Stock Analysis & Ideas

Why Long-Term Trends Favor Cheniere Energy Stock (NYSE:LNG)

Story Highlights

While Cheniere Energy already represented a relevant player due to its hydrocarbon business, the geopolitical crisis in eastern Europe bolsters the cynically bullish narrative for LNG stock.

Despite efforts of the international community to pivot to clean and renewable energy sources, hydrocarbon players like Cheniere Energy (NYSE:LNG) bring tremendous relevance to the table, in large part because of the high energy density of fossil fuels. However, Russia’s imprudent invasion of Ukraine sparked radical changes in the power paradigm, potentially leading to significant and sustained upside potential for LNG stock. I am bullish on Cheniere.

Fundamentally, natural gas specialists such as Cheniere – which focuses on liquefied natural gas, hence the ticker symbol – represent important businesses due to their infrastructural relevance. However, with Russia cutting off hydrocarbon outflows to Europe, western nations suddenly find themselves in need of energy alternatives. While Cheniere by itself is no panacea, it can play a vital role in addressing this dramatic paradigm shift.

To understand how LNG stock may benefit, though, it’s important to discuss the value of the underlying energy format.

Why LNG is Key to LNG Stock

Although natural gas in its native state presents significant energy potential, the transportation of the commodity in this form presents great difficulties. However, according to the Office of Fossil Energy and Carbon Management, LNG represents natural gas cooled to its liquid state. Moreover, the “volume of natural gas in its liquid state is about 600 times smaller than its volume in its gaseous state, making it easier for ocean transport.”

Bluntly speaking, in order for the U.S. to help Europe as an alternative provider of natural gas, it’s not just the supply of the underlying commodity that’s important. Rather, being able to transport it across the Atlantic is vital, and there’s no better way to transport natural gas across oceans than via its liquid state. Thus, LNG stock seems poised for long-term growth.

Also, McKinsey & Company notes that the “economics of LNG relative to oil and coal in consuming countries have improved markedly over the past decade.” While Russia’s invasion of Ukraine upsets this dynamic currently, over time, the trajectory may resume again in a positive direction. Theoretically, this circumstance should help LNG stock.

In addition, LNG is cleaner than other fossil fuels. While it’s not accurate to say that it’s a perfectly clean energy source, LNG players don’t clash as heavily with go-green initiatives as other fossil fuel providers. This, too, should help swing the needle in favor of LNG stock.

Geopolitics Cynically Support Cheniere

Along with the scientific relevance of natural gas in its liquid form, LNG stock will likely receive a cynical boost from geopolitical rumblings. Yes, Cheniere certainly played the role of “scab” effectively, supporting Europe in its hour of need and profiting handsomely. For instance, LNG is up 60% year-to-date, performing much better than the overall market. Cheniere clearly made the best of this otherwise terrible situation.

However, LNG stock may likely rise for years to come. First, Russia left a huge gap in terms of energy inflow predictability. It’s unlikely that circumstances will suddenly normalize ahead of winter 2023. Therefore, European nations will need support from other countries, including places like the U.S. and Australia. While Cheniere won’t be a sole panacea, it will very likely enjoy increased demand for several years.

Moreover, Europe is unlikely to just accept Russia back into the international community. Just before the COVID-19 pandemic, optimism sparked within Russia regarding economic diversification to maintain its impressive GDP growth rate at the time. Unfortunately, Moscow decided on imperialism, a barbaric relic of unenlightened paradigms that the world was trying to move past.

In that sense, what Russia did would not be forgotten or forgiven so quickly and easily. Cynically, that’s music to Cheniere’s ears.

Is LNG Stock a Buy or Sell, According to Analysts?

Turning to Wall Street, LNG stock has a Strong Buy consensus rating based on 12 Buys, one Hold, and zero Sell ratings. The average LNG price target is $210.69, implying 29.4% upside potential.

Also, on TipRanks, LNG stock has a 7 out of 10 Smart Score rating. This indicates moderate potential for the stock to outperform the broader market.

Keep in Mind What is Likely to Come

To be fully transparent, the financial data that undergirds LNG stock doesn’t present the most encouraging picture. However, prospective investors must keep in mind that they should bank on what is likely to come, not what is.

First, the not-so-pleasant news. Currently, Cheniere’s balance sheet could use some work. For instance, it doesn’t command the greatest cash balance relative to its debt profile. Also, the company’s Altman Z-Score (a solvency metric) is 0.87, reflecting a distressed business. This poor score also indicates possible bankruptcy risk in the next two years.

On the income statement, Cheniere does enjoy a three-year revenue growth rate of 24.8%, much higher than the industry median (which is actually in negative territory). However, on the bottom line, Cheniere’s profit margins on a longer-term average run below parity.

However, it’s critical to recognize that these averages reflect significant damage rendered during the worst of the pandemic. Now that Russia forced a new energy paradigm on the world, Cheniere looks like another animal. Given the dramatic surge in LNG stock amid an otherwise dour market environment, investors should keep close tabs on this energy player.

Disclosure

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