Will Cheniere Energy Deliver More Upside?

The commissioning of liquefied natural gas exports from the Sabine Pass Liquefaction project in February of this year has brought about a remarkable recovery in Cheniere Energy (LNG). The stock has run up an impressive 41% in just three months and I believe that this is just the beginning. Looking ahead, Cheniere Energy shares should continue to deliver more upside. Let’s see why.

The start-up of LNG exports will drive Cheniere’s performance

This year, Cheniere Energy has shipped seven cargoes of LNG to multiple destinations across the world, including three in the first quarter of 2016.
The important thing to observe here is that with just three cargoes exported in the first quarter, Cheniere’s LNG revenue quadrupled on a year-over-year basis.

Going forward, Cheniere should see further increase in its LNG revenue since it has already exported three cargoes in the second quarter, and the company is on track to export more cargoes of liquefied natural gas this year after Train 1 is completed this month. Moreover, Cheniere remains on track to begin the commissioning of Train 2 in the second half of this year, along with Trains 3 and 4 in 2017. In fact, Cheniere has already completed approximately 83.8% work on Trains 3 and 4.

Driven by the increase in the number of trains, Cheniere’s liquefaction capacity will rise since each train has a capacity of 4.5 mtpa. Now, as Cheniere’s liquefaction capacity rises, the company will be able to enter into more sale and purchase agreements. In fact, Cheniere has already entered into six third-party LNG sale and purchase agreements that equate to approximately 19.75 million tonnes per annum of LNG.

What’s more, as Cheniere’s completion rate on its LNG trains increases, the company’s development costs will come down. For instance, last quarter, Cheniere’s development costs fell to just $1.5 million as against $16 million in the year-ago period, which can be attributed to the substantial completion of the Sabine Pass liquefaction project.

More importantly, Cheniere’s rising liquefaction capacity will allow the company to tap the growing demand for LNG in markets such as India, the Middle East, China, and other Asian regions. In fact, LNG demand in these markets is expected to grow at a compounded annual growth rate of 4% through 2030.

The most important thing is that these regions are anticipated to consume approximately 75% of LNG exports by 2030. Thus, Cheniere should be in a better position to tap these markets as it is developing both the Sabine Pass and the Corpus Christi liquefaction projects that will together have an annual capacity of 50 million tons of LNG.

Cheniere has already outlined cash flow sources with SPAs

Cheniere Energy has already sold approximately 87% of its liquefaction capacity for the seven trains at the Sabine Pass terminal under a long-term agreement for 20 years. This move will help the company limit its exposure to the fluctuation in commodity prices. The chart given below demonstrates the estimated cash flows from Sabine Pass that Cheniere will earn as a result of its existing long-term agreements:

As seen in the snapshot above, Cheniere’s estimated cash flow will come in at $1.8 billion for Trains 1-5 at Sabine Pass, with the addition of Train 6 to take its cash flow up to $2.3 billion. On the other hand, even the Corpus Christi liquefaction project has long-term sale agreements that will give Cheniere cash flow clarity going forward. In fact, Cheniere has ensured that it will receive annual fixed fees of $1.5 billion from Corpus Christi for the next 20 years, generating distributable cash flow in the range of $800 million to $1.3 billion.

All in all, Cheniere has already set up annual fixed fees to the tune of $4.3 billion by selling its LNG under long-term purchase agreements. Thus, as Cheniere’s LNG export volumes pick up pace going forward, the company will be able to improve its financial performance substantially on the back of its sale agreements.


The future looks bright for Cheniere Energy as demand for LNG increases and the company completes its infrastructure development. This will lead to more upside in Cheniere stock as its finances will improve, which is why staying long in Cheniere Energy despite impressive gains in the past few months looks like a sound investment decision.
Published on May 16, 2016
By Subhen Mittra

Copyrighted 2016. Content published with author's permission.

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