monetary economics.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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