Today I’m re-sharing one of our older pieces that a lot of folks are still asking about, and that’s being actively promoted still with emails trumpeting that the CEO said that “this historic event opens a new chapter for the country” and will bring this company $2.9 billion per year.
What follows first appeared as part of the Friday File late last year (the Friday File is my weekly column just for the Stock Gumshoe Irregulars, our paid members — sometimes it’s about teaser pitches, sometimes about other stocks I’m interested in, sometimes both). That’s when this “one stock I would buy to turn $100,000 into $1 million” stock was first teased by the Oxford Club folks, though they’ve been pretty consistently re-running this ad for most of the past six months.
I have not updated or revised the text, the meat of the ad hasn’t changed very much as far as I’ve seen (though it seems to have gotten shorter), and the stock has fallen by about 25% from where it was on November 6 when the following was originally published…
… so if it’s really going to go up by 500% or 1,000%, well, you haven’t missed it yet. Enjoy! [And if you’ve already seen most of this, scroll down — I’ve added a quick update at the bottom]
—excerpt from the 11/6/15 Friday File—
This one is from the Oxford Club’s Dave Fessler — he’s pitching his Oxford Resource Explorer by telling us that he’s got one company he’d choose if he had to turn $100,000 into a million. Here’s how the email I saw starts:
“In mid-December 2015, a single company will do what no company has done in the history of the stock market.
“In short, the government granted it the right to operate in a very lucrative new trade business.
“And this special status could result in one of the biggest profit jumps we’ve ever seen.
“Consider the advantages it has…
“One, this business comes with profit margins as high as 82%.
“Two, it’s already signed six contracts with ‘fixed fees’ guaranteeing at least $2.9 billion in annual revenue – a near 1,000% increase from the $267 million it makes now.”
And he talks about how two billionaires put a combined $3 billion into this company, representing — so he says — great conviction on their part.
“How to Make 5-10 Times Your Money on… ‘The Fifth Greatest Trade of All Time’
“Two Billionaires Just Put $3.03 Billion Into This Single Opportunity…
“And if I were given $100,000 and challenged to turn it into $1 million, I’d put every penny on this stock.”
Bold, indeed. So who is it? You’re my dearest friends, the mighty Irregulars, so I won’t make you sit through the whole spiel… he’s pitching Cheniere Energy (LNG), which operates what will become the first US LNG export terminal at Sabine Pass.
It’s a great story of a company, and it may well turn into a fantastic business eventually — but it probably won’t be as magical as Fessler is teasing. Here’s how Oxford touts it:
“In December of this year, a single company will begin buying a certain product for $2.60 here in the States that has been sold globally for $10 or more.
“It is the FIRST company in America allowed to do it.
“Just recently, the government granted it a license for this business model… giving it what amounts to one of the greatest competitive advantages of all time – a full five-year head start on any competition.
“And according to industry experts, the company will complete this trade billions of times over the coming years… generating as much as $22.85 billion in the long term.
“In the short term, just six of its biggest contracts alone – already signed, mind you – will generate as much as $2.92 billion in annual revenue every year for the next 20 years.
“For a company that currently brings in $267 million per year… this represents a massive increase.
“We’re talking about earnings growth of nearly 1,000%.”
Well, yeah, those numbers aren’t made up — but neither are they imminent. Sabine Pass will see its first LNG Train (they call each refining and liquefaction facility a “train” for some reason) come online either late this year or early next year, and subsequent trains will come one over the next four years or so until that facility is complete. And they’re building a second facility as well, at Corpus Christi, which will also have probably six trains and which will be constructed over the next six years or so — first train maybe operational as early as 2018 or 2019.
And for the first several trains, much of the capacity of Sabine Pass is indeed already under contract — buyers will pay index prices for whatever country they’re importing to, mostly Japan, India and Europe so far, and Cheniere will buy the natural gas in the US, send it through the liquefaction process to be loaded on refrigerated LNG tankers, and deliver it to gasification terminals for their customers. It is indeed a huge arbitrage business, their profits will depend on the difference between the price they can get for the natural gas in the end market, and the price they have to pay to buy the gas in the US, pipe it into their LNG train, liquefy and ship it. The examples Cheniere gives in some recent investor presentations imply that the cost is natural gas plus about 15% (presumably that covers the gas that’s used to fuel the liquefaction plant cooling processes), plus $1 per mcf for shipping to Europe (or $2.25 to Asia), so you can figure your own math but they figure that their margins will be substantial as long as the Henry Hub price for natural gas in the US is at least a couple dollars cheaper than the LNG delivered price in Europe or Asia. Right now the margin is not huge, with Europe’s natural gas price around $6.70 (down from almost $10 a year ago) and Japanese LNG imports at $9 (down from $15 a year ago), but it would be profitable if they were up and running.
Which, of course, they aren’t yet — these are massive, incredibly expensive capital projects, and they take a long time to build. The first train will be up in the next few months, then the second a few months after that, and then they’ll add a train or two every year or two, essentially, until they’re all built out in about six years (though they do have a few other smaller plants on the drawing board as well). So when you think about investing in Cheniere, and start researching their projects, you’ll end up looking at a lot of their 2021 projections, because that’s what they use as their “run rate” once everything is built and operating at capacity. According to Cheniere’s projections, their EBITDA per share will be about $11 when they have nine trains running in 2021, assuming that European and Asian import prices are similar to current levels. The stock is now at $46, so you’d say you’re paying 4X EBITDA (EBITDA meaning Earnings Before Interest, Taxes, Depreciation and Amortization — people use it to more easily compare companies with different kinds of balance sheets or tax burdens, but that doesn’t mean the companies don’t actually pay interest or taxes, or have to account for depreciation).
Except people don’t look at EBITDA and market cap, for good reason — because if you don’t include the I in interest, you should at least include the full value of the company’s balance sheet, not just the equity. So if you look at enterprise value/EBITDA it’s a lot less flattering, Cheniere expects EBITDA of about $3.2 billion in 2021, and the current enterprise value, thanks to Oh My God So Much Debt, is about $28 billion… so that’s an EV/2021 EBITDA of about 9 (if you discount it back to the present using even a low discount rate, like 6% a year, to account for the missed opportunity that money will have in the meantime, that $9 in 2021 should be worth more like $6.50 today).
MLPs often trade at huge EV/EBITDA numbers, but refiners don’t — Valero (VLO), for example, and oil refiner, trades at a current EV/EBITDA of about 3. Not 2021 numbers, but 2015 numbers. Enterprise Product Partners (EPD) and Energy Transfer Partners (ETP), to provide some MLP examples, trade at EV/EBITDA numbers of about 12-15. That’s not to say these comparisons are meaningful, since no one really knows what the arbitrage for pricing will be for Cheniere in five, ten and 20 years as they start to pay off the cost of building these plants, those are just to give you an idea of how some energy processing stocks are valued today.
And there are some big billionaires involved in Cheniere — the biggest name is Carl Icahn, who got a seat on the board and bought a big chunk just a couple months ago, but Seth Klarman’s Baupost is likely the other billionaire owner of Cheniere that Fessler hints at, but other high-profile folks are involved as well. On the other side, Jim Chanos took a very public short position in Cheniere just a few weeks ago because of his argument, fairly compelling, that the world is going to be awash in LNG and the profits will not be nearly what Cheniere is projecting… particularly because of the massive, massive debt burden they’ve taken on to build these plants (that was EBITDA we mentioned above, and there’s a reason they use that in their presentations — because numbers look a lot worse when you have tens of billions of dollars in debt and have to pay interest, that capital “I” in EBITDA — Jim Chanos thinks the interest burden will be $2 billion a year by then).
This is probably going to be a story we see from a lot of the newsletter jockeys, because there’s an almost irresistible catalyst in the startup at Sabine Pass, and the top-line numbers look fantastic if you project a few years out and assume that global LNG arbitrage is still a viable business at that time, particularly if you assume that LNG costs return to their historical highs in Japan, Korea and Europe (which seems less likely, given the new supply becoming available out of Africa and Australia as well as the US). But it’s not going to be magic and it’s not going to be fast. If you’re feeling a bit more risk averse but like the idea of this, you might consider looking at Cheniere Partners (CQP), the MLP that Cheniere set up to be part of their financing for Sabine Pass (the MLP owns the Sabine Pass terminal and the old gasification plant as well as the under construction liquefaction plant, Cheniere is the General Partner and manager), that does at least generate some cash flow by way of MLP distributions, though it also sacrifices some upside by not being involved in all of Cheniere’s other development projects.
So that’s one teaser stock for you… and when you’re basing your investment on something that won’t happen for several years, which is when they’ll be producing a meaningful amount of LNG with much of the first plant operational, you’re taking on a substantial risk that your valuation argument isn’t going to hold water in several years. You might look it over and decide you like it, and investing alongside Carl Icahn would mean you have pretty good and shrewd company, but my kneejerk reaction after just browsing through the numbers for a half hour or so is to find Jim Chanos’ short position more compelling than Carl Icahn and David Fessler’s long position… which isn’t to say I’m going short, I have no intention of getting into this trade on either side, not when meaningful earnings are so far in the future and costs are so high.
—-back to June for a quick update—-
Chanos is still shorting LNG, and called Cheniere “financial engineering gone crazy” at the SALT conference last month, but there has been some rebuttal from Cheniere bulls, largely because they see some reason for optimism about the new management team and the likelihood that we’ll have more “visibility” about cash flow soon…. here’s an excerpt from a Citi research note that was covered by Barron’s:
“We see two catalysts for Cheniere Energy over the next 18 months. First, we believe the new CEO, Jack Fusco, will provide visibility to the market on the timing of when Cheniere will be profitable and when it will start returning capital to shareholders. Second, Cheniere’s marketing entity has contracts to sell 84 LNG cargoes through 2018. These are contracts linked to Henry Hub and TTF. These cargoes could be valued at $1.0Bn in gross revenue. Visibility on the margin for these cargoes could provide a point estimate on the potential cash flows from marketing.
“We maintain our: 1) Buy rating on Cheniere Energy and $47/share price target; 2) Buy rating on Cheniere Energy Partners LP (CQP) and $36/share price target; and 3) Buy rating on Cheniere Energy Partners LP Holdings LLC (CQH) and $23/share price target. Cheniere Energy stock appears to be pricing in the value of the contracts without any residual or commercial value for the assets. We believe the company will grow gross cash flows to $4.5B (EBITDA) and $4.00 in EPS in 2019.”
I still don’t have any exposure to Cheniere, personally, but the first LNG train at Sabine Pass did indeed start producing on time and they report that it was completed within the budget, and they’ve shipped out at least seven tankers of LNG as of a month ago and have now declared that Train 1 is “substantially complete”. Still lots to do and lots of construction to finance and complete, of course, to complete the other five trains at Sabine Pass and their other projects, but there will at least be actual cash flow from LNG sales coming in future quarters.
And we’ve left the original comments appended below for your edutainment… if you’d like to add to the discussion, please feel free to use our friendly little comment box to throw your thoughts on the pile. Thanks for reading!