I have stuck to oil and avoided talking about natural gas and related stocks, despite the strong move that nat gas has made in recent weeks -- climbing close to $2.50 per thousand cubic feet (mcf) this week after hovering near $2 through February and March. I still don't see the opportunity in nat gas as anywhere near as good as in oil, but perhaps there is one play that again is making sense: liquid natural gas exports with Cheniere Energy (LNG).
It's been a long history for me of trading around Cheniere and similar tanker plays like Golar (GLNG), having made some decent money in 2013 and early 2014. And while I missed the big move up to $80 late in 2014, I also missed out on the losses as debt and an internal proxy fight to remove founder Charif Souki dropped shares to $30 this year.
The natural gas market is not like oil, in that it is not a global market -- the markets that price nat gas remain local, with prices in Europe that continue to hover at a $5 premium to U.S. prices, and in Japan at as much as a $10 premium.
That has always made the model at Cheniere a simple one: Capture the arbitrage between plentiful and cheap nat gas here in the U.S. and extremely strong demand and dear prices in Asia.
Of course, that's not as simple: The mechanics of turning gas into a liquid for transport requires very cold temperatures and extreme pressures and specialized tankers to contain it. Building LNG plants and transports is a multibillion-dollar endeavor, which Cheniere has done successfully in Sabine Pass in Louisiana (and soon in Corpus Christi, Texas) -- but required a choking amount of debt to accomplish.
In addition, market vagaries could quickly destroy the arb: We've seen U.S. nat gas prices reach upwards of $10 in the early years of the century, and those analysts who predict they'll never see any extreme in most any commodity price are often proven to be fools (I'll add my own name to this list on oil reaching $40 a barrel this year).
So the modeling of customer contracts becomes critical for a company like Cheniere, and in that, they've done a fantastic job -- writing into contracts an additional $1.50/mcf premium to Henry Hub prices, no matter what they'll be, and locking in 20-year premiums on delivery of $3/mcf that will at the very least provide a cash flow yield of more than 15%. There is little commodity risk, at least at the outset of deliveries, and a long-term, bankable cash flow.
Others are chasing this model, most significantly Dominion (D) with its Cove Point plant in Baltimore -- but it's at least another year and a half away from completion and facing new challenges from environmental lobbying groups. Cheniere is very far ahead of everyone else in LNG.
Moving Souki out was tough, but he was never really an oilman -- and his replacement, Neal Shear, was one of the original creators of the Morgan Stanley (MS) commodity desk in the '80s. This is one guy who knows commodity markets.
Of course, Carl Icahn is a big investor in Cheniere, as is Seth Klarman. Normally, I don't really care which hedge funds own which stocks, but it is telling that Klarman, who usually has no problem holding cash, has accumulated such a large percentage stake in Cheniere and strongly added to holdings here in the $30s recently. If you buy shares here, you'll have the warmth of knowing you're in well below the basis price of either of these hedge fund giants.
I've waited a long time, trying to gauge when the shares will be done "growing into" their projected cash flow against the massive debt they still need to service. Now that the stock price has flatlined for several months here in the $30s, I think that time has come. This is not a speculative play, as it was in 2013 and 2014. It is a utility play with cash flow that greatly underestimates current share prices.
I'm recommending Cheniere Energy (for the first time in two years) at $37.