If you are investing over the long haul, putting too much of your thesis in short-term catalysts can be troublesome. There is a chance that those short-term catalysts are fleeting moments that might not lead to compounding wealth, or those catalysts might not even materialize at all. At the same time, though, finding stocks that can capitalize on those opportunities in the short term and translate them into long-term gains for investors can completely transform your portfolio.
Two stocks I have been watching closely -- Tellurian (TELL +0.00%) and NextDecade Corporation (NEXT +0.00%) -- have massive catalysts coming over the next 12 months that, if things fall in their favor, could set them up for several years of profitable growth. Let's look at what these two young companies are up to, why the next year or so could make or break them, and why they could be huge winners for investors.
Image source: Getty Images.
Capitalizing on the "Saudi America" theme
Four years ago, The Economist coined the term "Saudi America" to describe the monumental change in U.S. oil production brought on by shale drilling. The ability to commercially extract oil and gas from shale has lifted oil and gas production by 108% and 40%, respectively. While the increase in oil production is nothing short of incredible, the one that is incredibly interesting and concerns these two companies is on the natural gas side of the industry.
At the beginning of 2018, the U.S. became a net exporter of natural gas for the first time in decades. What's more, the cost of extracting that gas has fallen so sharply that the price of natural gas has been cheap compared to oil as well as compared to natural gas prices around the world. With so many companies looking to grow their business through higher production volumes and others looking to monetize associated gas from oil wells, gas in the U.S. is cheap. So cheap, in fact, that companies are spending billions of dollars on facilities that can capitalize on cheap gas such as power plants, petrochemical manufacturing facilities, and terminals to liquefy and export natural gas across the globe.
Exporting liquefied natural gas (LNG) is a relatively new business in the U.S., but it has so far proven to be a rather lucrative one. The U.S.'s first fully operational LNG export terminal -- owned and operated by Cheniere Energy (LNG 1.78%) -- has exceeded expectations since it started selling LNG cargoes. The appetite for U.S. gas has been much higher than originally anticipated, in large part because it is so much cheaper than other countries' LNG.
There has been a slew of new facilities built in the U.S. that are either currently operational or will ship their first cargoes by the end of this decade. According to Royal Dutch Shell's LNG Outlook, facilities starting up or about to go live in the next three years will add close to 100 million tons per year of export capacity, an increase of close to one-third of current demand.
However, LNG demand is the fastest-growing segment of the fossil fuels business, about 9% annually since 2015, and the current slate of facilities under construction won't be enough to satisfy demand as early as 2021. The amount of time it takes to construct an LNG facility means companies need to make final investment decisions soon. Otherwise, there could be a supply shortage.
Image source: Getty Images.
Why 2019 matters
Here's where Tellurian and NextDecade come into the picture. Both companies are in the planning phases of developing LNG export terminals on the U.S. Gulf Coast. Both of these facilities are monsters with annual export capacity of approximately 27 million tons per year. Thanks to all that cheap gas in the U.S. and the improvements in technology in recent years, both companies say that they can deliver facilities at much lower cost than those currently under construction. Furthermore, both Tellurian and NextDecade are building pipelines that will enable them to access incredibly cheap gas.
As it stands, both companies have submitted all of the necessary paperwork to regulatory bodies, the most important of which is a final environmental impact statement from the Federal Energy Regulatory Committee (FERC). Management at both companies has said that a final investment decision will be made on their respective facilities soon after these impact statements are released. According to the FERC schedule, Tellurian expects to receive a response by January, and NextDecade expects to receive its response by April.
Final investment decisions for these two companies could be huge catalysts. While there will almost certainly be financing and construction risks in play between the final investment decision and shipping their first respective LNG cargoes, a final investment decision means that these companies are drawing significantly closer to turning these facilities into a reality.
A shot at something big?
For investors, there is a real opportunity here to capitalize on this situation. As it stands today, the stock prices of both Tellurian and NextDecade have a lot of skepticism priced into them. If everything goes according to plan at Tellurian, it expects to generate about $3 billion in cash flow at current prices for LNG cargoes leaving the U.S. Gulf Coast. With a market capitalization of $2 billion, this stock could post large gains as the facility gets closer to completion. Similarly, NextDecade's market cap of $481 million means that not a lot of people have confidence it can pull this off.
No doubt, there is a lot of risk involved in these two stocks. And without other assets to fall back upon if these plans don't go through, these two stocks are very much all-or-nothing bets that will likely be incredibly volatile over the next few years. With regulatory approval expected in the next several months, these stocks will have some significant catalysts that will make their futures much less murky. That's why these two stocks are very high on my radar as we head into 2019.
