Shares of Cheniere Energy (NYSEMKT: LNG) slid more than 14% in October, while its subsidiary partnership Cheniere Energy Partners (NYSEMKT: CQP) slid close to 9%. While part of the reason for Cheniere's slide started with the announcement of an acquisition at the end of September, much of that decline was over something that has little effect on the company.
Image source: Cheniere Energy annual report.
Cheniere Energy started off the month on the wrong foot after the company announced that it would buy out all outstanding shares of Cheniere Energy Partners Holdings (NYSEMKT: CQH) at the end of September. The deal is part of management's plan to simplify the structure of the business now that the company is generating some revenue and cash flow from its LNG facility and not 100% reliant on the capital markets. Over the long term, this is the right move to make. It appears that the market doesn't like the timing of the deal, though, as Cheniere is still shelling out big bucks to complete the construction of its two LNG facilities on the U.S. Gulf Coast.
While there was no other news related to the company in October specifically, the decline in oil prices did have a pretty large impact on the company's stock. This may seem a bit odd since Cheniere Energy exports LNG and has little to no direct exposure to oil. What links these two things, though, is the pricing mechanism for natural gas and LNG globally. Unlike in the U.S., where natural gas is traded on a spot market just like oil, most international markets price natural gas and LNG at an indexed price to oil. So when the price of oil goes down, so too does the price of these other products.
While much of Cheniere Energy's LNG exports are sold on long-term contracts with little exposure to commodity prices, the company does also sell some of its cargos to the spot market that will be impacted by these lower prices. However, at this point in the company's development it hardly seems that investors should be worrying about this. What investors should remain focused on is for Cheniere to keep its facilities progressing on time and on budget. The company did post earnings last week that started to show the impact having just one of these facilities up and running will do for its financial statements. If it can do this with the other remaining LNG liquefaction trains under development, the company should be in good shape.
Eventually, investors will want to consider these kinds of factors in the investment thesis for Cheniere, but now is not the time. Based on the progress it has had so far this year toward making the U.S. a major LNG export powerhouse, investors should be encouraged.
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