Are Short Sellers Onto Something at Cheniere Energy?

Since everyone loves a winner, it's reasonable to assume that everyone hates a loser -- everyone but short-sellers, at least. These contrarian investors bet that hot stocks are primed to fall, aiming to turn their pessimism into profits.

Below we take a look at soon-to-be liquid natural gas exporter Cheniere Energy (NYSEMKT: LNG  ) , which saw a 5% increase in shares sold short among American Stock Exchange stocks in the last reporting period, shares that now total almost 10% of its float. Despite getting the export permitting out of the way, construction beginning of its Sabine Pass liquefaction facility, and large global demand for its output, many doubt that Cheniere's financial situation will allow investors to emerge unscathed.

Cheniere Energy snapshot

Market Cap

$3.4 billion

Revenues (TTM)

$271 million

1-Year Stock Return

34.4%

Estimated 5-Year EPS Growth

N/A

Return on Investment

(10.8%)

Dividend and Yield

N/A

Recent Price

$16.18

Shares Short Oct 15

18.3 million

Shares Short Sep 28

17.5 million 

% Change

5%

CAPS Rating

***

Sources: wsj.com, FinViz.com. N/A = not available; Cheniere Energy doesn't pay a dividend

Just because the shorts are piling in doesn't mean you should too. Such stocks could have serious problems that warrant their short interest, but they might also just be stricken by short-term troubles. Only Foolish due diligence will tell you for certain.

The short story
In the global export market for natural gas, Japan is the straw that stirs the drink. Asian LNG demand is expected to reach 400 million tonnes per year by 2020, with Japan remaining the biggest importer, though you can expect China and India to increase their demand as well.

Currently Asia's supply comes from Qatar, and to a lesser extent Australia, but the Middle Eastern potentate is already operating at its maximum annual export capacity of 77 million, while the land down under has but a third of that capacity now and won't see it reach Qatar's levels to around 2017. It's estimated Australia will grow to as much as 130 million tons per year, but that won't happen till 2035.

In the wake of the Fukushima reactor meltdown, Japan has paid as much as $20 per million metric British thermal units, though according to Cheniere it was down to $16.58 per mmBtu at the end of August. The regional price in Europe was under $12 per mmBtu. That's significant because Henry Hub natural gas prices current go for around $3.50; Cheniere can deliver it to Asia for around $9.50 and to Europe for under $8 per mmBtu.

Others recognize the opportunity, too. Apache (NYSE: APA  ) wanted to build an export facility in northwestern Canada using funds from EOG Resources (NYSE: EOG  ) and Encana (NYSE: ECA  ) to finance the construction, but Royal Dutch Shell (NYSE: RDS-B  ) plans on building a bigger one. Cheniere's announcement that it would sell its output based on the lower Henry Hub price instead of indexing it to the price of oil makes it too large of a hurdle to surmount.

While ExxonMobil (NYSE: XOM  ) and Kinder Morgan (NYSE: KMI  ) also want to get export permits for LNG, only Cheniere has successfully navigated the regulatory waters and come out intact on the other side. Moreover, the Energy Department has put the issue of export permits on the shelf for the time being, meaning Cheniere has free rein to forge ahead unmolested by domestic competition.

The LNG exporter has hired Bechtel to construct the terminal through its subsidiary Cheniere Energy Partners (NYSEMKT: CQP  ) , is lining up long-term-contract partners like Chevron (NYSE: CVX  ) and Total (NYSE: TOT  ) , and has shored up its finances. It says it won't stock or debt at the corporate level unless there are "exceptional" circumstances or opportunities.

It seems to me that Cheniere has an exceptional opportunity before it and the company is moving ahead to take advantage of the market and the regulatory environment while it can. Natural gas prices may rise, narrowing some of the margins Cheniere will enjoy, but it's still a profitable place to be in. As a result, I'm rating Cheniere Energy to outperform the market indexes on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars.

Don't sell yourself short
Share your views below on whether short sellers should be squeezed till it hurts, or if the stock ought to be shorted till the sun don't shine.

Cheniere is definitely one potential way to profit from cheap natural gas, but there are others. With the swelling of the global middle class, energy consumption will skyrocket over the next few decades, and long-term investors know that you want exposure to this growth. The Motley Fool picked one incredible natural gas company that presents a rare "double-play" investment opportunity today, recognizing it as the one energy stock you must own before 2014. You can uncover it today in our premium research report. Click here to read more.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 08, 2012, at 4:20 PM, Jackts wrote:

    pretty disappointed in just read article about short selling at lng.would expect someone doing this article to know about all pertinent info but there was no reference to sierra club appeal filed with obama epa.this would be very material info re this subject.

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