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 the price for the fuel and funds like the United States Natural Gas Fund (ARCA:UNG) have plummeted to historic lows. Those low prices have prompted a variety of firms to begin questioning what to do with our new found bounty. One option, which is gaining a lot of steam, is to begin exporting to countries where demand is greater. For investors, the rise of liquefied natural gas (LNG) exports could be a portfolio game changer.
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A Growing Market
At its core, LNG is essentially a natural gas that is cooled under pressure and converted to a liquid form to transport by tanker ships to markets not connected by pipelines. The fuel is then converted back to 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 and 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. That has sent prices for LNG to highs not seen since mid-2008.
SEE: Natural Gas Industry: An Investment Guide
In total, Asia accounts for about 60% of the global demand for LNG, with Japan, South Korea and China rounding out the top three users of the fuel. However, that percentage of demand is set to increase as nations like Malaysia, Indonesia and Thailand are set to become importers by 2017. At the same time, Japan's nuclear shut-down has the island nation buying up critical cargoes of the fuel as it seeks to replace the lost generation capacity. Some analysts peg LNG imports growing at an incredible 8.2% per year by the end of the decade.
This rising demand, along with higher prices for the fuel, have encouraged a whole host of firms including Dominion Resources (NYSE:D) and Sempra Energy (NYSE:SRE) to begin the process of building liquefaction plants here in North America in order to export LNG to Asia. There are currently 14 different plants in various stages of development.
SEE: How To Profit From Natural Gas
Playing the Growth in LNG 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. Here are some top picks.
Fresh off of its Gorgon LNG project in Australia with Chevron (NYSE:CVX), Royal Dutch Shell (NYSE:RDS-A, RDS-B) is planning a multibillion-dollar liquefaction plant on Canada's West Coast in Kitimat, British Columbia. Partnering with PetroChina (NYSE:PTR), Shell is hoping to build a 1.7 billion cubic feet a day facility by the end of the decade. The integrated energy major is already one of the leaders in LNG, with projects in Malaysia, Brunei and East Russia.
Day rates for chartering vessels that can ship the fuel from port to port continue to rise right along with Asia's demand. Almost every single LNG ship that is seaworthy is active, which results in zero spare capacity in the sector. Additionally, a new LNG tanker ship takes roughly two years to build and there is only one scheduled to be completed in 2012. These factors will benefit both shippers Teekay LNG Partners (NYSE:TGP) and Golar LNG (Nasdaq:GLNG) as day rates remain high.
Finally, with the International Energy Agency predicting that spending on various LNG infrastructure over the next 30 years will hit $250 billion, construction firms like Chicago Bridge & Iron (NYSE:CBI) and KBR (NYSE:KBR) 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.
SEE: Build Your Portfolio With Infrastructure Investments
The Bottom Line
With natural gas prices continuing to stay low, the answer for many producers is exporting that bounty to emerging Asia. Overall, long-term demand for LNG is growing and newly built infrastructure will help spur on that demand. Investors with long-term timelines may want to consider adding some capital to the sector, either through the previous picks or Cheniere Energy Partners (NYSE:CQP).
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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.
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