Description

Cheniere Energy (LNG) is a LNG export company and a fairly simple business to understand. They liquify natural gas for export and most of their capacity is contracted under long term (20yr) take or pay contracts.  This write-up is not intended to offer a detailed overview of the business but instead with focus on the catalysts I see in 2024 for the stock to work.  Over the last couple of months LNG has been a relative underperformer. 

I believe that their 4Q23 EPS print on 2/22/24 is a de-risking event that will pave the way for significant performance for the following 5 reasons:

1) Sell side has already walked down 2024 numbers fairly aggressively

Unlike 2022 where LNG had a ton of spot capacity and made windfall profits, LNG has very little, if any open capacity in 2024.  Accordingly LNG has spent the last several months telling the buyside /sellside that 2024 is more a "tariff" only type of year.  Tariff only EBITDA is $5.3-5.7bn and if you assume a modest tariff like spread on the open capacity that has already been locked, that probably adds $500 million.  So the street walked their numbers down from $6.65bn to around $6.25 since September 2023. 

2) LNG is going to give a 2024 conservative guide and set-up a beat and raise situation – just like they did in 2023

There is a fear in the market that LNG gives a super conservative guide like $5.8-6.3bn, but I think its more like $6.0-6.5bn and brackets consensus.  I actually think they make $6.5bn in 2024 as they will make money on gas basis.  LNG has a history of guiding conservatively and then beating and raising all year – that’s exactly what they did in 2023, so you don’t need to take my word for it….

3) LNG’s capital return plan is to balance share buybacks on a 1:1 basis with debt paydown.  2024 is going to serve as a “catch-up” year. 

See the most recent call on 11/2/2023:

“And for everyone to just be tracking the buyback, it will be lumpy, volatile, quarter to quarter as we try to be opportunistic. But what you can track it to is basically, we have already deployed over $3.5 billion to debt pay down in the updated capital allocation plan, and just over a billion and a half of buybacks so far in the same plan. So, there's basically a $2 billion plus catch-up trade that needs to occur really through 2024.”

I estimate between $2.0-2.5 billion in buybacks for 2024.  And this dovetails perfectly with them giving a conservative guide.  It makes no sense for them to run-up the stock ahead of a ramp in buyback

4) LNG will benefit from Biden’s DOE permit freeze due to potential scarcity issues

LNG stock yawned on this DOE news a couple weeks ago either because everyone assumes it gets reversed once Trump elected or because it only offers upside in the out years.  Some may argue downside for LNG because they have DOE permits pending for capacity post Corpus Stage 3 (eg. Midscale T8-9) but to me this is a potential windfall for LNG if this turns into a defacto ban.  Right now the market is basically putting a zero value on the LNG spot business because global arbs suck with TTF @ 9.  But if there truly is a de facto ban, then LNG’s export capacity becomes a scares resource and a future license to make windfall profits.  In the meantime, LNG is gold standard operator and anyone looking to contract capacity that was thinking of signing up with a player that doesn’t have DOE permits in hand will think twice, and be more likely to sign up with LNG.  Once scarcity and windfall profits come into play, you a rationale investor should be raising the multiple on the value of LNG’s business.

5) HES and PXD are expected to be deleted from SPX 500 by mid 2024 due to M&A, and its reasonable for LNG to be a $40bn market cap replacement. 

XLE is losing 2 members – going from 23 to 21 stocks.   And with LNG’s current size is comparable to OKE which is currently the 12^th largest member of the XLE.  Since LNG is not in any S&P index (not mid cap or small cap), the index add would truly require a ton of natural buying.  This could be tantamount to 10% of shares outstanding or $4bn in buying.  Add that to a $2-2.5bn buyback and you could see real demand to buy 15% of shares outstanding in 2024. 

6) Dare to dream ?

Buffet took out Cove Point LNG.  At current valuation, LNG is downright cheap at 10x tariff only EBITDA.  If you slapped 12x on tariff and 6x on spot capacity at a tariff type levels, my price target is $205

Catalyst

1) Sell side has already walked down 2024 numbers fairly aggressively

2) LNG is going to give a 2024 conservative guide and set-up a beat and raise situation – just like they did in 2023

3) LNG’s capital return plan is to balance share buybacks on a 1:1 basis with debt paydown.  2024 is going to serve as a “catch-up” year. 

4) LNG will benefit from Biden’s DOE permit freeze due to potential scarcity issues

5) HES and PXD are expected to be deleted from SPX 500 by mid 2024 due to M&A, and its reasonable for LNG to be a $40bn market cap replacement.