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Stock Analysis & Ideas

Cheniere Energy: A Sleeping Giant is About to be Stirred

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Although the fundamentals for natural gas stalwart Cheniere Energy seem troubled, the reality may be that LNG stock is just getting started as harsh realities in the critical resource sector come to roost.

Initially a fast-rising security due to sudden geopolitical relevance, Cheniere Energy (LNG) – which specializes in liquefied natural gas or LNG – encountered a weakness that belied its earlier vigor in recent sessions. A combination of increased supply and economic woes hurt demand, sending energy prices down. However, the narrative for LNG stock is cynically compelling in the longer-term picture. I am bullish on Cheniere.

One of the few publicly traded securities that managed to start this year relatively on the right foot, LNG stock really garnered upside momentum when Russia made the unsettling decision to invade neighboring Ukraine. In a blink of an eye, the worst crisis to hit the European continent since World War II erupted, threatening to dismantle the modern global order of diplomacy before warfare.

Of course, the strictly economic narrative benefitted LNG stock. With the U.S. leading the western world in sanctioning the Kremlin, the inevitable tit-for-tat response effectively shelved a major portion of global hydrocarbon energy supplies. Logically, prices skyrocketed, with rising inflation and intense travel demand only exacerbating the pain for everyday households.

However, a combination of excessive price spikes and a bigger-than-expected rise in natural gas supplies – applied downward pressure on the spot price for natural gas. As a result, the performance of LNG stock softened, although this weakness is likely temporary.

Cheniere Energy Stock Analysis

LNG has an 8 out of 10 Smart Score on TipRanks. This indicates a strong potential for the stock to outperform the broader market.

LNG Stock to Benefit from Energy Realities

Recessionary cycles tend to put extraordinary pressure on natural gas prices, which in any other circumstance would be bearish for LNG stock. For instance, in the aftermath of the dot-com bubble bursting, the natural gas spot price plunged from double digits to just under $2 per million British thermal unit (BTU). However, the difference this time around is obviously the war in Ukraine.

Perhaps French President Emmanuel Macron gave the starkest – and arguably most realistic – assessment of the new energy paradigm. He warned his country’s people that they might need to engage in a period of energy “sobriety,” according to the Associated Press.

Macron could have just cut to the chase with one figure, 45%. That’s how much Russia accounted for European Union imports of natural gas. Unless policymakers in the region have any other immediately serviceable alternative, natural gas prices seemingly have nowhere to go but up, especially with the winter season steadily approaching.

Admittedly, LNG stock is not a catch-all panacea. However, Cheniere is committed to doing whatever it can to help ease the supply squeeze. Thus, making it a compelling bullish idea in an investing ecosystem lacking confidence-inspiring endeavors.

Forward-Looking Vision is Required

While the geopolitical narrative undergirding LNG stock is intriguing, prospective investors will want to look underneath the hood. Here in the financials, the situation is a bit more challenging. The stock is an investment that requires wagering on what the future might bring, not what the present circumstances are.

On the positive front, Cheniere is a revenue machine. In 2021, the company rang up $15.9 billion in sales, up nearly 70% from 2020’s tally. More recently, in the first quarter of 2022, the LNG specialist posted revenue of $7.5 billion, up 142% from the year-ago level.

However, on the other side of the equation, 2021 yielded an operating loss of $696 million, eventually leading to a $2.3 billion net loss. In Q1 2022, the company’s operating income slipped $613 million into the red, while the net loss for the quarter was $865 million. Perhaps not surprisingly, Cheniere has a history of consistently negative annual free cash flow.

Looking out to the horizon, LNG stock essentially banks on a new geopolitical paradigm where Russia is fully committed to its military belligerence, thus practically eliminating a massive chunk of global energy supplies indefinitely.

Wall Street’s Take on Cheniere

Turning to Wall Street, Cheniere has a Strong Buy consensus rating based on nine Buys, zero Holds, and zero Sells assigned in the past three months. The average LNG price target of $175.67 implies 31.5% upside potential.

Waiting for the Tide to Turn

At the moment, stifling inflation and higher-than-expected supply levels have hurt demand for natural gas, thus forcing some weakness into Cheniere Energy’s price action. However, with no end in sight to the geopolitical crisis in eastern Europe, the disruption to critical resources suggests that LNG stock is merely gearing up for the next rally.

Disclosure.

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