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Shorting Cheniere: 1st LNG exports not enough to sway some investors

The SabinePass LNG export facility has proven it can liquefy U.S. natural gas and have itshipped across the world, but that is not stopping investors from short sellingCheniere Energy Inc. andCheniere Energy Partners LPshares.

SevenLNG cargos have departedthe Louisiana terminal for destinations including South America, Europe, Asia andthe Middle East. But skepticism about the project and its contracts has a substantialnumber of shareholders convinced that Cheniere stocks are priced too high.

"SinceSabine Pass is only functionally at the beginning of its commercial operation, you'restill dealing with a lot of uncertainty about future operations, future cash flows,and how to execute this proof of concept," Height Securities LLC energy analystKatie Bays said in an interview. "Obviously if you're shorting Cheniere atthis point, you either disagree with the fair value of those liquefaction fees,or you think that those won't materialize for some reason."

As ofApril 15, just under 24 million shares of Cheniere Energy stock — or more than 10.5%of total shares — were listed as short positions, with 10 days to cover, accordingto The Wall Street Journal. More than3.2 million shares of stock in Cheniere Energy subsidiary Cheniere Energy Partnershad short positions, representing 8.7% of total shares, with 17 days to cover.

"Investorsmight be thinking that Cheniere's business plan is way too optimistic," RaymondJames & Associates Inc. analyst Luana Siegfried told S&P Global Market Intelligence."People may not be incorporating all the trains of the Sabine Pass and CorpusChristi terminals, or investors could be incorporating some delays in the next trains,which could push back cash flow. Maybe some investors are shorting because theythink oil price will stay at lower levels for longer."

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Cheniere'scontracts are based on the Henry Hub natural gas price, but they compete with projectswhose contracts are linked to oil. That may prompt investors to believe buyers willuse that to their advantage.

"Oneof the arguments is that the contracts Cheniere has will be renegotiated on theparts of the buyers and the liquefaction fee will come down," Bays said.

Whileshort interest in Cheniere and Cheniere Energy Partners has declined in aggregateover time, Bays added, uncertainty about the U.S. LNG exports industry writ largedoes not work in its favor.

"Cheniere'skind of a lightning rod, and that's because LNG is an unusual business model forthis country," Bays said. "At this point, we don't have any other operatingexport terminals. We also have very few publicly traded companies that are peersfor Cheniere, so I think they get the brunt of a lot of this skepticism."

KynikosAssociates LP's Jim Chanos in particular remains convinced that Cheniere stock isovervalued, even after the company fired co-founder and CEO Charif Souki and beganoperations at Sabine Pass.

"Theproblem is you're just simply overpaying for it with no [room] at all for cost overruns,"the hedge fund manager and noted short seller told CNBC's "Fast Money Halftime Report" on May4 at the Sohn Investment Conference in New York.

"Webelieve Cheniere's cost estimates are too low in their forecast," he said."Having said that, you're paying a ridiculous price for 2020 or 2021 cash flowsrelative to almost any other type of energy infrastructure play you can buy in themarketplace today. So people are paying for a hoped-for income stream, which, again,we think is overstated, through their cost estimates, not their revenue."

Activistinvestor and major Cheniere shareholder Carl Icahn blamed Souki for Cheniere's position.

"Chanossays you should short it, and he had a good point because the company had tremendouscosts, and he looked at CapEx," he told CNBC in an April 28 interview. "TheCapEx was Souki looking to go into all these insane and harebrained ideas."

CallingCheniere "almost [a] no-brainer" buy, Icahn added that he now disagreeswith Chanos because the company's contracts "are pretty damn good."

CheniereEnergy on May 5 reporteda first-quarter net loss attributable to common stockholders of $320.8 million,or $1.41 per share, compared to a loss of $267.7 million, or $1.18 per share, duringthe year ago period. The company's declared results for the quarter were consolidatedto include the company's ownership interest in Cheniere Energy Partners, which isbased on Cheniere's full ownership of the general partner of Cheniere Energy Partnersand an 80.1% ownership interest in CheniereEnergy Partners LP Holdings LLC.

Moody'srecently upgraded ratingson Cheniere Energy Partners subsidiaries SabinePass Liquefaction LLC and SabinePass LNG LP due to "construction accomplishments" at SabinePass.

WhileChanos and others are still pessimistic, Raymond James' Siegfried has a differenttake.

"Frommy point of view, I think the stock is not a sell and that it's priced correctly,"she said.