DOE Report Should Push Natural Gas Forward

by Aaron Levitt | December 11, 2012 6:45 am

DOE Report Should Push Natural Gas Forward

With natural gas prices still hovering at lows and E&P firms still fracking out production at a record pace, one of the biggest “themes” for investors over the last year has been trying to figure out what exactly to do with all that gas. From using it as a transportation fuel[1] to a cheap feed stock in chemical industry, we’ve touched on them all here at InvestorPlace.

Aside from the domestic uses, one of the greatest possibilities for the fuel involves shipping our bounty overseas — via liquefied natural gas (LNG) tankers — to energy-hungry consumers in Asia.

While the battle for LNG supremacy rages on, the industry recently received a huge bit of praise from one of the most important deciders of its fate: The Department of Energy (DOE).

For investors, the DOE’s recent decision could finally be the necessary spark to make LNG exports[2] realty.

“Vast Economic Benefit”

As of the end of October, the DOE had 18 applications from various firms seeking the ability to export liquefied natural to end markets in Asia, South America and Europe … and it looks like those permits are one step closer to being approved.

The organization’s latest report on the sector could “put the pedal to the metal” and fast-track many of these projects through Washington’s current gridlock[3]. The heart of the DOE-sponsored white paper is that LNG exports — despite cries from environmentalists and chemical manufacturers like Dow Chemical (NYSE:DOW[4]) — actually do boost domestic economic activity. NERA Economic Consulting said it examined the impact of LNG exports across 63 different scenarios and found exports to be a net benefit for the overall economy. The study also showed that as levels of LNG exports increased[5], the net economic benefits increased as well.

The report is expected to help steer the Obama administration’s response to more than a dozen proposed export projects put on hold over the past year — a response that is critical since a surge in shale gas production upended the market and depressed domestic prices. Producers continue to languish as unseasonably warm weather[6] has kept natural gas prices in the basement. Meanwhile, a whole host of LNG projects are already under construction in Australia and Qatar.

Opponents of exporting have long argued that while the net benefit for the economy is positive, those benefits would not be shared evenly. Study author NERA Economic Consulting did note that this would be true, but only on muted level. For example, owners of natural gas resources and many downstream investors will benefit from the export boom[7], while regular wage-earners will face higher home heating costs. However, the increased number of jobs, royalties collected and investment gains will outweigh the potential problems.

Secondly, exports would have little impact on overall domestic manufacturing. “Serious impact” scenarios would be limited to companies with a high exposure to foreign competition and energy bills greater than 5% of their output costs. Some manufacturers have enjoyed rock-bottom prices for natural gas, thanks to the glut unleashed by hydraulic fracturing.

Overall, the study delivers a solid endorsement of natural-gas exports[8].

The Green Light For Investors

Given that there are now more than 23.71 billion cubic feet per day of potential export capacity projects — roughly one-third of the current U.S. production of natural gas[9] — that have filed for Department of Energy approval, the news is big for investors in the sector.

While it’s only step one in the approval process (FERC approval to build the physical plants is required), the report essentially gives the sector a real push forward. So far only Cheniere Energy (AMEX:LNG[10]) through its Cheniere Energy Partners (AMEX:CQP[11]) subsidiary has received all the necessary permits to export LNG to countries that do not have free-trade agreements with the U.S. — i.e. emerging Asia. The report could help make the other twenty or so plants a reality very shortly.

The list of potential winners include Freeport LNG — which is partly owned by ConocoPhillips (NYSE:COP[12]) and, ironically, Dow Chemical; Energy Transfer Equity’s (NYSE:ETE[13]) Lake Charles facility; and Sempra Energy’s (NYSE:SRE[14]) Cameron LNG.

I’m inclined to bet on Cheniere Energy’s Sabine Pass[15] if I wanted to play the facilities themselves since it’s already under construction and has some major backers.

Perhaps the best way to play the sector, though, lies within those firms charted with shipping that compressed and cooled gold across the sea. LNG shippers like Golar LNG (NASDAQ:GLNG[16]) and Teekay LNG Partners (NYSE:TGP[17]) — are a few of the bright spots in the sector.

Critical day rates for the pair continue to rise as do long-term shipping[18] contracts. While there has been some speculation that a glut of new LNG ships will hit the market over the next few years, I suspect that effect will be short-lived as more of these facilities are built not only here, but in Canada as well. More importantly, GLNG & TGP don’t really care who owns what facility or which ones are approved; they win no matter who is charting the boat and that makes them an ideal way to play the DOE’s good news.

Overall, Asia’s long term energy demand bodes well for LNG exports and the recent report for the Department of Energy will help move those exports into the right direction.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

Endnotes:
  1. transportation fuel: http://investorplace.com/2012/10/how-to-play-the-progress-in-natural-gas/
  2. LNG exports: http://investorplace.com/2012/10/trouble-in-china-for-u-s-lng-exports/
  3. current gridlock: http://investorplace.com/2012/12/have-yourself-a-merry-income-christmas/
  4. DOW: http://studio-5.financialcontent.com/investplace/quote?Symbol=DOW
  5. as levels of LNG exports increased: http://www.reuters.com/article/2012/12/06/us-lng-exports-idUSL4N09G0XU20121206
  6. warm weather: http://investorplace.com/2012/11/whats-up-with-natural-gas-heading-down/
  7. export boom: http://investorplace.com/2012/11/jack-welch-may-be-crazy-but-not-when-it-comes-to-natural-gas/
  8. natural-gas exports: http://investorplace.com/2012/04/energy-independence-boosting-lng-exports/
  9. production of natural gas: http://investorplace.com/2012/11/5-funds-to-play-u-s-oil-dominance/
  10. LNG: http://studio-5.financialcontent.com/investplace/quote?Symbol=LNG
  11. CQP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CQP
  12. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  13. ETE: http://studio-5.financialcontent.com/investplace/quote?Symbol=ETE
  14. SRE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SRE
  15. Sabine Pass: http://www.investorplace.com/investorpolitics/political-battlefield-shifts-to-sabine-pass/
  16. GLNG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GLNG
  17. TGP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGP
  18. long-term shipping: http://investorplace.com/2012/03/hop-aboard-the-boom-in-lng-shippers/

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