Bank growth and income with this energy linchpin

Cheniere (pronounced Shenear, emphasis on the second syllable) owns the export infrastructure that enabled Europe to keep the lights on after Russia invaded Ukraine and cut gas flows overland, and gave US producers an outlet for selling gas at higher prices. It is the fourth-largest liquefied natural gas (LNG) exporter in the world in its own right, behind the whole of Qatar, Australia and Indonesia, according to analysis by Bernstein. 

Demand for gas is strong, and the importance of LNG – natural gas that has been reduced to a liquid state through a process of cooling – is growing particularly fast. In its 2024 energy outlook, BP (BP.) noted that LNG demand had risen at eight times the rate of natural gas consumption in the past five years, driven by emerging Asian economies and disruptions to the Russian pipeline. 

BP predicts that the volume of LNG traded annually will go from 600bn cubic metres (bcm) to 800bcm by 2030, and reach 950bcm by 2040. However, If the rollout of renewables and other low-carbon technology ramps up this will be far lower.

For now, the first scenario arguably looks more plausible. Portuguese energy company Galp Energia (PT:GALP) signed a 20-year deal with Cheniere this month, which will kick in from the early 2030s onward. 

Meanwhile, Shell (SHEL) hopes to expand LNG capacity by 20-30 per cent by the end of the decade. “We have a fundamental conviction that this is not an LNG sprint of a few years, but that LNG will be required for decades to come,” said Shell boss Wael Sawan on an earnings call earlier this year. He labelled LNG the “the only serious credible solution that gives you both energy security as well as decarbonising the energy system in the particular sectors in which it works”.  

These companies are exposed to the floating spot price, and will suffer if a forecast glut of LNG supply arrives in two or three years. 

Cheniere might be protected from the worst, however. The group buys natural gas from the North American market, processes it into LNG, and gives customers the option to load the end product onto their vessels at its terminals. Alternatively, it will deliver the LNG to regasification facilities around the world.

Cheniere sells about 90 per cent of its volumes under long-term ‘take-or-pay’ style contracts for which it charges a fixed liquefaction fee. This creates a “stable Ebitda reliable even in times of oversupply”, according to Bernstein.

It sells the remaining volumes at spot rates, which leads to more volatile profits. When international gas prices were high in 2022 and 2023, the excess earnings allowed Cheniere to accelerate its debt paydown. When prices are low, however, the company feels the pinch. 

Cheniere is now a $40bn (£31bn) company that reported net income of $880mn in the June quarter. Earnings were significantly lower than last year due to the weaker gas price, but this makes it a good point for investors to buy in. The shares are up 8 per cent in the year to date, half the gain seen at supermajor ExxonMobil (US:XOM). 

Meanwhile, it has been putting its huge cash flow from 2022 and 2023 to good use, investing in new capacity, increasing shareholder returns and knocking around $9bn off the net debt pile.

Turning the tanker

Cheniere is a good example of a company that knows when to retool. It started life in 1996 as a traditional oil and gas hopeful, looking for reserves to extract and sell. Then management thought the US would start to struggle with gas supplies, so built the Sabine Pass regasification import facility in Louisiana. LNG would arrive and Cheniere would turn it back into gas. Sabine Pass came into operation in 2008. 

But then the shale boom happened, and the US shot to the top of the gas production league table. Imports weren’t needed, and Cheniere decided to change tack again. In the early 2010s it built a liquefaction facility, at the cost of around $6bn, to send US gas elsewhere. This was done under the leadership of the swashbuckling Charif Souki. 

The export capacity came online in 2016 and by then Cheniere had commissioned more capacity and started a second plant in Corpus Christi, Texas. Capacity now stands at 45mn tonnes a year, and a project to add an extra 10mn tonnes is in the works and set for commissioning at the end of 2024. 

It has been a wild ride, and Cheniere has suffered multiple near-death experiences since the 1990s. Loyal shareholders will have made out like bandits, though – the shares traded under $1 in 2008, putting the market cap at $48mn. This climbed to $10bn in 2013 when permits and financing came through for the LNG trains (the units that turn gas into LNG). Covid brought on a share price lull as demand crashed, but this recovered from late 2020 and since then the company’s shares have soared along with its status in the global energy system. 

The business model has proved stable in recent years: take-or-pay Ebitda, which is effectively baseline earnings, went from under $3bn in 2019 to over $5bn last year, and will climb over $7bn by 2028, according to Bernstein forecasts. 

The actual profit line has been more dramatic given the volatile gas market. In 2022, the scramble for LNG shipments sent the cash profit above $11.5bn, driven up by the difference between the US gas price and what LNG could fetch internationally. This dropped in 2023 given the more stable environment, but analysts expect this to sit around $7bn in the second half of the decade. This doesn't account for any surges in price, as seen in 2022. 

Shifting to export looks like an obvious strategy now, but when Cheniere first announced its change of plans, this was a radical move.

“It is more likely to see snow in New York in July than to see exports of gas from LNG terminals in the United States,” Fadel Gheit, an energy analyst with Oppenheimer & Co., told the New York Times in 2011. 

Golden Pass

Cheniere is somewhat insulated from price fluctuations due to its sales structure, but a flooded market would inevitably impact its bottom line. In the short term, however, there are challenges in getting new export terminals into operation, which could remove a fair amount of new supply from the market. 

Production at one joint venture between QatarEnergy and ExxonMobil has been pushed back six months to the end of 2025, which could “briefly impact global LNG prices and US natural gas production and prices”, according to Wood Mackenzie.

The presidential race is adding to the uncertainty. Earlier this year, Joe Biden paused approvals for new LNG export terminals along the US coastline, partly due to climate concerns. As an established player, this is no bad thing for Cheniere, although it also has its own expansion plans in the works. Donald Trump has been a critic of the permit freeze, so would likely remove it. 

In any case, Cheniere remains a growth and income opportunity. “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 a share,” Bernstein analysts concluded. Combined with its long-term growth story, enviable client base and enormous scale, this makes Cheniere too good to miss. 

Investors should note that Cheniere's structure is unusual. It has two separate listings in New York: Cheniere Energy (LNG) and Cheniere Energy Partners (CQP). The LNG ticker is suitable for retail investors.