Master of short-selling, Jim Chanos, has revealed his latest short bet: Cheniere Energy, Inc. (NYSEMKT:LNG), a developer of liquefied natural gas (LNG) plants. Shares fell by as much as 5% during the first two hours of trading today following the news. In an interview with CNBC, the manager of Kynikos stated his bearish views regarding the LNG business, branding Cheniere Energy, Inc. (NYSEMKT:LNG) a “looming disaster“. It seems this play could turn into a clash of investing titans, as legendary activist Carl Icahn holds a sizable long position in the company.
Let’s first take a step back and analyze how tracking hedge funds can help an everyday investor. Through our research we discovered that a portfolio of the 15 most popular small-cap picks of hedge funds beat the S&P 500 Total Return Index by nearly a percentage point per month on average between 1999 and 2012. On the other hand the most popular large-cap picks of hedge funds underperformed the same index by seven basis points per month during the same period. This is likely a surprise to many investors, who think of small-caps as risky, unpredictable stocks and put more faith (and money) in large-cap stocks. In forward tests since August 2012 these top small-cap stocks beat the market by an impressive 60.4 percentage points, returning 118% (read the details here). Follow the smart money into only their best investment ideas all while avoiding their high fees.
According to Chanos, the stalling demand for liquefied natural gas coupled with the massive costs of building and developing LNG plants, make investments in Cheniere Energy, Inc. (NYSEMKT:LNG) foolhardy. Accumulated excess supply coupled with the potential doubling of global production capacity is going to spell trouble for the gas industry, according to Chanos, who is citing a June report by the International Energy Agency, which predicts a slowdown in global demand growth for natural gas. The fact that its business is tied to Asia to some degree, will put even more pressure on Cheniere Energy, Inc. (NYSEMKT:LNG), as demand will suffer from the economic slowdown in Asia and especially in China.
Follow Jim Chanos's Kynikos
“With the stock at 30 times 2020 earnings, with the upside coming from a glutted market, we think the risk-reward in this, given where other LNG plays are in Australia and elsewhere, is just completely out-of-whack,” Chanos stated. Furthermore, the approval of the Iran nuclear deal and the subsequent removal of economic sanctions could see U.S. exporters face increased competition in the global natural gas market, according to Citigroup analysts.
Cheniere Energy, Inc. (NYSEMKT:LNG) is set to start exporting through its Sabine Pass LNG terminal in mid-December, becoming the first U.S.-based natural gas exporter, while the construction of another export terminal in Texas is well under way, with the company having borrowed some $20 billion for the building of the two terminals. Natural gas is cooled at an LNG plant until it takes liquid form, thus becoming easier to transport overseas, and is then regasified at the destination for normal distribution via pipelines. Roughly 80% of the company’s production is already tied-up in long-term supply deals, with the remaining share to be distributed to consumers as the demand arises. The company has estimated EBITDA of $2.2 billion per year from these contracts. In a recent interview with the Financial Times, Charif Souki, the Chief Executive Officer of Cheniere, stated his belief that demand for natural gas has more room to grow and sees the gas market eventually taking the form of a spot market, similar to the oil business.
Cheniere Energy, Inc. (NYSEMKT:LNG) is bleeding money and has not turned a profit for more than 20 years, but that did not stop Carl Icahn from taking an 8.18% stake in the company in August. His reputation immediately paid off, with Cheniere Energy’s management allowing him to appoint two board members just days later. It’s not just Icahn who sees upside potential in Cheniere Energy, Inc. (NYSEMKT:LNG), as billionaire Seth Klarman is also heavily invested in the company. His fund, Baupost Group, reported ownership of 15.3 million shares as of June 30, up by 12% during the second quarter. Andreas Halvorsen has, on the other hand, has chosen to limit his exposure to Cheniere, dumping 27% of his stake during the second quarter. His fund, Viking Global, now holds 11.3 million shares, the third-largest position among the hedge funds that we track.
Disclosure: None
