Chanos Shorting Cheniere Sides With Gas Bears Down on Oil, China

The Bullish Case for Cheniere Energy
  • Forecasters lower U.S. LNG outlook on reduced price advantage
  • IEA sees Asian demand weaker than previously expected

Jim Chanos’s bet that Cheniere Energy Inc. is set for a fall puts the hedge fund executive in line with a growing chorus of analysts forecasting grim prospects for U.S. natural gas exports.

Multibillion-dollar liquefied natural gas projects are facing a hard future as a crash in energy markets strains producers’ resources and global demand for the fuel wanes. Chanos has placed negative bets on Cheniere, declaring in an interview on CNBC that the LNG industry is a "looming disaster."

The bet also mirrors Chanos’s bearish view of growth in China, one of the key potential markets for LNG supplies.

“The single biggest worry is the very sharp slowdown in manufacturing in China,” said Michael Stoppard, chief strategist of global gas at IHS in London. “We’re at an absolutely critical pivot point of huge
uncertainty so people are betting in different directions.”

On Cheniere, Chanos is squaring off against billionaire Carl Icahn, an activist investor who is also the company’s biggest shareholder, with more than an 8 percent stake. Cheniere is the only pure-play LNG company and a proxy for investors betting on U.S. gas shipments. By the end of the year, it plans to begin shipments from the U.S. Gulf Coast, making it the first exporter of gas sourced from the lower 48 states.

Supply Glut

Those shipments will come just as a supply glut of LNG takes hold in 2016 and expands through 2025, when global export capacity may be 40 percent higher than demand, according to a report Monday by Bloomberg New Energy Finance. China’s appetite for LNG will grow more slowly next decade as its economy weakens and competition ramps up from pipeline imports, the report said.

That darker picture for demand coincides with an oil market slump that has also gutted LNG prices, which are linked to crude globally. That’s leveling the playing field for other international suppliers by eroding the U.S. advantage of lower gas prices, analysts at Bank of America Merrill Lynch led by Max Denery wrote in an August 21 note. Cheniere has marketed its exports based on U.S. gas prices, which have averaged $2.772 per million British thermal units this year.

Japan’s Price

Spot import prices for LNG in Japan were 29 percent lower from a year ago as of last month, at about $8.10 per million Btus, according to data compiled by Bloomberg. Henry Hub gas would have to trade below $2.00 per million Btu to be attractive for new European long-term contract buyers, according to the Bank of America Merrill Lynch report.

In June, the International Energy Agency cut its outlook for global natural gas use for the third consecutive year.

Not all analysts are predicting tougher times for LNG exporters, making it a toss-up as to whether Chanos or Icahn is making the right call.

Cheaper Projects

The cost and time to build LNG facilities has fallen. Construction in the U.S. is less than a third the cost of building in Australia, William Frohnhoefer, an analyst at BTIG LLC in New York, wrote Wednesday in a note. Demand for LNG slowed due to recent high prices and the stage is now set for a rebound, he said.

Cheniere may escape the impact of the market slowdown because it’s at the forefront of U.S. exports.

“The LNG market is probably headed for some level of oversupply in the future but we don’t think Cheniere is disadvantaged,” said Uday Turaga, chief executive officer of consultant ADI Analytics in Houston. “The second wave of LNG projects is probably going to be pushed out further.”

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