One solution to Europe's gas woes is to fill the loss of natural gas supply coming from Russia with liquified natural gas (LNG) from the United States, explains Tony Daltorio, editor of Market Mavens.
Europe has been the top destination for U.S. LNG for the past four months in a row. And while Europe's LNG import facilities need to be expanded, Europe's need for natural gas is truly good news for some American companies, such as Cheniere Energy (LNG).
Cheniere, which began operations in 2016, is the largest producer of LNG in the United States and the second-largest LNG operator in the world. It sells its LNG in more than 40 countries (expected to be 60 countries within a few years) on five continents.
Wall Street — the home of short-term thinking — has had Cheniere Energy in its doghouse for many years, trading in the $50 to $60 range. Traders seem not to have liked the fact that Cheniere was spending several billion dollars a year building LNG export terminals with virtually no immediate revenue. There were doubts that anyone wanted U.S. gas.
Fast forward to 2022 and Cheniere's business is booming. In its latest earnings conference call, the company said it expected to hit at least $7 billion in operating profits this year. And the company has enough cash flow to begin paying down its $30 billion debt load, as well as start a dividend.
Make no mistake: this is a growth business. The U.S. began LNG exports just five years ago. The Department of Energy predicts that it will soon have the largest peak export capacity of any nation in the world. Cheniere itself already has the capacity to export 45 million tons annually of LNG. And it's adding more capacity — about 10 million more tons.
Europe will be an eager buyer. And of course, there is the traditional large buyer of LNG — Asia. Cheniere signed the first ever long-term contract to supply American LNG to China in 2018. Last October, Cheniere signed its second long-term Chinese supply contract — a 13-year agreement with a subsidiary of China's ENN Natural Gas.
There's a lot to like about Cheniere Energy at the moment. First, Cheniere has some of the lowest-cost LNG projects in the world — around $500 to $600 per ton, well below the U.S. average of $800 per ton.
The company has some good lawyers, too: its contracts have neither price re-openers nor linkage to oil prices, and flexibility on where the LNG can be delivered. In effect, it's a toll business with secure revenues coming in.
I believe Cheniere will have billions of dollars to deploy over the next few years. This can be used for expansion, debt reduction and more stock repurchases, as well as higher dividends.
Finally, with the Russia-Ukraine situation, U.S. LNG is beginning to enjoy more of a market view as a reliable supplier of natural gas. This will boost the largest exporter of LNG in the United States, making Cheniere Energy the biggest winner in this whole sad situation. The stock is a buy on any weakness.