Cheniere Energy LNG, a natural gas exporter, continues its uptrend. The stock closed Friday’s session at $188.44 after setting a new 52-week high of $188.73 earlier in the day. As shown in this chart, with the advance, LNG shares are up more than 20% over the past six months, handily outperforming the sector and the S&P 500. The company has also fared better than other energy storage and transportation operators like MPLX LP MPLX and TC Energy Corporation TRP.

LNG, MPLX and TRP Stock Performance Comparison

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Given this impressive performance, should investors still consider buying LNG stock, wait for a better entry point, or even think of booking profits? Let’s delve deeper into the company’s fundamentals.

5 Reasons to Like Cheniere Energy Stock

Robust Long-Term Contracts Drive Predictable Cash Flow: Cheniere Energy benefits from its long-term customer contracts, locking in about 95% of anticipated production from its Sabine Pass and Corpus Christi liquefied natural gas (‘LNG’) projects through the mid-2030s. These contracts guarantee stable revenue streams, insulating the company from market volatility. This strong contractual foundation is expected to increase the company’s distributable cash flow over the next few years, supporting further stock price appreciation.

Strategic Expansion of LNG Capacity: Cheniere’s ongoing expansion projects, including the Corpus Christi terminal, are expected to increase the company’s total production capacity by 30% within the next five years. With the terminal on track to becoming the second-largest LNG terminal in the world, these expansions will capitalize on the growing global demand for LNG.

Analysts Take a Bullish Stance on Cheniere Energy’s Earnings Outlook: The Houston, TX-based energy player has lately been blessed with positive earnings estimate revisions. Looking at the current year, analysts have raised estimates by around 15% in the past 60 days. The 2024 Zacks Consensus Estimate is now $9.76 per share compared to $8.51 two months back.

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Shareholder Value Enhancement Through Buybacks and Dividends: Cheniere Energy has bolstered its investor appeal with a robust capital allocation strategy aimed at maximizing shareholder value. By authorizing an additional $4 billion for share repurchases through 2027 and boosting its quarterly dividend by 15% to an annualized $2.00 per share starting third quarter, Cheniere demonstrates a firm commitment to returning capital to shareholders.

Strong Financial Performance and Free Cash Flow: Cheniere Energy’s strong financial performance, particularly its free cash flow (FCF), puts upward pressure on the stock. After years of negative FCF, the company posted a record $9.69 billion in FCF in 2023, up from $3.17 billion in 2022. Even in the first half of 2024, LNG generated $1.58 billion in FCF, indicating continued financial health.

While Cheniere Energy has strong long-term potential, the current market conditions and specific challenges facing the company cannot be ignored.

Red Flags for LNG Stock

Elevated Debt Levels and High Leverage: Exporting natural gas — by setting up large liquefication plants — is a highly capital-intensive undertaking, with each unit running up multi-billion-dollar bills. This has translated into a huge debt load for Cheniere Energy. Its long-term debt is around $22.6 billion, with only $2.4 billion in cash and cash equivalents. Importantly, the company's debt-to-capitalization as of the end of the second quarter was 72.1%, posing a major risk and restricting its financial freedom.

Capital Expenditure Risk: Cheniere Energy is still expected to incur high capital spending and cash outflow for the foreseeable future as it looks to conclude the expansion of its Corpus Christi LNG terminal. This is expected to place a substantial burden on the group’s leverage and credit metrics, thereby straining cash flow and forcing the company to scale back its share repurchase and dividend programs.

Volatility in Cash Flow Generation: Given Cheniere Energy's earnings volatility due to fluctuating natural gas prices and changing demand, its performance can be unpredictable and risky. Additionally, the LNG industry's susceptibility to geopolitical events, regulatory changes, and potential oversupply could further destabilize Cheniere's operations and profitability.

Oversupply Concerns: The anticipated growth in global LNG supply, with several large facilities set to come online, is a risk to market oversupply. This could pressure prices downward in the near term, negatively affecting Cheniere's spot market sales and future contract renewals. Although long-term contracts provide some revenue stability, the influx of new capacity may dilute pricing power, potentially impacting the company's profitability and margins as new facilities come into operation.

Final Thoughts on Cheniere Energy Stock: Hold It for Now

Given these mixed factors, a prudent approach would be to wait for a more favorable entry point before committing to a position in Cheniere Energy. Till then, holding onto your shares could pay off.

LNG carries a Zacks Rank #3 (Hold) at present.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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