Stock Analysis

Is Cheniere Energy (NYSEMKT:LNG) Using Too Much Debt?

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NYSEAM:LNG
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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Cheniere Energy, Inc. (NYSEMKT:LNG) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cheniere Energy

What Is Cheniere Energy's Net Debt?

As you can see below, Cheniere Energy had US$31.5b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.18b in cash offsetting this, leading to net debt of about US$29.3b.

debt-equity-history-analysis
AMEX:LNG Debt to Equity History December 23rd 2020

How Healthy Is Cheniere Energy's Balance Sheet?

We can see from the most recent balance sheet that Cheniere Energy had liabilities of US$1.92b falling due within a year, and liabilities of US$31.7b due beyond that. On the other hand, it had cash of US$2.18b and US$390.0m worth of receivables due within a year. So it has liabilities totalling US$31.0b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$14.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Cheniere Energy would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Cheniere Energy shareholders face the double whammy of a high net debt to EBITDA ratio (6.7), and fairly weak interest coverage, since EBIT is just 2.0 times the interest expense. This means we'd consider it to have a heavy debt load. Looking on the bright side, Cheniere Energy boosted its EBIT by a silky 91% in the last year. Like a mother's loving embrace of a newborn that sort of growth builds resilience, putting the company in a stronger position to manage its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cheniere Energy can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Cheniere Energy burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Cheniere Energy's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Overall, it seems to us that Cheniere Energy's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Cheniere Energy (1 is a bit concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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What are the risks and opportunities for Cheniere Energy?

Cheniere Energy, Inc., an energy infrastructure company, primarily engages in the liquefied natural gas (LNG) related businesses in the United States.

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Rewards

  • Trading at 19% below our estimate of its fair value

  • Earnings are forecast to grow 28.49% per year

Risks

  • Negative shareholders equity

  • Significant insider selling over the past 3 months

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