Profit From Intercontinental LNG Exports

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

Most investors shun away from companies having exposure to natural gas. Natural gas production saw a boom, thanks to technological advancements. However, this boom remained largely in Northern America and unfortunately European and Asian countries couldn’t enjoy the production bonanza, which has created a price difference in the three regions. In the US, natural gas is priced at $3.20 per 1000 cubic ft., whereas in the European and Asian nations, it goes as high as $11 to $15 per 1000 cubic ft., respectively. Exporting natural gas to these regions would be a logical choice, but natural gas needs to be liquefied first in order to be exported. The shortage of liquefaction plants in the US discourages such exports, which brings Apache Corporation (NYSE: APA) into the picture.

Apache Corporation has a 40% stake in the $15 billion Kitimat LNG export plant, which is still in its development phase. The plant is expected to be operational by the end of 2015, and thereafter the company can export up to 5 million metric tonnes per annum of LNG. This would allow Apache Corporation to take advantage of the huge natural gas price difference between the Asian and American regions. Currently, Apache Corporation has the capacity to produce nearly 6000 barrels of LNG per day.

According to Reuters, at the end of 2011, the company had proven reserves of 2.5 billion barrels of oil equivalent. The rising crude prices, thanks to the global crude supply concerns would entice the company to ramp up its oil production.

Apache Corp. was recently involved in a $7 billion acquisition of natural gas assets in the Permian Basin from BP. Additionally the company also purchased natural gas assets in the Gulf of Mexico worth $1.05 from Devon Energy. The management expects the production to increase at the rate of 6-9% for the next 5 years. As of 2012, the company’s acquisition expenditure stands at nearly $3.35 billion, which is up 352% from the previous year. This highlights the aggressive intent of management.

In the recent results, the company reported a 3.5% annual and a 0.7% quarter on quarter increase in production of natural gas. Revenues saw an upside of 39.66% and the net income surged to $4.58 billion, up 51% from the year ago quarter. The EPS of $2.07 however missed the street’s estimates mainly due to the falling natural gas prices and the onetime $480 million write-off of its Canadian assets.

The company shares its market space with ConocoPhillips (NYSE: COP), Anadarko Petroleum (NYSE: APC) and Newfield Exploration Company (NYSE: NFX).

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Forward P/E</p> </td> <td> <p>Debt/Equity</p> </td> <td> <p>Gross Profit Margin</p> </td> </tr> <tr> <td> <p>Apache Corporation</p> </td> <td> <p>8.11x</p> </td> <td> <p>33%</p> </td> <td> <p>82.38%</p> </td> </tr> <tr> <td> <p>Conoco Phillips</p> </td> <td> <p>9.77x</p> </td> <td> <p>50%</p> </td> <td> <p>44.47%</p> </td> </tr> <tr> <td> <p>Newfield Exploration</p> </td> <td> <p>10.65x</p> </td> <td> <p>86%</p> </td> <td> <p>81.19%</p> </td> </tr> <tr> <td> <p>Anadarko Petroleum</p> </td> <td> <p>16.05x</p> </td> <td> <p>73%</p> </td> <td> <p>85.56%</p> </td> </tr> </tbody> </table>

Amongst the peers, Anadarko Petroleum enjoys the highest gross profit margin, but also trades at the highest forward P/E multiple of 16x. Apache Corporation has the lowest debt/equity levels, along with the lowest forward P/E multiple and the second highest gross profit margin.

In my opinion, the natural gas and crude rebound is here to stay. Though the company recently sold some of its stake in the Kitimat project to undertake other acquisitions, the long term growth prospects still remain intact. The numbers reported were dismal due to the onetime Canadian asset write off. Overall the company has sound fundamentals and the recent acquisitions along with the aggressive intent of the management, makes this stock hard to miss.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Apache. 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.

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