Cheniere Earnings: Wide Marketing Spreads Generate One More Great Quarter Before Expected Collapse

Cheniere’s LNG first-quarter earnings were predictably strong, but the quarterly cadence of EBITDA shows the return to more normalized levels of EBITDA and market spreads. Cheniere did boost its expected 2023 EBITDA range to a midpoint of $8.45 billion, slightly higher than our $8.4 billion forecast, as it was able to sell a few remaining liquefied natural gas cargoes at higher margins than expected. With first-quarter EBITDA of $3.6 billion, the remaining quarters average out to about $1.62 billion each, reflecting the steep fall in marketing spreads, thanks to lower gas prices. Still, as this is already incorporated into our model, we will leave our $161 per share fair value estimate unchanged, and our wide moat rating intact. Still, Cheniere was able to pursue a reasonable capital allocation plan with the bonus cash flows, repaying $896 million in debt, repurchasing 3.1 million shares, and paying out a quarterly dividend of $0.395 per share during the quarter.

The LNG market is playing out more or less exactly as we expected following a winter where EU storage levels have soared, thanks to reduced EU consumption. Cheniere noted a 12% decline in gas demand across Europe’s key markets in the first quarter. At the same time, Asian demand is picking up, as prices are now more palatable for these price-sensitive markets, and Cheniere noted a 4% sequential increase in demand.

We expect Chinese demand to start to pick up more in future quarters. In March, Chinese gas demand increased nearly 6% year over year, and LNG imports jumped 14%. On the China policy side, policymakers have suggested pursuing a more balanced approach to using coal and gas this year, likely not wanting to tighten the market too much and drive prices higher. However, over the long run, we think Chinese LNG will resume its role as the major demand driver for LNG and U.S. LNG in particular given its need to transition away from coal as a major energy source.