Please ensure Javascript is enabled for purposes of website accessibility

Cheniere Energy Results Continue to Defy Conventional Wisdom of the LNG Market

By Tyler Crowe - May 14, 2018 at 11:35AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For the second quarter in a row, management raised guidance because of great operational results and a better than expected market for liquefied natural gas.

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 (LNG 1.14%) 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
EPS (diluted) $1.50 $0.54 $0.23

Data source: Cheniere Energy earnings release. EPS= earnings per share

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. 

LNG cargo ship at a loading facility.

Image source: Getty Images.

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 (CQP 1.90%) 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.

LNG Chart

LNG data by YCharts.

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. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Cheniere Energy, Inc. Stock Quote
Cheniere Energy, Inc.
$126.58 (1.14%) $1.43
Cheniere Energy Partners, L.P. Stock Quote
Cheniere Energy Partners, L.P.
$45.06 (1.90%) $0.84

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.