What is the stock?
Cheniere Energy Inc (LNG:US)
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How long have you held the stock?
Over two years – initial position taken in April 2016
What do you like about it?
Cheniere is a key player in the LNG terminal and export business, having secured scaled development sites in two core LNG export regions in the US, namely Sabine Pass (Louisiana) and Corpus Christie (Texas).
Global LNG demand remains highly centralised, with Japan/Korea the major buyers and China/India the major growth centres, followed by Europe. United States LNG exports gained prominence after Cheniere’s inaugural export in the second quarter of 2016, with expectations of the US growing to become a major player by 2020. Cheniere will be competitive on the global cost curve.
The core of the investment thesis for Cheniere rests in the long-term, highly contracted nature of Cheniere’s output, with revenues coming from fixed fees derived from 20-year LNG sale and purchase agreements (SPA). The contract structure is a great example of the defensiveness of the infrastructure asset class offering investors long-term, highly visible earnings streams.
Cheniere is using these predictable cash flows to invest in further growth to support a huge and growing demand for LNG globally.
How is it better than its competitors?
Cheniere’s key strength is first-mover advantage in being the first US exporter of LNG by a margin of two years. The first-mover advantage enables Cheniere to develop leading expertise and relationships ahead of US peers. Moreover, the deep inventory of customer, producer, and pipeline commitments grant superior size and scale, which provide strong leverage to future LNG demand growth.
In addition, the highly contracted nature of Cheniere’s output once full production is reached, makes it an attractive pure play infrastructure investment proposition.
What do you like about its management?
Management have been successful in delivering major projects, on time and within budget. A new CEO was brought in 18 months ago to transition the business from a greenfield financier to a fully operational infrastructure business and he is executing very well.
What is your target price?
This is not a hard number – is based on an IRR (Internal Rate of Return) of at least 8% – if the annualised return falls below an 8% we would be a seller. For Cheniere this is evolving as it continues to add new contracted “trains”.
At what point would you sell it?
There are a number of scenarios where we could look to reduce or sell our position including:
- When its valuation falls below our benchmark return;
- If something fundamentally changes in the investment thesis to see the value or quality of the asset portfolio or company deteriorate (e.g. contract re-opening such that can no longer rely on visibility of earnings stream);
- Geopolitical risk. If we feel the business was at risk from President Trump’s trade wars, we would reduce exposure to assets at risk; and
- We re-position our portfolio for a shift in strategic direction, which could see us reduce exposure to “contracted assets”, such as Cheniere e.g. if we see the macro environment deteriorating, we could reduce our exposure to contracted assets and increase our exposure to regulated utilities.
How much has it added to your overall portfolio over the last 12 months?
The stock is a top five position for 4D Infrastructure and is up 33.6% over the last 12 months.
Is it a liquid stock?
Yes. The stock has a market capitalisation of US$16.3 billion and trades over US$150 million a day.
Where do you see value?
It is a high quality contracted operator, which is under-valued at current prices based on our analysis, which includes:
- Assessment and modelling of existing contracted volumes only with significant potential growth upside not yet valued;
- Strong monopolistic position with competitive advantages based on location, scale and first mover advantage;
- Management team that is executing well;
- Positive macro environment; and
- Highly correlated to two global themes, we remain very positive on: the emergence of middle class in developing economies and global transition to cleaner fuel sources, such as gas.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.