U.S. natural gas producers are sniffing the liquefied natural gas (LNG) smell of success. With natural gas spot prices in the high $2s/MMbtu right now, many producers are on the ropes and moving rigs to more profitable natural gas liquids (NGLs) and crude oil plays.
Fine, but some forward-looking companies are rushing to build terminals to export liquefied natural gas (LNG), whose prices have hit a four-year high this summer over $18/MMbtu. That's right, eighteen dollars, over six times the current U.S. spot prices and roughly three times the $6/MMbtu LNG export cost determined by energy data and analysis firm Bentek for future U.S. projects.
With these astonishing potential margins, no wonder investors are looking ahead even though the first North America LNG exports aren't expected until Canada begins in 2015; the U.S. projects 2016 and later. They see long-term contracts locking up the entire supply from three of the five U.S. projects on the books, too. To totally mangle a famous movie phrase, "They've already bought the seats so they're coming. Build it."
What demand is driving prices? Expert energy firm Bentek answers in one word: Asia.
Bentek estimates that Asian demand will dwarf every other region of the world, accounting for 86% (17.3 Bcf/d of total 20.2 Bcf/d) of the growth in this decade. Canadian and Australian export terminals would seem to be best-located for low shipping costs, but Bentek data show that each of those two countries and the U.S. have unique cost factors that put the U.S. on equal footing.
In the U.S., there are five projects on the boards (see the chart below).
Cheniere Energy Partners, L.P. (NYSE: CQP ) is a master limited partnership (MLP) that owns and operates the Sabine Pass terminal. Originally for imports -- hard as it may be to believe that a few years ago the U.S. thought it would need to import gas -- Sabine Pass will become an export center costing $10 billion. Cheniere Energy (NYSE: LNG ) owns 88.6% of the MLP.
Sabine Pass is the most advanced of the five projects on the boards, holding FERC approval and Department of Energy approval to export to countries. But even with all the positives, the company won't export its first LNG until 2016.
Announced Start Date and Approvals
Capacity and Estimated Production Cost (Breakeven)
|Cheniere Energy and Cheniere Energy Partners (with Blackstone)||Sabine Pass, Texas and Cameron, La. (on border)||2016; FERC approved; DOE export approval for non-FTA and FTA countries||2.4 Bcf/day (two phases); $6.47/MMbtu||All|
|Dominion Resources||Cove Point, Md.||2016-17; Expects to file FERC pre-filings application summer 2012||0.7 Bcf/day; $6.01/MMbtu||All|
|Numerous||Freeport, Texas||2016-17; Pre-filed FERC application; DOE export approval for FTA countries||2.8 Bcf/day; $5.80/MMbtu||~40%-66%|
|Sempra Energy||Cameron, La.||2016-17; FERC pre-filing application submitted||1.6 Bcf/day; $6.12/MMbtu||All|
|Southern Union and BG Group||Lake Charles, La.||2018; Initiated FERC application process April 2012||2 Bcf/day; $6.10/MMbtu||None stated|
Key: FERC = Federal Energy Regulatory Commission; DOE = U.S. Department of Energy; FTA and non-FTA indicate countries with whom the U.S. has a free trade agreement and does not have a free trade agreement.
DOE approval for export to both FTA and non-FTA countries is hugely important because today the U.S. has only 18 FTAs in force, and only two for Asian countries: Korea and Singapore. The huge demand from Japan after Fukushima (up 12% by volume and 52.5% by cost in 2011), China, and other countries requires approval for export to non-FTAs.
Pure play or diversified majors?
Cheniere Energy Partners may be speculative, given that it's all about Sabine Pass, but it is making MLP distributions at $0.43 a quarter, or 7.5% of Friday's $22.61 close, backed by private equity firm Blackstone's $2 billion investment. Cheniere Energy might appear a safer investment, because of its other pipeline business, but it's losing money. In the year to March 31, it burned through $69 million and has $440 million in the bank.
Yet of all the U.S. projects, Sabine Pass is the best bet to start and make money. It boasts all approvals and fully subscribed capacity -- the second-largest among the five U.S. projects. And just Thursday Cheniere Energy said that it would announce "within days" securing the project financing with up to as much as another $4 billion.
The others candidates include companies that are both pricey and for whom future LNG revenues may not move the needle. Two have gone sky-high, almost certainly because of contracts for their LNG export capacity. Sempra Energy closed Friday at its all-time high close of $68.88, and that's without adding in dividends since 1998. That's almost twice the company's $35 tangible book value. It's unlikely that Dominion Resources' Cove Point project would have a huge effect on company profits either, yet its stock has also risen to an all-time high (also excluding dividends).
That the LNG projects won't influence large companies' profits enough is one reason to avoid the Canadian investors in the Kitimat project, which really is three terminals that are in the same area of the British Columbia coast. Kitimat is jointly owned by Apache (NYSE: APA ) and EOG Resources (NYSE: EOG ) , both out of Houston, and EnCana (NYSE: ECA ) , based in Calgary. Though licensed by the federal government and approved by the indigenous government, Kitimat offers too little bang for the buck when divided among three companies.
Could new LNG supply kill prices as it did with natural gas?
Years ago, many investors, from individuals to hedge funds and larger institutions, bet heavily on the then-future shale natural gas revolution. They picked companies poised to profit from big landholdings and future production in the large plays. What they did not count on was -- oopsie! -- all the supply coming online at once would exceed demand and slaughter pricing. A lot of investors lost their energy.
Could this happen to LNG? With contracts in hand, though the details are not disclosed, it may not be as risky to invest in certain companies as it was in natural gas producers before the supply flood.
I'm a value investor through and through, but that doesn't mean I don't read the menu. Two top choices are Cheniere Energy and Cheniere Energy Partners. Cheniere Energy Partners is an MLP and offers a distribution, and of course 88.8% of that goes to the parent, Cheniere Energy. Both have risen dramatically from 52-week lows, but those were before approval and Blackstone's investment. In addition to those boosts, Sabine Pass today brags fully subscribed capacity and almost certainly will be the first to open.
Expect more debt and perhaps dilution if construction costs rise (when haven't they?), so be smart: These are worth just a few percentage points of your portfolio for the lottery ticket to see if the huge margins from selling cheap U.S. natural gas to high-paying customers are ships that indeed come in.
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