Cheniere Energy (LNG) is a stock that has had a phenomenally successful run over the last year or so. The stock climbed from under $25 at the beginning of 2013 to close to $60 a couple of days ago. This is a nice move in itself, but even more remarkable considering that, as recently as 2008, LNG was trading below $1 and just 15 months before that had been over $40.
The reasons behind these fluctuating fortunes are interesting and a great example of a “lemonade” story... you know, the old thing about “When life hands you lemons, make lemonade.” It is also a cautionary tale about accepting a consensus view. The original business model on which LNG’s strength was based was itself based on a prediction that was accepted as gospel just a decade or so ago, but which turned out to be as wrong as wrong can be.
At that time it was hard to find an energy expert who didn’t agree on one thing. The US was, in the early 2010s, going to have a huge need for imported natural gas. Oil prices were soaring to around $140/Barrel and of course we all knew that “peak oil” was coming. Supply of oil could not possibly keep up with demand, it was said, and the US would have to import natural gas to keep power plants and industry running. With that backdrop, Cheniere Energy, a small offshore oil exploration company saw an opportunity. The company shifted tack and begun to build a large Liquefied Natural Gas import facility at Sabine Pass, on the Texas-Louisiana border.
This “can’t fail” play on the coming need to import natural gas was completed in 2008, just in time for the shale, sand and fracking boom to make fools of all of those experts. Far from being in dire need of massive imports of gas, the US was now a major producer and the massive increase in supply caused natural gas prices to plummet.
Oops! Cheniere co-founder and CEO Charif Souki, however, did what good capitalists do when faced with adversity... he adapted. If there was so much gas in the US, then the need for liquefaction and for a terminal would still exist; it would just be for export rather than import. So, from a company whose vision had been overtaken by history and that looked headed toward bankruptcy emerged the next big thing in energy... a major player in the export of liquefied US natural gas. I cannot think of another time when a stock has been ultra-trendy twice, with the re-birth being based on the exact opposite business model to the initial plan.
This sounds great and given the innovation shown by the company and the prospects for exported natural gas, LNG (the stock) boomed again. At every turn it seemed that there were yet more reasons to buy Cheniere stock. They are building tankers to export liquefied natural gas, so will benefit from transport as well as liquefaction and terminal revenue. Russia's recent belligerent stance in Ukraine has made some of the opponents of exporting US gas think again.
Their argument was that these reserves put the country on the path to full energy independence, so from a national security perspective we should be hoarding, not sharing, our bounty. Now it looks like exporting natural gas could benefit, rather than harm that security. Gas exports are a major source of revenue for Russia and flooding the market with cheap American gas will hit them where it hurts. On top of that, natural gas prices have recovered in the U.S. somewhat, from a low around $2 to around $4.50.
So with good news piling on lucky breaks you would think that LNG is a slam dunk, and there are many people out there saying just that. I beg to differ. It could be that all of this potential will be unleashed, but, as the history of Cheniere itself shows us, there is no certainty that will happen. Right now, I can’t see any reason why not, but then nor, in 2006-7, could I or anybody else see why an import facility for natural gas would be anything but a great idea. The best laid plans of mice and men...
It is not that you shouldn't invest in something because there is a remote risk that things won't pan out. That would be a ridiculous assertion; risk is part of investing. Nor is it that consensus is always wrong. It’s just that there is always a risk that it could be, and you should have a reasonable prospect of being rewarded for that risk. I don’t believe LNG offers that at these levels. At close to $60 every bit of good news imaginable has been priced in and any hiccup will cause a sharp decline. In fact, if the last few days are any guide it won’t even necessarily take any bad news.
Investors showing signs of running out of patience with Cheniere should come as no surprise. The company has never made any money, which is not surprising given that all of this optimism is based on their heavy investment in something that may happen in the future. The lack of profit is one thing, but LNG has lost even more that analysts’ expectations in each of the last three quarters, and that has me worried. Sooner or later, any company has to start looking at P&L if they are to satisfy investors. I mean, even Amazon (AMZN) makes money occasionally.
As I hinted above, I have nothing against taking a chance or investing in a company that has taken a major gamble on a perceived opportunity. Speculation is good, but the days for speculating on the future of LNG probably ended about 6 months ago when the stock broke through $35. If I am right and a slightly cloudier picture of Cheniere's future causes a rush to exit at some point, then we may see those levels again. If we do, I will reconsider, but for now the fact that nobody seems to be able to find a reason not to buy LNG is not enough for me. There still has to be some prospect of a profit on my investment and, at these levels, I can’t see one.