Cheniere Energy: Sales Up But Prices Down, Leading To Hold (NYSE:LNG)

Investment thesis

LNG sales totaled 12.5 mln tons in 4Q 2023 (we forecast 11.3 mln tons, meaning a difference of 10.6%). LNG selling prices across all segments averaged $384/t, down 6% from our forecast of $409/t.

In 2023, the volume of LNG sold exceeded production capacity by 6%, reflecting the high efficiency of Cheniere Energy’s (NYSE:LNG) terminals and strong demand for the company’s natgas. Given the observed seasonal increase in production efficiency, we have raised our expectations for the volume of LNG sales in 2024 to 47.6 mln tons (-0% y/y). We expect that Corpus Christi Stage III will start to operate in 1Q 2025, enabling the company to ramp up the capacity, with 100% utilization of the terminals, to 49.3 mln tons (+4% y/y).

Speaking of the Corpus Christi expansion, Biden’s decision to stop issuing new permits for US LNG exports to countries outside the free trade agreement has no impact on the expansion of the Sabine Pass Liquefaction and Corpus Christi Liquefaction projects, although it does introduce regulatory uncertainty for the industry as a whole.

We have covered the stock before and do so regularly, so here’s the new report covering the company’s Q4 2023 financial results, along with the key news and LNG market updates. Rating is HOLD.

Key LNG import markets

More than 2/3 of LNG shipped by Cheniere Energy go to European countries. The next by the size of shipments is Asia.

In Asia, the main importers of natural gas are China, with its recovering manufacturing industry and rising gas consumption in the energy sector; and India, where demand for gas is expanding chiefly on the back of manufacturing activity (in such sectors as production of fertilizers) and energy generation amid the development of the national pipeline network and urban gas infrastructure. China’s LNG imports climbed by 14% y/y (8.3 mln tons) in 2023, India’s by 11% y/y (2.2 mln tons). It is also of note that gas demand jumped by 40% y/y (2.9 mln tons) in Thailand, by 20% y/y in Bangladesh and climbed by 5% in Pakistan (the latter two countries cumulatively ramped up LNG imports by 1.2 mln tons).

According to the IEA, in 2024 China will increase LNG imports by 10% y/y and India by 7%, meaning Asia will continue to make up most of the LNG demand growth globally.

Europe’s LNG imports declined by 1.5% y/y in 4Q 2023. Here are the reasons:

• Measures that were adopted earlier aiming to reduce demand in EU countries by 15% y/y through the end of the 2023/24 heating season.
• High inventories in underground storage facilities.
• Weak economic activity: Manufacturing PMI in the eurozone has been below 50 (it was consistently below 45 in 4Q 2023), which speaks to a declining number of new orders in the industry and, consequently, shrinking gas demand.

The abovementioned reasons have also prompted LNG prices in Europe’s natgas hubs to slip below spot LNG prices in Asia in 2H 2023. According to the IEA, the Platts JKM premium averaged $2/MBTU to the European TTF benchmark, which diverted spot-priced LNG shipments from the European market to Asia. The trend is expected to continue in 2024, but with a narrower spread between the prices, compared with 2H 2023.

The US continues to be the biggest LNG exporter to Europe: Its share of LNG supplies reached about 50% in 2023 and is presumed to keep rising. Demand for natgas in European countries is anticipated to edge up by 3% y/y, as the manufacturing industry’s demand for natgas is bouncing back, while economic activity in Europe is expected to rise.

More than half of LNG that was exported from the US in 2023 was produced by Cheniere.

Regasification capacity in Cheniere Energy’s key markets

It is expected that regasification capacity in Europe and Asia will expand substantially in 2024, which is necessary to meet their rising demand for LNG.

In 2023 Europe ramped up the capacity from 170 mln tons to 189 mln tons (+11% y/y), and future expansion is poised to be even bigger, bringing the number to 224 mln tons (+18% y/y) in 2024, to 241 mln tons (+8% y/y) in 2025, and to 251 mln tons (+4% y/y) in 2026.

Asia will boost its regasification capacity from 675 mln tons (+18% y/y) in 2023 to 788 mln tons (+17% y/y) in 2024, 882 mln tons (+12% y/y) in 2025, and 928 mln tons (+5% y/y) in 2026.

The biggest capacity expansion is set to happen in China and India: These countries will probably make up about 35% and 22%, respectively, of the total capacity increase across the region. More than 2/3 of the new capacity will be greenfield construction of terminals, and the rest will come from the expansion of existing ones.

LNG export approvals and Corpus Christi Stage III

Due to concerns in the US presidential administration about economic and environmental impact of outbound LNG shipments, US President Joe Biden decided to pause issuing new approvals for LNG exports from the US to countries with which it doesn’t have a free trade agreement.

The curbs will last at least until the next US presidential election, or November 5, 2024. During this time, the US Department of Energy will conduct an analysis of impacts of LNG projects on energy costs, America’s energy security, and the environment.

According to Cheniere Energy’s management, the decision for the time being has no impact on the Sabine Pass Liquefaction and Corpus Christi Liquefaction expansion projects, although it does introduce regulatory uncertainty for the industry as a whole. Cheniere Energy is confident it will be able to obtain all necessary regulatory approvals in a timely and seamless manner as required. Construction work is currently ahead of the original schedule.

Given that the construction is ahead of schedule, we expect the Corpus Christi Stage III project will be completed by the start of 2025.

Unit economics

LNG sales totaled 12.5 mln tons in 4Q 2023, and 47.8 mln tons (+2% y/y) in the full year 2023, up from our forecast of 46.5 mln tons (-1% y/y). In 2023, the volume of LNG sold exceeded production capacity by 6%, reflecting the high efficiency of Cheniere Energy’s terminals and strong demand for the company’s natgas.

Given the observed seasonal increase in production efficiency, we have raised our expectations for the volume of LNG sales in 2024 to 47.6 mln tons (-0% y/y). We expect that Corpus Christi Stage III will start to operate in 1Q 2025, enabling the company to ramp up the capacity, with 100% utilization of the terminals, to 49.3 mln tons (+4% y/y).

LNG sales under long-term contracts have typically made up most of the company’s sales, reaching 41.3 mln tons (+6% y/y) in 2023, or 86% of the total volume sold. We expect this figure to go up to 41.7 mln tons (+1% y/y) in 2024 and climb to 43.1 mln tons (+4% y/y) in 2025, when the new Corpus Christi terminals become operational.

With respect to natgas selling prices under various contracts, for our forecast we rely on international benchmarks: Henry Hub and TTF.

The forecast for the Henry Hub benchmark is provided by the US Energy Information Administration. The agency reduced the price estimate for the short-term because mild weather conditions are seen persisting until the start of 2Q 2024. The estimate was also cut for the medium-term, and we believe that’s because production is set to hold high. The Henry Hub price forecast was cut from $3.26/MMBTU to $2.65/MMBTU for 2024 and from $3.26/MMBTU to $2.94/MMBTU for 2025.

Given the rising proportion of gas-powered electricity generation (42%, +3 pp y/y), price volatility held above average throughout the year.

Based on the macroeconomic environment that was described above, we are lowering the forecast for TTF prices from $503/thousand cubic meters to с $382/thousand cubic meters for 2024, and from $464/thousand cubic meters to $377/thousand cubic meters for 2025.

LNG selling price across all segments of Cheniere Energy averaged $384/ton in 4Q 2023 (-49% y/y and +4% q/q), down 6% from our forecast of $409/ton. LNG price under long-term contracts reached $310/ton over the same period (-40% y/y and +5% q/q), down 3% from our forecast of $320/ton.

The spread to Henry Hub reached $122, up 11% from our forecast of $110. We are maintaining our previous assumptions that the spread will fall to the historical average. Regasification terminals, which are increasing in number in both Europe and Asia, will help meet growing demand without putting the market at risk, and therefore will reduce natgas price volatility.

Given the lower forecast for Henry Hub prices and the unchanged outlook for the spread to stand at $111 in 2024 and 2025, we are lowering the forecast for LNG prices under long-term contracts from $321/ton to $290/ton for 2024, and from $321/ton to $304/ton for 2025.

Given the lower forecast for TTF prices, we are also lowering the forecast for LNG prices under short-term contracts from $894/ton to $601/ton for 2024, and from $863/ton to $595/ton for 2025.

As such, we are lowering the forecast for the average selling price across all Cheniere Energy segments from $398/ton to $346/ton for 2024, and from $392/ton to $358/ton for 2025.

We anticipate that in 1Q 2024 LNG price under long-term contracts will reach $293/ton, and average LNG price across all Cheniere Energy segments will be $349/ton.

COGS model

The company’s gross costs are fairly volatile, ranging from 52% of revenue to as much as 152% of revenue in the event of losses from derivatives trading, and it still manages to keep the spread between selling price and costs at an average of about $200 per 1,000 cubic meters.

We remain committed to the rationale that the performance of net COGS per ton is linked to the Henry Hub gas price. We expect that this approach gives a closer approximation of costs relative to prices on the domestic market.

Given the lower forecast for US natural gas prices, we are lowering the forecast for gross costs from the average of $215 per one ton of product to $180 for 2024, and from $216 to $198 for 2025. The estimate we use for production costs is adjusted for derivative trading.

We are lowering the EBITDA forecast from $6 261 mln (-29% y/y) to $6 227 mln (-29% y/y) for 2024, and from $6 645 mln (+6% y/y) to $6 134 mln (-1% y/y) for 2025 due to:

• the reduction of the average LNG selling price across all segments of Cheniere Energy from $398/ton to $346/ton for 2024, and from $392/ton to $358/ton for 2025, which was partially mitigated by the lower forecast for production costs per ton for 2024 and 2025.

The Cheniere 2034 Notes

The issuance of the Senior Notes will not have a significant impact on the LNG’s balance sheet, as the company will simply repay the volume of the CCH 2025 issue through the issuance of the Cheniere 2034.

However, due to the lower coupon (5.650% per annum vs. 5.875% per annum), the company will pay less interest, which will positively affect its net income and EPS, potentially attracting new investors.

The issuance of the Senior Notes has no impact on the valuation of the company’s fair share price using the EV/EBITDA method.

Valuation

We are lowering the target price for the shares from $198 to $192 due to:

• the reduced EBITDA forecast for 2024.
• the shift of the FTM valuation period.

Based on the assumptions, we are assigning a HOLD rating to the shares.

Conclusion

We maintain our HOLD rating as the company’s future sales volumes remain comparable to the current ones and the HH and TTF price forecasts are lowered. To manage your positions, we recommend following Cheniere Energy’s earnings releases and LNG market updates.