Cheniere Energy, Inc. (LNG) in Houston, Tex., is an energy infrastructure company that is engaged in liquefied natural gas-related businesses in the United States. Natural gas prices have doubled this year and are expected to continue to rise. Analysts expect natural gas prices to hit a 13-year high this winter. The surging natural gas prices have driven LNG’s stock to a substantial gain over the past few months. 

Shares of LNG have advanced 46.2% in price year-to-date to close its last trading session at $87.74. Wall Street analysts expect the stock to hit $107.09 soon, which indicates a potential 22.1% upside from its last closing price.

According to Cheniere Energy CEO Jack Fusco, “as the economies began to ramp back up, and countries and companies worldwide decided natural gas was the fuel of choice for clean energy transmission, the demand has just skyrocketed.” He added that LNG has sold 90% of its production for the next 20 years. So, the company's declining inventories could pose a major challenge for the its growth in the coming months. This, along with its stretched valuation, makes the stock’s near-term prospects uncertain.

Here’s what could shape LNG’s performance in the near term:

Equity Offering

On August 17, LNG wholly owned subsidiary, Cheniere Corpus Christi Holdings, LLC (CCH), priced an  offering of $750 million of senior secured notes due 2039. The notes will pay 2.7% in interest per annum and will mature on December 31, 2039. The company intends to use the offering’s proceeds  to prepay a portion of outstanding CCH’s term loan credit facility.

Mixed Financials

LNG’s total revenues increased 25.6% year-over-year to $3.02 billion in its fiscal second quarter, ended June 30. However, its income from operations declined 84.4% from its year-ago value to $146 million, while its net income decreased 132.4% year-over-year to a negative $131 million.

The decline in net income was due primarily to an unfavorable impact from non-cash changes in the fair value of the commodity, foreign exchange, and the non-recurrence of net accelerated revenues recognized from canceled LNG cargoes valued at $405 million during the three months ended June 30, 2020. The company’s EPS also declined substantially year-over-year to $1.30.

Impressive Growth Prospects

A $12.94 billion consensus revenue estimate for the current year indicates a 38.3% improvement from the last year. Its revenue is also expected to increase 12.3% year-over-year to $14.53 billion in the following year. Analysts expect the company’s EPS to come in at $3.54 in the current year, representing a 1,141.2% rise year-over-year. Furthermore,  its EPS is expected to grow 24% per annum over the next five years.

Stretched Valuations

In terms of forward EV/EBIT, LNG is currently trading at 15.86x, which is 26.8% higher than the industry 12.51x average. Its 1.71 forward Price/Sales multiple is 40.3% higher than the 1.22 industry average. Also, its 7.35 Price/Cash flow ratio is 41.4% higher than the 5.20 industry average.

POWR Ratings Reflect Uncertainty

LNG has an overall C rating, which equates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

LNG has a C grade for Stability and Value. Its 0.92 beta and higher-than-industry valuation multiples justify these grades.

Of the 92 stocks in the C-rated Energy - Oil & Gas industry, LNG is ranked #71.

Beyond what I have stated above, one  can also view LNG ratings for Momentum, Quality, Sentiment, and Growth, here.

View the top-rated stocks in the Energy - Oil & Gas industry here.

Bottom Line

LNG is a well-known player in the oil & gas industry. Surging natural gas prices amid rising demand should provide the company immense opportunities to strengthen its position in the industry. However, LGN  lacks a solid financial profile. Furthermore, its stretched valuation could make its gains unsustainable, given current market volatility. Thus, we think investors should wait until its fundamentals improve before investing in the stock.

How Does Cheniere Energy, Inc. (LNG) Stack Up Against its Peers?

While LNG has an overall C Rating, one might want to consider looking at its industry peers, SilverBow Resorces, Inc. (SBOW) and Baytex Energy Corp. (BTEGF), which have an overall A (Strong Buy) rating.

LNG shares were trading at $89.75 per share on Wednesday morning, up $2.01 (+2.29%). Year-to-date, LNG has gained 49.51%, versus a 18.32% rise in the benchmark S&P 500 index during the same period.

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics.

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