Australia's woes may boost Cheniere Energy

If the country can't meet Asian demand for natural gas, Cheniere and other producers will step in.

By Jim J. Jubak Dec 3, 2012 6:31PM
Image: Natural gas plant (Kevin Burke/Corbis)The news out of Australia's natural gas industry is truly depressing -- for Australia's natural gas industry.

But that bad news is actually extremely positive for Cheniere Energy (LNG), the U.S. company that remains on schedule to have the first liquefied natural gas plant certified to export cheap U.S. natural gas up and running by 2015.

The problem for Australia’s natural gas industry, as it is for Australia’s coal industry right now, is cost. The country has so many liquefied natural gas projects under construction that it could replace Qatar as the world’s biggest exporter of liquefied natural gas within the next five years.

That’s if all these plants can be built on time and at a reasonable cost.

So far, the track record isn’t good. The first round of liquefied natural gas projects have all seen huge cost overruns and delays. And the problem looks like it will get worse in a second wave of projects and project extensions, budgeted at an estimated $160 billion.

The big immediate worry is that sometime in the next couple of weeks Chevron (CVX), the developer on the huge Gorgon off-shore development, will report that the budget for the 15 million metric ton-a-year project off Australia’s northwest coast has climbed by another $20.8 billion to a total of $62.6 billion.

In a recent speech to the Australian Institute of Energy, David Knox, CEO of Australian oil and natural gas producer Santos (SSLTY) said that it cost three times as much to develop a projection in Australia than on the U.S. Gulf Coast and that the problem was getting worse.

Which, of course, is good news for Cheniere, which is developing the first U.S. liquefied natural gas terminal licensed for export at its Sabine Pass site in Louisiana. Sabine Pass already has facilities for receiving imports of liquefied natural gas; Cheniere is in the process of adding a number of liquefaction trains that would turn U.S. natural gas arriving by pipeline into liquefied natural gas that could be loaded onto LNG tankers for export.

Original plans called for building four liquefaction trains each able to process 2 billion cubic feet of natural gas a day. Recently, however, the company has announced a deal with France’s Total (TOT) for a fifth train. It also looks like Cheniere stands a good chance of adding a sixth train after an agreement with Chevron.

Cheniere has also begun negotiations to get regulatory clearance for a greenfield liquefaction plant at Corpus Christi, Tex. The Corpus Christi plant is by no means a lock, but the troubles, costs, and delays in the Australian industry sure help make the numbers add up. If Australia can’t meet Asian demand for natural gas, other producers -- the United States, Norway, Canada, and East Africa --will step in.

I’ve had my eye on Cheniere for months with a target buying price of $11. (For more on natural gas and LNG see my post.) The stock hasn’t cooperated by dropping that far. The low was $11.75 on June 4 and right now the shares are trading at $16.80. Credit Suisse calculates that the addition of a fifth and sixth train at Sabine Pass is worth revenue and earnings that would add $4 a share to the stock. With that in mind -- and looking at the problems in the Australian industry -- I’d now look to buy at $14.50 or less on the next dip. (The stock traded at $14.11 on the Nov. 13 dip.)

My 12-month target price is $22 a share.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Cheniere Energy as of the end of September. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 

Tags: CVX


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


StockScouter rates stocks from 1 to 10, with 10 being the best, using a system of advanced mathematics to determine a stock's expected risk and return. Ratings are displayed on a bell curve, meaning there will be fewer ratings of 1 and 10 and far more of 4 through 7.

125 rated 1
267 rated 2
455 rated 3
612 rated 4
682 rated 5
695 rated 6
632 rated 7
472 rated 8
279 rated 9
147 rated 10

Top Picks

TAT&T Inc9



Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.

Contributors include professional investors and journalists affiliated with MSN Money.

Follow us on Twitter @topstocksmsn.