Should You buy Cheniere Energy (LNG) After Solid Earnings?
Back in the Summer, I wrote two separate articles telling you to avoid investing in Cheniere Energy Stock.
Today, I want to give you an update on them after they released solid earnings by answering the question – Should You Buy Cheniere Energy After Solid Earnings?
You can read the prior articles in full by clicking the links below…
But if you don’t want to; here’s a quick recap of why I told you to avoid its stock in the Summer.
From Article #1 Linked Above
1 Reason To Avoid Cheniere Energy
It’s Got An Enormous Amount of Debt
Normally in these articles I talk about other things like valuation, profitability, cash flow, the affects coronavirus is having on a company’s financials, and other things.
But frankly none of those matter with Cheniere Energy (LNG) due to its enormous debt load.
As of this writing Cheniere is a $12.4 billion market cap liquefied natural gas terminal operator.
Its most recent quarterly data showed it has $2.4 billion in cash. And it has $31.5 billion in short term and long-term debt and capital leases.
Total liabilities make up 99.4% of its balance sheet.
And its current debt to equity ratio is 148.8.
In other words, it has 154% more debt and capital leases than its entire market cap.
Its debt load is 12.1X higher than its cash levels.
It’s got one of the highest debt to equity ratios I’ve ever seen.
And after subtracting total liabilities from total assets there’s a number near $0. This means after subtracting debt from assets that the stocks equity – the shares you buy on the market – are almost worthless.
I want to invest in safe stocks that will be around for decades to help me build wealth over the long term. This helps insure I lose as little money as possible over time.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
For example, I look to invest in companies with a debt to equity ratio below 1… And Cheniere’s is 148.8.
And this still isn’t all…
One major reason it’s got an enormous amount of debt is because of its lack of ability to create free cash flow from its business operations.
Over the last decade the companies produced a total of negative $24.3 billion in free cash flow.
The only way this company has stayed alive to this point is through issuing shares. Issuing debt. And by selling properties.
In 2010 it had 56 million shares outstanding. But as of this writing it has 268 million.
This means its diluted shareholders by 379% in the last decade.
Think of this like a pizza.
When Cheniere issues more shares, the same size of pizza stays… But more people are around to eat it so the piece of pizza you have gets smaller and smaller the more it dilutes shares.
If a company keeps doing this over long periods like Cheniere has, the same size of the pizza remains but eventually you’ll get to eat little to no pizza.
This is bad enough by itself…
But Cheniere’s combined this with a massive increase in its amount of long-term debt over the last decade too.
From $2 to $3 billion in the early 2010’s. To now $30 billion.
Or a 10X increase in long term debt in 10 years.
Just to stay alive and continue operating and expanding Cheniere is diluting shareholders more and more. And issuing ever larger amounts of debt.
This is unsustainable.
Combine this with the ongoing and rapid increase in coronavirus cases worldwide causing massive uncertainty in energy markets worldwide and this makes Cheniere even more dangerous to own.
For these reasons I recommend you stay far away from Cheniere Energy’s enormously risky stock.
From Article #2 Linked Above
Since then, not much has changed for Cheniere… Even though they “delivered a 100% earnings surprise that beat analyst expectations.”
Yes, Cheniere’s results improved in the quarter when it comes to net income.
Analysts expected Cheniere to produce $0.39 per share in earnings. But it produced $0.78 per share instead.
And yes, this beat those original expectations by 100%.
But that doesn’t mean their overall earnings were great. Or that the underlying issue of the company having too much debt is gone.
Their earnings weren’t great. And their debt issues got worse in the quarter.
Cheniere earned $198.9 million in the quarter. This is great right because it earned a net profit in the quarter.
Not after you read the quarterly earnings report and see how this happened.
Its net income largely increased so much due to the “accelerated revenues recognized from liquified natural gas (LNG) cargoes for which customers have notified us that they will not take delivery.”
The quoted area is taken directly from its earnings release. The only thing changed in the quote is that I added Liquefied Natural Gas to explain what the LNG acronym meant.
That sentence means that due to accounting rules the company accelerated revenue that it was supposed to get in the future from contracts… Because clients chose not to receive those shipments in the future.
Likely, these clients canceled future contracts and paid a penalty of sorts to buyout the remaining contracts… Which is where this accelerated revenue comes from.
Think of this like canceling a yearly TV contract but still having to pay say 20% of the remaining contracts value to get out of it.
This isn’t a good thing.
To further illustrate why, Cheniere’s debt levels remained about the same as my last write up on the company… While its cash levels fell.
Current debt in the quarter that just ended was $237 million. And long-term debt – net of past and current payments – was $30.8 billion.
This is still $31 billion in debt – it had an estimated $31.5 billion as of my write up a couple weeks ago.
And its cash levels are now at $2 billion versus $2.4 billion as of my last write up.
Total liabilities as a percentage of the balance sheet are still at 98.7% compared to 99.4% in my previous write up.
Its debt to equity is still an outrageous 74.
Its debt levels are now 123% of its market cap of $13.8 billion.
And its debt load is now 14.4X its cash levels.
These are all still horrific.
And now clients are canceling contracts with the company.
Stay away from Cheniere Energy due to its enormous debt loads. And ignore the 100% earnings surprise” because in a real-world sense it doesn’t change anything about the company.
Especially when you read the quarterly financial and see why its net income was higher.
And frankly things are still about the same – even after Cheniere’s “Solid Quarterly Earnings.”
Because they did the same thing again.
Revenues fell 33% in the year-to-year quarterly period to $1.5 billion.
On a “normal” accounting basis they lost $463 million in the quarter.
But on an “adjusted” earnings basis they showed a net profit of $477 million.
While in the first 9 months of 2020 it earned net income on a “normal” accounting basis of $109 million.
While its “adjusted” net income in that same period was $2.91 billion.
Why the huge differences from negative and barely profitable to huge profits?
Because these “adjusted” earnings are making major adjustments like the last time I wrote you about Cheniere.
I won’t get into the details of the other things going into this because I don’t want to bore you… And frankly it doesn’t matter.
The bottom line here is that Cheniere is still massively adjusting earnings in their favor… But the underlying economics of the company are still bad.
Cargoes and volumes were down 49% and 50% in the quarter respectively.
Revenue fell huge as mentioned above due to lower volumes and shipments.
And this happened because demand for oil is still lower due to Covid.
With much of the US now either directly under lockdowns again – or mayors and governors threatening to lock things down again due the huge spike in cases – this won’t be solved anytime soon for Cheniere.
Combine this with its now even higher amount of debt at $31.34 billion of total debt… And this is a potentially disastrous combination.
For these reasons – and the ones in previous articles – continue avoiding Cheniere Energy.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.