Cheniere Energy (LNG -0.30%) has had one heck of a run so far this year, beating the S&P 500 by more than tenfold. It might seem odd that a company that has never earned a dollar is up so much, but its position as the first company to bring LNG export terminals online in the United States has many investors excited about the prospects further down the road. Let's look at what Cheniere has done this year to make investors so excited about owning its stock, and whether this euphoria can continue when the company starts to actually generate income in the next couple years.
Getting lined up
The idea of global liquefied natural gas export and trade sounds like a complex subject that the everyday investor might be afraid of tackling, but the company's business is actually very simple. Cheniere Energy and its subsidiaries -- Cheniere Energy Partners (CQP -0.38%) and Cheniere Energy Partners Holdings (NYSEMKT: CQH) -- own two LNG liquefaction and export facilities. Under long-term purchasing contracts, Cheniere will sell LNG to clients based on certain volume commitments and fees both dependent and independent of the price of natural gas. This chart shows the summary of all the contracts it has signed for its Sabine Pass facility in Louisiana.
Source: Cheniere Energy Investor Presentation.
These contracts will be Cheniere's lifeblood. Natural gas is a commodity with global price discrepancies, and major swings could make LNG exports from the U.S. unattractive if they were sold on the spot market. Locking in these long-term contracts ensures stable revenue without a whole lot of variation.
The one catch is that these contracts leave very little upside, so Cheniere and most LNG export facilities want to leave some production capacity available to be sold on the spot market. Too much exposure to the spot market is risky, but little to no exposure means few opportunities to capture windfalls when gas prices are out of whack somewhere in the world. Finding that sweet spot is critical.
This, more than anything, is why Cheniere shares have risen so much in 2014. Since the beginning of the year, the company has signed multiple purchasing contracts for its Corpus Christi facility totaling 7.65 million tons per year. These agreements represent about 58% of the total production capacity of the new facility, which is expected to come online by 2018.
So does that fall within the sweet spot? Not quite. Cheniere ideally wants to have 75% of all its production capacity under long-term contracts, leaving about 10 million tons per year of capacity it can sell under short and medium-term contracts. It is very close to achieving that at its Louisiana facility -- 73% long-term contracted today -- but has a couple years to go before the Corpus Christi facility needs to be contracted at its target range.
What a Fool believes
Cheniere has done quite a bit to shore up its long-term future with the contracts at its Corpus Christi facility. The facility hasn't yet been approved for exports by the Federal Energy Regulatory Commission, but those customer commitments should go a long way helping that process along.
It's almost impossible to value shares of Cheniere based on its current revenue and income because, frankly, revenue is close to nonexistent. Instead, we can roughly estimate a valuation based on projected EBITDA once all of its facilities come online. Cheniere estimates EBITDA to the parent company will be $3.3 billion-$4.5 billion once all assets are operational in 2018-2019. Based on today's total enterprise value, that puts total enterprise value to EBITDA at around 6.6 times-9 times. It's not egregiously expensive, but it's still a pretty hefty premium to pay for a company that will take four to five years to even reach that valuation.
Overall, Cheniere looks like it will be a solid company for many years to come thanks to the strength of those long-term contracts. At today's price, however, it might be worth holding off for a better deal down the road.
