China just upped tariffs from 10% to 25% on a major U.S. industry, but Neil George tells us why it’s still a great buy
Yesterday, we looked at Monday’s trade-war-related sell-off through the eyes of a quant investor. Specifically, we examined research from John Jagerson of Strategic Trader.
And the takeaway?
U.S. stocks are likely in for a rally over the coming month, based on the history of how markets have behaved in similar past situations.
In today’s Digest, let’s get additional color on the trade war — specifically, one sector that is near and dear to the Trump administration, and also is home to investments found in the portfolios of millions of Americans. Today, let’s look at whether your portfolio is affected, and what to do about it.
After all, knowing what’s happening in the markets is helpful, but not nearly as helpful as knowing what that means for your specific investments.
Let’s dive in …
***What U.S. industry is being targeted by China?
Neil George is the editor of Profitable Investing. He’s an expert at income investing, finding his subscribers high-yielding, quality investments whether through dividend-stocks, bonds, REITs, MLPs, you name it.
In Neil’s latest update to subscribers, he recapped the trade war situation, highlighting a U.S. industry in the crosshairs of Chinese tariffs. From Neil:
The United States and China are taking tougher negotiating stances in their ongoing trade discussions. The U.S. has upped its tariffs on $200 billion of Chinese imports to 25%, effective on goods leaving port as of May 10.
China has pledged to impose tariffs on a meager $60 billion of potential goods from the U.S. as of June 1 at a rate that has yet to be fully committed but is assumed to be in the range of 20% to 25%.
The list of U.S. goods includes beer, wine and liquefied natural gas (LNG).
It’s the LNG tariff that caught our eye.
***You see, LNG is a commodity central to the Trump administration’s goal of exporting more U.S. energy around the globe
So, what does this Chinese tariff on LNG news really mean? How big of a deal is it?
Let’s contextualize the situation by starting with one of Neil’s updates from last fall.
In the update, Neil told us how the price of natural gas had fallen by nearly half over the past five years. He then continued with the explanation:
The key reason behind this price drop is that there isn’t the necessary infrastructure to transport [natural] gas to markets where the price of gas is much, much higher, like Asia and Europe.
Cooling gas into LNG makes it easier to pipe, train and ship to markets far from the productive fields in North America. But this process has been met with a barrage of regulatory roadblocks in America by state, local and more importantly Federal regulators who have been hell-bent on preventing LNG from being a boon to the American economy.
That is quickly being fought by the Trump Administration, which wants to light a match to the industry to get gas moving and revenue flowing to companies and the economy.
The U.S. is the fastest-growing LNG exporter in the world. It’s expected to rank third in exports in 2019 behind Qatar and Australia.
So, the U.S. is sitting on a glut of natural gas, and Trump wants to export it, boosting our domestic economy. Well, who has a huge appetite for LNG?
You guessed it.
China is now the world’s second-biggest LNG importer.
However, news this week is that China has slapped a retaliatory 25% tariff on U.S. LNG.
***How is this going to affect domestic LNG exports? Do energy investors need to be worried?
For that, let’s go back to Neil:
As for LNG, the market is so short in supply and long in demand that the fledgling U.S. LNG exporters and shippers are fully in the driver’s seat for their product — and China really needs the LNG.
So, on the surface, this LNG tariff would appear to be a major headwind. For instance, here’s Financial Times reporting on the news:
“A 25 per cent tariff is probably going to mean that no U.S. LNG will be going to China,” said Nikos Tsafos, senior fellow at the Center for Strategic and International Studies in Washington.
But this type of analysis needs to be taken in a broader context. In fact, here’s the follow-up sentence …
He added that the effect on current LNG facilities would be minimal because “the market has already adjusted and the U.S. LNG will be going somewhere else”.
You see, global demand for U.S. LNG remains strong, despite Chinese tariffs. In fact, U.S. LNG has already been hit with a 10% tariff from China that’s been in place for months. Because of this, U.S. exporters have been finding other buyers around the globe. In other words, the U.S. LNG industry isn’t beholden to fluctuating Chinese demand.
As just one illustration, we can look at the U.S. company, Tellurian. It operates an LNG terminal in Louisiana. From Financial Times:
Charif Souki, Tellurian chairman, said: “China imposing tariffs on U.S. LNG is a classic example of cutting off your nose to spite your face.”
Mr Souki, formerly chief executive of Cheniere, said the company was in advanced negotiations with groups including Total of France, Petronet of India and others in the Middle East.
“We welcome other investors yet we are very confident that we will reach FID [final investment decision] within the next few months with or without Chinese participants,” he said.
***It’s for these reasons that Neil is still recommending LNG companies
And there’s one in particular which Neil like — Dominion Energy.
From Neil:
Dominion Energy (D) is a diversified utility that has been ramping up its LNG export terminal facilities and related pipelines. Dominion is a regular corporation with regulated utility businesses and unregulated operations including its pipeline assets and its LNG facilities in the Mid-Atlantic.
Overall revenues are up 4.59% on average over the past three years, with the unregulated segments including its LNG operations rising at an average annual rate of 18.21%. It also pays a nice dividend yielding 4.80% and is another great value at current levels.
And in case you’re still concerned about Chinese tariffs for whatever reason, an update from Neil from this past fall points toward an added insulation from Chinese tariffs which Dominion enjoys:
Adding to Dominion Energy’s market for LNG is the further push in Europe for a series of expanded and new LNG import terminals. This will be a major boon for LNG export terminals on the east coast.
Neil recommends Dominion up to a price of $78. As I write, it’s trading around $75, with a dividend yield of nearly 5%.
Pulling back, yes, the U.S./China trade war has the potential to affect our portfolios — Monday’s sell-off was evidence of that. But Chinese tariffs on the LNG industry aren’t likely to have any substantive effect, regardless of what some headlines would have us believe.
For now, stay long LNG.
Have a good evening,
Jeff Remsburg
