In 2008, a Houston-based energy company saw an enormous opportunity.
In June of that year, natural gas was selling for $14 per thousand cubic feet. At the time, it appeared the U.S. was going to run out of natural gas, and it seemed like the perfect time to build new import facilities and take advantage of increased demand.
However, new hydraulic fracturing (fracking) technology changed the rules of the game. All of a sudden, natural gas was plentiful and cheap. As a result, gas prices plummeted.
So what happened to the energy company eager to import natural gas?
As you might expect, shares prices fell off a cliff.
Since then, things have turned around for Cheniere Energy (LNG). In fact, the stock has gained an astonishing 2,568% since bottoming out five years ago.
If you're a regular StreetAuthority reader, you've probably heard of Cheniere before. In December 2011, StreetAuthority resources expert Nathan Slaughter recommended Cheniere to the subscribers of his Junior Resource Advisor newsletter.
Three months later, the stock had more than doubled.
So how did Cheniere achieve such a dramatic turnaround?
Well, instead of letting its new Sabine Pass import facility in Louisiana sit and rust, the company set to work securing contracts and refitting the facility for the export of natural gas.
By 2016, this facility is expected to export 500 million cubic feet of natural gas per day. And the company isn't stopping there: Cheniere plans to build five more facilities by 2019, for a total investment of $12 billion.
The company hopes to export about 4% of current natural gas production to hungry markets overseas. Today, European and Asian markets are willing to pay an average of four times as much as U.S. consumers for natural gas.
Best of all, Cheniere is the only company given approval by the Department of Energy to export natural gas. Although this monopoly status is unlikely to last forever, it will allow the company to basically print money as long as it does.
The U.S. government has been slow to issue permits for the export of natural gas, and U.S. chemical companies like Dow Chemical (DOW) and Huntsman (HUN) are pushing lawmakers to limit exports. Chemical companies are some of the largest domestic consumers of gas -- for instance, Dow uses 850,000 barrels of oil equivalent per day -- so it's in their interest to keep supply levels high and prices down.
However, because Cheniere has already received approval to export, the political pushback should only help the company in the coming years by creating a barrier to entry for its competitors.
Cheniere continues to ink new deals that should serve it well in the future. Under aggressive CEO Charif Souki, the company has signed a $1.5 billion equity financing deal with Blackstone (BX). As Forbes magazine recently reported, long-term contracts with BG Group, Total (TOT), Korea Gas, India's GAIL, Spain's Fenosa and the U.K.'s Centrica will earn the company $2.6 billion a year in revenue when the Sabine Pass facility opens in 2016.
Cheniere's stock is up almost 60% since the beginning of the year, and it's trading near the top of its 52-week range. The company does not pay a dividend, so the stock is more appropriate for investors interested in growth, not dividend income.
How much growth are we talking about?
In 2012, Cheniere's revenue totaled $266 million. So all things being equal, the company's revenue is expected to increase nearly tenfold (to at least $2.6 billion) by 2016.
While the company will most likely plow a large portion of this increased revenue into new export facilities and paying off debt, shareholders could well be rewarded in the long run, as the U.S. energy boom is still in the early stages and shows no signs of slowing down.
Risks to Consider: While domestic competition will have a tough time catching up, Cheniere does face competition from exporters based overseas. There are currently major projects underway in Australia, Canada, Africa and Papua New Guinea that could compete with Cheniere for a piece of the lucrative Asian market.
Share prices are currently trading at high price-to-book (P/B) and price-to-sales (P/S) ratios (15 and 23, respectively) in relation to industry peers. These high valuations increase investor risk at today's prices. In addition, Cheniere's share price is subject to changes in the volatile natural gas market, something that is beyond the company's control.
Action to Take --> Purchasing the stock at today's prices is a speculative investment and only appropriate for investors willing to shoulder the risk. However, should prices pull back between now and September -- and natural gas prices tend to rise in fall/winter months and decline in spring/summer months -- I think buying Cheniere below $25 per share makes good sense. This share price is closer to the three-year moving average, yet it takes into account Cheniere's future contracts, monopoly status and huge growth potential.
- 2,568% Gain In 5 Years -- And This Energy Stock Still Has Room To Run
- The Best Way To Profit From The Fracking Boom
- How to Profit from the Cheapest Natural Gas in Recent History