How to Profit from LNG No Matter What the U.S. Does

Matthew Carr
by Matthew Carr, Emerging Trends Strategist, The Oxford Club

How to Profit from LNG No Matter What the U.S. Does

There’s a great, strange story by F. Scott Fitzgerald called, The Diamond as Big as the Ritz. In it, the Washington family has discovered a mountain that’s made entirely of diamond in an uncharted part of Montana. It’s just one giant, mountain-sized chunk.

The tale deals with greed and the basics of the law of supply.

But the Washingtons can’t let anyone know their diamond mountain exists… If people found out, it’d collapse the diamond market, making the precious stone worthless. And the Washingtons themselves would be cast into poverty.

So, it’s this strange dual existence for the Washingtons. They’re the wealthiest family in the world, but only because they vigilantly and brutally control the diamonds that flow from their mountain. They never let on there’s an oversupply.

Since 2007, the United States has undergone a series of dramatic changes. We fell into the dark days of a recession. These shadows still linger. Banks collapsed. The housing market collapsed. Jobs were lost in the millions.

We’ve scratched and clawed our way back. Though we’re not fully recovered yet.

But in those years, we also discovered that we had something we didn’t know was there. Old drilling techniques applied to new areas resulted in a staggering increase of precious resources - natural gas and oil. We found our own diamond mountain.

All of a sudden, it was a new day. We no longer needed to rely as heavily on foreign sources for oil and we had more natural gas then we knew what to do with. The billions spent on terminals to import liquefied natural gas (LNG) from overseas – once again - were obsolete overnight.

The success of hydraulic fracturing in shale areas flipped the U.S. natural gas industry on its head. And of course, the price of natural gas buckled, then collapsed, falling to new decade lows on our sudden abundance.

The problem is: Now what?

Don’t Focus on U.S. Nat Gas Exports

Here’s where things get interesting…

A lot of people are salivating at the idea of cheap U.S. natural gas being exported as LNG.

But getting that industry off the ground takes time… years. And currently, there’s only one LNG export terminal actually existing in the United States - in Alaska - that was exporting LNG to Japan for more than 40 years before the contract recently expired.

There’s a push on though in the United States and Canada with companies like Sempra (NYSE: SRE), EOG Resources (NYSE: EOG), EnCana (NYSE: ECA), TransCanada (NYSE: TRP), Exxon Mobil (NYSE: XOM), ConocoPhillips (NYSE: COP), BP (NYSE: BP), Cheniere LNG (AMEX: LNG), Dominion (NYSE: DOM) and Williams Companies (NYSE: WMB) all are at potential LNG export projects.

Cheniere is the only one that’s really made any headway. And its first LNG exports are still years away. For the others, investment decisions have to be made, permits, approval, blah, blah, blah

At the same time, Congressmen Ed Markey and Peter DeFazio and Senator Ron Wyden are looking to block U.S. LNG exports. And any projects that receive approval will have to deal with any public and environmental opposition or petitions.

This is why I wouldn’t bank my money on a U.S. LNG export industry… At least not yet. Those companies will rise and fall on news, not anything tangible reflected in their balance sheets, for the next few years in terms of LNG.

And I ultimately don’t believe the industry will be that big. The United States won’t be the next “Qatar…”

But don’t despair. There’s one aspect of the LNG industry that’s critical to international trade. And is profiting right now, and will continue to profit for the years to come…

Keep it Simple

I don’t invest in surpluses. I invest in shortages.

Companies like Teekay LNG (NYSE: TGP) or last week’s IPO of GasLog (Nasdaq: GLOG) might not be household names. If they weren’t on your radar in 2011, don’t worry, because you didn’t miss the boat… It’s a bad pun, but I’m dead serious.

They’re part of a small group that controls a very small, but vitally important resource: ships.

We’ve covered here before about how the high price of oil triggers more exploration. That means companies that own drilling rigs see demand for their services skyrocket, and rates for these services go up exponentially.

Same thing is true for LNG. Global demand for LNG is up and rising (especially in the wake of the global pullback on nuclear), the price of LNG in Europe and Asia is high, demand for LNG ships to deliver the fuel skyrockets. So, day rates for LNG ships in 2010 were $37,000. Those rates soared to a peak of $160,000 in 2011. And even though they’ve come down a bit, they’ll still likely average around $140,000 in 2012, possibly even going as high as $200,000 per day.

If you’re doing the math, a jump in rates to $200,000 would be a 441% increase in just two years.

Here’s the other kicker; there’s a shortage of LNG carriers.

Now, the utilization rate for the global LNG fleet is around 98% and will remain at that elevated level until 2015, when new builds start coming on line. The few shipyards in the world that can build LNG tankers are booked until the end of 2014.

There simply aren’t enough ships. In total, 69 new ships are currently on order. It’s projected that there’ll need to be 175 new LNG tankers by 2017, just to meet rising demand out of Asia – like China and Japan – as well as the growing LNG spot market.

And here’s the final piece: if the United States decides to export LNG, any new terminals that do come online will need to ships to haul that LNG, as well.

Don’t outsmart yourself by trying to figure out whether or not a company is going to finally start exporting LNG from the United States. There’s no money to be made there now. Invest in the shortage that currently exists – LNG tankers – which will only be exasperated if the United States starts exporting.

Good Investing,

Matthew Carr

P.S. The companies I mention above, Teekay LNG (NYSE: TGP) and GasLog (Nasdaq: GLOG), are both solid plays on LNG. Teekay even offers a healthy yield of 6.5%. But one company I saved for Investment U Plus readers has shown the highest revenue growth of the bunch.

To find out which LNG shipping company has exploding revenue growth and already pays a 3% dividend to boot, click here.

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