3 Ways to Profit From Asian Natural Gas Imports
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The growing production of natural gas in the United States caused prices to drop to less than $4/million Btu. In other parts of the world, prices remain high. In Japan, for example, natural gas sells for roughly $14/million Btu. In the wake of its earthquake/tsunami/Fukushima nuclear disaster, Japan has understandably moved towards natural gas as a utility fuel despite the high cost. In fact, Japan is now the world’s biggest importer of liquefied natural gas, or LNG. Fortunately for Japan, the United States hardly enjoys a monopoly on new natural gas production. Fortunately for investors, there are some ways to profit from this Asian natural gas trade.
A new era for New Guinea?
While Russia and Australia seem logical gas suppliers to Japan given their geography and natural gas reserves, a little country called Papua New Guinea may also grab a piece of the liquefied natural gas export market. Two of the companies engaged in exploration and production of natural gas in this country are ExxonMobil (NYSE: XOM) and InterOil Corporation (NYSE: IOC).
Exxon, of course, represents the epitome of Big Oil. Its involvement in Papua New Guinea natural gas centers both in production and LNG exports. The country’s main natural gas pipeline exists courtesy of ExxonMobil. ExxonMobil actively collaborates with other companies like InterOil to ensure the pipeline stays full, but rest assured, Exxon will produce its fair share of gas in Papua New Guinea. The advantage of investing in ExxonMobil rests in its size and safety. Papua New Guinea is home to literally thousands of tribal groups, and some of them have been fighting each other since the beginning of time. Add ongoing friction with illegal immigration from neighboring Indonesia and political stability can hardly be assumed. If political chaos erupts, ExxonMobil may see a hit in its revenues, but will hardly go under. On the other side of the revenue coin, if natural gas exports go well, they won’t make a huge impact either.
For those willing to take some risk, consider InterOil Corporation. This firm operates natural gas exploration and production, midstream and retail businesses in Papua New Guinea. Unlike ExxonMobil, InterOil’s success hinges solely on its Papua New Guinea operations. Right now, production looks very good. InterOil’s proven reserves currently run roughly 9 tcf, and the company’s exploration activities have barely begun. Of interest is a company claim that previous estimates of natural gas reserves may be inaccurate and that based on current finds, Papua New Guinea may hold as much as 26 tcf of natural gas. If modern models prove true, InterOil may be sitting on a gas gold mine. Will political stability in Papua New Guinea allow this natural gas to come to market? So far, so good, but investors should keep a wary eye on this country.
Shipping rather than exploration and production?
A better investment than gas producers may be liquefied natural gas transportation. Ships known as LNG carriers transport liquefied natural gas from producer to customer regardless of who is on either end of the deal. Golar LNG Ltd (NASDAQ: GLNG) owns and operates 13 LNG carriers with 13 more on order for delivery by early 2015. Even better, the company produces profits and pays a 5.5% dividend. For those willing to do the paperwork, there’s Golar LNG Partners (NASDAQ: GMLP), a master limited partnership that pays a little over 6% in dividends.
Golar common stock currently trades around its 52-week lows, the stock price brought down by one of its LNG carriers spending more time in drydock than anticipated which, in turn, hurt earnings. Analysts have also downgraded their opinion of the stock. The MLP is doing better having reported particularly favorable earnings last quarter.
Golar’s future holds more than simply shipping liquefied natural gas. The company operates ships that can make liquefied natural gas onboard, allowing offshore natural gas production to be processed and exported without having to be first transferred to an onshore facility. Similarly, Golar operates ships that can receive natural gas from shore and load it onto LNG carriers. Lastly, Golar recently announced an equity stake in a liquefied natural gas plant in British Columbia that looks to export gas to Asia. This diversity of operations should provide revenue security to the company.
Final Foolish Thoughts
Japan, South Korea and China are the world’s top three importers of liquefied natural gas at a time when global natural gas production looks to steadily increase. The Asians know this and seem willing to wait until production increases, thus pushing down prices and profit margins for gas producers. To me, Golar, either its common stock or MLP, offers the best combination of income and capital gains potential. The demand for natural gas isn’t declining anytime soon and Golar operates one of the biggest independent fleets of LNG carriers. Its diversity of other LNG operations further adds to its appeal.
Robert Zimmerman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!