Why U.S. Natural Gas Companies Are Looking Forward To 2014 (UNG, BX, LNG, BX)
Tony Daltorio: Natural gas companies in the United States hope the worst is behind them.
In 2012, natural gas prices plummeted to a two-decade low at below $2 per million BTU. This meant U.S. natural gas lost 87% of its value over a six-and-a-half year period. The low price was thanks to a glut of gas due to newer drilling technologies such as fracking.
But there is hope for a brighter future on the horizon for these companies.
As pointed out recently by Money Morning Global Energy Strategist Dr. Kent Moors, a liquefied natural gas (LNG) export surge is expected in this country starting in 2014. By 2020, forecasts are for the United States to become a force in global LNG trade.
The U.S. is projected to account for nearly 10% of global LNG trade by the end of the decade, from zero today.
“The demand scenario forming is a primary reason why the industry is gearing up for a major resurgence,” explained Moors.
And while there are obstacles, Moors said the long-term outlook is filled with profit opportunity.
“The natural gas market is about to get a whole lot better,” said Moors.
U.S. LNG Exports: Asia a Major Factor
The key to this entire scenario will be the continued booming demand from Asia, which accounts for almost two-thirds of global LNG consumption. China is expected to become the world’s second-largest importer of LNG by 2020.
However, the demand is coming not only from emerging economic powers such as China, but also from countries like Japan and South Korea.
Japan’s move away from nuclear power since the Fukushima disaster has only accelerated its move into LNG. According to gas exploration company BG Group, its LNG imports rose from about 70 million tons per year to 77 million tons last year and could reach 83 million tons this year.
And a South Korean utility, Korea Gas, is the world’s biggest buyer of LNG on the open market.
It is this demand that lead Bernstein Research to forecast a doubling of demand for LNG over the next decade to 408 million tons annually.
Another plus factor for LNG exports from the U.S. is the fact that domestic gas prices are a fraction of gas prices in both Europe and Asia – about one-third of Europe’s and one-sixth of Asia’s prices. That makes an ideal scenario for U.S. gas companies to export some of their natural gas.
First U.S. Export Facility
The first major move toward the United States becoming an exporter of LNG was made earlier this year.
That was when the U.S. Department of Energy gave its final approval for a LNG export facility: the Sabine Pass plant in Louisiana owned by Cheniere Energy (NYSE:LNG).
Overall, the Department of Energy has received applications from eight companies for 150 million tons of LNG exports annually, but it is expected to approve only projects for about one-third of that amount.
Sabine Pass was originally built as a LNG import facility so many of the necessities – storage tanks, pipelines, docks – are already in place. But it still will cost $5.6 billion to convert it to an export facility. Sabine Pass is the first such project in the lower 48 states in more than 40 years.
The good news for Cheniere is that it already has customers lined up for its LNG including the aforementioned Korea Gas and BG Group. Maybe that’s why its stock is up more than 80% over the past year.
The company also has had some strategic partners invest into the project. These partners include U.S. private equity firm Blackstone Group (NYSE:BX), Asian private equity firm RRJ Capital, Temasek, and China Investment Corp (CIC).
Exports Mean Higher Natural Gas Prices
The important takeaway for investors is that as exports add to growing demand for U.S. natural gas, prices will inevitably rise. This is an obvious plus for domestic natural gas companies.
But already there is growing political pressure from U.S. chemical producers and power companies who are worried about higher natural gas prices due to LNG exports. According to the U.S. Energy Information Administration in a Jan. 19, 2012 report, exporting LNG may cause natural gas prices to rise to above $9 per million BTU. This is well up from the lows experienced earlier this year, but still far below the all-time high of $15.78 hit in December 2005.
While other estimates forecast lower natural gas prices than the government estimate, one thing is clear: The U.S. government will never approve all the proposed LNG projects.
This leaves Cheniere Energy not only with a first mover advantage, but perhaps a near monopoly on LNG exports for the foreseeable future. This makes it an interesting investment as major hedge funds such as D.E. Shaw and Steve Cohen’s SAC Capital Advisors seem to have concluded. These funds are among the company’s largest investors.
Related: United States Natural Gas Fund LP (NYSEARCA:UNG).
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