Short Cheniere Energy (LNG)
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Buy to open Cheniere Energy (LNG) 21 Oct 2022 $150 Puts at $3.4
Cheniere Energy operates the 30 mtpa Sabine Pass LNG facility in SW Louisiana and the 15 mtpa Corpus Christi LNG facility in South Texas. Cheniere is a full-service LNG provider, right from procuring natural gas, to processing it into LNG and loading on to ships for delivery to the customer's regasification facilities around the world.
"Approximately 85% of Cheniere’s expected aggregate LNG production capacity, either completed or under construction, is contracted through long-term take-or-pay style agreements with creditworthy counterparties. The remaining volumes of LNG we can produce are available for our integrated marketing unit to sell into the market. That gives Cheniere the unique combination of stability and opportunity — long-term, contracted, stable cash flows, plus marketing opportunities driven by shorter-term natural gas supply and demand fundamentals in markets worldwide."
The stock hit a lifetime high of $172.25 today. We're taking advantage of this craziness by buying cheap puts. Why do I say craziness? Take a look at Cheniere's balance sheet. The company has a shareholder equity deficit of $3.56 billion and a current market cap of $42.53 billion. With $42.5 billion in total debt and a working capital deficit of $1.37 billion, its balance sheet couldn't be in worse shape. While the company managed a 9.25% profit margin in Q2 ($741 million net income on revenue of $8 billion), it lost money for the first half of 2022. While natural gas rose 57% in Q1, the company wasn't profitable for that quarter.
Adding to the valuation concern, management is plain crazy. This gem is from the Q2 earnings call: "Not only has our prioritization on debt paydown accelerated the deleveraging of our consolidated balance sheet, but also we are more than halfway through our three-year $1 billion share repurchase authorization in less than a year."
I've analyzed 1000+ companies over the last 7.5 years and I can't recall a single example of a company with a working capital deficit, negative equity, and a gargantuan debt load spending their cash hoard on share buybacks. LNG really stands in a league of its own. The company even pays a 33 cent quarterly dividend out of its accumulated deficit! I've double and triple and quadrupled checked their Form 10-Q because I keep wondering if I'm missing something, but I'm not (check it out for yourself, link below). As impossible as it seems, it must be true because these are the numbers on their SEC filings.
LNG has become a momentum stock. Going up simply on the news of natural gas and LNG demand being sky high. Nat gas is not called the widow-maker trade for no reason. When it turns, it'll be so sharp, stocks like LNG will get slaughtered. We will bet on this using put options, since premiums are low. Two months is sufficient time for now - I'll consider rolling the option in a month if the move hasn't transpired by then.
As I'm about to hit send, the option price is $3.25 but I'll use $3.4 as our entry as that's the price at which you can be sure of a fill.
Cheniere balance sheet. Source: Q2 2022 Form 10-Q
Digging a deeper equity hole by paying dividends to boot.