As the author of "Margin of Safety,"Â Seth Klarman (Trades, Portfolio) is often known for his conservative, value-based approach. Recently, however, followers have been surprised at many of his largest positions. Not only do they include volatile biotechnology names like Atara Biotherapeutics Inc. (ATRA, Financial) and Forward Pharma AS (FWP, Financial), but it looks like he’s put 18% of his entire portfolio in Cheniere Energy Inc. (LNG, Financial).
Now controlling 15% of the entire share base, Klarman purchased his stake over the past two years, paying up to $76 a share in 2014. On Dec. 31, 2015, he increased his position by 64%, paying a much lower $37.25 a share. Since then, the stock has continued sinking, hitting a 52-week low recently of about $27 a share. Is this a chance to buy into a famed value investor’s best idea at a much more attractive price than he paid?
Benefiting from energy arbitrage
Due to fracking, natural gas supplies have exploded in the U.S., severely compressing domestic prices. Despite low pricing, cheap extraction and plenty of reserves ensure that U.S. production should at least remain elevated for decades.
Asia, however, has not enjoyed an explosion of natural gas production due to limited ground reserves. That’s caused natural gas prices in Asia to be roughly 2-3x higher than in the U.S. While this spread may fluctuate, it will likely remain due to structural differences. While the exporting infrastructure hasn’t existed to this point, it looks like a pretty good business to liquify natural gas in the U.S. and ship it to Asia in order to capitalize on a healthy, long-term spread. That’s where Cheniere comes in.
Cheniere currently has about 31.5 mtpa under construction, which will make it one of the largest exporters of LNG in the world. In total, this will cost the company around $30 billion. Demand is huge, however, as the U.S. suffers from a natural gas supply glut and Asian consumers are forced to pay elevated prices. That’s why 87% of Chienere’s export capacity is already contracted, These are 20-year contracts with fixed fees and no price reopeners. This will provide Chienere about $4.3 billion in fixed fees per year that are not tied to commodity prices.
Cheniere can profitably sell LNG into key demand regions even in periods of lower market prices. Even if selling prices were to remain low, Chinere would still turn a profit.
Even with only seven trains of capacity (which is already a majority contracted), total EBITDA would be around $2.1 billion. With a depressed market cap of only $6.72 billion, shares trade at a bear-case scenario of only 3.2x EBITDA. With plenty of growth projects left to expand exports, shares could get even cheaper on an earnings basis.
Carl Icahn (Trades, Portfolio) also seems to be a fan, building up a position in the last couple months that rivals Klarman’s massive bet. It’s not tough to see why they see an undervalued, long-term winner in Cheniere Energy.
