An investor can think of Cheniere Energy ( LNG) as part of a long-term secular narrative that is being supported by long-only investors. Think of natural gas engine maker Westport Innovations ( WPRT), one of the few pure-plays on the buildout of natural gas transportation infrastructure. Cheniere, building the first government-approved natural gas export terminal in Louisiana, is the only pure play on the development of a U.S. natural gas export market. Weakness in natural gas pricing is actually a tailwind for Cheniere, as it continues to add support to the idea of exporting U.S. natural gas. There is a difference between a trade that works and an earnings model that is still difficult to project. William Frohnhoefer, analyst at BTIG Investments and one of the only analysts to cover Cheniere Energy, thinks that, even at a 52-week high, the company's first-mover advantage hasn't been fully priced into shares. The BTIG analyst has a $19 price target vs. Monday's close at $15.08. Frohnhoefer said that if an investor thinks of the company like a midstream master limited partnership -- Cheniere's subsidiary, Cheniere Energy Partners ( CQP), is an MLP -- then a trading multiple of 11X to 14X projected EBITDA is fair. BTIG bases its $19 price target on a ten-year terminal multiple. "Institutional investors with a view on natural gas prices are attracted to this thesis," Frohnhoefer said. The news flow for Cheniere Energy continues to be positive. Last week, BG Group ( BRGYY), which has a deal with Cheniere Energy, said the U.S. will be able to supply about 9% of global liquefied natural-gas output by the end of the decade, or 45 metric million tons of LNG versus global supply of 480 million tons a year by 2020. Cheniere shares are up 17% since that BG commentary. There are many risks to the Cheniere story, though, so here are a few:
Shares have simply run up too much already to continue to be supported by investors with its earnings years still far out on the horizon.
It loses key financing support from larger partners in the energy market.
The U.S. natural gas export market never takes off.
Overseas demand for U.S. natural gas doesn't materialize because of the explosion of shale gas finds in Asian markets like China.
While all of these risks are reasonable, and Cheniere has a complicated balance sheet, BTIG's Frohnhoefer said worrying about the U.S. natural gas market never taking off or Chinese shale finds supplying its own needs is an argument for another day. All Cheniere needs now is to sign up enough long-term contract partners for the export terminal so that its cash flow from running the facility is a certainty, regardless of short-term fluctuations in natural gas pricing, and that supports trading.