The Best Ways to Play LNG

01/30/2020 5:00 am EST

Focus: ENERGY

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

What are the best ways to invest in growing liquid natural gas (LNG) adoption? asks Elliott Gue, editor of Energy & Income Advisor. Here, he highlights two stocks poised to benefit in this market.

Kinder Morgan Inc (KMI) is going to a get a big lift this year from its $2 billion Elba Island LNG facility. Startup was delayed unit the 2019 fourth quarter due to operational issues, with the first cargo not leaving until mid-December.

Since then, however, the company has systematically brought four units online, with FERC approving a second unit to begin exporting. Kinder shares continue to trade just below our highest recommended entry point of $22.

We believe they’re likely already pricing in the promised dividend increase to 30 cents a share in April, but not the likely earnings lift the company will get this year from 10 trains of LNG export capacity entering service, as well as natural gas pipeline infrastructure to feed it.

The company also continues to successfully reduce its once-crushing debt load, most recently with after tax proceeds of $764 million from the sale of shares of Pembina Pipeline it absorbed from the sale of its former Kinder Morgan Canada unit.

The most direct US play on LNG growth is Cheniere Energy (CQP). We generally recommended avoiding this name early in the decade when it was almost entirely dependent on contracted LNG import capacity.

But the company has since constructed meaningful export capacity at its Corpus Christi and Sabine Pass facilities. As a result, management has been able to resume distribution growth even as long-term import capacity contracts have wound down.

And Cheniere has begun generating reliable free cash flow after all capital spending as well, with guidance 2020 results of nearly $1.5 billion expected to cover distributions by at least 1.2 times.

Q4 results are expected out at the end of February along with updated 2020 guidance. At that point, we’ll consider raising our buy target depending on what we hear. Until then, Cheniere remains a buy on dips to $42 or lower.

Outside of our  model portfolio, super oils like Chevron Corp (CVX), Royal Dutch Shell (RDS.A) and Total SA (TOT) are all ramping up their LNG investments globally, with stakes in many of the projects shown in our tables. All rate buys even for the most conservative investors.

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