As I see it, there are three surefire trends for natural gas come the second half of 2013:
1. The United States will triple its exports of liquefied natural gas (LNG).
2. Demand for LNG will continue to expand globally.
3. Stocks in companies that make liquefied natural gas facilities will go up over the long run.
About a year ago, I wrote a free report called “The Ring of Fire.” In it, I outlined the companies that would befit from the abundance of low-cost natural gas being produced in North America…
One stock I sold for 47% and I’m waiting to get back in. The second company is up 48%. Warren Buffett followed the lead of Crisis and Opportunity and just added it to his portfolio. Heck, even the runt of the litter is up 11% — not too shabby.
I continue to be long and strong on profiting from natural gas and natural gas exports.
There will be no clearer a trend than betting on natural gas over the next five years.
But the trend isn’t just low-cost natural gas. It’s natural gas exports.
Recently, Platts came out with a report saying the United States is doubling its exports to Mexico:
In terms of US/Mexico cross-border points, existing capacity is close to 3 Bcf/d for flows into Mexico, according to the Mexican government’s Secretaria de Energia, the report said. Close to 1.6 Bcf/d of the capacity is in South Texas, another 800,000 Mcf/d is in southern California, with the rest split between Arizona at 400,000 Mcf/d and West Texas at 200,000 Mcf/d.
However, actual flows from the US into Mexico averaged just 1.7 Bcf/d in 2012, in part because of constraints on the Mexican side of the border, Goldman Sachs said. Three major pipeline projects south of the border approved by the Mexican government will allow more gas to reach downstream demand centers.
Unlike the U.S. and its Keystone Pipeline blunder, Mexico has no problem with cheap energy, and these pipelines will be completed by 2015.
Mexican gas demand is growing because their GDP is running at 3.8% this year. This is great news for Mexico (which I’m bullish on) because they are a free trade partner connected to the gas grid. They get to pay the Henry Hub price of $3.85.
That is much less than the LNG price in Mexico, which is $10 per mmbtu, but isn’t getting many takers.
Off the Pipe
Other countries not connected to the North America natural gas grid have to pay much more.
In Japan, for example, the price for LNG is $15.25 today, down from $18 in June of last year.
The problem with natural gas is that it costs a great deal of money to build the infrastructure that can reduce great quantities of the stuff to -260ºF. It then has to be put in cryogenic ships to take it to market. Barclays estimates the cost of liquefaction and travel at $9.15 per mmbtu.
This means that even if the U.S. could build more than the two LNG export terminals currently approved by the EPA (26 are tangled in red tape), Japan would still have to pay around $13 per mmbtu of LNG…
But they have to buy it. They have no choice. After the Fukushima nuclear power plant melted down, Japan started closing the rest of its plants.
Still, the two approved export sites will be able to ship 3.6 billion cubic feet of LNG a day. The U.S. may export 6.5 billion to 8.5 billion cubic feet of gas a day by 2020.
LNG demand is rising in China (up 9.9%) as the leadership wants to cut back on the debilitating pollution caused by burning the local brown coal.
South America, Africa, and North America saw consumption go up, too, and consumption rose 12.6% in Norway, 7.8% in Qatar, and 11% in Saudi Arabia.
In total, global natural gas consumption rose by 2.2% to 3.3 trillion cubic meters.
Global production lead by the USA (up 4.7%) grew at 1.9% to meet this demand.
Those are pretty solid numbers, considering the world has been steeped in economic malaise for five years.
There are those who worry that U.S. LNG exports will lead to higher prices in the United States. This is unlikely.
Even if exports are at capacity by 2015, that would only be around 10% of the current U.S. daily production of 60 bcf/d. And we can always pump more. There is an estimated 100 years’ worth of supply at the current production rate.
Yes, the U.S. and Canada will continue to expand LNG exports…
One market sector that will benefit are those companies that make the LNG storage and distribution stations.
Companies like Chart Industries (GTLS: NYSE) have done very well over the past few years. GTLS’ stock is up 80% in the past 52 weeks. That said, it has gotten a bit pricey as of late (PE of 39, earnings growth of 10.30%). It’s OK to buy a stock with a high price-to-earnings ratio, but only if that number is exceeded by earnings growth.
Fluor Corporation (FLR: NYSE) might be the better option in the LNG engineering sector. They have a PE of 21.30 and $2.18 billion in cash.
For those of you with a more speculative frame of mind, you could buy companies that are looking for the mother lode of natural gas in Asia.