Stock of the week - Cheniere Energy (24.03.2022)

• Risk of EU being cut off Russian gas remains real

• US expected to announce natural gas supply deal with EU

• Cheniere Energy - first exporter of US LNG

• Cheniere is pure natural gas stock, not involved in oil production

Russian invasion of Ukraine has resulted in an international condemnation of Russia and led to unprecedented sanctions on the Russian economy. However, Russia's biggest source of income - energy commodity exports - was largely spared. Now the situation is getting tense. Russia's Putin said that his country will require RUB payments for its natural gas from so-called "unfriendly countries" and it could lead to a total ban on Russian gas in the EU. This, in turn, could be an opportunity for US LNG companies, like Cheniere Energy. 

Ban on Russian gas likely an opportunity for US companies

As there are some indications that European countries will not agree to making natural gas payments in rubles, the risk of Russian natural gas flows to Europe dropping to zero remains real. This could be an opportunity for US natural gas companies. In fact, it is already rumored that the United States will announce increased LNG shipments to Europe as soon as tomorrow. Question remains whether the US is able to supply the EU with needed quantities of natural gas. On one hand, it is the biggest natural gas producer in the world with a production over 40% higher than that of Russia in 2020. On the other hand, Russian consumption amounts to around 50% of domestic production while US consumption amounts to around 90% of domestic production. Meaning that the United States does not have enough production to fully replace Russian exports to the US. On top of that, US gas cannot be exported to Europe via pipelines and needs to be exported via sea. This has 2 limitations - availability of LNG fleet and availability of infrastructure for LNG imports in Europe. Nevertheless, the current situation is likely to lead to increased investments in both US production capacity as well as LNG fleet and infrastructure.

Cheniere Energy - first exporter of US LNG

Cheniere Energy (LNG.US) is a well-known US natural gas company and a member of Fortune 500 list. Back in 2016, Cheniere became the first US company to export liquified natural gas (LNG) to foreign markets. Unlike US supermajors ExxonMobil or Chevron, Cheniere is not involved in oil production and therefore can be seen as a pure natural gas stock. Having said that, it can be used by investors to get an indirect exposure to the natural gas market. The company has greatly boosted its LNG exports in 2021 with the number of cargos increasing from 391 to 561 (+45%) and volume of exported cargo increasing from 1,381 to 2,018 TBtu (+46%). Thanks to an increase in natural gas prices, revenue during the period jumped 70%, to $15.86 billion. What one may find worrying in Cheniere's 2021 results is a big net loss of more than $2.3 billion. However, the company explained that it was due to a derivative loss due to changes in fair value amounting to $5.8 billion. Adjusted EBITDA, which excludes such one-off, non-operational factors, increased 23% in 2021, to €3.96 billion. 

Taking a look at Cheniere Energy (LNG.US) chart plotted against US natural gas prices (NATGAS, light blue overlay), we can see that the two have moved in tandem in the post-pandemic world. In fact, Cheniere's stock outpaced gains in natural gas prices. Cheniere Energy trades around 400% above its pandemic low while US natural gas prices trade around 250% higher. Source: xStation5