Playing The Big Winners In U.S. LNG

By Aaron Levitt | May 24, 2013 AAA

The rapid adoption of hydraulic fracturing and advanced drilling techniques has allowed exploration and production (E&P) firms the ability to exploit North America's vast shale formations in their search for new sources of supply. However, these extraction methods may have proven too good. The United States and Canada are awash in a virtual sea of natural gas. So much so, that prices for the fuel and funds like the United States Natural Gas Fund (ARCA:UNG) have fallen well below their historic highs.

Those relatively low prices have prompted a variety of producers to begin questioning what to do with our new found bounty. One option- which recently scored a major win- is to begin exporting to countries where the demand is greater. For investors, the growth in liquefied natural gas (LNG) exports could be one of the biggest trends facing the domestic energy sector.

SEE: A Natural Gas Primer

A Big Approval
Hydraulic fracturing is truly an efficient method of producing natural gas. New estimates from the Department of Energy puts domestic natural gas reserves at a huge 2,384 trillion cubic feet. That's an increase of 22% versus 2010 estimates and is enough energy to power the U.S. for another 105 years. That huge lifespan has some analysts worried about long term lower natural gas prices for producers.

Given those higher reserve estimates many producers see exporting through LNG as a way to combat overall lower prices.

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. While the LNG import market in the U.S. is relatively non-existent, demand for the fuel in emerging Asia continues to skyrocket. As these economies continue to industrialize and grow, the need for more energy is becoming a critical issue. To that end, many have begun the process of building new import terminals to gain access to the fuel.

Potential exporters recently got a big win via a critical approval. Since the DoE signed off on exports from Cheniere Energy’s (AMEX:LNG) Sabine Pass terminal back in 2011, a fierce battle has been waged in Washington about additional export facilities. This week the Feds finally approved unrestricted natural gas exports from Freeport LNG's Quintana Island facility located in Texas. Analysts estimate that the approval could finally open the flood gates for the more than 26 other facilities waiting in limbo.

All in all, that could be the shot in the arm for the domestic natural gas industry to realize higher long term profits.

SEE: Fueling Futures In The Energy Market

Playing the Growth in U.S. LNG Exports
Given that LNG exporting has been given the green light here in the U.S., investors may want to cash in on the trend. Both Dow Chemical (NYSE:DOW) and ConocoPhillips (NYSE:COP) own the newly approved Freeport facility. Freeport has been cleared to export roughly 511 billion cubic feet of natural gas annually for the next 20 years to all points in Asia- especially Japan. Already the facility has secured contracts with various utilities in the nation. The two firms could be big winners once the facility is up and running.

Also winning big could be both Dominion Resources (NYSE:D) and Sempra Energy (NYSE:SRE). These two firms are just some of the 26 different companies vying for a permit from the DoE and FERC. However, both utilities represent projects that are most likely to be approved from the Feds.

With LNG liquefaction, debottlenecking and receiving terminals costing billions of dollars to construct, engineering and construction firms like Chicago Bridge & Iron (NYSE:CBI) and Foster Wheeler AG (Nasdaq:FWLT) should get the nod from investors. The pair represents the two key infrastructure firms that are responsible for the bulk of current and new capacity infrastructure coming online in the years ahead. As construction ramps up, both CBI and Foster Wheeler should see higher growth than their current multiples suggest.

Finally, it stands to reason that natural gas-focus producers here in the North America have the biggest to gain as they will be able to sell their production at higher prices overseas. However, as natural gas prices cratered over the last few years, many have switched more profitable shale oil. That leaves pure producers like EnCana (NYSE:ECA), Ultra Petroleum (NYSE:UPL) and Range Resources (NYSE:RRC) in a great spot to profit.

SEE: Oil And Gas Plays In North America

The Bottom Line
For U.S. producers of natural gas, exporting that bounty is seen a necessary way to profit from higher demand overseas as well as higher prices. The potential of those exports received a major win recently from Uncle Sam as another facility gained regulatory approval. For investors, the time to add some capital to the sector could be now.

At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.

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