"In part one of this series on exporting natural gas, we examined multiple reasons why exporting natural gas would harm the US economy. In a nutshell, a variety of companies, ranging from Dow to Nucor use cheap natural gas to help grow their businesses. American consumers and small businesses also benefit from lower energy costs and cleaner air. There are compelling arguments for exporting natural gas and we’ll look at those in part two of this series.
We’re bloated with gas, we can afford to export it
The primary argument for aggressive natural gas exports centers on the over-supply of natural gas the country currently enjoys. This has driven the cost of natural gas to $3.87/mmBtu as opposed to $8 in the United Kingdom and $16 in Japan. This price difference not only gives American chemical companies a competitive advantage, it creates a great profit opportunity to natural gas exporters. With those profits and, not to mention, balance of trade improvements, would come economic benefit to the country. Proponents of expanding natural gas exports see a window of opportunity and wish to take advantage before it closes. A big boost came in the form of a US Energy Information Administration sponsored study that demonstrated under various scenarios exporting natural gas would give an economic benefit to the country. Even under the unlikely scenario of unlimited gas exports, the country would still enjoy a net economic benefit. Would natural gas prices increase? Early on, assuming limited exports, possibly not. In time, as exports increased, prices would likely increase as much as $1.11/Mcf. This would hurt US industries using natural gas as feedstock or energy, but according to this study, the net benefits for the country would outweigh the costs.
We have these import terminals that could be converted to export terminals
Roughly five years ago, several expensive natural gas import terminals were built on the Gulf Coast or, in the case of Dominion Resources (NYSE: D), on the Chesapeake Bay coast in Maryland. These were obsolete before they were completed. Now, companies such Sempra Energy (NYSE: SRE) and Cheniere Energy (NYSEMKT: LNG) hope to convert these import terminals into export terminals. The Dominion facility, in particular, enjoys a location advantage for exports to Europe and for deliveries from Marcellus shale gas. All of these companies could make billions exporting to Asia where prices are higher.
Competition’s growing, we can’t wait forever
Sadly, these export terminals can’t be built in a day. Beyond the regulatory process, converting an import terminal to an export terminal takes time and costs billions. A bona fide risk is that as hydraulic fracturing takes off in foreign countries such as Poland, America’s price advantage will erode. China reportedly may have the world’s largest shale gas reserves and would not hesitate to exploit this commodity. Australia could become a major supplier to Japan. These countries could develop their gas fields before America develops its export capabilities. Right now, Cheniere is the only US company with an export permit and they don’t expect to begin exporting gas until 2015. Cheniere has one customer under contract. By the time other US firms begin exports, will there be enough business to make the whole venture profitable?
A happy medium?
The US EIA report mentioned above suggested that early on, US natural gas exports would not cause a significant spike in natural gas prices. Cheniere believes as long as US gas sells for $3 MMBtu and the Asian price is in the low to mid-teens, it can make a significant profit. To be sure, Japan, Korea and India could be big customers in the future, and supply Cheniere, Dominion and Sempra with sizable revenues. If exports can be handled so that Dow, Nucor and other gas consumers don't lose their cost advantage, then everyone should be happy. Given the earnings multiples of Sempra (PE of 19.8) and Dominion (PE of 25), I can’t help but wonder if some expectations of export revenue aren’t already built in. For Cheniere, with its negative earnings for the past nine months, high debt and over 200,000 shares sold by insiders over the past month, I’m wondering if it’s not going to break back down to $15/sh before it exports a single shipment.
Final Foolish Thoughts
In my opinion, the solution to the US natural gas export debate centers on finding a level of export that keeps gas prices low, but allows enough volume for Cheniere, Dominion and Sempra to recoup their investments in their export terminals. Whether this balance can be achieved before foreign gas development undermines America’s price advantage defies prediction. In terms of policy, I support limited exports with an eye to impact on price. In terms of investment, I would steer clear of Cheniere for the moment given its earnings problems above. Dominion and Sempra, again, selling at high multiples makes me leary. I would not invest simply on the basis of possible gas exports at least two years in the future. "