Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



3 Questions for the Next Chapter in Natural Gas Exports

For quite some time, people who follow the energy space have been waiting to see what the government would decide to do with natural gas exports. With opponents and proponents of exports spending big money on lobbying efforts, there was a little uncertainty on how the government would continue.

Now that the Freeport LNG facility, which ConocoPhillips (NYSE: COP  ) owns a 50% stake in the general partnership, has received a license to export to countries that are not in a free trade agreement with the U.S., we have entered a new chapter in the natural gas export debate. This new phase also brings with it new questions. Let's examine three of these questions to see if they can shed some light onto this new territory.

Question 1: How much will we export? 
For the next couple of years, the answer to this question will depend heavily on one man: Dr. Ernest Moniz, the new secretary of energy. While Dr. Moniz is a proponent of LNG exports, he is not about to let natural gas exports go unfettered. LNG exports will have to be treated as a balancing act. How much can the U.S. realistically export without drastically affecting prices here?

The two facilities that have non-free trade agreement licenses already, Cheniere Energy's (NYSEMKT: LNG  ) Sabine Pass and ConocoPhillips' Freeport LNG, will have a combined export capacity of 3.6 billion cubic feet per day, which is about 5.2% of all U.S. production today. It is very likely that more licenses will be administered. If all applications were granted, though, the U.S. would have capacity to export 41% of total domestic production. The chances of us exporting that much gas are next to nothing, since it would likely have a big influence on domestic prices. This raises the next question.

Question 2: How will this change gas prices?
Study upon study have been done looking at how exports will affect natural gas prices, and all of them are more or less based on who has performed the studies. A study in January conducted by The U.S. Energy Information Administration modeled the effect of natural gas exports on price using various scenarios that varied in total gas exported and rate at which these facilities are brought online. In the most severe case (high total export volumes adapted very quickly), natural gas prices would be 35% higher than the reference case in 2018, but would subside as production caught up. The more modest approaches never saw a price increase greater than 20%.

One of the reasons that natural gas exporters do not want to see prices rise too sharply is because it would completely wipe out their competitive advantage in the global natural gas market. According to Richard Bass and Gordon Pickering of Navigant Consulting, the costs for liquefaction and transportation for natural gas costs approximately $4.00 per million BTUs. For American natural gas exports to be competitive, prices here need to be low enough that the price of gas plus the processing cost (and profit) are less than spot prices in other countries. This will give gas prices in the U.S. some wiggle room, but not much if companies want LNG to remain profitable.

Question 3: How should investors play LNG exports?
The energy space has a lot of moving parts, and sometimes getting a pulse on the entire industry can be difficult. So rather than trying to find some convoluted investment theory regarding natural gas, let's boil it down to one take-home message: Demand for natural gas will go up. 

Using this simple thesis not only makes the whole idea of LNG exports rather simple, it doesn't need to drastically change the way you think about the energy space already. For those who are a little more tolerant of risk, natural gas producers should look a bit more attractive. Low-cost producers like Ultra Petroleum (NASDAQOTH: UPLMQ  ) and Exco Resources (NYSE: XCO  ) beat analyst expectations this past quarter because the small uptick in gas prices gave them enough room to profit. If we were to see an uptick in demand thanks to natural gas, then these companies could stand to profit greatly. 

These two companies, just like all exploration and production companies, will still be at the whim of commodity price risks. So swings in natural gas prices could eat into that profit. For the more risk-averse investor, these new LNG facilities will need to have gas brought to them, and the only feasible way to do that right now is natural gas. Look for companies that will be building out pipelines to these new facilities, as they will be able to get a decent chunk of the action without as much exposure to commodity prices. Natural gas pipeline giant Kinder Morgan (NYSE: KMI  ) will more than likely be reaping benefits from this action in the years to come. 

What a Fool believes
The book about natural gas exports is not completely written, and it be a few more years before we see a definitive conclusion on where natural gas exports will take us. This work may not be of the length of War and Peace, but it will take longer to finish than we may have hoped. 

It's easy to forget the necessity of midstream operators that seamlessly transport oil and gas throughout the United States. Kinder Morgan is one of these operators, and one that investors should commit to memory due to its sheer size -- it's the fourth-largest energy company in the U.S. – not to mention its enormous potential for profits. In The Motley Fool's premium research report on Kinder Morgan, we break down the company's growing opportunity -- as well as the risks to watch out for -- in order to uncover whether it's a buy or a sell. To determine whether this dividend giant is right for your portfolio, simply click here now to claim your copy of this invaluable investor's resource.

Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2456600, ~/Articles/ArticleHandler.aspx, 5/29/2016 4:17:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 17,873.22 44.93 0.25%
S&P 500 2,099.06 8.96 0.43%
NASD 4,933.51 31.74 0.65%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

5/27/2016 4:00 PM
COP $44.33 Down -0.40 -0.89%
ConocoPhillips CAPS Rating: *****
KMI $17.85 Down -0.07 -0.39%
Kinder Morgan CAPS Rating: *****
LNG $32.77 Down -0.50 -1.50%
Cheniere Energy, I… CAPS Rating: ***
UPLMQ $0.89 Down -0.12 -11.50%
Ultra Petroleum CAPS Rating: **
XCO $0.79 Down -0.04 -4.63%
EXCO Resources, In… CAPS Rating: **