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R. Vanzo
R. Vanzo
Articles (164) 

Seth Klarman Bets the Farm on Cheniere Energy

It's no wonder Klarman and Carl Icahn are betting big

As the author of "Margin of Safety," 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. (NASDAQ:ATRA) and Forward Pharma AS (NASDAQ:FWP), but it looks like he’s put 18% of his entire portfolio in Cheniere Energy Inc. (LNG).

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.

About the author:

R. Vanzo
Ryan has been covering public equities for more than a decade. He has worked on the investment research teams for several multi-billion dollar hedge funds in San Francisco and New York.

Rating: 4.8/5 (4 votes)

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Comments

Shreyas Patel
Shreyas Patel - 5 years ago    Report SPAM

Hi, do you have a link to the 13F filing that shows Klarman increased his LNG holding in 4Q15?

Ryan Vanzo
Ryan Vanzo - 5 years ago    Report SPAM

I draw my numbers from GuruFocus' datasets: http://www.gurufocus.com/StockBuy.php?GuruName=Seth+Klarman

ralph.adamo.123
Ralph.adamo.123 - 5 years ago    Report SPAM

Just a correction to your article. Klarman's LNG position is 22.7 million or 9.6% of total shares outstanding, not 15%.

Shreyas Patel
Shreyas Patel - 5 years ago    Report SPAM

The figures are actually correct. 37m shares, 15% ownership

http://www.sec.gov/Archives/edgar/data/3570/000114036116047276/doc1.htm

Kees van Wanrooij
Kees van Wanrooij - 5 years ago    Report SPAM

Why not use EV/EBITDA instead of Marketcap/EBITDA?

Ryan Vanzo
Ryan Vanzo - 5 years ago    Report SPAM

That would be a much better metric, thanks Kees. Shares would only trade at 10x a run-rate EBITDA due to LNG's big debt load. Still a compelling thesis, but would rely more on the company's growth plans to develop more train capacity.

rlawson36
Rlawson36 premium member - 4 years ago

I see people speaking often of "trains" in connection with LNG. is this literally a "train?" Or something else? Can someone define "train" (if it's literal - how many cars)?

Sorry for the basic question.

This one intrigues me, but I am having a hard time getting a handle on the potential earnings per share - or the range of probably earnings per share - might be 2,3, 5 years down the road.

Thanks - I realize this is being posted well after the fact. Hope someone sees it.

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