Description

I am recommending a long position in Cheniere Energy (LNG).  The stock is a 2-3 year double to triple ($40-60 target) with limited downside and a strong event path over the next 3-6 months which will drive a re-rating of the stock. 

Cheniere has been a hotly debated stock over the years on VIC and much of the details of the company and management have been covered in these discussions so I will try not to be repetitive and will instead focus on what is new and why this is still compelling despite the 40% move it has had over the last 3 months. 

Cheniere Energy Inc. (LNG) has a $4.9b market cap ($20.10/share on 245mm fully-diluted shares), no debt and ~$215mm in cash.  LNG owns 4 key assets:

-           ~60% fully-diluted LP stake in Cheniere Energy Partners (CQP), a publicly-traded MLP

-          100% GP stake in CQP

-          100% stake in the Creole Trail Pipeline (recently valued at $480mm by Blackstone)

-          100% stake of a proposed natural gas liquefaction facility located in Corpus Christi, TX (currently in the permitting process)

CQP is current constructing the first natural gas export terminal in the US at Sabine Pass, LA.  As of now Sabine Pass is the only permitted export facility.  The plant is comprised of four liquefaction trains totaling 18.0mm tpa of nameplate capacity (4.5mm tpa per train).  Trains 1-2 have been financed and are under construction.  Trains 3-4 will be financed in Q1 and will break ground next summer.  The plants are 90% contracted with 20-year take-or-pay contracts will European and Asian utilities (British Gas, Fenosa, Korea Gas, GAIL).  The remaining 10% can be sold on a merchant basis by Cheniere.  We have spoken to numerous industry contacts and the feedback we have gotten is that the Sabine Pass contracts are rock solid (i.e. favorable to Cheniere).  The four trains are being built by Bechtel (the leading E&C company for LNG construction with 45% global share in liquefaction trains) under lump-sum turnkey contracts.  Total construction costs will be ~$10.5-$11.0b on a fully built out basis ($7.8b to Bechtel, $1.1b balance of plant/owners costs/contingency, remainder capitalized interest).  The first train comes online in mid-2015 with another train approximately every 6-9 months thereafter (4^th train done by mid-2017). 

Financing for trains 1-2 was completed last summer.  CQP raised a total of $5.6b - $3.6b in bank debt at L+350 and $2.0b in preferred stock from Blackstone (75%) and LNG (25%).  Please note that the per share distributable cash numbers below include all dilution from the Blackstone preferred and management compensation associated with trains 1-4. 

Once constructed the facilities will do ~$2.4b in contracted EBITDA (excluding any merchant contribution) and CQP will generate distributable cash of ~$3.00/share.  At a 7.5% dividend yield this implies a $40/share price for CQP.  When you take that back to LNG (through its LP stake and GP splits) LNG will generate $1.0b ($4.00/share) in pre-tax cash flow (no taxes until 2022).  Merchant contribution would be incremental to this but at current (wide and likely unsustainable) spread between US natural gas and global LNG prices would yield another ~$3.00-4.00/share in cash flow.   The appropriate comp group for LNG will be the publicly-traded GP owners (c-corporations) of MLPs:  WMB, KMI, OKE, ETE, XTXI are the key ones.  These stocks trade at 3-4% dividend yields but arguably will have higher growth than LNG (assuming LNG/CQP can’t grow beyond trains 1-4 at Sabine).  If we assume a much more conservative 7% yield, we get a $57-$85 target in 2016 (vs. current stock at $20) on $4.00-$6.00/share of distributable cash at LNG.  As a reminder this is on Trains 1-4 at Sabine Pass only. 

Incremental upside optionality which would take these price targets even higher:

-          Sabine Pass expansion: Cheniere has signed a 20-year take-or-pay contract with Total for a Train 5 at Sabine.  If they get a second contract then Sabine 5 will likely be built (assuming it can be permitted).  They are also marketing a Train 6.

-          Corpus Christi:  In the permitting process

Catalysts

-          Financing for trains 3-4:  this is launching at the end of this month.  The credit markets currently are white hot as we all know and our discussions with project finance lenders indicate this is shaping up to be an easy deal.  The company is targeting $4.5b in bank debt and ~$0.6b in CQP equity.  We have modeled $1.0b in CQP at $20.00/share in the numbers above. 

-          Contract for the remaining capacity at the proposed Train 5

-          Contract for Corpus Christi capacity

Risks:

-          Once the financing is completed, the there are two primary risks:  cost overruns and capital allocation. 

• Cost overruns:  From the conversations we’ve had the risks here are quite minimal (in contrast to the severe cost pressure the Asian LNG projects have suffered).  The degrees of difficulty on Sabine Pass are significantly lower (no upstream component, port and gas storage is already built, the liquefaction facilities are standard design/technology and are being built onshore Louisiana with grid power and a large and underemployed labor pool that can drive home from the site every day).
• Capital allocation:  This has concerned many investors due to the company’s history.  The management owns ~10% of the company and following their near-death experience of 2008 will not consider any non-contracted/merchant builds.  

Catalyst