The LNG Opportunity Keeps Getting Better

By Aaron Levitt | April 18, 2014 AAA

It’s no secret that North America is now awash in abundant natural gas production. As energy firms like Fort Worth, Texas-based Range Resources Corp. (NYSE:RRC)- have adopted fracking and other advanced drilling methods in spades, the amount of natural gas being produced in the U.S. and Canada is staggering. And while domestic demand is growing, we still are producing perhaps more than we need.

Which poses an interesting question- what to do with the excess?

While there have been efforts made to increase domestic demand, the idea of exporting our excess has gained significant steam over the last few years. For investors, the opportunity in shipping our natural gas production around the world could be one of the biggest pays over the next decade.

Rising Global Demand For LNG 

It was just a few years ago that the United States was forced to import natural gas. However, with the adoption of hydraulic fracking, the tables have turned and North America is poised to be one of the leaders in liquefied natural gas (LNG) exports. At its core, LNG is essentially natural gas that is cooled under pressure and converted into a liquid in order to be transported by tanker ships to markets not connected by pipelines. The fuel is then converted back into a gas at various import terminals.

And demand for LNG is growing like weeds.

According to analysts at consultancy Ernst & Young, since 2000, global LNG demand has risen by an estimated 7.6% per year. That torrid rate is nearly 3 times faster than overall domestically produced/consumed natural gas demand. The future seems rosy as well. E&Y predicts that overall global LNG demand by 2030 will be double 2012’s numbers of 250 million metric tons. 

The key driver for that demand will be energy hungry Asia. Nations like Japan, South Korea and Taiwan continue to use LNG in spades as they look for ways to power their advanced economies. At the same time, both China and India are expected to be the largest growth markets for LNG. China alone is expected to nearly triple its demand for liquefied natural gas by 2020. Adding in Southeast Asian nations like Malaysia, Indonesia and Thailand- which are all set to become importers by 2017- and you have a robust demand situation. All in all, analysts predict that Asia will account for more than 80% of all LNG exports. 

This rising demand, along with higher prices for the fuel, have encouraged a whole host of firms including utilities Dominion Resources Inc. (NYSE:D) of Richmond, Va. and San Diego's Sempra Energy (NYSE:SRE) to begin the process of building liquefaction plants here in North America in order to export LNG to Asia.

Playing Rising Exports

Given Asia's voracious demand for the fuel, LNG will remain a top draw for those firms providing to the continent. While not all the projects will be built, investors should consider adding some of the major players to a portfolio in order to profit from the trend.

Leading the way could be Houston-based Cheniere Energy (NYSE:LNG). Cheniere is the only company that has been approved across the board by U.S. regulators to begin exporting natural gas from its Sabine Pass facility on the Gulf Coast. That fact vaults LNG into the pole position as leader in exports. Cheniere continues to rack up big multi-year contracts with European and Asian utilities- like Spain’s Endesa Generacion and Indonesia’s PT Pertamina. For those investors looking to extract a bit of yield out of Cheniere, the firm has set-up a master limited partnership subsidiary- Cheniere Energy Partners LP (NYSE:CQP)- as well as a publicly graded general partner (GP) as Cheniere Energy Partners LP Holdings, LLC (NYSE:CQH). 

In order to make LNG exports/imports a reality, it’s going to cost serious money to make it happen- billions of dollars. Leading the way in contorting these facilities are engineering firms like The Hague, Netherlands-based Chicago Bridge & Iron (NYSE:CBI) and Baar, Switzerland’s Foster Wheeler AG (Nasdaq:FWLT). The duo represent the two key infrastructure firms that are responsible for the bulk of current and new LNG capacity coming online in the years ahead. Backlogs continue to rise at CBI & FWLT as do share prices. 

Finally, LNG exists because there are no pipelines that cross the ocean. That means the firm that specialize in shipping it should benefit long term. Hamilton, Bermuda-based Golar LNG (Nasdaq:GLNG) has been in operation for more than 30 years and features 13 different LNG vessels. However, given the demand profile, GLNG is planning on adding nearly 11 ships over the next few years. Likewise, newer firms have taken to the LNG market for shipping. Athens-based shipping firms Dynagas LNG Partners LP (Nasdaq:DLNG) and StealthGas (Nasdaq:GASS) both offer the opportunity to pay younger and smaller fleet sizes. 

The Bottom Line

As we continue to unearth a record amount of shale gas, exporting that bounty is quickly taking shape- especially to energy-thirsty Asia. For investors, playing growing LNG exports could be one of the biggest opportunities in the oil & gas sector. The previous picks- along with LNG shipper Teekay LNG Partners (NYSE:TGP) –make ideal selections to play the trend.

 

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