Cheniere Energy: LNG Terminal Pause A Positive (Upgrade) (NYSE:LNG)

With the Biden administration putting a pause on LNG terminal permitting, let’s catch up on Cheniere Energy (NYSE:LNG). While on the surface the news sound like a negative, I actually think it’s a positive for Cheniere. In November, I lowered my rating on the stock to “Hold” as it closed in on my price target of around $200 following a solid performance. The stock is down about -7% since I downgraded it.

Company Profile

As a reminder, Cheniere operates liquid natural gas (“LNG”) terminals. Its facilities liquify natural gas in order for its to be transported overseas, where it is converted back into natural gas through a regasification process.

The company owns a stake in one of the world’s largest LNG facilities, Sabine Pass, through its 48.6% ownership stake in Cheniere Energy Partners (CQP). The Sabine Pass has six operational trains with an aggregate approximately 30 mtpa of LNG capacity. It has storage capacity of approximately 17 Bcfe, an interconnecting pipeline, and three marine berths to accommodate LNG transport vessels. Cheniere also owns the GP interests in CQP, as well as has incentive distribution rights (“IDRs”).

Outside of its stake in CQP, it also directly owns an LNG terminal near Corpus Christi, Texas that can produce approximately 15 mtpa of LNG. The facility also has approximately 10 Bcfe of LNG storage, a natural gas pipeline, and two marine berths.

LNG Export Terminal Permitting Pause

Last week, the Biden Administration put a pause on permitting new LNG export terminals. The pause will allow the Department of Energy (“DOE”) to take time to review the potential environment and economic impact of the proposed projects.

The administration had been getting stepped up pressure from environmentalists in recent months after approving the Willow oil-drilling project on Alaska’s North Slope. With the 2024 election campaign cycle kicking off, Biden clearly wants to re-align himself with environmentalists, and this appears to be a way to help him accomplish that.

Now whether pulling back on LNG export terminals actually is environmentally friendly is up to debate. Within the U.S., natural gas, more than anything else, has helped reduce carbon emissions, as power plants have shifted from coal to natural gas.

Meanwhile, LNG is being used to help displace coal in places like Asia.

While renewables may be more environmentally friendly, there could be limitations to their uses as base load power as green energy like solar and wind can be dependent on weather conditions and time of day. The question then becomes if transported nat gas is more environmentally friendly than locally produced coal, although some destinations likely have neither. Perhaps the DOE will be studying this during their LNG terminal pause.

Regardless, while the news sounds bad for a company like Cheniere, it is actually is probably very good for the firm. The pause is only expected to impact four projects that are currently awaiting approval from the DOE, as well as anything that hasn’t gone before the DOE yet. The latter scenario includes Venture Global’s Calcasieu Pass 2 (CP2) project, which is currently being reviewed by the Federal Energy Regulatory Commission (“FERC”) before it goes to the DOE. CP2 is one of the largest LNG projects currently up for consideration.

Cheniere, meanwhile, is in the process of expanding both its Corpus Christie and Sabine Pass facilities. FID for its Corpus Christi Stage 3 Project was approved last June and the facility was over 44% complete at the end of Q3. The project will add about 10.5 mtpa of LNG of production capacity with initial production now set for the end of the year. Substantial completion of the project was moved up to between 2Q/3Q 2025 to the second half of 2026, versus prior guidance of the second half of 2025 to first half of 2027. This project will not be impacted by the LNG terminal pause.

As for its Sabine Pass expansion, the company pre-filed with FERC in February and hired Bechtel do FEED work, as it looks to increase capacity by over 20 mtpa through three trains with expected capacity of ~6.5 mtpa each. The project got its export license from the DOE in March of 2022, so this project while earlier in the process also appears safe.

Now, Cheniere has also talked about adding a 7^th and 8^th train to Corpus Christi. This potential extension looks like it would be impacted by the Biden LNG terminal pause. However, this project was further down the road and smaller than the other two.

Now in addition to the government risk, the Sabine Pass project does face inflation risks with potential costs going up. However, Cheniere has always done a good job of managing costs and getting projects done on time or ahead of schedule. However, project costs of all kind have risen over the past two years due to inflationary pressures.

Now there shouldn’t be much macro and commodity risk going forward, unlike prior years when it had less contracted capacity. Cheniere is the most contracted out it’s ever been, with only about 2% of capacity not contracted out for 2024. Its EBITDA sensitivity to prices is only about $50 million in 2024, which is minimal off an over $6 billion EBITDA base. It has very long term fixed fee or take-or-pay contract, so unless a customer goes bankrupt, and most are large utilities, these risks are minimal.

Valuation

Cheniere trades at 10.6x the 2024 EBITDA consensus of $6.3 billion. For 2024, its trades at 9.9x the 2025 EBITDA consensus of $6.7 billion.

It trades at about a 2024 DCF yield of about 9.5% based on around $3.8 billion in DCF.

As I’ve previously discussed, there aren’t really any great public company comparisons for Cheniere, although Energy Transfer (ET) and Enterprise Products Partners (EPD) both have export assets. Both trade at discounts to Cheniere, but both are more diverse.

With its assets suddenly becoming a bit scarcer due to the LNG terminal pause and less volatility in its results moving forward, I think the company can trade at 12x 2025 EBITDA. That would value the stock at $225.

At this point, there shouldn’t be much volatility in its EBITDA, as 98% of its production capacity is contracted out for this year on fixed fee and take-or-pay contracts, while it will get a boost in production in 2025 as Corpus Christie 3 starts producing some LNG. This added production will also be contracted out with similar long-term contracts. This is just some great visibility into numbers.

Conclusion

Overall, I think the LNG terminal pause is good for Cheniere. Its main projects already have DOE approval, and a bunch of potential competition just saw their projects delayed. This only makes its existing assets and projects currently approved even more valuable. I’d also expect this news to be able to help the company firm up existing capacity at Sabine Pass to get this expansion project over the finish line in terms of contracting.

Now Cheniere’s 2024 EBITDA will come in much lower than 2023 results, as the company saw some outsized gains from spot prices on the small percentage of its volumes that were not contracted out. This year volumes will be the most contracted in company history and spot rates have come down, so it should be back to normalized EBITDA going forward, with its growth projects the main drivers. Overall, expect more steady and predictable results in 2024 and likely beyond.

Given the current developments with the LNG terminal pause and likely more visible results moving forward, I’m going to raise my rating to “Buy” with a $225 price target.