Who Will Win in the Race to Export Natural Gas?
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As if hydraulic fracking weren’t controversial enough, the next big push in the domestic energy industry is to take some of that fracked gas and send it elsewhere. While this could be a boon for the industry’s producers and investors, the potential rise in natural gas prices from increased demand won’t sit well with consumers. Neither will these export projects sit too well with those protectionists or environmentalists amongst us.
No matter which side of the debate you find yourself on, at this point we’re talking about a rather small amount of gas that has the potential to be exported. However, that small amount could mean some big profits. Which company is in the best position to win?
The big hurdle any would-be exporter has to overcome other than federal permission is the cost to convert an import facility to now export. Take ExxonMobil’s (NYSE: XOM) Golden Pass Products near Port Arthur, Texas, which is a joint venture with Qatar Petroleum. The partners are planning to spend $10 billion to convert the recently completed import terminal. The project, if approved, would have the capability of two billion cubic feet of gas a day, which is just a small sliver of the 72 bcf the US produces each day.
Another player in the race is Sempra Energy (NYSE: SRE) and their Cameron Liquefaction Export Project. This project would be slightly smaller than Exxon’s at 1.5 Bcfd. Sempra estimates the project will cost $5 to $6 billion and they are looking for a joint venture partner to split the costs. They are well under way on their project timeline and will be making a go, no-go decision by the second half of next year. The project could be commercially operational by 2016 at the earliest.
With their 1.8 bcf of daily send out capacity, Dominion’s (NYSE: D) Cove Point LNG facility is the most uniquely positioned as this facility is strategically located to take advantage of the Utica and Marcellus shale production. They are in the process of getting their necessary approvals and at this point won’t begin construction until early 2014 with the project not going into service until the spring of 2017. The project would most likely have similar capital requirements as the Exxon and Sempra projects.
The most advanced project at this stage is the Sabine Pass facility being developed by Cheniere Energy Partners (NYSEMKT: CQP). They are the first and only project to gain all key DoE and FERC approvals. This is a two-stage project with the first stage beginning construction this year and commencing operations starting in 2015 with the second phase about two years behind. This project was made possible in part thanks to a $1.5 billion equity investment by the private equity firm Blackstone Group (NYSE: BX). In total, phase one of the project is estimated to cost $5.75 billion of which the Blackstone equity represented 75% of the total equity required.
Now that we’ve considered the players involved let’s take another look at my original question. Notice that question wasn’t who will win the race, but who will win in the race. Barring any unforeseen delays, as the first mover Cheniere should have no problem sailing away with it as they become the first company to export natural gas. But is getting there first enough to make them a winner? At this point I think it does as none of the projects I’ve mentioned have all the approvals in place to export gas.
Looking a step further, none of those projects will move the needle as much as this one will for Cheniere. For Exxon their portion of the $10 billion required to build their terminal is less than one quarter of cash flow. For Cheniere though, by 2017 they expect to generate $2.7 billion of EBITDA, which would really go a long way toward increasing the value of this $3.5 billion enterprise. After spending the $10 billion that’s required to build out the complete project you can slap any multiple you want on the company and you’ll come up with a pretty decent return for unit holders. While at this point Cheniere is still a lottery ticket, it’s one where all the numbers seem to be pointing toward a big payoff in the future.
latimerburned has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend Dominion Resources. 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. If you have questions about this post or the Fool’s blog network, click here for information.