The market may be generally efficient most of the time, but that means that some of time, stock markets are inefficient. And that small sliver of inefficiency can create huge opportunities.
Market inefficiencies can surface in a multitude of ways. Fear creates mispricing. Forced selling, as we saw in 2008, creates significant market mispricing. Complexity or misunderstanding also creates opportunity, and I would place Cheniere Energy (LNG) in the misunderstood list.
Cheniere is an exporter of liquefied natural gas and is the first company in the U.S. that has received regulatory approval to export liquefied natural gas (LNG) on a commercial scale. It has spent the past decade or so getting regulatory approvals and constructing state-of-the-art facilities, and officially began exporting LNG this year. It's a safe bet to say that there will no direct competitors to Cheniere in the United States for a while. Besides obtaining rigorous regulatory approval, it would take tens of billions of dollars to develop what Cheniere has put together.
Today, Cheniere has a market cap of $8.5 billion and an enterprise value of approximately $25 billion. In my view, Cheniere's business is probably worth $50 billion or more. To be sure, I subscribe to the view that an asset is worth what someone is willing to pay for it. And right now, the market isn't willing to pay for that. I believe the market is wrong.
In addition to the above, the LNG market is uniquely attractive. Cheniere's contracts are signed for 20-year terms and payments for LNG are made regardless of whether the customer takes delivery. And Cheniere's customers are the real deal -- super-major oil companies and governments on behalf of state-owned oil companies. Also consider that Cheniere's raw material, natural gas, is more abundant and cheaper in the U.S. than anywhere in the world. Cheniere has a massive stream of future guaranteed cash flows totaling tens of billions of dollars.
Cheniere's interim CEO recently noted that any buyout of the company would require a significant premium above what is typically paid in the energy space. Seth Klarman, perhaps the most skilled investor in complicated arenas, has made Cheniere his biggest equity position, worth more than $1 billion. In his entire career, I don't think Klarman has ever lost money in his biggest conviction bets. Another shrewd investor that has piled more than $1 billion into Cheniere is Carl Icahn.
Cheniere is a highly misunderstood business, but that misunderstanding will clear up as the company continues to get buzz from exporting shipments of LNG. Once the curtain of confusion is pulled away and the cash flows that Cheniere has coming over the next two decades are appreciated, I suspect a lot of interest in this company will begin to materialize.