Benefiting From an Energy Boost

 | Sep 10, 2012 | 4:00 PM EDT  | Comments
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In a schedule 13G filing with the Securities and Exchange Commission (SEC) on Friday, PointState Capital reported that it was increasing its stake in Cheniere Energy (LNG) to 5.5%, or 11.8 million shares. The move brings PointState's total holdings in the natural gas distributor to a value of more than $185 million.

While Sean Cullinan's fund had shown modest interest in Cheniere Energy in its most recent Form 4 filing, this new development had the energy bulls clamoring to buy in after reports of a plus-5% passive stake started hitting the newswires. On Friday alone, shares of Cheniere spiked nearly 475 basis points in the market's first few hours of trading. By the end of this buying spree, these gains had settled in to a share price of $15.73 after the stock began trading at the $15.12 mark earlier that day.

Interestingly, this upsurge is just the most recent bit of positive momentum surrounding shares of Cheniere Energy, which have gained 15.5% in the past month, outpacing the oil and gas refining industry (4.6%), and competitors such as Sempra Energy (SRE) at -3.3%, McMoRan Exploration (MMR) at -6.3%, BP (BP) at -0.73%, and ConocoPhillips (COP) at -0.93%.

While the company has reported a loss in its first two quarters of 2012, earnings are trending in the right direction, and Q3 EPS is expected to come in at -$0.12 a share after hitting -$0.34 one quarter earlier. On the whole, the Street is expecting Cheniere to pass the profitability mark sometime around 2015, and new developments in the export markets may hasten this trend.

As the Houston Chronicle reported late last month, "Cheniere is the frontrunner in the race to export domestic supplies of natural gas, made abundant [...] through the technological advances in hydraulic fracturing." The company has already submitted a federal request to construct an export facility on the Gulf's western coast, near Corpus Christi, Texas.

In the hedge fund industry, it's not just PointState Capital that's betting a natural gas export boom is in the cards for Cheniere. Consider these statistics: At the end of 2011, 23 hedge funds held long positions in the natural gas distributor. By the end of this year's second quarter, this number had risen to 30.

Other fund managers who currently hold Cheniere Energy in their portfolios are John Kleinheinz, billionaire Stanley Druckenmiller, Daniel Arbess, and Richard Driehaus. Druckenmiller's holdings of the company are particularly notable, as his Duquesne Capital fund was the original training ground of Sean Cullinan and six of PointState Capital's other founding members.

While it is never a bad idea to follow respected money managers into a position, it's always a good strategy to perform some secondary analysis as well, particularly from a valuation standpoint. Since Cheniere has experienced negative earnings throughout most of its history, it will serve us well to use sales multiples in place of traditional price-to-earnings (P/E) ratios.

Despite the fact that the company has grown its revenues by an average annual rate of 16.5% since the recession, the stock still trades at a price-to-sales ratio (9.5x) that is nearly half of its 2008 value (18.9x). Moreover, Cheniere also trades at a PSG ratio -- which is similar to the PEG -- of 0.57. This is below aforementioned peers like McMoRan Exploration (2.36) and ConocoPhillips (0.63).

PointState Capital reported a 5.5% passive stake in Cheniere Energy last Friday, which gave the stock quite a boost in early market trading. This short-term uptick is part of a larger trend for the natural gas company. It appears that much of this bullish pressure is the result of speculation that the company is the frontrunner in the U.S.'s natural gas export race, which is a bet that the hedge fund industry at large has supported rather heavily. If sales multiples are any indication, individual investors can still find value in this stock.

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