A crane stands during construction at the Cheniere Energy LNG export terminal in Corpus Christi, Texas.
Eddie Seal/Bloomberg
Liquefied natural gas has become a growing export industry in the U.S. One analyst thinks that investors should adjust their portfolios as they play the trend.
Credit Suisse analyst Spiro Dounis downgraded Cheniere Energy Partners (ticker: CQP), a master limited partnership that operates pipelines and an LNG export terminal in Louisiana, to Underperform from Neutral. He raised his target for the price to $32 from $31, though, because the stock has outpaced his earlier expectations. Cheniere Energy Partners stock was trading 0.9% higher to $37.71 on Thursday.
Dounis said that the stock has risen too much, so that its valuation is now out of step with the rest of the industry “given the over 25% 1-year outperformance versus the Alerian MLP index and limited opportunities for multiple expansion.”
Barron’s wrote a positive story on Cheniere Energy Partners in May, arguing that its dividend was safe and that prospects for LNG looked strong. The stock has risen 11% since then.
Like other MLPs, Cheniere Energy Partners pays a strong dividend. The stock now has a dividend yield of 6.9%. Management has continued to raise the payout during the pandemic even as other MLPs have cut theirs due to weakness in energy prices.
Cheniere Energy Partners is a subsidiary of a larger LNG company called Cheniere Energy (LNG), which is in the same business. There are a few key differences, though.
The parent company is a traditional corporation, and it doesn’t pay a dividend. It has more growth opportunities, but also more risk.
Even as he advised investors to back away from the MLP, Dounis said the parent company is worth an investment now. Cheniere Energy posted strong earnings and offered encouraging financial forecasts for 2021, and it could produce substantial cash flow in the years ahead as LNG exports grow.
That could allow it to pay a nice dividend and reduce debt. The stock trades at $54.13. Dounis’ price target is $69.
“We expect Cheniere to generate nearly $12 billion in cash flow over the next 5 years, nearly 90% of its current market cap, he wrote. “Admittedly, a large portion of that cash flow will be directed toward reducing leverage – we anticipate about $8 billion directed to debt reduction. The remaining cash flow likely takes the form of buybacks or dividends, as early as the second half of 2021 which is sooner than expected. We now model a $2/share (about a 4% yield) annual dividend in 2022.”
Most analysts expect the parent company to eventually fully take control of the MLP, though perhaps not in the near term given valuations.
Write to Avi Salzman at [email protected]
