3 Ways to Ride the LNG Fired Rocket
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Thanks to the shale gas boom in North America, natural gas has hovered around $3.50 per MMBtu over the last year. But Asian and European nations haven't been that lucky with the production bonanza, which is why natural gas costs 3-4 times more in these regions than in North America. This pricing differential presents an bullish case for at least three different industries, and here are a few handpicked companies that seem poised for a tremendous upside.
Cheniere Energy (NYSEMKT: LNG) has almost become synonymous with LNG exports from the U.S. The company received the first approval to setup an LNG export terminal over the last 50 years, and Cheniere was quick to take advantage of the opportunity. It is currently expanding its Sabine Pass terminal, which is expected to be operational by 2017. But, the company is already enjoying a near monopoly in the industry.
It has already secured willing buyers from the Middle East, which are ready to import LNG as soon as the development work is complete. Talking about its existing exports, the U.S. government recently made an exception by allowing LNG exports to India. Normally, the U.S allows exports to countries that have signed the Free Trade Agreement, but the recent permission to export 3.5 million tonnes of LNG per annum could be the start of a greater and deeper relationship with India.
Anadarko Petroleum (NYSE: APC) has been generally known as an oil E&P company, but it has shifted its focus to natural gas lately. In 2010, Anadarko Petroleum and Eni jointly discovered the world’s second largest natural gas reserves in Mozambique, Africa, with reserves of over 150 trillion cubic feet of natural gas. Being geographically closer to Asia, Anadarko would not only save transportation costs, but would also incur fewer risks involved in overseas transportation.
But, the development costs of the project are estimated to be around $50 billion, with absolutely no returns on investment until 2018. Since Anadarko has cash and cash equivalents of $2.47 billion and generated $1.75 billion in free cash flows last year, it isn’t financially capable to undertake such high risks. As a result, Anadarko is in talks with ExxonMobil and Royal Dutch Shell to sell 10% of its stake for around $2.5 billion.
But that doesn’t take away all its potential rewards. The company is in talks with 20 willing buyers of LNG in 10 different nations, and it’s quite possible that it would secure long term contracts by the end of this year. With willing buyers and blockbuster proven reserves, it’s only a matter of time before Anadarko Petroleum starts getting the massive influx of cash from LNG exports.
Constructing LNG facilities
Chicago Bridge & Iron (NYSE: CBI) is one the leading engineering and construction companies around the world, which specializes in the development of natural gas projects. With the radical shift towards natural gas fired power plants and the rising demand for LNG in Asia, Chicago Bridge is one of the prime beneficiaries with a bright future.
Over the last five years, its net income has surged 946% while operating cash flow has risen 126%. The divergence in the growth of net income and operating cash flow can be explained by the 99% improvement in its gross margin over the last five years.
As a by-product of its robust growth, shares of Chicago Bridge have spiked 171% over the last five years, yet, its shares appear to be undervalued with a forward P/E of 10x. This is due to the fact that 2013-14 is expected to be an exceptional year for the company with an improving order book, and analysts estimate its annual EPS to grow by nearly 20% over the next year, and nearly 19% over the next five years.
LNG exports haven’t reached their saturation point yet as most of the projects are still under development. But, they involve a significant amount of risk and investors can create a portfolio of the above mentioned companies to hedge their risks and spread their rewards.
Piyush Arora 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!