Currently, Canada has zero ability to export natural gas, which must first be turned into liquefied natural gas, or LNG, via super-cooling. Although Canada has approved 11 projects for LNG export (virtually all in British Columbia), falling energy prices and rising construction costs are hampering development.

Canadian LNG exports, however, just got a much-needed boost. In October, British Columbia announced a major tax break that will help lower the cost of building LNG plants in Canada. The break is a 1% tax rate on LNG sales until project costs are recovered, after which the rate rises to 3.5%.

Based on a relatively favorable tax and regulatory environment, and pipeline access to western Canada’s massive gas production, we think Canada could be exporting LNG within two years, in line with the U.S., joining the exclusive club of LNG exporters now dominated by Qatar.

Africa (Nigeria, Angola, Algeria), low-cost producer Russia, and Australia are all far behind Qatar, which exports just over 10 billion cubic feet of gas per day (bcf/d). For context, China alone is now consuming 14 bcf/d and this is expected to rise to 60 in the coming decade.

Even if just a few of the Canadian LNG export projects were permitted to be built, LNG exports from British Columbia could provide a revenue windfall similar to the oil-and-gas boom in Alberta’s oil sands. But though the LNG export opportunity is huge, so are the risks, since all LNG terminals in Canada have yet to be built.

How to Play

The prudent way to invest in Canada’s LNG future is through small to midsize Canadian companies that have reliable dividend payouts and diversified, stable operations. They’re not dependent on LNG exports happening anytime soon, but they’re strategically placed to reap big benefits if the industry develops as we expect. Below are four ways to play.

AltaGas: First in Line

Although AltaGas Ltd. gets most of its income from regulated operations in Canada and the U.S. (gas distribution and utilities), 25% of Alta’s business is midstream services, such as pipelines. It is the midstream segment that is likely to make AltaGas (TSX: ALA, OTC: ATGFF) a big winner from LNG exports.

First, AltaGas owns the Pacific Northern Gas (PNG) pipeline, which it paid a premium for in 2011, but which turned out to be a good investment. The PNG pipeline is the only one that can carry gas from fields of western Canada to the LNG export terminals to be built in British Columbia. While other pipelines are in the planning stages, being first is a big advantage.

Second, AltaGas and its partners are first in line to buy an existing offshore LNG terminal (built on a barge) called Douglas Channel, which should emerge from bankruptcy in 2015 (the courts recently approved the restructuring plan). Based in Kitimat, B.C., Douglas Channel could be the first terminal to export Canadian LNG. AltaGas also plans for a second offshore terminal called Triton, to also be supplied by its PNG pipeline, which would be expanded at a cost of $1.5 billion.

AltaGas—a great way for investors to play the Canadian LNG story—is a buy under $44.

ARC Resources Ltd.: Meet the Producer

About 60% of ARC’s production is natural gas in a variety of regions that have direct pipeline access to Canada’s Pacific coast, where the LNG terminals are to be located. ARC’s holdings include more than 560,000 acres in Montney (northwest Alberta) and in northeast British Columbia. ARC was recently priced just under $29 and yielded over 4%, down substantially from its 52-week high.

ARC Resources is a buy under $28.

Keyera Corp. & Pembina Pipeline: The Middlemen

Both of these companies have big operations in the gathering, processing and transporting of natural gas liquids (NGLs) such as butane, methane and propane. These are among the very few companies in this space, so they have pricing power and most of their revenue stream is not heavily dependent on energy prices.

Keyera Corp.’s (TSX: KEY, OTC: KEYUF) expanding base of gas-gathering and processing assets in western Canada will be put to excellent use should one or more of the proposed LNG ­export projects move forward.

Meanwhile, Keyera continues to thrive in a tough market for natural gas and NGLs, due to its integrated NGL handling services and presence in drilling areas where activity levels have held up reasonably well.

Some of the company’s most exciting projects for growth center on delivering gas condensate to oil sands producers for use in diluting bitumen (oil sludge).

Keyera’s revenue and earnings have both been growing an average of 19% annualized the past three years, and this is likely to continue.

Keyera, which is largely insulated from commodity price swings because of its fee-based business model, is a conservative way to play Canadian LNG and is a buy up to $80.

Pembina Pipeline Corp. (TSX: PPL, NYSE: PBA) isn’t as tightly tied to the LNG story as our other picks. However, Pembina’s network is crucial for the movement of oil and natural gas liquids (NGL) around western Canada. The company transports about 50% of the conventional oil produced in Alberta and roughly 30% of the NGL production in western Canada.

Pembina is investing heavily in expansion, with projects ranging from new conventional pipelines to gas services.

Among the most notable is Pembina’s Phase III expansion, for a pipeline that runs from western Canada (Edmonton, Calgary) to the Pacific coast (Taylor, B.C.). 

Once complete, Pembina could see its total pipeline capacity more than double.