2 Ways to Play the LNG Boom

Demand for liquefied natural gas, or LNG, is set to rise faster than supply during the next few years. This is likely to lead to higher profits for all companies operating within the industry. Indeed, a research note published by Bank of America in November highlighted the fact that many major LNG projects will not come online until 2015, even as demand for the fuel accelerates.

Rising cost of production
Royal Dutch Shell (NYSE: RDS-B  ) is more aware than most about the rising cost of LNG production. The company owns a 25% share in the Gorgon LNG project, which is majority owned by Chevron (NYSE: CVX  ) . Unfortunately, the cost of getting Gorgon into production has spiraled out of control, from the initial estimate of $37 billion, projected back in September 2009, to a current figure of $52 billion. This extra $15 billion is not small change, even for Chevron and Shell.

These high costs, according to some, are due to the high cost of labor within Australia along with a strong Aussie dollar. Poor rates of productivity have also seen the first expected date of export from the site pushed back to the first quarter of 2015 instead of late 2014.

Nonetheless, with demand for LNG set to rocket, major integrated oil and gas companies would be silly to let this opportunity pass them by. So, Shell is using its imagination and going offshore.

In particular, Shell is constructing the world's first floating liquefied natural gas facility, Prelude FLNG, off Australia's northwest coast. The scale of this project is, in a word, huge: The Prelude vessel is going to be longer than 450 feet but with as much capacity as a conventional plan, albeit with a lower price tag. Prelude is the first of many FLNG vessels and should allow Shell to participate in the LNG boom while cancelling, or scaling back, some of its onshore projects.

According to analysts at Deutsche Bank, a conventional, onshore LNG plant would cost around $3.6 billion to build for every million tonnes of output per year. In comparison, a floating project would only cost $2.9 billion to construct for a similar output.

Rapidly rising demand
Nonetheless, within Asia there are currently a number of factors driving the demand for LNG higher. For example, all 50 nuclear reactors remain shut down within Japan, and South Korea is having issues with nuclear safety certificates. What's more, China has warned that the country may face natural gas shortages this year. All in all, these factors indicate that demand for LNG this winter could exceed supply.

It would appear that this demand is already having an effect on the market as ICIS, the world's largest petrochemical market information provider, recently reported that the LNG contract for January delivery closed at $18.78 per million British thermal units, the highest monthly level ever recorded by the ICIS.

Transport
With demand rising faster than supply, it is likely that buyers will want their cargoes delivered quickly, and they'll be willing to pay a premium for this, good news for Golar LNG (NASDAQ: GLNG  ) and Teekay LNG Partners (NYSE: TGP  ) . Now, unfortunately, Golar reported a third quarter EBITDA loss of $3.3 million. However, according to management, this loss was due to the fact that two of the company's ships, Viking and Gimi, were idle for a large part of the third quarter. Nonetheless, with demand for LNG exploding, Viking soon found a charter at the beginning of the fourth quarter. Although, due to Gimi's size and age, the vessel could not find a customer and had to be laid up.

Still, Golar took delivery of two new boats during October and has plans for an additional four to be delivered in 2014. With activity in the LNG market increasing, Golar should not have trouble finding customers for these ships, and growth should ensue.

Meanwhile, Teekay reported rapid growth during the third quarter with distributable cash flow expanding 12% year on year. The company benefited from the acquisition of another tanker and an investment in European, Exmar LPG. Teekay has acquired a 50% share of Exmar. What's more, it would appear as if Teekay's growth is set to continue as the company has an additional ship expected to be delivered, well, around now; the this ship is already contacted out on a four-year contract.

In addition, including orders from Exmar, Teekay has 12 mid-sized carriers on order for delivery through 2018, with growth expected in the LNG market and several huge new LNG production projects being completed between now and 2015, it would appear that these new vessels will arrive in a market where demand for their services is high. I should also mention that Teekay is planning to sell some older vessels in its fleet, which should improve efficiency when the new boats come online.


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