Is Liquefied Natural Gas Still a Buy?

Cheniere Energy (NYSEMKT: LNG), a future U.S liquefied natural gas exporter, kicked off 2014 on a positive note as its shares added nearly 12% to their value (up-to-date). The high expectations from the company to start exporting liquefied natural gas keep its valuation rising. Moreover, the recent rally in the price of natural gas may have also slightly contributed to the company’s stock to rise. Given these developments, is the company’s current valuation makes Cheniere Energy an investment worth considering?

Natural gas market

The prices of natural gas rallied in the past several weeks and reached its highest level in recent years. The colder than normal weather in the Northeast and Midwest along with the low storage levels have pressured up its price. This rally also had a modest positive effect on shares of Cheniere Energy.

The chart below shows the normalized prices of natural gas and shares of Cheniere Energy in the past several months. As you can see, both prices were correlated especially in the past several weeks.

natural gas LNG Feb 2014Source: Energy Information Administration and Google finance

Based on the above, if the price of natural gas changes direction and fall, this could pressure back down the price Cheniere Energy’s stock. So what’s next for natural gas?

On a yearly scale, the Energy Information Administration projects the 2014 average price of natural gas will be 11% above its 2013 annual average price. In such a case, this could have some moderate positive effect on Cheniere Energy’s valuation. But for 2015 the EIA projects the price of natural gas will drop by 2.3%. Keep in mind, Cheniere Energy plans  to start exporting LNG from its Sabine Pass Liquefaction project in 2015. Thus, until then, the changes in the price of natural gas will have little direct effect on the company’s valuation.

But the main risk Cheniere Energy faces is the changes in the price of natural gas. Cheniere Energy has already reduced its risk related to its LNG exports by closing 20 years contracts to sell LNG for five out of its six trains in the SabinePass project — the first project that is expected to start working in 2015. Even though these contracts are secured for 20 years, the price of LNG is still uncertain and will be based on the market price of the Henry Hub plus a fixed component.

Until Cheniere Energy starts to export LNG, it will also have to face strong competition from other countries.

Strong competition in the LNG market

Qatar, the world’s leading exporter of LNG, plans to boost its LNG shipments to Europe by 22% in 2014. Such contracts are likely to crowd out any new players from entering the LNG business in Europe in the near future.

In the meantime, other countries including Australia and Israel are expanding their LNG business with the help of leading oil and gas explorers. Chevron (NYSE:CVX) is expanding its LNG projects in Australia including its Gorgon project, which is almost 75 percent complete. The company plans to start extracting gas in mid-2015. Its Wheatstone project has recently reached construction and LNG marketing milestones. This project is expected to start producing LNG by 2016. In 2014, the company plans to further increase its capital expenditure as Chevron moves close to first production.

Israel is another country that is slowly increasing its natural gas production: Israel has several off shore caches of natural gas. Noble Energy (NYSE:NBL) is one of the companies that will cash in on these explorations. The company holds  36% in the Tamar project. Further, the company has recently announced an agreement to sell natural gas from this project to energy companies in Jordan. The current estimates are that this agreement will generate gross revenue of $500 million. Therefore, the U.S LNG business isn’t the only one progressing.

Take away

The liquefied natural gas market is likely to keep growing as the demand for energy shifts from coal to natural gas. But the progress of other countries such as Australia and Israel in natural gas exploration could loosen the LNG market in the coming years and thus reduce the price of natural gas. Therefore, I still think the sharp rise in Cheniere Energy’s valuation might not reflect the current direction the LNG market is headed.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.