What do $6 trillion and $12 have in common? $12 is the premium Japan's $6 trillion economy pays for natural gas over North America. Japan on average pays $15.74 for a mmBtu of natural gas (million British thermal units), versus $3.64 for North America (based on futures traded in New York).
Several energy companies are betting big on North American natural gas production and LNG exports, and are investing in both LNG export terminals and shale plays to drive future growth.
Apache (NYSE:APA) and Chevron (NYSE:CVX) own a 50/50 stake in a proposed LNG export terminal in British Columbia. If approved and completed it will export 5 million metric tons of natural gas a year, with the potential to go up to 10 million metric tons.
If you can purchase or produce natural gas for $3-5 mmBtu and sell it in a foreign market for $15, then you can expect to have some nice margins. This enables Apache and Chevron's natural gas assets to become significantly more valuable and switch from a headwind (natural gas is below the cost of production) to a tailwind for profit growth.
It gets even better for Chevron, as it is seeking to leverage its 325,000 acres in the Duvernay shale play in Alberta that it bought back in 2011-2012, which are rich in dry natural gas and natural gas liquids. If it can fully develop that field then it can ship the dry natural gas back to Kitimat to be turned into LNG.
Apache loves America
Apache is spending $4 billion of its $10.5 capital expenditure budget this year on US onshore operations with plans to increase North American liquids output by 25% in 2013. Apache plans on using the cash flow from its overseas operations to fund expansion in the US.
As of Apache's latest earnings release, it produced 120,000 bpd of crude oil, and that figure goes up to 175,000 bpd when you add in natural gas liquids. This represents 26% production growth year over year and is why Apache is focusing more on high-margin, high-growth areas.
Apache is running 45 rigs in the Permian Basin and 35 rigs in the Anadarko Basin. Apache is already above its 25% liquids growth projection and should be able to meet or exceed its guidance.
Apache is also trying to cut down its debt, which stood at $11.4 billion at the end of 2012, and refocus on growing North American liquids production. In July Apache sold $3.75 billion of Gulf of Mexico assets to help rebalance its portfolio.
If Apache is serious about focusing on North America then this is a stock worth looking at as it organically grows its business. This is a nice change from before when it used a $16 billion spending binge from 2010 to 2012 to find growth.
Big bet on the Marcellus
Chevron leases 714,000 net acres in the Marcellus play, which is around Pennsylvania and Ohio. The Marcellus has the potential to hold more than 500 trillion cubic feet of natural gas, with 50 trillion cubic feet of that recoverable. Chevron clearly sees a lot of potential in this play, otherwise it wouldn't have gone out to lease so much land.
At the end of 2012 the Marcellus play was producing 138 million cubic feet of natural gas a day with 10 rigs up and running. In a few years when LNG exports come online there would be a major ramp up in production and Chevron already has the necessary infrastructure in place.
Chevron is betting big on shale gas on both sides of North America in two different countries. Chevron is a good dividend play for the long term as LNG exports from Canada and the US will increase its cash flow and boost investor returns.
Ahead of the game
ExxonMobil (NYSE:XOM) is a major natural gas producer and stands to reap huge rewards from LNG exports to Asia. Exxon sold its North American natural gas for an average price of $3.32 in 2013, which is far below the price of production.
Exxon is the largest natural gas producer in the United States, and plans on being able to turn a profit off of its natural gas assets in a few years. If natural gas prices rise to $5-6 when the US starts exporting LNG in 2015 then ExxonMobil will see a strong headwind pushing profits up as it will fetch almost double the price it currently is selling natural gas for.
Exxon owns a 30% stake in the Golden Pass terminal facility in Sabine Pass, Texas . Qatar Petroleum International owns the other 70%. So far the terminal has the right to export 15.6 million metric tons of LNG to nations with free-trade agreements.
19 others are still seeking approval, so Exxon is ahead in the LNG export game. This will enable Exxon to fetch profitable prices for its natural gas.
Many experts see natural gas prices in the US rising to $5-6 mmBtu by 2015 when North America connects its production to the global market. This will enable the largest US natural gas producer to fetch double the price it currently is selling its natural gas for and will provide a strong boost to Exxon's bottom line and potentially to its dividend.
Apache and Chevron also see a lot of potential in LNG exports but are building a terminal in Canada to bypass harsh energy export regulations in the United States. Apache's plan to cut debt through asset sales and refocus on North American liquids production will result in a company with higher margins and a better balance sheet, so I'm bullish on its long-term fundamentals.
Chevron will reap huge rewards from its Marcellus assets if natural gas prices return to profitable levels and is setting up the infrastructure to be able to do so. Chevron's plan to link its Canadian Duvernay shale play to its LNG export terminal is a great way to increase profitability through vertical integration and will translate into larger cash flow, enabling Chevron to invest back in the business and possibly increase its 3.3% dividend.
Editor's Note: A revision has been made to correct prior claims that Golden Pass has permission to export LNG to non-Free Trade Agreement countries. The terminal only has Department of Energy approval to export to those countries with which the United States holds a Free Trade Agreement.