Raising my target price--again--for stock pick Cheniere Energy

12/09/2013 5:08 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

A huge week for shares of Cheniere Energy (LNG) as the stock climbed by 13.4% from the November 29 close through the end of trading on December 6.

That pushed the shares through my target price again. Given the news behind the surge in share price, as of December 9 I’m upping my target price on Cheniere Energy to $52 a share by June 2014. (Cheniere Energy is a member of my Jubak’s Picks http://jubakpicks.com/  .)

What news makes me so positive on the stock?

Two big announcements on the company’s Corpus Christi liquefied natural gas export terminal pushed that project closer to getting an export license from the U.S. Department of Energy. (Cheniere already has an export license for its Sabine Pass export terminal. The facility, the first to receive a DOE license that permits exports to any country in the world is expected to begin shipping liquefied natural gas from the United States in 2015.)

Cheniere reported that it had signed a 20-year sale agreement with Pertamina, a state-owned Indonesian energy company, for the purchase of about 0.8 million metric tons a year of liquefied natural gas. The U.S. Department of Energy wants to see purchase agreements in place before it grants licenses for new export terminals so this deal moves the Corpus Christi facility a step closer to getting a license. (The deal, obviously, is contingent on the facility getting a DOE license.)

Still on the Corpus Christi front, Cheniere also announced that it had entered into contracts with Bechtel Oil, Gas and Chemicals for the engineering and construction of the LNG trains to be built at Corpus Christi. Plans call for construction to begin in 2014 (pending that DOE license again) on up to three liquefied natural gas trains with a total capacity of 13.5 million metric tons a hear. The first train is projected to go into production in 2018.

Again, as with the Pertamina deal, this construction contract, will move the license application ahead at the Department of Energy.

But to my mind the biggest news of last week for the valuation of Cheniere actually came from Royal Dutch Shell (RDS.) Europe’s biggest oil company announced that it would halt plans to build a $20 billion natural gas of liquids plant in Louisiana. (Even though the state of Louisina had agreed on $112 million in subsidies.) The project would have used cheap U.S. natural gas to produce 140,000 barrels a day of liquid fuels normally made from oil. Royal Dutch Shell cited rising costs and uncertainty about oil and natural gas prices by the time the plant entered operation in cancelling the project

Why is this so important to Cheniere’s valuation? Several reasons.

First, the cancellation of Shell’s project emphasizes the huge first-mover advantage that Cheniere has. Future plants to be built by competitors will face much higher construction costs. Inflated labor costs have already resulted in a 20% cost overrun for Chevron’s (CVX) Gorgon liquefied natural gas project in Australia. And a Canadian oil sands boom that has pushed wages for oil industry construction workers in Canada to 60% more than in the United States is giving pause to companies such as Chevron, Royal Dutch, and Petroliam Nasional that have as many as nine liquefied natural gas terminals on Canada’s West Coast on the drawing boards.

Second, the more the export terminals and gas liquids plants that don't get built—or at least don't get built quickly—the less likely it is that U.S. natural gas prices will spike upwards and reduce or eliminate the profits from buying natural gas in the United States where it’s cheap and shipping it (after its been turned into a liquid) to Asia and Europe where gas is expensive. In other words, the cancellation of Shell’s gas to liquids plant extends the time period in which Cheniere can expect maximum profits from being early to market.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Cheniere Energy as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/.
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