The average U.S. LNG exports rose 61% year over year from January through November 2019, according to the U.S. Energy Information Administration. The LNG exports for the period averaged 4.8 billion cubic feet per day. Moreover, the EIA expects LNG exports to keep rising and average 6.5 Bcf/d in 2020 and 7.7 Bcf/d in 2021. Cheniere Energy (LNG 0.96%) is one of only four companies in the U.S, that currently have commercially operating LNG facilities. The other three operators are Dominion Energy, Sempra Energy, and Freeport LNG Development L.P. Additionally, Kinder Morgan's Elba liquefaction facility is currently under commissioning.
Unlike Dominion and Sempra, which are predominantly utility companies, Cheniere Energy's fortunes are tied to its LNG operations. But rising export volumes may not be enough to make Cheniere Energy a buy. While LNG exports continue to rise as new facilities start operations, weaker prices are spoiling the party for the operator.
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What's ahead for Cheniere Energy?
In 2019, Cheniere Energy completed the construction of the second train at its Corpus Christi facility. The company also started commercial deliveries at the first train at Corpus Christi and fifth train at its Sabine Pass facility. That contributed to a 55% growth in production, a 22% growth in the company's revenue, and a 38% growth in its earnings for the year. The reason why Cheniere was able to generate high earnings despite short-term market headwinds is that its projects' volumes are supported by long-term contracts.
While the short-term factors may not affect Cheniere's earnings immediately, they can affect the company's longer-term growth plans. For example, the company expects some delay in making a final investment decision for the planned expansion of its Corpus Christi facility. Termed Corpus Christi Stage 3, the project plans to have up to seven liquefaction trains with a total capacity of around 10 million tonnes per annum. A somewhat lukewarm customer interest due to an expected lower LNG demand resulting from the impacts of coronavirus or a warmer weather may delay an FID on the project. Cheniere has already received regulatory approval for the project.
The company has robust parameters for its growth capital investments. It goes ahead with a project only if 80% or more of the project's volumes are contracted. In the current environment, Cheniere's management is willing to reduce debt or return capital back to its shareholders, in that order, if the investment parameters are not achieved. That looks like a sound strategy.
LNG PE Ratio (Forward) data by YCharts
Should you buy Cheniere stock?
Cheniere looks well placed to grow in the longer term. It is a top global LNG player, which should benefit from the expected higher demand.Though weaker LNG prices have delayed an FID on Cheniere's Corpus Christi Stage 3 expansion, it is worth noting that the first phase of that project is planned to become operational only in 2024. So, the company has some space in managing its start based on market conditions.
In the meantime, train 3 of the current facility is expected to become operational in 2021. Moreover, train 6 at its Sabine Pass facility is under construction with an estimated completion in 2023. So, after three additional trains that became operational in 2019, Cheniere has more capacity coming online over the next few years. What's more, each of these projects are backed by take-or-pay contracts, which provides a lot of visibility to Cheniere's earnings growth. Its earnings over the next several years are, in large part, independent of LNG prices. These projects should keep fueling the company's earnings growth while the market conditions for LNG improves. Overall, the market's reaction for the stock due to the current LNG environment is largely out of line with the company's business model.
Overall, I wouldn't be too worried of the short-term volatility in LNG prices. However, it may take a while for the global LNG markets to become balanced. Considering that the stock doesn't pay a dividend, I would rather watch it from the sidelines to jump in as soon as the markets improve and customer interest for the projects begins to rise.
