The Best Way to Ride LNG Exports

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Since the natural gas production bonanza has not been enjoyed by Asian and European countries, the commodity is priced 3-5 times higher in these markets. Due to this huge pricing difference, exporting natural gas to Asia and Europe from the US appears to be a logical move. But for that, natural gas needs to be liquefied, and the shortage of liquefaction plants is a stepping stone. However, a lot of projects are coming up, and companies like Chevron (NYSE: CVX) and Cheniere Energy (NYSEMKT: LNG) are spending billions in order to take advantage of this price difference.

As a matter of fact, Chevron’s upcoming Wheatstone (costing $29 billion) and Gorgon (costing $37 billion) projects would position the company as the leading LNG supplier around the globe. Cheniere Energy is also another upcoming player in the LNG export market, with its Sabine Pass under development. The infrastructural spending on LNG plants is only increasing which brings the leading LNG facility developers, KBR (NYSE: KBR) and Chicago Bridge & Iron Company (NYSE: CBI) into the picture.

KBR has been the frontrunner in LNG production facility development, and the company has developed more than 40% of the global LNG production facility around the globe. In Q2 KBR’s backlog rose by a hefty 44%. The company ended Q3 with a revenue backlog of $14.8 billion, up by 27% year over year and cash and cash equivalents of $846 million, up by $22 million.

Management expects the cash flows in Q4 to strengthen, as it would be working towards collecting due receivables and rolling over untimely bills to Q4. These under-recoveries justify the revenue drop in Q3. The book to bill ratio stands at 80%, with a gross profit margin of 18.2%. With these numbers, it would be safe to expect some solid earning releases from the company.  

Shares of KBR trade a forward P/E of 9.63x indicating that the stock is undervalued. Debt/Equity stands at a meager 4%, with a healthy P/S ratio of 0.52x.

KBR was recently selected by

1)      GDDF-Suez: To develop a floating natural gas production vessel.

2)      Höegh LNG: To carry out a pre Front End Engineering Design (FEED) study for LNG-FPSO project.

3)      KBR was also selected to develop the FEED for Kitimat LNG Project

However, the Freeport LNG and Yamal LNG projects were awarded to CB&I. The development of these projects is yet to take off, and we can see improved cash flows of both KBR and CB&I as soon as their development begins.

Though KBR has a larger order backlog, CB&I’s spectacular performance cannot be neglected. CB&I reported a 15% jump on revenues and earnings rose by 13.9% YoY, and the results beat the Street’s estimates. The company ended the quarter with new bookings worth $930 million, and the overall backlog stood at $9.5 billion.

The company ended the quarter with $655 million in cash and cash equivalents with a net debt of only $615 million. The debt/equity ratio is only 3%. The company appears to be undervalued as the forward P/E equates to 11.88x with a lucrative 0.76x PEG. Additionally the company has a P/FCF yield of 14.48x and a trailing P/S of 0.76x. Analysts expect the average EPS growth over the next 5 years to be 18.83%, which means that the stock could double in value in less than 4 years. With good financials and fundamentals, CB&I is hard to miss.

KBR and CB&I are the top two LNG infrastructure companies in the US, and with increasing demand for LNG facilities, both the companies have come into the limelight. KBR and CB&I have both performed well and have a number of projects lined up for development. Though KBR presents a better case, conservative investors should look to hold both the stocks to spread their risks and rewards.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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