by, Ben Smith Managing Partner Enercast.com firstname.lastname@example.org
Natural Gas market conditions are prompting the energy hungry U.S. to seek new overseas supply sources. Fed chairman Alan Greenspan said back in early July �Today�s tight natural gas markets have been a long time coming and futures prices suggest that we are not apt to return to earlier periods of relative abundance and low prices anytime soon.� Importing natural gas from energy rich areas seems like the most promising answer to shortfalls in supply.
With growth in US LNG consumption imminent, which companies are set to capitalize? First we will look at market conditions that point to growth in LNG and then we�ll examine three companies set to take advantage of this growth.
Some Favorable Factors:
1. Strong Natural Gas Demand: Conservative natural gas demand growth estimates for 2004 are around 2% moving daily usage to 65bcf per day. This growth takes into account 1% demand destruction.
The U.S. economy looks to be getting itself back on track which equates to higher energy usage. We saw more evidence of this last week with the third quarter GDP growth of 7.2%.
Extreme weather also increases energy usage. Seasonally, Enercast.com is predicting a cooler than normal winter across large energy consuming regions of the northeast. Longer term, US demand for natural gas in forecast to top 35 trillion cubic feet (Tcf) by 2025, a jump of 52 percent from this year.
2. Reduced Domestic Production: Improved exploration and production technology have drained our limited natural gas resources at a quick pace. Easy stores of natural gas in North America are dwindling. Despite rising natural gas prices, investment in new domestic production and rig count have not kept pace. Instead, money is being allocated toward LNG projects and development.
3. Higher Prices: To correct for the supply/demand imbalance, price must increase. The U.S. Energy Information Administration expects natural gas prices to increase about 9 percent this year as supplies remain tight. Most industry experts do not project LNG to have a major influence on total supply until later this decade. Higher nat gas prices will only increase investment and excitement in these companies.
4. Lower LNG Costs: Economies of scale and competitive improvements have made LNG costs much lower in recent years. Costs of shipping and production have become cheaper, larger, and more efficient. As European and N. American gas markets mature, cost structure for liquefying and transporting natural gas is declining, driving development of spot LNG market in Atlantic Basin. LNG is now competitive with most domestic production.
So long as natural Henry Hub gas prices remain above $3.50/MMBtu, LNG is an attractive import. LNG costs are derived from the following: gas production between $.50-$1.00/MMBtu, liquefaction cost $.8-$1.00/MMBtu, shipping $.65-$1.60/MMBtu and receiving terminal cost $.40-$.50/MMBtu (shipping being the most variable cost). Total start to finish cost averages $2,50-$3.50/MMBtu.
5. Available Overseas Supplies: With respect to the US, deliveries from the Atlantic Basin (e.g. Algeria, Nigeria, Trinidad) present the most attractive opportunities at prices above $3.50MMBtu. Proposed liquefaction projects in Atlantic Basin could add 1.8 Tcf of new supply by �06. Trinidad�s Train 4 expansion (approved by partners Biritsh Gas, BP and Repsol) liquefy another 250 Bcf annually, Norwegians building Snohvit, Chevaron Texaco in Angola, and more trains likely in Nigeria and Trinidad, Atlantic LNG supply could grow to 5.9 Tcf/year if all projects are completed by 2010. The Middle East plans on building out supply of 2.1 Tcf by �06 (Qatar aggressive w/ plans to supply US and Europe), could be sold in Atlantic or Pacific Basins with Europe being the closest market.
1. Political Decisions: A significant increase in domestic production would make LNG less profitable. If higher energy prices persist and hinder economic improvement, it could put pressures on the US government to open restricted lands.
Many communities do not want LNG facilities in their neighborhood. Losing new development decisions would cause a short term drop in valuation of certain LNG companies. Cheniere Energy watched its stock fall over 10% when the Audubon Society objected to their plans to build a new LNG project in Texas.
Stabilization of Middle Eastern crude supply and lower crude prices could also drag natural gas prices down.
2. Volatility: Not only have natural gas prices increased, but so has the volatility. This volatility makes investment in energy service companies less attractive to long term buy and hold investors. Instead, they attract hedge funds and short term traders, which only add to the volatility. This makes market timing even more important when looking to pick up shares.
3. Investing in future revenues: Cash flow from new LNG projects will not be seen until later this decade. We should not expect to see added gas supply from most proposed projects until 2006 or later. This means that gas prices and market conditions must stay favorable to make LNG investments worthwhile.
This year we could see an immediate increase in expansion of current facilities. U.S. LNG regasification capacity is 1.2 Tcf/year, which could grow 40% to 1.7 Tcf/year from expansion of existing capacity, represents 6%-7% of US demand. US LNG imports in �02 were at 252 Bcf (1% of total consumption and 21% of total regasification capacity).
Introduction to Niche LNG players
We have looked at a number of companies leveraged to the LNG space which are poised to capitalize on the forthcoming natural gas environment. There are few LNG pure-plays available to US equity investors. Many of the terminal developments worldwide are being spearheaded by large energy conglomerates and/or companies unavailable to US investors. All four US regasification sites are operated by large conglomerates. Owners are (Tractebel (Everett, MA), El Paso (Elba Island, GA), Southern Union (Lake Charles, LA) and Dominion (Cove Point, MD)).
Our first investment idea focuses on companies responsible for the development and construction of the terminals where returns are more immediate and cash flows less risky.
Cheniere Energy (AMEX: LNG) is a company that plans, develops and runs LNG terminals (That's the plan, anyway). They also have small stakes in some Gulf wells, I believe, as well as some geological mapping process/software/system.