LNG Demand And Capacity Expansions Will Drive Long-Term Earnings Power

Catalysts

About Venture Global

Venture Global develops, builds and operates large scale, low cost LNG export facilities that supply long term energy to global customers.

What are the underlying business or industry changes driving this perspective?

• Rapid ramp up of Plaquemines and CP2 production, with proven ability to operate meaningfully above nameplate capacity, should drive sustained volume growth and materially higher revenue and EBITDA as additional trains reach COD.
• Growing global demand for LNG as economies substitute away from coal and Russian pipeline gas, particularly in Europe and emerging markets, should support robust long term liquefaction spreads and underpin higher earnings power through contracted and merchant volumes.
• Industry leading construction speed, modular design and data driven operational optimization at Calcasieu Pass, Plaquemines and CP2 are lowering delivered unit costs, which should widen net margins and enhance project level returns over time.
• Expansion of long duration SPAs with utilities and national energy companies in Europe and Asia, combined with increasing portfolio flexibility across multiple terminals, should stabilize cash flows and reduce earnings volatility while supporting incremental upside on uncontracted cargos.
• Ongoing brownfield expansions and bolt on phases targeting more than 100 MTPA of total capacity are expected to leverage existing infrastructure and financing platforms, improving capital efficiency and boosting long run return on equity and consolidated EBITDA.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Venture Global's revenue will grow by 20.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.0% today to 9.4% in 3 years time.
• Analysts expect earnings to reach $1.8 billion (and earnings per share of $0.68) by about December 2028, down from $2.1 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.2 billion in earnings, and the most bearish expecting $71.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 22.5x on those 2028 earnings, up from 8.6x today. This future PE is greater than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to grow by 1.18% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.91%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Adverse outcomes or larger than expected cash settlements in the remaining Calcasieu Pass arbitration cases could divert capital away from growth projects, weaken investor confidence and reduce future profitability, directly pressuring net income and consolidated EBITDA over the long term.
• If global LNG supply growth catches up with or exceeds demand growth faster than management anticipates, particularly after 2028 as multiple new projects come online worldwide, sustained compression in liquefaction spreads and fixed liquefaction fees would weigh on revenue growth and EBITDA margins across Venture Global’s portfolio.
• Persistent or rising project costs from power island delays, incremental equity injections and ongoing construction challenges at Plaquemines and CP2 could erode the low-cost producer advantage, resulting in lower project returns, tighter net margins and weaker long term earnings than currently projected.
• Increasing regulatory, environmental or geopolitical constraints on U.S. LNG exports, including permitting risks and potential policy shifts tied to energy transition goals, could limit new capacity additions or delay brownfield expansions, capping volume growth and constraining revenue and EBITDA expansion over time.
• Greater reliance on commissioning and excess cargos for margin upside, combined with higher exposure to short and medium term contracts, leaves Venture Global more sensitive to cyclical LNG price swings, which could lead to volatile revenue and EBITDA and undermine the assumed stability of long term earnings power.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $12.26 for Venture Global based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $4.5.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $19.0 billion, earnings will come to $1.8 billion, and it would be trading on a PE ratio of 22.5x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $7.23, the analyst price target of $12.26 is 41.1% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.