While falling crude oil prices have gotten most of the attention, prices for various other energy commodities have also followed oil prices downward. From coal to heating oil, the last few months have sent futures contracts lower and lower.
That downward trend extends to natural gas, too — particularly liquefied natural gas (LNG).
The global LNG market has been stuck with a slight supply glut, which hasn’t been too kind for export contracts or share prices for the firms currently or planning on exporting the stuff.
In fact, a few analysts have even postulated that some new LNG projects could be uneconomical to pursue under current prices and certainly unprofitable if prices fall even further.
Well, those unprofitable predictions may not matter in the long run. The glut of LNG should prove to be temporary, which means investors now have an interesting opportunity to load up on some of the LNG stocks for their portfolio.
A Big Drop In LNG Prices
As we’ve fracked and fracked, the United States continues to pull a tremendous amount of natural gas out of the ground. And with that growing supply, prices for natural gas have dropped considerably from their $15 per million British thermal units (MMBtu) peaks. (At one point, natural gas almost broke $1.) To combat that low price, many producers in the U.S. fought hard to begin exporting natural gas to Asia and Europe, where prices for LNG are much higher.
The problem is that recently, overseas LNG prices haven’t exactly been rocking, either.
LNG contracts for December delivery in Europe are currently around $9.95/MMBtu. At the beginning of October, the same contract cost $12.66/MMBtu. Meanwhile, LNG spot prices in Asia have realized a nearly 40% drop this year.
The LNG price drops are a simple case of supply and demand. As the global economy seems to be stuck in neutral, we simply aren’t using enough energy currently to match supplies of the LNG. The weather and the rise of energy alternatives only compound the problem for LNG prices. While we suffered through the polar vortex, Europe actually had a mild winter, which dropped demand for electricity and natural gas.
At the same time, Europe’s energy efficiency mandates seem to be working, while the continent’s heavy focus on new alternative and renewable energy projects is finally making a meaningful dent. In Asia, Japan has been restarting its dormant nuclear reactors in order to meet its energy crunch.
All of this is a problem for planned U.S. exporters of LNG.
Analysts at French investment bank Societe Generale estimate that U.S. natural gas prices should trade between $4 and $4.50 per MMBtu for the next two years. Under that pricing scenario, the bank estimates that U.S. LNG exporters would need European prices to be $9 per MMBtu and Asian prices at $10.65 in order to make a profit. That’s basically where we are at today. Any continued drop in LNG prices overseas could make both these markets unreachable for many potential exporters.
LNG Is A Long-Term Game
While the current glut and potential unprofitability of some LNG projects could be a cause for concern in the short run, the long-term picture is pretty rosy for LNG prices.
After all, we’re still using a ton of energy.
According to the Intentional Energy Agency’s (IEA) latest World Energy outlook report, by the time the clock rolls over to 2040, the planet will see a 37% increase in energy demand based on today’s numbers. The vast bulk of the new demand will stem from emerging Asian nations as well as countries in Africa. The IEA estimates natural gas will become the world’s most dominant fuel source by the 2030s.
So that takes care of the long-term picture.
In the medium term, several factors will help drive LNG prices higher. Natural gas and LNG prices are very sensitive to the weather. Already, colder temps and heavy snows have begun to buoy U.S. prices, while a longer cold winter in Europe is beginning to take shape. Analysts predict that the weather alone could send LNG prices back up around 50%.
Weather aside, political instability in the Ukraine/Russia could cause Europe to begin importing more LNG from other sources. That increased demand will help drive up prices as stockpiles begin to disappear. And let’s not forget that if prices do kill off several projects, the remaining facilities will be stronger and have some sort of price control.
Two LNG Players To Buy
Given that the long-term picture is still rosy, investors may want to use this downturn to snag some of the better LNG players — especially LNG stock that have already received the necessary approvals to begin exporting.
Cheniere Energy Inc. (LNG) could be one of the best LNG stock to buy. Through its Cheniere Energy Partners, L.P. (CQP) subsidiary, the firm was one of the first companies to receive FERC permits to begin exporting the fuel at its Sabine Pass terminal in Louisiana. That massive project is nearing completion and should be ready to go by 2015. At the same time, Cheniere has recently acquired financing to begin converting a second facility it owns into an LNG exporting terminal located in Corpus Christi, Texas. That project is scheduled to begin exporting in 2018.
While LNG isn’t profitable yet, once these facilities actually exporting natural gas, Cheniere stock holders could profit in a hurry. In the meantime, investors can get a 5.9% dividend yield if they opt for CQP shares while they wait.
For those investors looking for a smoother ride, utility Dominion Resources Inc. (D) could be a better bet than LNG/CQP. The mega-utility’s Cove Point facility continues to make progress and received authorization from the Department of Energy to begin to exporting LNG. And like Cheniere, Dominion has decided to place the structure inside a MLP for maximizing its profits.
Since launching in October, Dominion Midstream Partners, LP (DM) is up big (17%) and could be an even bigger play than CQP. Dominion has already announced plans to drop down several more of its natural gas pipeline and infrastructure assets — including gathering systems in the Marcellus. Those assets will continue to boost the MLP’s distributions further down the road
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.