Is Cheniere Energy a Huge Risk?
Cheniere Energy (LNG) reported its first quarter 2016 results on 5th May. The company posted weaker-than-expected results last week with a huge bottom line miss. The company posted an EPS of -$ 1.41 per share which meant it missed the EPS estimate by $ 0.98. Even more serious was the revenue-miss.
Before the announcement of the results, the stock had been performing exactly in the way the investors would have liked it to. It hit the three month bottom of $ 22.80 on 8th Feb, took off from there and held on to above $ 35 for more than 2 months till the day the results were declared. After the first quarter results announcement, Cheniere shares lost that momentum and declined over 13 % in just these few days of the month of May that have past.
The net loss increased from $ 268 million for Q1 2015 to $ 321 million in the last reported quarter. However, if we look closer into the details, the loss hasn’t increased due to the company’s business performance. The primary reasons behind the increase in net loss were an increase in derivative losses and the early extinguishment of debt by the prepayment of the outstanding term loan. The derivative loss increased by $ 46 million to $ 181 million. And as a result of the debt extinguishment act, the company does not have any more debt maturing till 2020. Hence, it was a rather smart move for the long term transition of the company from a development-phase company into an operating company.
Thus, these external factors were behind the huge net loss. The company’s business has not actually failed to deliver and it has got a lot of potential for tapping the opportunity available in the LNG market over the long run.
Demand Growth and Infrastructure development:
Keeping in mind the fast anticipated pace of LNG demand growth, Cheniere is focusing on the rapid development of its infrastructure. Going forward, it is anticipated that demand for LNG will increase at a CAGR of 4.8 % until 2030, doubling as compared to 2015 levels. Also, the supply-demand gap is projected to open up shortly after 2020 as trade grows and existing production declines in certain regions. Hence, the supply-demand scenario will look like the following chart:
However, to meet this demand, the industry might fall short as there is not enough supply on the market and also the number of trains required to deliver that much LNG are not enough. Approximately 42 LNG trains will need to take FID in the coming decade in order to cater to that growth in demand through 2030.
Keeping that vision in mind, Cheniere has started building its trains. The company has already brought its first train online at Sabine Pass at the end of February as it had completed a majority of the work on this platform. In fact, the Trains 1 and 2 are 98.3 % completed and both will start operating within the next two quarters. Further, the Trains 3 and 4 are 83.8 % completed and are expected to be fully completed next year. And a total of 7 trains are under construction each with a design capacity of 4.5 mtpa. 87 % of the LNG design production capacity of these 7 trains has already been sold with 20 year contracts with fixed fees.
Up to 2019, Cheniere will build a total of six trains at Sabine Pass and five trains at Corpus Christi to take its liquefaction capacity up by 49.5 mtpa. After doing all that train building task, will account for more than 10 % of the global LNG market by 2020. And that’s the opportunity investors must look at before taking their decision rather than the recently reported losses.
There are definitely certain risks involved in the case of Cheniere. One is that the counterparties with which Cheniere has signed its contracts may back out. If that happens, the cash flow that we are assuming to be ensured for the long term future won’t materialize. This could hamper the train building projects on which the company’s future now almost completely relies. In that case the company will have to finance the projects with additional debt which would be huge. Further, it will also have to run around to find new customers for the capacity that if will have built by then.
Cheniere Energy has disappointed the investors with its latest results earlier this month. The impact on the stock is obvious too. But the future prospects of LNG, the commodity, are looking great in the long term. Hence by readying itself to deliver the future LNG demand shows some promise. Having that said, the risks are there and are certain too. So it is advisable not to enter this stock at this point since there are a lot of uncertainties involved in it.