The United States is awash in oil and natural gas. Although oil is largely a global business, natural gas isn't. That's left a domestic oversupply of natural gas and depressed prices, recently below $4. Gas prices around the world, however, are much higher—creating a long-term opportunity for drillers.
Not so cheap
That's why companies like Cheniere Energy Partners (CQP -1.42%) are working hard to build the infrastructure to export liquefied natural gas (LNG). Doing such a thing wasn't even a thought when the company first started building its Sabine Pass facility, which was originally intended to accept imported natural gas. The potent combination of horizontal drilling and fracking, however, changed that quickly.
Cheniere is still building, so it's losing money. However, it will be among the first companies to market with an export facility. Moreover, it already has customers. So, when it finally starts to ramp up, this limited partnership should quickly grow its fee-based business.
Although owning an LNG port is a good way to benefit from the export of natural gas, Cheniere is a toll taker so the upside from natural gas price increases, should there be any, will be limited. That's where the drillers come in.
Caught in the hype
Royal Dutch Shell (RDS.B) has a long history trading LNG. As such, it already has extensive relationships with key global customers. And it is building out its U.S. drilling operations. Right now that's a negative because Shell got caught up in the land grab when U.S. natural gas prices were still high.
Simply put, like other industry heavyweights, it overpaid. It's selling off less desirable assets and taking writeoffs. That's turned U.S. natural gas into a drag on results. However, as the U.S. export market opens up, Shell will have existing relationships it can leverage to sell its U.S. LNG abroad. That makes this around 5% yielder a good long-term play on LNG exports—and it's trading at a relatively low price compared to other integrated oil and gas companies.
Chesapeake Energy (CHKA.Q) is another driller that bought too much property when natural gas prices were high. After a public spat with dissident shareholder Carl Icahn, the company has a new CEO and has shifted from being a land play to a drilling play. And it has been working diligently to reduce the debt it took on during the land spree.
Next year, however, should be a turning point. Although Chesapeake has been forced to sell off assets to keep itself going lately, its 2014 capital spending program shouldn't require any asset sales. That means the worst may finally be behind Chesapeake, which also happens to be one of the lowest cost natural gas drillers around.
With low costs, Chesapeake can make money before others do and will benefit early from any export led price increases. That should be a boon to the top and bottom lines of this recovering industry participant. However, it isn't the only one that keeps costs down, Ultra Petroleum's (UPL) costs are even lower.
Unlike Chesapeake, Ultra didn't get itself into the headlines because of an ugly corporate battle. That said, the low natural gas price did require the company to write down the value of its assets in a big way, leaving the company with an over $14 a share loss in 2012. However, it's been profitable every quarter this year and a burgeoning export market only improves the outlook.
Some ways to play
For conservative investors, Shell is probably the best play on LNG exports because it has the size and scale to exploit the opportunity and withstand any setbacks. Once up and running, however, Cheniere's toll-taker model might be of interest, too. For more aggressive investors, companies like Ultra and Chesapeake offer direct exposure to natural gas drilling and industry leading costs. That's a good combination, just in case exported LNG doesn't take off as quickly as hoped.
