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Natural gas is an abundant resource. It’s also cleaner and cheaper than some other fossil fuels.
However, natural gas has a significant disadvantage. In its natural form, gas must travel by pipeline. Unfortunately, it’s not easy to build pipelines over oceans, making international markets hard to reach. Companies must turn natural gas into a pressurized liquid that gets loaded onto ships and carried to overseas markets.
Energy companies are investing billions of dollars in building liquefaction facilities in hopes of cashing in on growing international demand for liquefied natural gas (LNG). Here’s a look at what’s ahead for the sector and what companies are in the best positions to cash in on this trend.
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Global LNG trade reached 360 million tonnes (MT) in 2020, enough to power 725 million homes, according to industry leader Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B). While that was only a marginal increase from the prior year, LNG proved to be highly resilient given all the turmoil caused by the COVID-19 pandemic. India helped fuel that growth, with its exports rising 11% in 2020.
While the COVID-19 outbreak had some effect on the LNG market in 2020, including delaying some projects, it hasn’t tarnished the long-term outlook. Shell still expects global LNG demand to almost double to 700 MTs by 2040 from the 2020 level. Fueling that growth will be its importance in powering the economies of South and Southeast Asia and its potential ascendance as a crucial bunker fuel for ships.
Several companies are investing to meet the predicted future need. They are exploring for more natural gas resources and also developing LNG export and import infrastructure. Those investments could pay big dividends for LNG-focused companies provided the demand grows as expected and pricing stays attractive.
Many of the world’s largest LNG producers are state-controlled companies. Qatargas, owned by the government of Qatar, is the world’s largest LNG producer.
However, while state-owned companies are a force in the LNG market, they’re not alone. Several publicly traded energy companies rank among the LNG sector’s biggest producers. Here are three top LNG stocks for investors to consider:
|Company||What Makes It a Top LNG Stock?|
|Cheniere Energy (NYSEMKT:LNG)||It’s the leader in producing and exporting LNG in the U.S.|
|Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B)||It’s a world leader in LNG. Its integrated business includes gas supply, LNG export and import infrastructure, and a leading marketing operation.|
|Total (NYSE:TOT)||It’s right behind Shell as a leader in the global LNG industry, controlling 10% of the world market in 2020.|
Cheniere Energy (NYSEMKT:LNG), the first company to export LNG from the lower 48 states (in 2016), has become the leading U.S. LNG producer. It operates two LNG facilities along the U.S. Gulf Coast that export gas to foreign buyers. Cheniere was the second-largest LNG operator and fourth-largest LNG supplier globally in 2020.
Cheniere Energy’s LNG operations buy natural gas on the open market and have it shipped to its facilities via third-party pipelines, as well as those it operates. It then liquefies the gas and sells roughly 85% to foreign buyers such as utilities under long-term, fixed-fee contracts. It makes the remaining supplies available to other buyers at the going market rate.
The company’s contracted volumes provide it with predictable cash flow. It uses that money to repay debt, invest in expanding operations, and reward shareholders through dividends (which it initiated in 2021) and share repurchases. It has new capacity coming online in early 2022 and expects to start developing a new phase at its Corpus Christi LNG facility.
Cheniere’s strategy of selling the bulk of its LNG via long-term contracts is a stabilizing force for the company as it navigates the challenges of the global energy market. Combine that with its visible growth, and it’s an intriguing U.S.-centric option for investors.
Also of note, the company is working to deliver even cleaner LNG. Through the use of nature-based credits, Cheniere supplied Shell with a carbon-neutral LNG cargo in 2020, offsetting emissions from the production and consumption of the shipment. Such initiatives should enable Cheniere to play an important role in the energy transition to cleaner fuel sources.
Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) was an early pioneer in the LNG market and has grown into a dominant force over the years. The company has LNG supply projects in 10 nations. It also has interests in a couple of regasification plants that turn LNG back into gas so it can flow through local pipeline systems.
Shell operates an integrated gas business. It controls supply by producing gas from a variety of fields and also operates LNG export facilities and markets LNG to customers around the world. This combination enables Shell to keep costs low so it can maximize the value of the LNG it produces.
The company has several integrated gas projects under construction to maintain and increase its LNG output through the early part of this decade. Meanwhile, it has many more in development to fuel growth in the years to come. Because of that, Shell will remain one of the driving forces in the LNG market.
TotalEnergies (NYSE:TTE) has made LNG a priority in recent years. The French energy giant rebranded in 2021 to reflect its strategy shift toward cleaner energy. That includes a focus on investing in renewable energy, electricity, and natural gas. It aims for oil to fall from 55% of its business mix in 2020 to 30% by 2030, with cleaner energy taking a greater share.
The company acquired or developed several LNG projects in recent years, which pushed it up the global rankings for production capacity. Its portfolio had the capacity to produce 10% of the world’s LNG volumes in 2020, making it the second-largest publicly traded LNG supplier behind Shell.
Like Shell, TotalEnergies’ LNG operations are both integrated and global. It operates several production facilities around the world that supply gas to liquefaction complexes. It also runs a large-scale marketing and distribution arm that sells and delivers gas to customers. This integration helps it to get the most value from the LNG it produces.
TotalEnergies expects to continue expanding its LNG empire in the coming years. It’s aiming to increase capacity from 40 million metric tons per year in 2020 to 50 million by 2025. That growth could enrich its investors if LNG demand expands as expected.
The world’s economies will need an increasing supply of cleaner-burning fuel in the decades ahead to help combat climate change. Due to its abundance and lower carbon emissions, natural gas appears poised to offer a growing share of that supply. LNG gives it the global access needed to reach key markets.
While the sector hit a speed bump in 2020 because of the COVID-19 pandemic, the long-term outlook for LNG remains intact. LNG demand and prices surged in 2021 as the global economy rebounded from its pandemic-driven lows and countries increased their focus on reducing emissions. Consequently, LNG stocks could do exceptionally well in the coming years as companies benefit from a global need for this vital fuel.
While state-owned companies are a force in the LNG market, they’re not alone. Several publicly traded energy companies rank among the LNG market’s biggest producers. Here are three top options for investors to consider:
Cheniere Energy: It’s the leader in producing and exporting LNG in the U.S.
Royal Dutch Shell: It’s a world leader in LNG. Its integrated business includes gas supply, LNG export and import infrastructure, and a leading marketing operation.
Total: It’s right behind Shell as a leader in the global LNG industry, controlling 10% of the world market in 2020.
Oil and gas companies play an important role in helping to fuel the global economy. While the world is slowly pivoting to cleaner, renewable energy sources, the modern economy will continue to require fossil fuels for years to come. But trying to time the market, whether for oil and gas or for any investment, is risky at best. Add that to the other sector-specific risks, and you may decide to avoid the oil and gas industry altogether.
What is liquefied natural gas?
In its natural form, natural gas must travel by pipeline, and pipelines can’t easily be built over oceans, making international markets hard to reach. Companies must turn natural gas into a pressurized liquid that gets loaded onto ships and carried to overseas markets.
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