The Natural Gas Company You Need to Watch After Today

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

The Natural Gas Company You Need to Watch After Today

by David Fessler, Investment U Senior Analyst

Tuesday, October 4, 2011: Issue #1614

The energy sector has taken a pounding over the last few trading sessions... If you're overly focused on the short-term in the markets, you're probably not feeling too well.

But if you're investing in natural gas for the long term, you'll definitely feel confident after reading the EIA's Annual Energy Outlook for global demand... I know I do...

At 52-percent, the global growth rate in natural gas use over the next 25 years will be nothing short of spectacular. And even while the recession of 2009 resulted in a dip of about two trillion cubic feet, the decline in usage is now reversed. Levels now exceed those before the downturn.

Next year and over this decade, there's a lot of money to be made in natural gas. You just have to know where to look in the supply chain for the best opportunity. And right now, I'm seeing a lot of opportunity in processing terminals as the United States is set to become a chief exporter of this new liquid gold... Let me explain.

Global Trends in Natural Gas Spot Prices

If you thought European prices for natural gas were high, then check out this chart from the EIA.

It shows the spot price for natural gas in the United States at the Henry Hub, the European price as measured at the National Balancing Point in the U.K. and Japan’s average LNG import price (measured monthly).

Global Trends in Natural Gas Spot Prices

The chart clearly shows Japan is paying a fortune for natural gas. Why? Simple: It has no indigenous supplies of its own, and has to import all of the natural gas it uses. Much of that comes from the U.S. LNG export plant in Kenai, Alaska.

Exacerbating Japan’s problem was the earthquake, tsunami and disaster at the Fukushima nuclear plant, which took a significant amount of power production offline for the foreseeable future.

Most of that generating capacity was replaced with natural gas-fired units. This increased the demand for LNG in Japan, and subsequently, the price it pays. And remember, this is just one energy-starved nation in a world where demand is going to grow by 52 percent over the next 25 years.

The Growing Case for U.S. LNG Exports

The United States is the Saudi Arabia of natural gas, and the price has been relatively constant for the last two years.

Besides creating a cheap fuel that’s increasingly becoming the fuel of choice for power plant operators, a number of companies are putting plans in place to turn their LNG import terminals into bi-directional facilities.

With as much as a $12-per-million-Btu (MMBtu) difference in the price for gas here and abroad, exporting LNG makes a lot of economic sense. The cost to liquefy natural gas tacks on less than $1 per MMBtu. Intercontinental transportation via LNG tankers adds another $1 to $2 per MMBtu. That’s still well under even the price Europe is paying, and a far cry from what Japan pays.

Where to Consider Investing in LNG

As previously stated, the only liquefaction terminal in operation presently is in Kenai, Alaska. Numerous others are in the planning stages. Of the two that are furthest along, one is being built by Cheniere Energy Partners (AMEX: CQP).

It received approval to begin construction of a liquefaction plant at its Sabine Pass receiving terminal located in Cameron Parish, Louisiana. When fully operational in 2015, Cheniere expects to be able to process and liquefy 1.2 billion cubic feet of natural gas.

The problem is that 2015 is a long way away, and the stock is taking a pounding without a steady stream of revenue. It's down more than seven percent so far today...

Which brings me to another play that I really like over the long term. A second company in the advanced stages of planning for an LNG export terminal is Dominion Resources, Inc. (NYSE: D).

It’s requested permission from the U.S. Department of Energy to modify its Cove Point LNG re-gasification terminal. It wants to be able to install LNG liquefaction trains, and ultimately be able to export natural gas from Cove Point.

Construction would start in 2014, and first LNG production is slated for 2016. While both companies are good bets on LNG, Dominion is well capitalized, and Cheniere will likely have to raise significant additional capital to finance its project. That would likely happen in the form of the issuance of additional common shares, further diluting existing stockholders.

There's certainly a good case for both companies. But for now, take a look at Dominion. Though it's down a little more than three percent today, the stock is still near its 52-week high, and it sports a nearly four-percent yield. When the LNG begins to flow, Dominion will be in the catbird’s seat. And so will its shareholders.

Good investing,

David Fessler

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