The country's invasion of Ukraine back in February caused a major shake-up in the global energy market. Western countries, led by the U.S., sanctioned Russian oil and gas to combat Russia's aggressive moves.
As the largest natural gas supplier to European countries, Russia is in a crucial position. At first, it continued supplying natural gas to nations that defied the sanctions. But all of that could be changing fast...
At the end of last month, the head of the International Energy Agency warned that Russia might completely cut the supply of natural gas to Europe. Now, the continent is desperately looking for ways to import natural gas.
And it's banking on something called liquefied natural gas ("LNG").
The LNG process involves cooling gas down to liquid form to make storage and transportation easier and safer. LNG takes up about 1/600th the volume of natural gas in its normal state. That means you can transport more gas while taking up less space.
Plus, LNG is nontoxic and noncorrosive. So it's a cleaner energy source than coal and oil.
The U.S. is one of the world's largest LNG suppliers. And one of the biggest winners of this new energy world is Cheniere Energy (LNG).
The company stood up the first major LNG export facility at Sabine Pass in 2016. Now, it's the largest exporter of LNG in the U.S. And it's still adding capacity as it works to satisfy Europe's energy needs.
Despite rising demand, as-reported metrics would have you believe that growing its exports hasn't been profitable for Cheniere Energy. Using generally accepted accounting principles ("GAAP") metrics, the company's return on assets ("ROA") hasn't reached its 5% cost of capital since opening its exporting facility.
But Uniform metrics unveil the company's true profitability. The added capacity of the Sabine Pass export facility has helped Cheniere Energy's business. Uniform ROA rose from 6% in 2017 to more than 9% in 2020.
But before making any investment decision, you should always consider what the market is pricing in for the company.
By utilizing our Embedded Expectations Analysis ("EEA") framework, we can see what investors expect any company to do over the next few years.
The market typically determines valuations using a discounted cash flow ("DCF") model, which makes assumptions about the future and produces the "intrinsic value" of the stock.
Here at Altimetry, we know models with garbage-in assumptions based on distorted GAAP metrics only come out as garbage. Therefore, we use the current stock price with our EEA analysis to determine what returns the market expects.
Analysts expect Cheniere Energy's returns to hit all-time highs in the next two years as Europe relies on American LNG more than ever. However, the market is only pricing in returns to be at current levels. In other words, investors don't expect European demand will matter for the business...
Cheniere Energy is poised to mint money over the next two years as the U.S. gets more connected to the global LNG market.
That could imply higher natural gas prices... higher volumes... and higher profits for Cheniere Energy, the top U.S. LNG exporter. But based on our analysis, the market is missing this trend. Investors may want to take note.
July 26, 2022