Cheniere Energy: Unseasonally War Winter

Investment Thesis

Cheniere Energy (NYSE:LNG) has seen its stock sell off in the past month. However, I assert that the Liquefied Natural Gas dynamics have permanently changed in 2022. And Cheniere will be a key player to benefit from this.

The LNG market was impacted by the Unseasonally War Winter. What does this mean?

In sum, here’s why paying my estimated 7x 2023 free cash flow remains a very compelling investment.

Faded Tailwinds

Natural gas prices have tumbled in the past several weeks.

This has led many investors to believe that the energy trade has died for 2023 as a whole. Indeed, we can see below, how the XLE ETF (XLE), which is a broad energy tracker, has taken a breather in the past month.

This slowdown in appreciation has led investors to conclude that the winning themes of 2022 will not repeat themselves this year.

Note, the XLE index above includes other energy components besides just natural gas. It also includes oil companies and oil services, to name a few. Nevertheless, it is reflective of the overall sentiment investors have to energy.

Meanwhile, Cheniere’s share price itself has fared substantially worse of late, as you can see here.

In fact, in a little over a month, Cheniere’s share price fell by 20%.

2023, Unseasonally War Winter

This is my point. Cheniere had a lot of tailwinds to its back in 2022.

Clearly, the war had unexpected ramifications. This led to countries around the world scrambling to secure LNG.

Furthermore, not only was Europe desperate for LNG supplies, but the overall sector was compliant and provided further tailwinds too. For example, with the price of thermal coal being notably strong, this drove strong demand for natural gas as a preferred alternative energy source.

Hence, the Unseasonally War Winter is a play on the dynamics that took place on the two sides of the energy balance.

First, the war shock drove prices for natural gas higher. Only for a few months later to be followed by a slump in natural gas due to the unseasonably warm winter.

So, What’s Next?

I firmly believe that the market isn’t very good at pricing step changes. A shock and high demand on one side, followed by a slump on the other side, has led to much excitement and despondency in natural gas.

But the long-term secular story for natural gas isn’t finished. And here are three reasons why.

• The abnormally warm weather can’t be relied on to solve our energy security. Energy security is no longer a buzzword. It’s a crucial driver of political policy. High quality of life is directly correlated with significant access to cheap and reliable energy.
• Industries around the world use natural gas. From steel production to chemical feedstocks to fertilizer. With global usage of natural gas in industries reaching approximately 20% to 25%, depending on the country. Indeed, many commodity companies in Europe, for example in steel or glass production, have curtailed production as natural gas become uneconomic as an energy input. This is not a sustainable practice and many other sectors are eager to return back to full production.
• There’s an ESG mandate at play that seeks to fade fossil fuel usage. However, natural gas is seen as a bridge between the old and the new energy transition.

Accordingly, this is my argument. Even if in the very short term, Cheniere’s share price has tumbled, I don’t believe that the level of risk that investors are now pricing in is justified.

Put another way, I advance that there’s too much pessimism already priced into Cheniere’s share price.

LNG Stock Valuation — 7x 2023 Free Cash Flows

Analysts following Cheniere believe that its free cash flow will drop in 2023 by nearly 40% compared with 2022.

Even while recognizing that Cheniere’s 2023 free cash flows are not going to be as strong as 2022, I nonetheless believe that a 40% drop in free cash flow is too bearish for the reasons I’ve stated above.

Simply put, this is my thesis. There is a secular story for natural gas. For as long as natural gas prices in Europe remain high relative to the US, demand for exporting LNG will remain strong and provides support for Cheniere’s free cash flows.

Next, here are my free cash flow estimates for 2023. Recall, for the first 9 months of 2022, Cheniere’s free cash flows reached $6 billion. Hence, I suspect that close to $7.5 billion is likely for 2022 as a whole.

If we then assume a conservative 30% cut to this free cash flow in 2023 this would lead Cheniere’s free cash flow to be approximately $5.3 billion this year.

Thus, including a robust margin of safety, Cheniere’s stock is priced at 7x.

The Bottom Line

2022 put a spotlight on our dependency on natural gas.

Rather than repeat my argument let me instead highlight a quote from Equinor’s (EQNR) CEO Anders Opedal where he made the case in a BBC interview today that there is “a kind of re-wiring of the whole energy system in Europe particularly after the gas from Russia was taken away.”

In sum, this is my contention, our energy problems haven’t been solved by the Unseasonally War Winter, meaning the volatility in natural gas prices. Irrespective of what the natural gas spot market may lead one to believe.