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

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.

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Motley Fool writer/analyst Mike King owns shares in Santos. You can follow Mike on Twitter @TMFKinga

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