Cheniere Energy Inc.
As we promised this week, it’s time for us to present you with an analysis of a stock we believe has a lot of potential ahead. Before going into details, however, we’d like to mention that this analysis is just a prediction, and you should do your own research before deciding to invest. Also, it’s important to mention that the stock we are presenting today is appropriate for a long term investment, so if you are planning to approach this stock with a speculative purpose, we recommend being extremely careful. So with that intro and without further ado, let’s see what we have prepared for you today.
We’ve been going through different sectors and companies for the past few weeks trying to find a good fit to start as well as we wanted a company that is easily accessible to trade their stock in the US and Europe. As we mentioned a week ago, there seems to be a lot of potential in the energy sector, which took a huge hit during the pandemic but is slowly recovering. However, we believe that there is a lot of value in Natural Gas in regards to Crude Oil, which, as we saw, can be quite unpredictable at times. It seems the biggest oil-producing nations are constantly in disagreement about the supply, prices, production, etc. of the Black Gold.
There are a few reasons we’ve chosen Natural Gas as a starting point which we’d like to outline below:
- First, the Natural Gas price is currently at one of the lowest levels. We saw the commodity dive to those levels back in 2016 and before that 2012. It seems that there is a cycle for the price of the commodity forming, and a new cycle begins every 4–5 years, which could potentially mean that we’re at the beginning of a new uptrend cycle in the price.
- Over the past few years, the demand for Natural Gas worldwide has grown exponentially. According to the IEA’s (International Energy Agency) report from 2019, the Natural Gas production in 2018 hit a new record with a 4% increase from the previous year. Natural gas production has been rising since the economic crisis of 2009, with a compound annual growth rate of 2.8%. The demand for the resource has been also growing especially in the Asia region (China in particular). Over the last 20 years, the natural gas consumption rose by an average of 7.7% on an annual basis, while in China, the average increase rate was 13.3%. I expect to see a continuation of this uptrend in natural gas demand, especially in Asia, with countries like Taiwan and Singapore growing at a fast economic rate.
- Another important and rising figure is the percentage of natural gas used in electricity production. Before Oil and Coal were the major resources used in electricity production, with the pressure for more efficient and greenways to produce electricity, Natural gas has been gaining popularity and a big share in electricity production. In 2019 and only in the US, Natural Gas amounted to 38.4% of all fossil fuels used to produce electricity. In comparison, Coal has amounted to 23.5% while Nuclear power to 19.7%. Expectations are that this number will rise on a worldwide scale due to the cleanliness of Natural Gas compared to Coal and safer way to produce in comparison to Nuclear power. Of course, renewable sources are a big part of that cycle, but this field still remains quite expensive to apply on a national or worldwide scale.
- Another thing to consider here is the temperatures and weather expectations. Usually, higher consumption of electricity by residential and commercial sectors occurs during winter and summer. This is caused by the fact that in the winter more electricity is used for heating, while in the summer more electricity is used by air conditioners. So the temperatures and the weather are an important factor in electricity usage and production, which inevitably affects the demand for Natural Gas and its’ price. Since we are at the beginning of the summer, we can expect to see an increase in electricity usage and thus a spike in demand for Natural Gas and its’ price. However, it is important to review the expected temperature changes this summer, although it is quite early to give any preliminary prognosis. According to NOAA (National Oceanic and Atmospheric Administration), the US is expected to see a cooler summer than 2019 with average temperatures in July-August between 22 degrees Celsius to 31–32 degrees Celsius.
Of course, those prognoses could easily change in the upcoming months; however, a cooler summer would probably mean less electricity consumption and less demand for Natural Gas. Still, we don’t believe that this will have a huge impact, but it could potentially cut our possible profit margins by a bit. At the same time, due to the pandemic and many companies moving to home offices, the residential sector electricity usage is expected to rise in comparison to the commercial sector. This could potentially lead to increased electricity consumption, which would cover the possible difference due to weather fluctuations.
- Back to Asia — we see it as the biggest consumer of Natural Gas in the future. The EIA predicts that the annual natural gas consumption will reach 120 billion cubic feet per day by 2050, which will outpace the regional production 50 billion cubic feet. This means a huge shortage will widen pushing demand for Natural Gas imports to extreme levels. However, those predictions and the contracts for importing natural gas won’t happen at the last minute obviously as usually those contracts are with a span of 20–25 years meaning that in the next 5–10 years it is highly likely that a lot of big Natural Gas producing and transporting companies will be receiving contracts from Asia for huge imports of Natural Gas.
- One last thing — considering the issues with Natural Gas transportation since it requires the building of pipelines which is quite expensive endeavour and especially when it has to be transported over the ocean so for example from US to the Asia region it creates additional obstacles, we’ve decided to focus on a more precise commodity and sector — LNG or Liquified Natural Gas. LNG is more easily transported, does not require additional infrastructure, and is perfect for exports and distribution across the globe. At the same time, it’s quite useful for domestic transportation in the US, although there are enough pipelines built. Not to mention that LNG is being tested to be used as fuel for boats, trains, and other big transportation vehicles. The results seem quite promising, and it is highly likely that in the next couple of years, Liquified Natural Gas could become a major part of the transport industry, which would boost the demand for it and, accordingly, its price. That is why we’ve decided to choose a company that specializes in the production and distribution of LNG — Cheniere Energy (Ticker: LNG).
After we’ve reviewed the prospects ahead for the commodity and the possibilities and value that it holds, its’ time to move on to an in-depth analysis of the chosen company. Ironically or not, the ticker of the company corresponds to the abbreviation of the commodity we are focusing on — LNG. Lets’ state a few facts about the company’s past, present and possible future, which would give us a good picture about its’ value.
Cheniere Energy Inc.
The current market capitalization of the company is around $12.53b. Some of its’ biggest competitors are Duke Energy ($66.28b market cap), Sempra Energy ($37.61b) and ConocoPhillips($49.24b). However while the rest of those companies in the list are more focused on production and transportation of Natural Gas, Cheniere Energy is entirely focused on production and transportation of Liquified Natural Gas. At the same time comparing the market capitalization of those 4 companies is showing us that there is plenty of room for Cheniere Energy to grow.
Statistics for Q1 this year show an increase in revenue of 19.81% year-over-year. At the same time, for the past 12 months, the revenue of the company increased by 27.13% compared to the previous year. Their operating income for Q1 this year has increased by 122.11%, and over the past 12 months, an increase of 64.68% was observed. The EPS (Earnings Per Share) have also been steadily growing over the past few years with an astonishing 261.7% increase in the past 12 months and a 164.81% year-over-year increase in Q1 this year. Obviously, those are signs of a company that is currently on the verge of progress, meaning that it could be a potential hidden gem.
In 2018 the company has signed an agreement with CPC Corporation (Taiwan), to supply liquefied natural gas for 25 years. This contract is worth $25b and the deliveries are set to begin in 2021. Although this is probably priced in on the market already this hard step on the Asian market for the company could eventually lead to future expansion and more contracts from other Asian countries.
The ROE (Return on Equity) in the next 3 years is expected to be very high, which could potentially increase the operational funds of the company and allow it to expand its’ business.
Like many companies in this sector, Cheniere Energy is also struggling with a huge pilled debt; however, in both the short term and long term it is expected that their assets will cover their liabilities, thus improving the equity to debt ratio.
The future growth forecast seems reasonable with a revenue growth of 11.4% in comparison to a 9.2% annual revenue growth for the whole sector and 8.8% for the market. This places the company ahead which could potentially yield additional dividends and could help expansion.
Last but not least — the current stock price is 33% lower than the fair price in regards to future revenue growth. We’ve already seen the bottom in March this year at around $27 per share and the company stock is currently traded close to $49 per share. The highest point for the share price was in 2014 when the price peaked at $85 per share (not considering the listing price). Based on everything said so far, we expect to see the share price continue rising and probably reaching the peak price in the next 3–5 years, probably even outperforming it. A more short term target would be between $60 to $70 per share. The fair value, according to simplywall.st is $72.91, which outperforms our predictions.
Technical chart of Cheniere Energy Inc.
We’ve covered most of the important factors that could influence the stock price and the possibilities in the future of the company. We’d also like to add that we’ve also chosen this company because its stocks are easily accessible, especially for Bulgarian citizens and other European citizens through the online banking app — Revolut. If you are planning on investing, you can download the app and search the stock by typing the name of the company or its’ ticker — LNG. Keep in mind that Revolut only offers cash account trading, which we recommend for long term investments, but if you want to use a margin account, you’ll have to open an account with a broker like CMC.
As usual if you have any questions or comments you’d like to share with us do not hesitate to contact us either through our social media profiles or directly at contact@dmtrading.bg.
Our team wishes you all the best!
⛔ Risk Warning: Investing in financial assets involves risk and is not suitable for all investors; do not risk more money than you can afford to lose. Please make your own research to make sure the product is right for you.
