How to play the LNG game....
Not every IPO is created equal.
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A Historic IPO & the Pulse of the LNG Market (NYSE:VG - Venture Global)
Written by Altug Karakurt
The LNG Pipeline & VG's Position
The United States has the 4th largest proven natural gas reserves in the world [1]. A good chunk of these reserves became feasible and readily available recently as a by-product of fracking for oil, especially in West Texas. In fact, the natural gas is so abundant that the captured natural gas is often just burned in the oil wells to get rid of, which is called "flaring". In 2018, the excess natural gas even managed to get the natural gas price turn negative. Long story short, the US has more natural gas than it knows what to do with. So, what do they do with it? They sell it to the countries that were not as blessed by the geological lottery. How do they do it? By the miracle of liquefied natural gas (LNG), of course!
The exported LNG is shipped over gigantic tankers and as a result, the liquefaction is done by a coast. The extracted and refined natural gas is transported to the liquefaction facilities. Here, the gas is cooled down to -260 F (-162 C) in giant industrial refrigerators called liquefaction trains. At this temperature, the natural gas turns into liquid and is ready to be pumped into the export tankers to be shipped abroad.
Due to its proximity to the Permian Basin in West Texas, i.e. the fracking capital of the country, the best place to build the liquefaction infrastructure is the Gulf of Mexico. Cheniere Energy (NYSE:LNG) is located in Texas and the largest player in the sector, while VG ranks second with its two facilities in the neighboring state of Louisiana.
What's the big deal about the IPO?
There is a good argument to be made for a significant expansion in North American LNG exports, but I'll save that for my next write-up and stick to the VG IPO. The point is, there is a lot of money bullish on LNG exports. With the Trump election and the “Drill Baby Drill” narrative, the valuations across the sector already got a healthy boost. Given the investor interest and the high valuations in the sector, now seems like a great time for private companies in the sector to IPO. The VG IPO is closely watched by the industry to take the pulse of the market. The analysts think VG might be the first in a series of IPOs from the companies in the wider LNG sector.
On December 20, 2024, the company filed their S-1 [2] and got the wheels moving for going public.
On January 13, 2025, we found out that the company intends to raise $2.3B that corresponds to a whopping $110B valuation [3]. If that sounds outrageous, it’s because it is. For context, that number would almost double VG’s larger competitor Cheniere’s $50.5B market cap.
On January 24, 2025, the IPO finally took place with a valuation of $60.5B [4], making the company the 10th largest publicly traded oil&gas company.
In the end, the outrageous initial valuation was slashed in almost half and the company ended up raising $1.75B, still making this the biggest oil&gas IPO in a decade and the fourth largest since 2000. [4]
The headlines about the IPO are getting hung up on the significant reduction from the outrageous initial valuation. However, taking a step back and looking at the big picture, this IPO was far from a failure. As I discuss shortly, I believe the company got a much more generous valuation than they deserved. Will the private LNG companies on the sidelines read the news the same way as me and join the party? Only time will tell.
Competitive Advantage & Catalysts
The liquefaction business has a high barrier of entry. It takes a huge upfront investment and years of construction to get a facility of any scale up and running. The other big obstacle was permitting. There has been a freeze on LNG facility permits until Trump revoked the ban last Monday with an executive order [5]. Without the permitting hurdle, companies with producing or at least permitted plants no longer have the moat they used to.
What differentiates VG is the way they build their liquefaction trains. The company’s competitive advantage is the ability to manufacture their own trains and do so at scale. They designed a smaller train that they can build themselves quickly in a factory. Conversely, Cheniere orders their trains from manufacturers like Chart Industries to be built and delivered years later. This seems to be the main selling point from the company. The narrative the company is trying to get out is along the lines of:
Due to the new administration, the permitting process is going to be much easier. If demand for LNG exports do increase as predicted, we can expand capacity quickly and take market share from slower growing competitors.
It’s not a coincidence that the media narrative around the IPO is a “pure-play LNG bet” [4].
Risks
In my opinion, the advantage of their scalable liquefaction train model is overstated. While they are positioned well for a LNG export boom, this trend was in the works for a while now and their competitors have also been preparing for growth this whole time. In order for VG to significantly outgrow their competitors, not only do they need the boom, but they also need the boom to be so much larger than expected that the company’s scalability makes a difference. Given the very optimism in the market, I find the real export growth to significantly exceed the quite high expectations very unlikely.
There is an ongoing arbitration between VG and 8(!) oil companies (including majors like BP and Shell) for the tune of $6B(!) due to VG’s alleged failure to deliver gas agreed on long term contracts. These disputes are all for the company’s first plant that has been only active since early 2022. I’m concerned about the size of the claims, the number of complaints and the short time-span it took to piss everybody off. Even if VG gets out of all this without paying a dime, these disputes put future business with very large producers at risk.
The Verdict
The company’s publicly available filing [2] has financial information until the end of 2023, which is not very reflective of the current status of the company due to recent expansions. Instead, I’m going to keep it simple and compare VG’s valuation with a company that I know very well, Cheniere Energy. VG currently trades at a 20% larger market cap than Cheniere, despite the smaller market share, the lingering legal problems and Cheniere’s very near future expansions coming live. We’ll get a clearer picture of the company after a few quarterly reports, but as of now, VG looks way too overpriced to me.
Although I’m planning to dig deeper into the S-1 [2] when I get a chance, I don’t see a secular investment thesis for VG. If one wants to bet on the LNG exports, I think Cheniere offers a much better opportunity with a proven track record, strong outlook and shareholder return outlook. (Look out for a dedicated write-up on Cheniere in the future). In order for me to consider VG over Cheniere, I would need a steep discount. I’m uninterested in the stock unless it experiences a significant unwarranted 40-50% drawdown from the IPO price.
The only reason I can imagine being interested in the company is if they ever start selling their trains to other LNG companies and introduce an infrastructure angle to the story. Otherwise, the only reason I could find VG appealing is if I were to bet on the LNG theme more generally and buy them as part of a sector-wide basket.
[1] Wikipedia: List of countries by natural gas proven reserves
[2] SEC: Form S-1 for VG
[3] WSJ: The Aspiring $110 Billion Energy Company Banking on Trump’s Return
[4] CNBC: Venture Global awaits first trade
[5] Reuters: Trump lifts freeze on LNG export permit applications
[6] Bloomberg: Arbitration Claims Against LNG Exporter Venture Global Reach Close to $6 Billion
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