Liquified Natural Gas: Two Large-Cap Winners on the Horizon
Federico is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
An American champion
Chevron (NYSE: CVX) is not only poised to benefit from the growth in the LNG market, the company is also is a top performer. Chevron's strong dividend growth, share buybacks, solid balance sheet (with $5 billion more cash than debt), and high upstream margins make it a great long-term holding for any portfolio. Despite having reduced dry gas drilling in North America to minimal amounts, Chevron is growing its natural gas production by 7% year-over-year (yoy) focusing on international projects. Among its main projects and dealings related to natural gas and LNG I must specially mention:
(1) The long-term sales and purchase agreement with Chubu Electric on 1 million metric tons per annum (MTPA) of LNG from the Wheatstone project in Australia.
(3) Chevron's Angola LNG project, which should contribute an average of 60 million barrels oil equivalent per day (mboed) once the resources are fully developed.
(4) Chevron's agreement with YPF to invest in the Vaca Muerta shale formation in Argentina, which is supposed to be the world's second largest shale-gas reserve in the world. Even if Chevron has not yet started to invest heavily in Vaca Muerta, it is expected to do so as soon as Argentina's government reaches an agreement with Repsol (NASDAQOTH: REPYY.PK). Repsol (which still holds 12% of YPF's shares) is expecting to get as much as $10.5 billion for its former 51% stake in YPF, which was expropriated during April 2012.
Chevron's worldwide production is expected to increase by 1% yoy until 2014 and then begin to grow at 5% as new projects, mainly Australia LNG and West Africa, begin production. Paying a 3.4% dividend yield and trading at 2013 9.6 times P/E, I think Chevron is the best bet among the American oil majors.
One European bet ready to boom on LNG
Royal Dutch Shell (NYSE: RDS-A) is committed to growth. The Anglo-Dutch company has 35% of its capital tied up in new projects. The company is projected to add 700 mboed of new production (20% of last year's production) through 2017-2018. If the objective is fulfilled, Shell will generate $175-$200 billion in total cash flow from 2013 to 2015 compared to its capital spending of $120-$130 billion. The increased cash-flows should allow the company to keep on investing while raising the dividend and buying back shares.
Natural gas is a key component of Shell's growth strategy. According to the company's last quarterly statements, gas production was +3% yoy and +8% sequentially, led by LNG projects. Besides, the company has been working on some key undertakings:
The two companies named above are two mature oil and gas players trading at very reasonable levels. That said, they are investing heavily in the US and internationally to become leaders in the future LNG world. This is no detail. In the future, the energy landscape will be much more influenced by LNG than it is today. The shale revolution has made gas resources cheaper, making it a key element in tomorrow's world.
Federico Zaldua has no position in any stocks mentioned. The Motley Fool recommends Chevron. 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!