Evidence of Booming Natural Gas
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It is easy to make predictions about a market but facts are necessary to confirm those predictions. The latest energy projects in North America show serious growth in the natural gas market. The decision to relax the EPA rules and growth of fracking has led to a boom in U.S. natural gas supplies while Mexico's monopolized gas market has created serious supply shortages. Mexico has proposed new pipelines to allow America to export more of their natural gas. Natural gas as a replacement for gasoline is rare but nevertheless truckers and some niche users are considering switching over. The growth of pipelines for the export market, the development of LNG ports like that of Cheniere Energy Partners, the growth of natural gas power plants, the growth of exports to Asia, and the exploration of natural gas a primary transportation fuel are concrete evidence that low prices have finally started to spur demand in new and innovative ways. It is important for investors to note that the idea of a natural gas boom has developed from a theory to a clear reality. Low well head prices are setting the market up for a medium term price boom.
The boom in the U.S. energy and natural gas market is also confirmed by the slow reorientation of Canadian supplies to Asian exports. Overall natural gas imports into the U.S. continue to decline. PetroChina Company Limited (NYSE: PTR), Royal Dutch Shell (NYSE: RDS-A), the Japanese Mitsubishi, and Korean Gas Corporation energy companies have come together to develop an LNG facility in Kitimat, BC, Canada to export natural gas to Asian markets. Canada has historically been one of America's main export partners. The development of new facilities to export gas out of North America and in the midst of declining imports is a clear sign of growing demand
The creation of these LNG facilities and the other developments in the energy infrastructure reflect these are multi-year projects and reflect billions of dollars in capital investment. The ability for Asian nations to source a larger portion of their energy sources outside of the risk prone Middle East and hotly contested central Asian states is very attractive from a geopolitical standpoint. The Middle East is a powder keg. Japan, Korea, and China see many benefits from sourcing energy supplies which bypass Iran. These nations are willing to pay a premium for North American energy sources. Petro China, Mitsubishi, and Korean gas cannot be understood apart from their respective governments. Japan needs more energy sources given its desire to remove nuclear energy. China wants energy security as it competes with the U.S. and Russia for energy in the Middle East and Central Asia. Petro China is partly owned by the Chinese government and its actions need to be understood from a perspective of a central planner. Korea is not able to exert influence in Southeast Asia or the Middle East like China and as such North American energy sources are very attractive.
Petro China and Shell have both seen revenue growth with flat EPS growth over the past five years. Petro China's revenue growth has been much stronger at 25% as opposed to Shell's 5.5%. Petro China's diversified interests from exploration to pipelines means that it is not as volatile as some of the juniors. Its strong connections to the Chinese government give it a definite advantage over foreign firms and allows them to pick the best foreign partners as recent events show. Shell also continues to grow. Recently they commissioned a massive floating LNG facility which will save them money in the expensive Australian market. The company also purchased assets from Chesapeake and is working to increase the use of natural gas as a replacement for gasoline. Shell's innovation and experience in more developed markets and Petro China's connections in China make both companies solid investments.
If rig counts continue to decline and more negative fracking news hits the market then United States Natural Gas Fund, LP (NYSEMKT: UNG) and United States 12 Month Natural Gas Fund (NYSEMKT: UNL) are good ways to play the short term boom in prices. UNG faces higher roll costs so if you expect to hold shares for at least a year then UNL is the better choice. For those looking to make equity investments in corporations there are a number of options. Cheniere Energy Partners gives investors an interest in U.S. based LNG projects while Shell gives more diverse exposure. Cheniere Energy Partners' smaller size and greater risk is compensated by their 7.1% dividend while Shell only offers 4.2%. U.S. natural gas exports are increasing and investors should take this sign as clear confirmation of growing demand in the midst of a shrinking rig count.
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