LNG 2Q2017 Earnings: On the verge of breakout; guidance raised; raising ST-Target to $65/sh

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Market Price (8/8/2017): $42.60/share; ST-Target: $65/share; NIV: $211/share

In our opinion, Cheniere needs to buy back all CCH HoldCo II Convertible Senior Notes (CCH Holdco 2 Convertibles), but conversion unlikely before March 1, 2020. So, we feel investors won’t be concerned until 2019. So, we’re upgrading our ST-Target to $65/share from $44. Regardless, we believe 10% automatic discount on conversion price is a mistake. Cheniere continues to show marketing and trading (M&T) power, accounting for more than half of revenue. We like it. We like that Cheniere’s looking at ways to deploy future FCF, but not thrilled about foreign and liquids-based ventures; we believe there are many US opportunities involving E&P, pipelines or M&T. We’re surprised and disappointed Cheniere could not roll-up CQH but we believe roll-up of CQH and CQP will happen in due time. We believe new Midship pipeline feels right but mid-scale LNG plant feels wrong. We feel there are better ways to finance expansion program, but, LT, company faces under-leverage problem. We’d like Cheniere to take excess cash flow to pay dividend after rolling up CQH and CQP and after its third act. Though loose now, we expect global LNG markets to tighten quicker than current expectations and believe Europe would continue to migrate towards hub pricing/trading, and Asia is likely to start hub pricing/trading.

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