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Cheniere Will Get Killed

Posted February 12, 2015

The Fevered Dreams of LNG Ninjas...

It has been a market truth for most of a decade that the price of natural gas in North America was one-sixth the price of natural gas in Japan.

The dream of many an entrepreneur was to put the fun back in fungible. That is, they want to compress or liquefy cheap American or Canadian natural gas and ship it across the Pacific.

They would reap large rewards from the arbitrage.

I made a lot of money over the last five years by owning Chicago Bridge & Iron (NYSE: CBI) — a company that builds the infrastructure needed to move natural gas around the planet.

I was smart enough to sell it in early 2014 when the trend broke down.

CBI Five-Year Chart: Say Goodbye, CBI

cbilng

As an aside, this chart looks enticing. I could see a dead cat bounce here. It might be time to get back in.

Back to my main point.

The price of natural gas in New York in liquefied form is trading at $4.63 per mmBtu.

The spot price for Japanese liquefied natural gas is $10.20, and it is falling fast. It was $15.10 in December and was as high as $18 last year. Some companies are getting it for less.

According to Reuters:

Japanese utility Tohoku Electric in January purchased an LNG cargo for delivery in the third week of March at a price in the low $7 per million British thermal unit (mmBtu) range.

Japan has historically paid the highest price for LNG and takes one-third of all LNG produced. In other words, it makes the market.

Stralya LNG

But LNG will get even cheaper due to a slowdown in the Chinese economy and new supply coming from down under. There are several large LNG plants coming on line this year in Australia and Papua New Guinea.

According to different article from Reuters:

With projects under construction going ahead as companies treat them as sunk cost, Australia's LNG export capacity is set to more than triple to 86 million tonnes a year before 2020, putting it ahead of current leader Qatar which exports 77 million tonnes annually and U.S. expectations of selling 61.5 million tonnes per year by 2020.

Natural gas has been predicted to overtake coal as Australia's biggest export.

A $20 billion Exxon Mobil (NYSE: XOM) LNG deal with Papua New Guinea is predicted to make that country the fastest-growing one on earth this year. In fact, many have said it will double its GDP.

That's a lot of new LNG hitting the Asian market over the next five years. And we aren't even talking about new Chinese fracking or Russian pipelines.

The situation for 2015 LNG will be falling demand and increased production.

Why, then, is Cheniere Energy Inc. (NYSE: LNG), a company that is building LNG export terminals in the U.S., still trading near its all-time highs?

Cheniere has a P/E of N/A because it doesn't make money. It has a P/S of 60.96 on $268 million in sales. But it lost $524 million last year.

lng987

This is a $16 billion company by market value, but it has $9 billion in debt and only $791.66 million in cash.

At the current cash burn rate, that gives the company a year and a half before it is out of cash. I know it has financing lined up for $12 to $20 billion to get its facilities up and running in a few years, but I sure as hell wouldn't lend the company money given the current market conditions.

I certainly wouldn't own its stock. In fact, I will be recommending some wacky long-term puts.

Cheniere is going to $32. You heard it here first.

All the best,

Christian DeHaemer Signature

Christian DeHaemer

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Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor's page.

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