Investing in Liquefied Natural Gas Stocks

Updated: Jan. 12, 2021, 7:07 p.m.

Natural gas is an abundant resource that’s cleaner and cheaper than other fossil fuels. However, it has one major disadvantage. In its natural form, this gas must travel by pipeline, and pipelines can’t easily be built over water, 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.

And energy companies are investing billions of dollars in building liquefaction facilities in hopes of cashing in on the growth of international liquefied natural gas (LNG) demand. 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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An overview of the LNG market

Global LNG trade reached 359 million tonnes (MT) in 2019, enough to power 722 million homes, according to industry leader Royal Dutch Shell (NYSE:RDS.A) (NYSE:RDS.B). That was 12.5% above 2018’s level and more than triple 2000’s. The bulk of that LNG is going to Asian markets, fueled mainly by demand from China.

While the COVID-19 outbreak had some effect on the LNG market in 2020, including by delaying some projects, it hasn’t tarnished the long-term outlook. Shell still expects global LNG demand to double from 2019’s level by 2040, given 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 this future need by not only exploring for more natural gas resources but also developing LNG export and import infrastructure. Those investments could pay big dividends for LNG-focused companies, provided demand grows as expected and pricing stays attractive.

What are the top LNG companies?

Many of the world’s largest LNG producers are state-controlled companies. Qatargas, which is 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, as several publicly traded energy companies rank among the LNG market’s biggest producers. Here are three top options for investors to consider:

Company What Makes It a Top LNG Stock?
Cheniere Energy (NYSEMKT: LNG) The leader in producing and exporting LNG in the U.S.
Royal Dutch Shell (NYSE: RDS.A) (NYSE: RDS.B) A world leader in LNG. Its integrated business includes gas supply, LNG export and import infrastructure, and a leading marketing operation.
Total (NYSE: TOT) Right behind Shell as a leader in the global LNG industry, controlling 10% of the world market in 2020.

Data source: Company investor relations websites

1. Cheniere Energy

Cheniere Energy (NYSEMKT:LNG) was the first company to export LNG from the lower 48 states in 2016 and has become America’s leading 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 buys natural gas on the open market and has 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 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, which it uses to repay debt and invest in expanding its operations. It has new capacity on track to come online in the first quarter of 2021 and the second half of 2022.

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.

2. Royal Dutch Shell

Royal Dutch Shell (NYSE:RDS.A) (NYSE: DS.B) was an early pioneer in the LNG market and has grown into a dominant force over the years. It vaulted to the top of the publicly traded leaderboard in terms of annual production capacity in 2016 when it acquired BG Group for $70 billion. As a result, the company now has LNG supply projects in 10 nations as well as 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 not only controls supply by producing gas from a variety of fields but also operates LNG export facilities and markets LNG to customers around the world. This combination enables it 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.

3. Total

Total (NYSE:TOT) has made LNG a priority in recent years. The company acquired or developed several projects, which pushed it up the global leaderboard 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 operator, behind Shell.

Like Shell’s, Total’s 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 maximize the value of the LNG it produces.

Total expects to continue expanding its LNG empire in the coming years: It is aiming to increase its capacity from 40 million metric tons per year in 2020 to 50 million metric tons per year by 2025. That growth could enrich its investors if LNG demand expands as expected.

Related topics

LNG has a bright future

The world’s economy will need an increasing supply of fuel in the decades ahead. Due to its abundance and lower carbon emissions, natural gas appears poised to supply a growing share of that demand, with LNG giving it the global access needed to reach key markets. This outlook suggests LNG stocks could do exceptionally well in the coming years as companies benefit from meeting the world’s need for this vital fuel.

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