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Cheniere, CME Group's Futures Contract to Reshape LNG Space

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Cheniere Energy, Inc. (LNG - Free Report) recently agreed to work with CME Group Inc. (CME - Free Report) , one of the world's most diverse derivatives marketplaces, in order to create a futures contract for supplying liquefied natural gas ("LNG"). The deal, which will enable physical delivery of LNG produced in the United States, is expected to make the LNG market more transparent and liquid.

The Sabine Pass terminal of Cheniere in the U.S. Gulf Coast will be the delivery location for the contract. The terminal operates four trains that produce 18 million metric tons of LNG a year, while two more trains are in the pipeline. Addition of the two trains will further increase the terminal’s capacity to 27 million metric tons of LNG a year. Moreover, Cheniere, which has a huge LNG focused business, is currently developing an exporting facility near Corpus Christi, TX.

The new product is expected to be traded on the New York Mercantile Exchange (NYMEX).

Contract Rationale

With surging natural gas production from the U.S. shale revolution, LNG supply increased rapidly, bringing in opportunities as well as price risks for traders. The contract is expected to provide a significant LNG risk management tool for the exporters. Moreover, the deal can reinforce Henry Hub Natural Gas Futures’ role as a benchmark for international gas prices. 

Additionally, it will benefit United States, a key global LNG exporter, in view of its rapidly growing international demand due to the rising economies in Asia. Global LNG consumption was 39 billion cubic feet per day (Bcf/d) in 2017 compared with 29.1 Bcf/d in 2010. The global consumption is expected to further rise in the coming years through 2050 at around 3% per annum. This huge demand can be targeted by the growing gas export capacity in the country. In this context, the Cheniere-CME contract assumes greater significance.

Price Performance

Houston, TX-based Cheniere has gained 35.2% in the past year compared with the 26.5% rally of its industry.

Zacks Rank and Other Stocks to Consider

Currently, Cheniere has a Zacks Rank #2 (Buy). Investors interested in the Energy sector can opt for other top-ranked stocks like BP p.l.c. (BP - Free Report) and EOG Resources, Inc. (EOG - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

London-based BP is an integrated energy company. The company’s top line for 2018 is anticipated to improve 12.6% year over year, while its bottom line is expected to increase 77.7%.

Houston, TX-based EOG Resources is an upstream energy company. The company’s top line for 2018 is anticipated to improve 41.4% year over year. In the last four reported quarters, the company recorded an average positive earnings surprise of 30.1%.

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