Invest in LNG Exports Indirectly

By Joshua Bondy - January 2, 2013 | Tickers: LNG, CHK, XOM | 0 Comments

• Email
• Print

The huge price differential between North American natural gas prices and Asian prices continues to drive interest in LNG export facilities. Directly investing in such facilities may not be the best option as the expensive transportation and liquefaction process make the margins unstable. In a recent report created for the U.S. Department of Energy, it was found that the U.S. as a whole will benefit from LNG exports, as they will help to boost prices, but it is uncertain how much gas will actually be exported.

How to Invest

Investing directly in an LNG export company like Cheniere Energy (NYSEMKT: LNG) is risky given the large amount of volatility in the spot market. Their recent Capital One Southcoast 2012 presentation lays out an optimistic scenario where Henry Hub stays at $4.00/MMBtu and Asia averages $15.00/MMbtu, Europe averages $12.00/MMBtu, and the Americas average $15.00/MMBtu. After transportation and liquefaction costs, Cheniere projects a margin of $6.65/MMBtu in the Americas, $3.15/MMBtu in Europe, and $4.40/MMBtu in Asia. These numbers would be more encouraging if Henry Hub prices truly stayed around $4.00/MMBtu, but as the chart below shows, this has not always been the case.

Henry Hub Natural Gas Spot Price data by YCharts

Anyone with experience in the energy markets knows that steady prices and equilibrium are not the norm. Booms and busts are common. Companies can hedge some of their production and use longer term contracts but the reality is that these tools can never isolate a company completely. Short term price fluctuations can be removed to some degree, but the industry as a whole remains cyclical.

Currently Cheniere operates an LNG import facility which they are looking to develop into an export facility as well. In 2009 they signed 20 year contracts with Total and Chevron. These contracts bring in revenue and a positive EBIT, but interest expenses have made net income from continued operations negative in 2009, 2010, and 2011. Analysts also expect 2013 EPS to be negative. Cheniere's balance sheet is not that attractive with $2.295 billion in long term debt and a total debt to equity ratio of 3.85. LNG exports will be part of America's energy infrastructure, but the size and stability of the American LNG industry is uncertain. Volatile prices, stiff competition from the low cost Middle East producers, negative earnings, and a high debt load make Cheniere a risky investment.

Traditional Producers 

Traditional natural gas producers offer a better way to benefit from LNG exports. Future liquefaction facilities help to provide a price floor for the North American market by exporting gas when its becomes cheap. In the face of low gas prices, Chesapeake Energy (NYSE: CHK) was recently forced to sell some assets to help cover their cash short fall. If North America already had developed substantial LNG export facilities, then the extra demand would have helped to keep the wellhead price well above the recent lows of $2/MMBtu. 

Chesapeake is the second biggest natural gas producer in the United States and continues to focus on developing wet gas fields. The firm is becoming less dependent on Natural Gas while dealing with the overhang from the questionable practices of their CEO. After the recent asset sales, CHK's total debt to equity ratio is down to 1.32, and 2013 earnings are expected to come in around $1.32, which gives a forward P/E ratio of 12.6. CHK is not risk-less, but it appears less risky than Cheniere. 

The Middle Ground

Exxon Mobil (NYSE: XOM) and Qatar's Golden Pass are currently in talks to expand the Texan Golden Pass LNG import terminal to become an export facility. Investing in XOM gives some exposure to the developing North American LNG export market but through a profitable company with a substantial capital base. The potential addition to the Golden Pass Terminal is expected to cost around $10 billion, but for a company like Exxon Mobil such a price is not very expensive. XOM has a market cap of around $400 billion and posted a net income of $41.1 billion in 2011.  Investing in a pure LNG export company carries a large amount of risk, but XOM's varied assets give the diversification necessary to make such risk acceptable. At a P/E ratio of 9.1, XOM is trading at a reasonable valuation while offering exposure to this growing part of the energy industry. 

Conclusion

The regional price differences between North America, Asia, and Europe are not set in stone, and investing directly in an LNG exporter is risky. LNG exports will help to establish a price floor in the general market, and traditional producers like Chesapeake will reap the rewards. A large diversified player like Exxon Mobil offers another way to invest directly in the industry without taking one exceedingly large amounts of risk. Liquefaction facilities are not exceedingly common in North America, but this innovative infrastructure will benefit the industry and investors as a whole. 

• Email
• Print
• Feedback