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Export Natural Gas, Import Profits

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On most occasions the U.S. Energy Information Administration’s report on energy consumption and production projections conjures up little more than a yawn. Every once in a while, though, something such as horizontal drilling comes along and turns every projection on its head. The administration’s latest report projects that shale gas will represent half of the total dry gas produced by 2035, up from 23% in 2010 and 1% in 2000.

The industry may not cheer the glut of natural gas, however. This tidy Bloomberg article on natural gas prices, reserves, and lack of demand sums up the industry’s woes. Several companies that raced to purchase wells in the Marcellus and Eagle Ford shale deposits have resorted to selling assets to prop-up their balance sheets. It could get worse as the bi-annual energy sector credit reassessment will target overexposed gas producers.

Unfortunately, many investors who followed companies into the natural gas revolution are feeling the pain too. Luckily there is a silver lining. As a result of the ridiculous overabundance of natural gas the Federal Energy Regulatory Commission (FERC) has approved the initial stages of three new liquefied natural gas (LNG) export terminals and is considering up to four more.

<img src="/media/images/user_6293/lngterminal_large.jpg" />

Sempra Energy’s Hackberry, LA facility is strictly for imports, but that will change soon.

Although the first facility Cheniere Energy’s (NYSEMKT: LNG) Sabine Pass expansion is not slated for operation until 2015, FERC’s decision to export domestic production provides a much needed date to work around. For companies grappling with growing reserves now there may be little relevance to projecting domestic production out to mid-century, since regulations and technologies will most likely change. The near-term projections have a pretty concrete chance of materializing, however, which is why the U.S. Energy Information Administration’s following prediction has the industry cheering:

The United States will become a net exporter of LNG in 2016.

While I believe the industry should receive some blame for not being proactive or creative with reserves exports alone are a solid reason to go long on natural gas. Over 25 countries are net importers of LNG with a dozen or so developing countries expected to join the list soon. Furthermore, not every country with shale deposits can export LNG at an economical price. That’s because gas prices are determined at a more local/geographic level than other commodities such as oil.

While going through the process of attaining approval for exporting natural gas is a daunting task, the development of the three approved sites will lay the groundwork for others to follow. Here is a table of approved LNG export terminals listed with proposed final capacities in billion cubic feet per day (bcfd):

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Location</p> </td> <td> <p>Proposed Capacity</p> </td> <td> <p>Expected Operation</p> </td> </tr> <tr> <td> <p><span><span>Cheniere</span> Energy</span></p> </td> <td> <p>Sabine Pass, Louisiana</p> </td> <td> <p><span>2.0 <span>bcfd</span></span></p> </td> <td> <p>2015</p> </td> </tr> <tr> <td> <p><strong><span><span>Sempra</span> Energy</span></strong> <span class="ticker" data-id="205564">(NYSE: <a href="http://caps.fool.com/Ticker/SRE.aspx">SRE</a>)</span>  </p> </td> <td> <p><span><span>Hackberry</span>, Louisiana    </span></p> </td> <td> <p>1.7 bcfd</p> </td> <td> <p>2016</p> </td> </tr> <tr> <td> <p><strong><span><span>ConocoPhillips</span></span></strong> <span class="ticker" data-id="203175">(NYSE: <a href="http://caps.fool.com/Ticker/COP.aspx">COP</a>)</span></p> </td> <td> <p>Freeport,Texas*</p> </td> <td> <p><span>1.8 <span>bcfd</span></span></p> </td> <td> <p>2017</p> </td> </tr> </tbody> </table>

*ConocoPhillips is 50% owner of Freeport LNG-GP Inc. See this complicated chart.

Now what?

Gaining approval to export LNG is just the first difficult step in the process. Companies must then attain siting, construction, and operating permits from FERC and various other state and environmental agencies. But all things being equal, how do they compare with one another?

A lot of attention has been paid to Cheniere Energy’s planned export facility. Unfortunately, a lot of attention has been paid to Cheniere Energy’s debt as well. At the end of 2011 the company had about $2.9 billion in total assets and $2.5 billion in long term debt, which has steadily fallen from $3.1 billion in January 2009. That trend may reverse if their proposals for building additional export terminals are approved. If the company can cash-in on the growing international trend of LNG they very well may become the leader of the industry in the U.S.

If Cheniere is too risky for you, then you may consider Sempra Energy. The company sports a P/E of 14.5, a $15.6 billion market cap, an impressive appetite for growth, and a 3.7% dividend to boot. While Sempra’s proposed export terminal is smaller than Cheniere’s, the company isn’t overexposed financially and can better weather construction delays. Furthermore, Sempra also operates an LNG import terminal in Mexico that could also be expanded for exports. That would give Sempra the ability to export directly to the two hungriest LNG markets: Asia and Europe. Even without a west coast export terminal Sempra Energy provides a great growth opportunity in LNG.

One for the backburner

One proposed export terminal is worth keeping an eye on as well. From a financial health point of view, Southern Union Company (NYSE: SUG) is somewhere in between Cheniere and Sempra. The company has proposed building the largest LNG export facility in the U.S. with a capacity of 2.4 bcfd.  Better yet, the company owns and operates almost 20,000 miles of gas pipelines and reaches over 500,000 people with its growing utilities operations. Should they gain approval, Southern Union will be an impressively well-rounded player in the industry.

Foolish bottom line

As domestic producers grow reserves and international consumers gobble up imported gas, it is easy to see that exporting LNG is an enormous opportunity on the verge of materializing. Both Cheniere and Sempra’s Louisiana terminals are located next to major gas pipelines that have access to two-thirds of the U.S. market. Furthermore, LNG demand is projected to grow at 6.7% annually until 2020. If you’re still bullish on natural gas and are looking for a way around historically-low prices, then LNG exporters may be worth a look.

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