Liquefied Natural Gas Limited shares are sinking: Should you sell?

LNG's shares have dropped more than 20% in past week. Is there more to come?

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published October 7, 2014 10:52 am AEDT

Liquiefied Natural Gas Limited's (ASX: LNG) shares have dropped more than 20% in the past five days, last trading at around $3.27. In early trading today, shares have dropped 5.8%.

That's well below the 52-week high of $4.49 reached on September 15.

So why are shares sinking? Has the company's fortune changed for the worse?

Far from it.

Over the past month or so, a slew of positive news announcements have come out, including a site lease extension for the company's Fisherman's Landing project, the extension of the managing director's employment contract to June 30, 2017.

Additionally, LNG Limited has been admitted to both the S&P / ASX 200 Index (Index: ^AXJO) (ASX: XJO) and S&P / ASX 300 Index (Index: ^XKO) (ASX: XKO).

But there's one piece of news that is likely the cause of the share price fall. Brent oil prices have slipped 20% in the past three months to US$92 a barrel, from US$115 in June 2014. The prices that LNG Limited will receive for its liquefied natural gas will likely be linked to the oil price – much as it is for other gas producers.

Perhaps surprisingly, shares in other ASX-listed oil and gas producers Santos Limited (ASX: STO) and Woodside Petroleum Limited (ASX: WPL) are down 3.4% and flat respectively over the past week – significantly different to LNG's share price performance.

But a looming event could see oil prices begin to rise to around US$100 per barrel. The Organisation of Petroleum Exporting Countries (OPEC) meets next month, with one of the decisions likely to be whether to cut production of crude oil, or leave the oil wells pumping at current rates.

There's no clarity around the likely outcome either, with a number of OPEC oil ministers voicing their support or not for cutting production. The meeting will have big implications for the US and a host of US shale oil companies. Some estimates suggest share oil can cost up to US$80 a barrel to produce, and at current prices, many of these wells will soon be unprofitable.

How that affects LNG Limited is yet to be determined. However, if the oil price keeps falling, it seems LNG Limited's share price is set to follow.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don't worry, though – you're not locked in, and can cancel your auto-renewal at any time before each 'anniversary' date without question or penalty.