Why Cheniere Is My Top Pick for 2017

 | Dec 26, 2016 | 10:00 AM EST
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I think 2017 will shape up as perhaps the best year for energy stocks in a decade, but I'm faced with quite a challenge in finding a No. 1 stock to recommend in the sector. Should I go with U.S. shale-oil producers, or should I bank on a resurgence the oil-services sector's resurgence? What about looking for an infrastructure comeback based on a Donald Trump presidency?

All of these investment themes arguably have merit, but if I have to pick just one stock only, I'm making the call that the absolute best opportunity will likely come in the natural-gas sector -- and my top 2017 pick there is Cheniere Energy  (LNG) .

Now, you might ask why I'm going with a natural-gas play (particularly Cheniere) instead of an oil pick. After all, I foresee a major rebalancing coming for oil coming some time in 2017, with prices rising to more than $100 a barrel. But natural gas is a localized bet that will be less affected by global geopolitics or worldwide supply changes. That makes understanding and predicting the opportunity quite a bit easier.

Here's what I see for natural gas in 2017: a U.S. glut. That means a major opportunity ahead in natgas exports, with liquid natural gas becoming less of a promise and more of a practical reality. If that happens, Cheniere remains the market leader, and likely the only fully hedged liquid-natural-gas investment to appear in 2017. Cheniere doesn't bank on natgas spot prices in either the U.S. or export markets, and it doesn't need an immediate arbitrage to take advantage of any disconnect between the two.

It's true that the current price differential between natural gas between the United States and, say, Japan is huge -- more than $10 per thousand cubic feet. But even if those numbers were to shrink quickly, Cheniere would remain unaffected, as the firm has already banked and hedged long-term contracts for its liquid-natural-gas exports. That's not the case with the gasification-tanker business for something like Golar  (GLNG) , which relies on short-term arbitrage opportunities.

So, Cheniere remains the only game in town, at least until Dominion Resources  (D) finally finishes its Cove Point export terminal, which was only two-thirds completed as of August. Cheniere's prospects are also completely stable -- in fact, the firm will even have a better opportunity as it expands from current facilities in Sabine Pass, La., into a new export terminal in Corpus Christi, Texas.

It's true that Cheniere's stock price has been buffeted at times by natural-gas pricing -- but honestly, for no good reason. As I said, the company is really entirely disconnected from spot natgas prices. And as Cheniere's volume increases and its cash flow continues to overwhelm the company's debt position, this is a stock that can really do nothing but go higher throughout 2017. Slowly, but surely.

As an aside, I expect growth in liquid-natural-gas output from Cheniere (and Dominion when its new terminal comes online) to serve as a catalyst for steady rises in U.S. nat-gas prices. In fact, that's one of the reasons I remain committed to natural-gas companies as great long-term values. But again, if I can only pick one stock to recommend for 2017, it'd be Cheniere.

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