Europe’s reliance on Russian natural gas may not last forever. U.S. exporters could benefit.
Chatchawan Akarapratchayakul/Dreamstime
Russia’s invasion of Ukraine has underscored major risks to security in Europe, including the region’s reliance on Moscow as a supplier of natural gas, a critical source of heating fuel.
Europe is a leading importer of natural gas, and counts on Russia for some 40% of its supply.
Maybe not for long.
Amid a wave of sanctions against Russia following its attack on Ukraine, Germany—which relies on Russia for the majority of its gas—is planning an about-face on energy policy. The country has pulled the plug on the Nord Stream 2 gas pipeline from Russia, and plans to build two terminals to receive liquefied natural gas, or LNG, which is a form of the energy source that has been cooled for transport.
Policy changes in Europe’s largest economy may be just the start of wider investment across the region to look beyond Russia for domestic gas supply in the medium term. Europe has ambitions for renewable sources to become a dominant source of energy in the long-term, but fossil fuels will continue to be needed as a stopgap.
As Barron’s has reported, one of the simplest ways for Europe to replace Russian gas flows is through LNG from the U.S., where there is more gas in the ground that can be used domestically, and output has been steadily rising.
In this changing landscape, Cheniere Energy (ticker: LNG) may be a winner.
While the stock market has been down in the dumps for much of 2022, Cheniere has been a rare riser in a sea of red. The stock was up 4% on Monday, having climbed almost 32% so far this year.
Headquartered in Houston, Cheniere was the first U.S. company to export LNG, with new capacity at its terminals on the Gulf of Mexico helping bolster demand for U.S. exports in the past two months. Traders have already been shipping U.S. LNG to Europe over the past year in an arbitrage to capture energy prices that were already at record highs before the conflict in Eastern Europe.
The future looks bright for the company, according to a team of analysts led by Sean Morgan at investment banking firm Evercore. The group rates Cheniere stock at In Line with a target price raised in the past week to $152 from $134, implying some 13% upside even after the recent rally.
“The unfortunate news of a ramped-up Russian invasion of Ukraine, has led European leaders to question the future of their energy supply stack,” the team at Evercore wrote in a research report. “In the short run, Europe remains utterly dependent on Russian gas with major producers such as Cheniere, Qatar, and Australia operating close to full capacity.”
“However, in the long-run we expect Europe will lean more heavily into U.S. LNG exports to offset a deliberately decreasing reliance on cheap Russian pipeline gas,” added Morgan and the other analysts. “Cheniere is structurally advantaged vs. peers to capture that export growth potential.”
Beyond the growth outlook that has shifted in line with geopolitical uncertainty, Cheniere’s business has been humming along nicely. The group reported fourth-quarter financials last week that mostly impressed.
While profit based on an adjusted metric—earnings before interest, taxes, depreciation, and amortization, or Ebitda—came in at $1.34 billion, slightly short of the $1.38 billion expected by Wall Street, sales trounced estimates. Revenue of $6.56 billion in the quarter was far ahead of the $4.61 billion figure expected by analysts.
Cheniere stock is overwhelmingly rated at Buy among brokers surveyed by FactSet, with analysts putting an average target price on the stock of more than $140.
Write to Jack Denton at [email protected]
