Cheniere Energy

Cheniere Energy posted Adjusted EBITDA of $1.8 billion versus the PitchBook consensus of $1.7 billion and was at the high end of estimates. Management raised EBITDA guidance by $650 million to a midpoint of $8.15 billion, as gas prices have rebounded, and the year production outlook was raised.

Why it matters: Guidance has now been raised by over $1 billion since the start of the year. We see the likelihood of elevated global gas prices into 2027 as a certainty, with Cheniere able to lock in pricing toward the end of this year as buyers look to secure uncontracted cargoes. Many market analysts were working under a September Qatar restart assumption. As August starts, that is practically impossible. Winter refills and demand will have to be met simultaneously if supply returns by the end of this year, amplifying any tightness.

The bottom line: We are lowering our fair value to $268 from $269 after refreshing our model with the most recent results. Near-term pricing has a lower impact on our fair value. If peace becomes a reality before 2027 and prices decline, we might revise our fair value down to around $260. We see shares fairly valued, trading solidly in 3-star territory. We expect further volatility in shares, as the conflict dictates near-term commodity price outlooks. Our wide moat, Standard Capital Allocation, and Medium Uncertainty ratings are unchanged

Key stats: Repurchases were stable from the first quarter, with 2.2 million shares retired. Per management, a dividend increase is likely, pending board approval. We see the repurchase activity as modestly positive and below our fair value, with an average retirement price of $250.

We are slightly lowering our fair value estimate to $268 per share from $269 after incorporating the most recent results.

Cash available to Cheniere for distributions is largely secure, as the majority of revenue is derived from fixed-fee contracts. We expect distributable cash per share to average $25 over the next 10 years. Consistent distributable cash will support growing returns as more volumes are produced.

Due to the significant fixed-fee component of contracted LNG volumes, declining natural gas prices generally improve the firm's margins. We assume strip pricing for natural gas in the first two years of forecasting, $3.10 and $3.50 per million British thermal units for the remainder of 2026 and 2027, respectively. After that, we assume midcycle real prices of $3.70/mmBtu.

We award Cheniere Energy a Wide Morningstar Economic Moat Rating based on its intangible assets. The intangible assets are multidecade agreements that secure 90% of all volumes it produces. Liquefied natural gas production facilities of Cheniere’s scale require strong capital backing, usually secured by large multidecade purchase orders from LNG buyers. The result is a steady business that sits between a diverse set of investment-grade counterparties with limited commodity price exposure.

Cheniere makes money in two ways. Most of its business is generated by fixed-fee customers. Fixed fee customers pay a flat fee per molecule regardless of taking possession and a variable fee of 115% of the Henry Hub benchmark if they do take possession. These customers are locked into contracts lasting more than a decade and generally receive the molecules for less than spot prices. LNG would have to be trading at a substantial, if not unheard of, discount in the spot market for a customer to not take possession. That’s because the purchaser will still be on the hook for the fixed fee. If a customer fails to take possession, Cheniere can sell the commodity on the open market through its marketing arm.

Cheniere’s marketing function generates the remainder of the firm’s revenue. Marketing makes up about 10% of volume but 14% of revenue in a midcycle environment. That’s because buyers looking for LNG on short-term arrangements generally face acute shortages for power generation. LNG tends to be cheaper and cleaner than alternatives like diesel, which make up for gaps in power demand and supply. While it’s a small part of Cheniere’s mix, marketing injects volatility into the business. However, that volatility tends to benefit Cheniere’s business more than harm it. Cheniere’s marketing unit sold LNG at higher prices than contracted volumes in all but two years since 2016, creating additional value. Even so, Cheniere has sought to reduce its marketed volumes further and produce stable returns throughout the cycle. We think there’s substantial merit to this approach due to the changing dynamics of the industry.

Cheniere spearheaded the last revolution of the LNG industry, decoupling contract terms from diesel- or oil-linked pricing. This allowed for greater certainty when commissioning large LNG production facilities. Accelerated global demand for LNG has also spurred a flurry of interest from buyers to snap up every free cargo, intensified further by the loss of Russian gas. Because of these fundamental changes, new competitors have emerged in the US and abroad. So, new supply from unbuilt LNG facilities is vying for the same pool of LNG consumers to secure financing and begin building. Cheniere has an advantage here; it is widely regarded as a dependable counterparty with substantial experience.

The strong demand for LNG means that some projects with less than 90% of contracted capacity, less favorable terms, or less creditworthy counterparties, will proceed to production rather than die in the proposal process. This dynamic threatens the spot market, as uncontracted or orphaned volumes are sold at discounted prices as producers seek to recoup the cost of gas, operations, and debt.

Pricing pressure will likely exist through the remainder of the 2020s, as US production alone is set to double before the end of the decade.

Cheniere’s size and reputation in the industry are substantial and the firm has successfully contracted volumes on multidecade time frames.

LNG is a necessary transition fuel with continued global demand.

Much of the firm’s US competition will be heavily indebted by new expansions, offering Cheniere the opportunity to grow advantageously.

Due to the high proportion of contracted volumes, Cheniere does not benefit as much from spikes in LNG demand.

The large number of new LNG projects coming online could make contracting new volumes difficult.

The volatility caused by growing demand for US natural gas could make the entire sector less competitive.