by Aaron Levitt | February 21, 2012 1:54 pm
It’s no secret that United States is experiencing a natural gas boom. New advances in drilling techniques have allowed a variety of energy companies to tap the various shale rock formations[1] throughout the country. Coupled with a lack of domestic demand, this sheer abundance of available natural gas has sent prices for the fuel down to record lows of around $2.50 per million Btus.
As prices continue to hover around these historic levels, U.S. producers have begun the process of either idling wells or looking outward for other sources of demand. One answer could be found in Asia. The region’s unquenchable thirst for energy could be the key for the United States to unlock its potential as powerhouse natural gas exporter. For investors, playing these exports could be the best way to bet on the domestic natural gas sector.
Most investors aren’t familiar with the liquefied natural gas (LNG) market. Essentially, LNG is natural gas that is cooled under pressure and converted into a liquid for transport by tanker ships to markets not connected by pipelines. The fuel then is converted back to a gas at specialized import terminals.
Nations like Japan have relied on LNG as a major fuel source for its power plants, as it lacks hydrocarbon resources, and Asia already accounts for more than 60% of current global LNG demand. However, with Asia’s continued economic growth and breakneck modernization, analysts estimate that LNG imports to the continent will continue to skyrocket over the next decade. China alone will see its imports of liquefied natural gas rise 42% this year[2], according to asset manager Arctic Securities ASA.
Given Asia’s thirst for energy, the United States is in a prime position to fill that need. According to a new Department of Energy report, U.S. gas production grew by a record 4.5 billion cubic feet a day during 2011. However, domestic demand growth was just 920 million cubic feet. That leaves plenty of room for exports. British Gas Group (PINK:BRGYY[3]), the U.K.’s third-largest natural gas E&P firm, estimates the U.S. will be able to supply about 9% of global LNG capacity[4] — or 45 million metric tons — by the end of the decade.
The reason for the surge in potential exports: the low price of natural gas in the United States. Currently, major exporters in Australia and the Middle East nation of Qatar link the price of LNG to the Japan Crude Cocktail, a measure of the average price of custom-cleared oil imports into Tokyo. However, U.S. LNG exports would be tied to Henry Hub spot prices, currently far less expensive than the 40-year-old traditional pricing link. Analysts at Bank of America (NYSE:BAC[5]) estimate that this difference in pricing issues could slow down or idle new projects in Australia[6], such as Chevron’s (NYSE:CVX[7]) massive Gorgon export facility.
However, there are some possible speed bumps along the way for United States relative to LNG. First is expense. Gasification plants and export terminals take billions of dollars to construct. Given the tight lending environment, some projects might sit fallow until lending returns.
Then there is the real problem of future legislation. Democratic Congressman Edward Markey recently introduced two bills to prevent shipments of LNG and would prevent the approval of any new export terminals until 2025. The bills likely won’t survive the Republican-controlled House, but the fact they were even considered at all is something natural gas investors should take seriously. Several firms like Sempra Energy (NYSE:SRE[8]) have applied to reconfigure their LNG import facilities to exporting ones. The impact of these bills could seriously undermine these efforts[9].
Despite the legislation risks, exporting natural gas via LNG remains one of the only viable options for U.S. producers as long as domestic demand remais low. For investors, playing the potential could mean profit potential as well.
Receiving one of the first FERC permits to begin exporting LNG, Cheniere Energy (AMEX:LNG[10]), through its Cheniere Energy Partners, L.P. (AMEX:CQP[11]) subsidiary, has been racking up major contracts for its Sabine Pass[12] terminal in Louisiana. The firm now counts British Gas, Spain’s Gas Natural SDG and India’s GAIL as multiyear contract holders for its pending output starting in 2015. LNG shares have been steadily rising on the news of each additional contract signing and recently surged 11.4% the week the British Gas deal was announced.
Overall, the firm’s outlook has changed for the better, as securing financing for some of its high debt load — one of the major factors weighing on LNG shares of late — would have been almost impossible without these new contracts. Cheniere represents a volatile yet direct high-growth play on LNG exports with the U.S.
For those looking for a smoother ride, utility Dominion Resources (NYSE:D[13]) could be a better bet. The mega-utility’s Cove Point facility recently received authorization from the DOE to begin to exporting LNG[14] to countries that have free-trade agreements with the United States. The company filed a second application requesting authorization to export to additional countries. That application looks likely to pass.
Dominion offers a plethora of regulated and unregulated utility assets to balance out its high-growth LNG segment. Shares of the firm seem fairly valued for a utility and yield a market-beating 4.2%. It’s not a pure play, but growth in Dominion’s LNG operations should help boost earnings over the long run.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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