This is part three of a multi-part interview with Joe Boskovich Sr, Chairman and Chief Investment Officer of Old West Investment Management. The interview is part of ValueWalk’s Value Fund Interview Series.
Here’s parts one and two:
- Value Interview With Old West Investment Management [Pt. 1]
- Value Interview With Old West Investment Management [Pt. 2]
The interview will be downloadable as a PDF at the end of the series.
Interview With Old West Investment Management [Pt. 3]
One of the stocks on the long side you like is Cheniere Energy. Could you walk us through your investment thesis here?
Cheniere, whose stock symbol is aptly L.N.G., (Liquified Natural Gas) is one of our newest investments, and one that I am hugely optimistic over. LNG is in the business of sourcing natural gas here in the U.S. and shipping it all over the world. LNG first came to our attention several years ago when we noticed legendary investor Seth Klarman of the Baupost Group accumulating shares. Another legendary investor, Carl Icahn, is the largest shareholder and two of his lieutenants have board seats. Today, Baupost owns 30 million shares (12.7% of the company) and Icahn owns 32 million shares (14% of the company). Both of them have an average cost in excess of $55 per share, far above today’s price of $44.
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I generally don’t think much of CEOs who appear on CNBC’s Jim Cramer show. I would hope they are too busy running their company to participate in such a circus. I watched interviews with LNG CEO Charif Souki, and I was totally turned off. He appeared to be a jet setting, fast talker who spent a fair part of the year in Aspen. I decided not to touch the stock with him as CEO. When I heard he was fired, I was excited and anxious to see who they would hire. Jack Fusco, CEO of electric power plant operator Calpine, left a very good job to take over as LNG CEO. Fusco has spent his entire career in the utility/ power plant/ natural gas business and seemed perfect for the role. I was also thrilled to learn that Fusco agreed to buy $10 million of LNG stock, and he was given another $10 million of restricted stock as part of his package.
To ship natural gas overseas by vessel, it needs to be converted to liquefied natural gas (LNG). The natural gas is delivered to the terminal where it’s chilled to -240°F, a temperature that transforms vapor to a liquid, compressing its volume 600 times. Once it arrives at a foreign destination, it is deliquified for use. Thanks to technology in oil and gas production, the United States has become the leading natural gas producer in the world, and natural gas usage continues to grow dramatically. Much of the world is dealing with air pollution, and some of the biggest contributors are coal fired power plants. Wind and solar plants are still in their infancy, and are very expensive, and nuclear powered plants are problematic to say the least. Natural gas fired plants aren’t pollution free, but are much, much cleaner than coal plants. Natural gas is also used heavily in manufacturing plants, production of chemicals, and on highway and off highway trucks.
LNG has two locations where they operate what they call “trains”. Each train is a terminal where the gas is liquefied and transferred on to a vessel. LNG will have six trains at Sabine Pass, Louisiana, and three trains at Corpus Christi, Texas, both locations situated on the Gulf of Mexico. All trains at both locations should be completed by 2019. After years and years of planning and construction, Train One at Sabine is completed and they shipped the first vessel two months ago. Construction giant Bechtel Corp. is building the projects, and total project cost is estimated to be $30 billion.
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There are competing LNG projects being developed around the world, including Chevron’s huge Gorgon project in Australia. The fact that Cheniere began the process several years ago gives them an advantage as they have supply contracts with users all over the world. LNG has supply contracts with British Gas, Gas Natural Fenosa of Spain, Korea Gas, Gail Limited (India), Total of France, Centrica (U.K.), PT Pertamina (Indonesia) and more. With these supply contracts, LNG is paid a fixed fee to liquefy and load the LNG on to the vessel. They are not taking market risk with the price of natural gas. There is talk of oversupply of L.N.G. in the future, but Cheniere is in a great position having all these customers signed to long-term supply contracts.
The LNG investment is not without risk. A major concern of ours is the amount of debt the company has. As I stated earlier, the total project cost is estimated to be $30 billion, and LNG has $16 billion of long-term debt, and this number could increase. However, the company estimates they will have in excess of $1.0 billion of free cash flow within five years. The company is confident they’ll have no problem servicing and repaying their debt. The bottom line is, we in the U.S. have enormous reserves of natural gas, and the world is using more of it every day.