Shares of Cheniere Energy Inc. LNG rose more than 6% in after-hour trading on the NYSE yesterday, on the announcement that activist investor Carl Icahn has taken a new 8.18% stake in the company.
Carl Icahn spent slightly more than $1 billion to accumulate 19.4 million shares of Cheniere Energy.
So what made the billionaire investor buy shares of the natural gas exporter that has eroded money for more than 20 years at a stretch? Carl Icahn believes that the shares of the firm are undervalued and hence have the potential to rise in the near future.
Now, which fundamentals of the company led the activist investor to believe that Cheniere Energy will grow? The company is not yet widely known but Carl Icahn is hopeful of this Houston-based firm becoming the first company to export huge amounts of natural gas from the U.S. shale formations by the end of 2015.
Cheniere Energy also has contracts from natural gas buyers for a long period of 20 years. Its first cargo should be ready for shipping by the end of this year.
Another point that impressed Carl Icahn is the company’s plan to construct its second export terminal at Corpus Christi, TX. The huge export facility will likely cost around $16 billion.
Carl Icahn added that he is willing to discuss issues with management and board of directors of Cheniere Energy to sort out problems related to the company’s operations, capital spending, aggressive executive compensations and financing. Management might even be compelled by the iconic investor to cut the huge pay packages of its executives. During 2013, Charif Souki, the chief executive of Cheniere Energy drew $142 million as compensation. This made Charif one of the country’s highest paid executives.
We should mention here that Carl Icahn has already bought significant stake in companies like Chesapeake Energy Corp. CHK and Transocean Ltd. RIG. There, too, he imposed significant changes on management and the boards.
If history has a habit of repeating itself, we might see the same happening at Cheniere Energy. On a positive note, these changes might help the company to grow in the coming years.
Currently, Cheniere Energy carries a Zacks Rank #4 (Sell), implying that the stock will underperform the broader U.S. equity market over the next one to three months.
Meanwhile, a better-ranked player in the energy sector is Seadrill Partners LLC SDLP. The stock carries a Zacks Rank #1 (Strong Buy).
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