Ask most oil and gas analysts or take a look at industry outlook presentations about liquefied natural gas and you will find one common theme among them: The recent completion of LNG export terminals means there is more supply than demand. If this were the case, then prices of LNG should be low today and Cheniere Energy's (NYSEMKT:LNG) results wouldn't be that great. And yet, the LNG export specialist's most recent results paint a completely different picture. Not only did the company post better than expected results, but management raised its guidance for the second consecutive quarter.
So what has been going on that has allowed Cheniere to post these kinds of results? Let's take a look at the company's most recent earnings results and see if this kind of outperformance can continue for a while.
By the numbers
|Metric||Q1 2018||Q4 2017||Q1 2017|
|Revenue||$2.24 billion||$1.75 billion||$1.21 billion|
|Operating income||$747 million||$441 million||$376 million|
|Net income||$357 million||$127 million||$54 million|
Cheniere's results lately have been the confluence of two big factors. One of those was the completion and operational start-up of its fourth liquefaction process train at its Sabine Pass facility more than five months ahead of schedule. Technically, the company was supposed to still be in the commissioning phase of this facility and producing small amounts of commercial cargoes. Instead, it is pretty much running at full capacity.
The other thing that is helping boost Cheniere's results is much better than expected prices for LNG on the open market. Even though Cheniere has more than 85% of the production from Sabine Pass contracted under fixed-fee contracts, the remaining 15% is sold on the spot market through Cheniere's own marketing arm. This past quarter, spot market prices for LNG were much higher than expected because of colder winter temperatures and insatiable demand from China. In January, the spot price for LNG had reached $11.70 per million BTUs, which was the highest it's been in over three years. These higher prices give Cheniere ample opportunity to cash in on low-cost natural gas in the U.S., which has more or less remained below $3.00 per million BTUs for the past year.
Even though the spot price has come down a bit since then, it still gave management enough confidence to increase its guidance for the full fiscal year. Management raised its estimate for full-year adjusted EBITDA to $2.2 billion-$2.5 billion and distributable cash flow from Cheniere Energy Partners (NYSEMKT:CQP) to $0.35 billion-$0.55 billion.
What management had to say
In Cheniere's press release, CEO Jack Fusco gave a quick recap of why management felt comfortable enough to raise its guidance for the year and explained that investors should expect a final decision on an expansion project at its Corpus Christi facility relatively soon. Fusco stated:
Our record first-quarter 2018 results are the product of a robust LNG market and superior execution throughout the company, and we are raising our full-year 2018 guidance to reflect our year-to-date performance coupled with LNG market pricing that is stronger and more durable than we previously forecast. Solid LNG market fundamentals and the strategic positioning of our world-class LNG platform reinforce my confidence in our long-term growth prospects. We continue to progress Train 3 at Corpus Christi and expect to make a positive final investment decision on that project in the coming weeks.
Is conventional wisdom wrong?
For years there have been doomsday prognostications about the price of LNG. The thought was that all this LNG supply hitting the market from Cheniere's facility, several LNG export terminals in Australia, and few others scattered across the world would create a supply glut and send prices into the doldrums. That hasn't been the case, though. Even though prices have cooled off a bit lately, the price for LNG cargoes is still above $7.00 per million BTUs.
One thing that happened most LNG soothsayers didn't account for was a rapid increase in demand that absorbed this capacity, and we're seeing that play out in Cheniere Energy's results today. If we continue to see this escalation in demand, then it would seem that many of these projections about LNG being oversupplied out to 2025 are wildly overstated and could accelerate Cheniere's plans to expand its Sabine Pass and Corpus Christi export facilities. That should be music to investor's ears because at today's stock price -- its enterprise value to EBITDA ratio is 21 times -- you are paying for a lot of growth.