3 Winners of the Natural Gas Export Trade

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

Earlier this month the Department of Energy released its much anticipated study on exporting natural gas.  The report noted that natural gas exports would have a “net economic benefit” to our economy.  While each export terminal will need to be approved on its own merits, this is a big step toward alleviating our natural gas glut. 

As with any contested project, there will be winners and losers.  According to the report, the expansion of LNG exports would have two negative side effects.  Because it would raise energy costs it would depress real wages as well as the return on capital in all other industries.  Overall, the additional income created by exporting gas would outweigh those losses according to the report.

What was interesting is that the report noted that the more gas that was exported, the higher the overall economic benefits.  Despite this it also drew the conclusion that exports wouldn’t directly affect overall U.S. employment.  That means the true beneficiaries are the investors in those companies that would most directly benefit from this shift. 

So, who wins as we begin to export our gas glut?  I propose three winners in the industry (using pictures no less).  Not every potential winner will be worthy of your investing dollars as each company has its own unique risks and reward profiles for you to consider.

Winner #1: LNG Terminal Owners

Currently just Cheniere Energy’s (NYSEMKT: LNG) Sabine Pass terminal has been granted approval to export gas.  There are 15 other projects in the works, but none will be finished until after Cheniere’s launch in early 2015.  The economics of owning an LNG export terminal are compelling, but the capital required is enormous.  It will take more than $10 billion to bring a terminal online and that’s not a capital commitment that most firms can easily undertake.     

Cheniere estimates that the company can generate a margin of between $4.30 to $7.80 per MMBtu with $3 gas here in the states and low teens gas overseas.  That’s worth billions to the company and others who export.  However, as much value as these projects could create for investors of LNG export terminal owners, there are other winners to consider. 

Winner #2: The Midstream Industry

A bulk of the proposed and potential export terminals would be built along the US Gulf Coast as you can see from the following map:

<img src="/media/images/user_12784/untitled_large.png" />

While production in the region is growing thanks to both the Eagle Ford Shale and Permian Basin, there are other basins farther away whose gas is a candidate to be exported.  The following chart shows the vastness of our natural gas resources:

<img src="/media/images/user_12784/4-map-of-unconventional-plays_large_large.jpg" />

That gives opportunities for pipeline operators like Kinder Morgan (NYSE: KMI) and Enterprise Products Partners (NYSE: EPD) to benefit. In the following chart you can see the vast networks that Enterprise has built to keep gas flowing (for Kinder Morgan click here)

<img src="/media/images/user_12784/epd_1_large.jpg" />

These companies make money as gas passes through a network of pipelines.  Each new pipeline or storage facility that’s built brings a steady flow of incremental revenue for midstream companies.  Both have extensive networks that will benefit from the natural gas export trade.

Winner #3: Natural Gas Producers

While those engaged in the logistics of natural gas exports will benefit, it’s the production companies that really win big. 

Take Chesapeake Energy (NYSE: CHK) for example.  As the top natural gas producer in the nation no company has more riding on the price of gas.  The company also has a great position to benefit from exports with acreage in the Eagle Ford, Barnett, Haynesville and Anadarko Basin as you can see from the map below:

<img src="/media/images/user_12784/chk-opmap-776x420_large.jpg" />

Another producer that’s positioned to prosper is Southwestern Energy (NYSE: SWN). Like Chesapeake, the company has large acreage positions near the Gulf, specifically in the Fayetteville Shale as you can see from the map below:

<img src="/media/images/user_12784/swn2_large.jpg" />

Southwestern Energy is one of the lowest cost producers in the country.  The more money they can get for the gas it produces, the more revenue that will fall to the company’s bottom line. 

Foolish Bottom Line

We are still in the early innings of an energy revolution in our country.  Exporting the excess gas is just another step forward for our nation.  There will be lots of winners as this comes to fruition.

If you want to play the higher risk with higher reward game then both Cheniere and Chesapeake could bring you investing riches.  If you'd rather just sit back and collect dividends then either Kinder Morgan or Enterprise might be worth taking a look at.  Finally, if you want to play the rebound on gas prices then Southwestern offers plenty of upside as prices rise.  Other winners will surely emerge in each category, but each one of these companies is in a great position to win big as we begin to export gas.

latimerburned owns shares of Enterprise Products Partners L.P. The Motley Fool owns shares of Kinder Morgan and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Motley Fool newsletter services recommend Enterprise Products Partners L.P. and Kinder Morgan. 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!

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