Three Companies Leading the Race to Export Natural Gas
William is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
U.S. natural gas supplies are over-abundant, prices remain suppressed, and the future is becoming clearer: world-wide exportation. The Henry Hub natural gas spot price has been slowly climbing this summer – up to $3.09/MMBtu as of Friday, July 27, from its April low of $1.82/MMBtu. But even so, prices are still well below the typically required minimum of $4-$7/MMBtu (depending on the intended use of the fuel) needed for natural gas producers to profit from opening new wells. Investors wishing to capitalize on the recent incredible rise in recoverable natural gas still face an indefinite limbo as the profit barrier put up by this low spot price endures. The profit margins of U.S. natural gas producers are so desperate for higher domestic prices that investors might as well trade futures contracts on the commodity itself — if that wasn’t risky enough before the scandal at Peregrine Financial.
Since the rise of hydraulic fracturing, estimates of natural gas reserves in the U.S. now total 2,214 trillion cubic feet (tcf), the largest in the world. Just one tcf of natural gas is enough to heat 15 million homes for an entire year. This enormous excess in supply has driven prices down and, not surprisingly, the excitement for domestic natural gas production has turned somewhat sour.
But U.S. natural gas production still promises huge profit potential. In Europe, the average spot price for imported natural gas is around $11-$12/MMBtu, and even higher in Japan, close to $17/MMBtu. The only way for producers to really profit from tapping into new reserves, at least while domestic prices languish, is to begin exporting. In my view, three companies are first in line to capitalize on the future of U.S. natural gas exportation.
Cheniere Energy (NYSEMKT: LNG) is on track to open the first liquified natural gas (LNG) export facility in the U.S. since 1969. Upon the failure of its Sabine Pass natural gas import facility, located on the Gulf Coast of Louisiana (a victim of the sharp decline in domestic natural gas prices), the company has shrewdly decided to convert the terminal into a liquefaction facility for LNG exportation. The company’s prospects for success have been looking better ever since. In April of this year, Cheniere secured approval from the Federal Energy Regulatory Commission (FERC) to build its exportation facility. Furthermore, Cheniere has secured long-term customer sale and purchase agreements from four U.S. natural gas producers, including BG Gulf Coast LNG, LLC, Gas Natural Fenosa, KOGAS, and GAIL (India) for a grand total of 16 mtpa (million tonnes per annum), equivalent to 832 MMBtu or 0.83 tcf per year. Upon securing a $3.4 billion loan earlier this month, construction at the Sabine Pass is scheduled to commence this fall, and the export terminal is set begin operating in 2015.
Dominion Resources (NYSE: D) only slightly trails Cheniere in the race to open a natural gas export facility. Like Cheniere, Dominion plans to convert its Cove Point LNG import terminal, located on the Chesapeake Bay in Maryland, to an export facility. The company hopes to receive FERC approval in February of 2014 and begin construction in March of that year. If all goes as planned, operations would commence in 2017. And since the FERC recently granted permission for one export facility, I believe this timeline will prove fairly accurate. There are two aspects of Dominon’s project that set it apart from Cheniere: its geographical location, and the company’s own natural gas reserves of 6.5 tcf. The Maryland location puts Dominion’s terminal in close proximity to the one of the largest shale formations in the U.S., the Marcellus, bearing 141 tcf of natural gas. And while investors wait for exports from Cove Point to start, they can collect 3.9% in annual dividends on Dominion’s shares.
Teekay LNG Partners LP (NYSE: TGP) presents a different way to profit from the future of U.S. natural gas exports. The company has 27 leased LNG carriers operating worldwide, making it the third-largest independent owner/operator of LNG tankers in the world. Teekay has an extraordinarily stable business model, operating almost entirely under long-term contracts of 10-25 years duration. Additionally, its fleet features mostly brand new tankers, half of which were built in the last four years. As demand for LNG tankers expands, so will Teekay’s fleet. In addition to the highly probable future returns of Teekay’s share price, investors will receive an impressive 7.01% dividend yield, which has been routinely increasing since the company’s inception in 2005.
While the future of domestic natural gas prices remains uncertain, we can be sure that the U.S. is well-positioned to become the world’s leading LNG exporter. The turmoil and government instability in the middle east could also accelerate natural gas exports from the U.S. Investor’s need to have near-term patience until these terminals become operational, but U.S. natural gas has taken a life of its own in the last few years. It looks like nothing can stop this huge glut of cheap energy from dominating world markets.
wremmes has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.