Gassed Up: Can Cheniere Energy Keep Climbing?

Key Points

• Given Cheniere’s role in heating homes and businesses globally, this stock may only be warming up.
• Natural gas futures have trended higher as a result of lower inventories and strong overseas demand.
• Demand for liquid natural gas is expected to stay robust for years to come.
• Cheniere is slated to report third quarter performance before the open on November 3rd.

Few stocks have performed as well as Cheniere Energy, Inc. (NYSE: LNG) over the last couple of years. The liquid natural gas (LNG) leader is up more than 400% from its March 2020 low…and doesn’t appear to be losing any steam. 

As the major indices head south, Cheniere is setting fresh record highs with ease. It finished last week on a three-day run that put it within a few bucks of its $178.62 peak.

We know that the energy sector is the lone bright spot in a dull 2022, but Cheniere is doing extraordinarily well. Its LNG transport services are in high demand and, like everything else, its contract prices are on the rise. 

Yet with fears of an economic slowdown mounting ahead of the winter season, will there be less of a need for Cheniere? Quite the contrary. Given the company’s role in heating homes and businesses globally, this stock may only be warming up.

Why is Cheniere Energy Performing So Well?

U.S. natural gas futures spiked above $9.00 in August 2022, a level not seen in 14 years. They have trended higher during the pandemic recovery as a result of lower inventories and strong overseas demand. And with Russia the world’s second largest natural gas producer, the Ukraine invasion has forced Europe and Asia to turn to the U.S. to secure supplies for heating, cooking and refrigeration. 

Concerns about Russian supplies pushed natural gas prices to record highs in both regions. Relatively cheaper U.S. natural gas has thrust Cheniere Energy into the spotlight to fulfill international demand. Elevated prices and volumes have made for stellar financial results for the nation’s largest natural gas exporter.

As the owner of nine LNG terminals, Cheniere Energy has a first mover advantage that has never been more apparent. It was the first to receive U.S regulatory approval to ship the commodity overseas and currently serves 36 countries. 

Cheniere’s Sabine Pass terminal near the Gulf of Mexico operates six liquefaction units, or ‘trains’, each of which can move 4.5 million tons of LNG to seaward vessels. The Sabine Pass can access natural gas from all domestic sources east of the Rocky Mountains. Cheniere’s elaborate pipeline network allows it to buy natural gas from producers, convert it to liquid form and transport it to the coast for shipping.

What Will Drive LNG Export Demand in the Future?

The near-term geopolitical dynamics aside, demand for LNG is expected to stay robust for years to come. This is because the world and Asia-Pacific region in particular are shifting to cleaner burning fuels for power generation. China, South Korea, India and Pakistan are all expected to be major natural gas importers as the decade progresses.

As for supplies, natural gas markets are expected to see tight inventory levels well into 2023. Russia continues to curtail natural gas flow to Europe, leaving nations scrambling to secure supplies for the cold weather months. Even with the European economy slowing, heating and electricity needs are fairly constant. With no resolution in sight, Russia’s retaliatory actions in response to sanctions could keep natural gas availability low for some time.

This is not a good situation for European households, but a highly favorable backdrop for Cheniere. The company engages in long-term ‘take-or-pay’ contracts that stipulate customers take delivery of LNG at a set price or pay a penalty. Most of Cheniere’s customers are locked into these fixed price arrangements, with the non-contracted portion of LNG capacity subject to market volatility. It is the cash flow visibility afforded by the take-or-pay contracts that is the most attractive aspect of Cheniere equity.

Is Wall Street Still Bullish on Cheniere Energy?

While Cheniere’s stock often gets yanked around by natural gas price volatility, it is important to remember ‘spot-driven’ contracts comprise only about one-fifth of cash flow. Long-term contracts, a healthy long-term demand outlook and management's increasingly shareholder-friendly nature are better reasons to own the stock.

With the cash flowing like LNG, Cheniere recently issued its first ever dividend payment last Fall. The $1.58 annual dividend equates to a 0.9% yield that’s icing on the cake to Cheniere’s tremendous capital appreciation. An expanded share buyback program is even more reason to ride this runaway growth and income train. Amazingly, at 16x this year’s earnings estimate, Cheniere remains an inexpensive LNG pure play.

Even after its impressive climb, sell-side analysts love Cheniere Energy. Last week, Jefferies started covering the company with a buy rating and $210 price target that was matched by Raymond James. Wells Fargo raised its target to a Street-high $236, which suggests another 34% upside.

Cheniere is slated to report third quarter performance before the open on November 3rd. Last quarter’s report came with an expectation of “sustained higher margins” and an increased profit forecast. It's hard to envision the next report being anything but bullish.