Is This Natural Gas Stock Overrated?

Natural gas has been the topic of the year for energy investors. As production ramped and we experienced an unseasonably warm winner domestically, prices kept falling, and falling, and falling. Now, after hitting less than $2 per million metric British thermal units in April, prices seem to have finally rebounded and sit at their late 2011 levels, but they remain far below their long-term average.

At least domestically, that is. Unlike oil, natural gas prices vary dramatically by market because of the difficulty of transporting the fuel. Equivalent amounts of natural gas that cost as little as $3 per MMBtu stateside cost upwards of $16 in other regions such as Japan, the world's largest natural gas importer.

Getting cheap natural gas from here to there is difficult. Gas must be liquefied for transport, an expensive and complicated procedure. Enter Cheniere Energy (NYSE: LNG  ) . After much patience, the company received approval to convert its Sabine Pass plant into an LNG export facility.

Aside from the lengthy process to receive the license, the expense to develop LNG terminals is enormous. According to a recent article in The Economist, a liquefaction facility can cost as much as $30 billion to build. Cheniere was fortunate enough to be able to use some existing infrastructure in its conversion, but other companies probably won't have the same luxury. This license gives Cheniere a temporary monopoly on the potentially crazy-profitable export market, but competing projects are also in the works.

The slow road to China
But it's not quite as cut and dried as selling $3 gas for $16. The process of liquefying, transporting, and regasifying can cost as much at $7 per MMBtu. The tanker charges to Asia alone are expected to run $2.50 to $3 per MMBtu, as much as the gas itself. That still leaves a hefty profit margin for sure, but others will probably be able to transport for less. The key market for export is Asia, and Cheniere's Louisiana-based terminal is about as far as you can get from The People's Republic.

Australia is building out LNG terminals as well, Canada has enormous shale gas that could be cheaply shipped from its West Coast, and Russia has historically been in talks with China about a natural gas pipeline. Even Kenya, Tanzania, and Mozambique are becoming viable exporters. None of these alternatives must travel as far as Cheniere, or pass through the Panama Canal, which can run as much as $265,000 in tolls alone. And when you're paying more than $100,000 a day for a transportation tanker, those extra days at sea are meaningful.

And China could still have an even more convenient option: itself.

China is estimated to have the world's largest shale gas reserves. Despite less experience and a more difficult drilling geology, in the long run it's hard to imagine it being more cost-effective to import from the U.S. compared with other nations, or drilling for natural gas itself.

I worry that by the time these long-term bets on natural gas play out, the market for the fuel could be starkly different. Remember when we spent $100 billion as a country to import natural gas because it was so expensive? Well, that was only five years ago, and look at the performance of the United States Natural Gas Fund (NYSE: UNG  ) since then.

UNG Chart

UNG data by YCharts

Five years ago we knew about our enormous natural gas reserves -- it just wasn't economical to drill for them. That's exactly where China is today. For us, fracking came along -- what Vinod Khosla has aptly referred to as a "black-swan technology" -- and everything changed here. It will change for China, too, once its infrastructure is more developed. As a long-term investor, though, I'm at odds with the strong buy rating analysts have placed on the stock and am not sold on the story yet.

There are better ways
That doesn't mean you're out of options, though. The U.S. still remains a leader in natural gas drilling tech, and China is increasingly looking toward companies with expertise to form joint ventures and learn from. Companies such as Haliburton (NYSE: HAL  ) and Schlumberger are obvious choices here, and they're two companies that I believe have remained perpetually cheap for all of 2012. Devon Energy is in play, too, and jumped in bed with China to the tune of a $2.2 billion shale deal with Sinopec.

There are also strong domestic plays. Cheap natural gas has prompted many, including famed energy investor T. Boone Pickens, to consider the resource a viable transportation fuel. This isn't lip service, either -- he's pioneered Clean Energy Fuels (Nasdaq: CLNE  ) , a company that is building out a natural gas highway along major trucking routes. The alternative fuel source can save truckers up to 40% of their fuel costs and helps keep their shipping rates competitive against railroads.

And along the same vein, there's Westport Innovations (Nasdaq: WPRT  ) , a Motley Fool favorite that's up 20% in the last three months. The company specializes in converting diesel engines to run on natural gas, which is compelling for the same fuel-savings reasons.

The best
As good as these natural gas stocks are, though, there is one energy stock that could be even better. In fact, it could be The Only Energy Stock You'll Ever Need. It's a well-positioned equipment provider that's poised to make investors today rich off the next energy spike, and it already has strong ties to China. The company was issued the highest recognition by the Chinese government to foreign nationals for its meaningful contribution to the country's energy advancements. Read more about it.

Austin Smith owns no shares of the companies mentioned here. The Motley Fool owns shares of Devon Energy and Westport Innovations. Motley Fool newsletter services have recommended buying shares of Devon Energy, Westport Innovations, Halliburton, and Clean Energy Fuels. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 02, 2012, at 10:50 PM, OGRAPS wrote:

    Afraid you guys are way off with your comment about a $30g price. You need to be more factual and do your homework better.

    I am not sure that they are procuring ships as I haven't seen anything anywhere to indicate such.

    Gas supply is via US pipeline network so no drilling costs or even much for pretreatment costs to speak of; maybe some drying.

    They are a functioning receiving terminal, there-in marine loading facilities will probably require minimal modifications unless they decide to add a berth but that's not that big a deal.

    They already have sufficient tankage for the 1st 2 LNG trains so that decreases the costs of a 5.8mm train by $65mm+. Figuring 1 tank per train so they are in good standing for savings for even 4 trains. depends on their business strategy but why sell domestic for $2 when you can get $14+ foreign.

    Don't know for sure what liquefaction process they will align with but their cited costs for funding probably have adequate contingency and seem pretty good to me.

    Been building LNG plants since 1980 so without a lot of internal knowledge to change my mind I would say they have a good handle on their budget and they should be way less than $30bn for even 4 new trains, much less for the 2 they announced.

    Long and heavy on this one and the distributions are great.

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