U.S. Natural Gas Growth: CONSOL and Cheniere

By Maxxwell A.R. Chatsko - January 16, 2012 | Tickers: LNG, CNX | 0 Comments

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This is the first in a series of articles analyzing total United States energy production. Below we will consider the increasingly important – and controversial – topic of natural gas. But first, let’s take a look at total energy production from all sources.

Natural Gas

The fastest growing source of energy in the United States in 2010 was natural gas, which contributed 22 quadrillion (10^15) Btus and is expected to continue its upward climb in coming years. In 2005 roughly 18 quadrillion Btus of the United States’ energy flow was from natural gas. That means it grew an astounding 22% from 2005 to 2010, which is a big deal for any energy source. This growth was made possible by the economical development of wells in large deposits such as the Marcellus and Utica Shale in the Appalachian region and the Barnett and Eagle Ford Shale in Texas.

Although natural gas advocates tout its importance in relieving our dependence on energy imports, most of the natural gas produced in the United States today goes into heating and electric power generation. Neither of these areas is largely affected by energy imports. However, game-changing technologies such as liquid natural gas have amazing potential to be used as future transportation fuels. As Cheniere Energy Inc. (NYSEMKT: LNG) is finding out though, that potential will require a lot of capital before it is realized. I firmly believe in the future of liquid natural gas as a technology. It would be a tremendous blunder for the United States to not provide support for this budding industry given our large reserves of natural gas.

Marcellus Shale: CONSOL’s Playground

The Marcellus Shale is of particular importance to the future of energy for the United States due to its shallow depth and proximity to the energy-gulping northeast market. This field is also uniquely positioned in the backyard of CONSOL Energy (NYSE: CNX). Although known for being a leader in the coal industry, CONSOL Energy’s 2012 budget includes $755 million for natural gas ($575 million for development of Marcellus Shale) – compared to $720 million for coal ($360 million for coal production improvements). Trading near 52-week lows and with the bottom line anchored by its extensive coal production capacity, the company makes for an interesting growth play. Natural gas and coal combined to make up almost 60% of the total energy consumption of the United States in 2010. If CONSOL can continue to make waves in Marcellus, the company will cement its legacy as an energy powerhouse. The following table highlights the company’s drilling targets of new wells for each of the next four years:

Table courtesy of CONSOL Energy's 2012 Budget Report.

Texas Shale Deposits: Can Cheniere Beat the Debt Clock?

The debt-ridden, overly-optimistic, hasn’t-made-a-profit-in-15-years Cheniere Energy may win its gamble on building expensive liquid natural gas (LNG the fuel, not the company) export terminals, but there are several big questions to answer. At the end of 2011 debt was 131.4% of capital. Furthermore, a $298 million debt payment that was due in May 2012 was successfully paid off with a stock offering by the company. Knowing that dilution is not a sustainable answer to the debt problem CEO Charif Souki tried to reassure investors when he said the company will restructure its debt, but that remains to be seen. The company’s Louisiana plant will cost about $4.5 billion, while a planned Texas plant will cost an estimated $7.5 billion. That is a considerable amount of money.

Luckily for Cheniere the world is developing quite an appetite for LNG. It is estimated that LNG will grow 6.7% annually until 2020. Most of the demand comes from energy deprived countries such as South Korea, Japan, France, Spain, and Italy. The Louisiana and Texas plants would have no problem serving the European market, but it seems unlikely that they will have a direct impact on the Asian market. Energy companies that are heavily invested in the Texas shales will be eager to inject their gas into international markets. That bodes particularly well for Cheniere. In late November Cheniere agreed to a 20-year supply deal with Gas Natural SDG SA of Spain. The deal called for supply of 5 billion cubic meters per year, which represents 15% of Spain's total LNG consumption. One thing: the export terminals have yet to be built and supply doesn't begin until 2017. Will they be able to escape their enormous debt load by then?

The Future of Natural Gas

It appears that CONSOL and Cheniere are in good positions to capitalize on the growth of natural gas in their respective regions. CONSOL Energy is in a good position both strategically and financially, which makes it an attractive play for investors looking to get in on natural gas without the high-risk, high-reward of Cheniere. However, I think Cheniere can attract enough investments in the form of partnerships to stay afloat at least a few more years. The United States’ enormous reserves of natural gas make it a perfect match for liquid natural gas. Say what you want about government involvement in business, but I will reiterate my view that the United States would be foolish to not encourage a healthy domestic LNG industry. Exporting and transporting LNG is already a stable and profitable industry internationally. With enough effort the United States could export natural gas as fuel and establish itself as a leader in LNG technology (compressing, tankers, pipelines, etc). A lackluster effort would result in being years behind our competitors – something we cannot afford in this critical industry of the 21st century. 

Did you enjoy this article? Follow me on Twitter to keep up with my future posts on energy @BlacknGoldFool.

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