While the positive news Cheniere Energy (AMEX: LNG) received on May 20, 2011 sent shares of the company to a new 52-week high of 11.11 and fueled a continued run of support on Monday as shares eclipsed that mark having hit 12.81 during the trading day there remain a number of concerns regarding LNG that shouldn’t just be dismissed.
Yes the U.S. Department of Energy gave LNG the green light to export natural gas to any country that isn’t under a trade embargo, certainly news that should be welcomed by shareholders and worthy of a bump in share price, but it doesn’t erase the financial mess that the company is currently operating in having recently reported a $39.8 million net loss for the first quarter ending on March 31, 2011. That’s a $4.6 million jump from the $35.2 million net loss during the same period 2010.
The idea that Friday’s news would provide some relief to the net losses sounds nice, it’s the first time the Energy Department has allowed an exporter to send natural gas as liquefied natural gas to all U.S. trading partners, but the reality is LNG wouldn’t begin exporting until 2015 and the financial demands of expanding their Sabine Pass LNG terminal in southwestern Louisiana will be significant.
Not only will the costs to prepare the terminal be significant, something Cheniere hasn’t even estimated as of yet, the decision to actually move forward with the green light hasn’t been made. LNG has said they will have to determine how many exporting contracts they can obtain as well as the conditions related to securing financing before they make a final investment decision. This obviously means that while the news is positive it doesn’t mean anything concrete.
Assuming that LNG follows through with the investments necessary to expand their Sabine Pass LNG terminal the company would then be exporting an estimated 803 billion cubic feet of gas a year, an impressive figure that could significantly improve their financial situation. Of course LNG doesn’t own a monopoly on natural gas and with domestic supplies climbing, the Energy Department has reported nearly two trillion cubic feet of natural gas in underground storage and supplies, the company could be facing some competition.
According to a report published by WallStreetJournal.com on Monday a study by consultancy Wood Mackenzie “found that 40% of U.S. natural gas produced last year didn’t meet break-even prices for producers.” Along with that unsettling figure, the report also pointed to the Potential Gas Committee’s assertion that the amount of natural gas available for U.S. production would meet domestic needs for 100 years at the current consumption rate.
What this has done is hit hard at the profit margins within the natural gas industry and caused several companies to scale back on new gas drilling efforts. What would obviously benefit the profit margins would be higher demand which would then result in higher prices yet the WSJ article stated “this would likely take several years.”
LNG does have the support of President Barack Obama who has stood by his endorsement for a domestic alternative to oil and has pushed for more programs and incentives tied to the use of natural gas. Those programs and initiatives could find more traction in the short-term as oil prices continue to climb thanks in large part to the unrest in Northern Africa and the Middle East.
Investors are also well aware that the EPA will be proposing limits on greenhouse-gas emissions from power plants in July and if those limits are implemented it may just encourage companies to abandon their coal-fired plants and adopt gas. As positive as the news was regarding exportation of natural gas as liquefied natural gas the EPA report could actually provide a more immediate impact on the company and certainly help out financially.
Because LNG is carrying heavy debt and 2015 is still some time away it is likely that the company will continue to see some volatility with its share price, having already dropped from their high of 12.81 on Monday to a low of 11.62 on Tuesday. That being said, the outlook for LNG appears strong as they have the inside track on exporting natural gas and could see their domestic demand increase with EPA regulations along with government supported initiatives. For those betting long there may be some unsettling price fluctuations yet it’s hard to see how LNG won’t ultimately provide the payday they believe is coming.
As it stands LNG is holding steady on Tuesday with a share price around 11.70 – 11.80 and that could see a healthy bump if the EPA pushes more stringent regulations. Right now shares are well above the 50-day moving average of 8.63 and the 200-day moving average of 5.95 with strong trading volume supporting the interest.