Massive Upsurge Expected from this Stock
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Natural gas prices had dropped from the $10 mark in 2008 to $1.9 on April 20th, 2012. Investors around the globe were worried from the drop, as the prices plunged by more than 80%. But on taking a look at natural gas chart post April 20th, we can notice that the prices have risen to the $3.2 mark which is an increase of 68.42% in a matter 6 months. Had the increase been 5-10% it would have been ignored and called speculation, but this surge in price was mainly due to the falling number of operational natural gas rigs.
The main culprits in the dip in gas prices were the introduction of advanced drilling and hydraulic fracturing techniques. Natural gas was available at cheaper rates and companies over the time revved up their gas production. This led to an oversupply in the market when the demand was near to stagnant. Now that the profit margins of natural gas companies are strained, in order to have profitable operations, the companies are shutting down their gas extraction rigs. In 2012 alone the count of operating rigs shrunk by 45% and the total count of the rigs now stands at a 13 year low.
Millions of investors around the globe now believe that the recovery of natural gas is finally here, and the best way to play it is through natural gas ETF's. I on the other hand believe that betting on just the recovery of natural gas involves a significant amount of risk. I firmly believe that investing in a natural gas relating company, with great growth prospects would be a better and safer idea to play the recovery.
Cheniere Energy (NYSEMKT: LNG) is a natural gas exploration and development company, which is also involved in the marketing of liquefied natural gas. The company with a market cap in excess of $3.3 billion is Texas based and owns 88% stake in Sabine Pass LNG terminal which is a 1015 acre facility. The terminal has a depressurizing capacity in excess of 4 billion cubic feet per day. It's not hard to figure out that the company has its profits, dependent on the market pricing of natural gas.
It’s worth noting that natural gas is available in the US cheaply for around $3/mmBtu, in Asian countries like Singapore, the gas is available for nearly $13/mmBtu. The huge difference in the pricing is due to the fact that the newly introduced, gas extraction techniques weren't able to increase the production of the gas in the Asian countries.
"So it makes sense to export the gas, doesn't it?"
"Yes, it does, but there is a headwind"
Natural gas needs to be liquefied first in order to be transported, and for liquefaction, companies need liquefaction plants. Currently there are around only 50-60 liquefaction plants globally, with none in the lower 48 states of US, which doesn’t allow the US based natural gas producers to take advantage of the difference in prices.
“So where's the growth prospect?”
In April, 2012, Federal Energy Regulatory Commission allowed the company to build its own gas liquefaction export plant at its Sabina Pass facility. The liquefaction plant would be the first plant to be developed in the US in the last 50 years. This plant would enable Cheniere Energy to export 16 million tons of LNG every year, which gives the company a huge edge over its competitors.
Another positive for the company is that Cheniere Energy already has an operational site which allows rapid development of the plant. The development is expected to complete by 2015 and to add to the bonanza; Cheniere Energy has already signed contracts with willing buyers in the Asian countries.
"Cheniere Energy looks great"
Cheniere Energy shares its market space with Chevron Corporation (NYSE: CVX), Total (NYSE: TOT), Marathon Petroleum (NYSE: MPC) and Conoco Philips (NYSE: COP). In addition to being a potential game changer, the company’s stock has also been a star performer in terms of stock returns over the last three years.
It’s not hard to conclude all the mentioned reasons are all compelling for a solid buy recommendation for the game changer. The company already has a gross profit margin in excess of 60% and its operations in the Asian countries would only make the margins fatter. It is due to these reasons that I believe that the stock is headed north.
PiyushArora has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron and Total SA. (ADR). 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.