The Explosive Fight Over LNG Exports

There is a battle brewing over the future of natural gas in the US. On one side is the energy industry, which is keenly interested in pursuing exports. On the other are industries that will benefit if natural gas prices remain depressed.

Investors who correctly forecast the outcome of the battle could profit handsomely by investing in the winners

Last week, Dow Chemical (NYSE: DOW) decided to sever ties with the National Association of Manufacturers (NAM) because Dow claims that NAM has sided with member companies like ExxonMobil (NYSE: XOM) in pushing for unlimited exports of natural gas.  ExxonMobil has proposed a natural-gas export terminal in Texas, and accuses Dow of being “protectionist” in its opposition.

The stakes are high. Over the years, there has been a manufacturing exodus from the US among industries that depend on cheap natural gas as a major input. Producers of chemicals, plastics and fertilizers would benefit from a continuation of the multi-year slump in US natural gas prices.

Natural gas prices chart

The hydraulic fracturing (aka fracking) revolution has increased the supply of natural gas and natural gas liquids (NGLs), and depressed prices. But those low prices have led to a manufacturing resurgence in the US. According to the New York Times, Dow Chemical has identified 91 manufacturing projects — representing $70 billion in potential investment and up to 3 million jobs — that companies have started or proposed as a result of cheap natural gas. And a report from the Yale Graduates Energy Study Group indicated that in 2010 cheap natural gas provided a net benefit to the US economy in excess of $100 billion.

In a 2012 report, Dow claimed that “natural gas price volatility over the past decade contributed to the United States losing $30 billion a year in exports as 42,000 factories closed. This resulted in the loss of 6 million direct manufacturing jobs, about 1/3 of the US total.” The company laid out its opposition to policies that could increase the price of natural gas, including:

  • Tax incentives for natural gas vehicles
  • Regulations that force rapid conversion of coal-fired power plants to natural gas
  • A rush to export liquefied natural gas (LNG)
  • Constraints on supply through bans or unreasonable restrictions on hydraulic fracturing

Dow is obviously speaking out of its self-interest, but it does have a point. Certain industries such as its own will see a major financial benefit if gas prices remain low. The key question becomes whether those benefits — which include improved balance of trade and job creation in those industries — outweigh the cost to industries that suffer from low natural gas prices.

Other winners if natural gas prices remain depressed are companies that are working to build out infrastructure for natural gas transportation. The lower the price, the more compelling the economic incentives for fleet owners to switch to natural gas.

The growth of companies like Clean Energy Fuels (NASDAQ: CLNE) and Westport Innovations (NASDAQ: WPRT) will be heavily influenced by the price of natural gas. Their prospects would look very different if natural gas prices rose to $6 or $7 per million British thermal unit (MMBtu).  

Finally, consumers also stand to benefit via lower heating and electricity bills. Over the past five years utilities have made a major switch from coal to natural gas as a cleaner and more economical option for producing electricity. In 2008 natural gas was used to produce 20 percent of America’s electricity, but by 2012 the natural gas share rose to 30 percent.

Natural gas consumption chart

Naturally, producers of natural gas bear the brunt of low prices, alongside drilling services providers. A number of oil companies acquired natural gas producers when it seemed like prices were going to remain high.

In 2005 my former employer ConocoPhillips (NYSE: COP) acquired Burlington Resources for $35.6 billion, a deal that looks terrible in hindsight. In 2009 ExxonMobil spent $41 billion to buy Houston-based XTO Energy. But last year ExxonMobil CEO Rex Tillerson acknowledged that the company was “losing our shirts” on natural gas because of low prices. The oil and gas industry sees exports as one avenue for boosting gas prices and helping its bottom line.

A number of studies have concluded that the effect of increased exports on natural gas prices would be mild. Most studies indicated the potential for a price increase in the range of 5 percent to 10 percent. The  Department of Energy (DOE) commissioned a study that concluded increased natural-gas exports would provide a net benefit to the US economy:

“Across all these scenarios, the US was projected to gain net economic benefits from allowing [LNG] exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased.”

Which side will win out? Ambitious LNG export facilities are already in the works. Cheniere Energy’s (AMEX: LNG) master limited partnership, Cheniere Energy Partners (AMEX: CQP), is planning a 2015 start-up for an expansion of its Sabine Pass LNG facility that will permit natural gas liquefaction and therefore export.

But some lawmakers have sought to slow down the rush to export LNG. In a letter to Energy Secretary Steven Chu, Sen. Ron Wyden (D-Ore.) complained that the DOE study “fails to fully assess the impacts of rising natural gas prices on homeowners and businesses.”

Unless our shale gas resources are grossly overstated, expect projects to export LNG to push forward. There will be resistance among some lawmakers, and among environmentalists who oppose any further development of fossil fuels, but economics will ultimately win out.

Around the Portfolios

Schlumberger (NYSE: SLB)
The leading global oilfield services provider struck pay dirt with its fourth-quarter earnings report, as strong demand for deepwater drilling expertise offset a margin squeeze on land in North America.

Schlumberger had already warned of that pressure last month, and so managed to edge past the reduced consensus earnings estimate by a penny per share while revenue was up 14 percent from a year ago and 3 percent above consensus.

The stock rose more than 4 percent to a four month-high on the day. Investors were likely reassured by a forecast that earnings would rise at least 10 percent in fiscal 2013, in line with the expected increase in exploration and production spending outside of Canada and the US.

Some of the projects that have been delayed, nicking the bottom line in the recent quarter are expected to drive growth next year, with Russia and sub-Saharan Africa showing particular promise. Schlumberger will also be looking to build on strength in the Gulf of Mexico, which helped cushion the slowdown in land-based US fields.

The company hiked its quarterly dividend 13.6 percent for a forward annual yield of 1.6 percent at Friday’s close of $76.50 a share.

Analysts remained overwhelmingly supportive, encouraged that Schlumberger derives two-thirds of its revenue outside the US and so stands to be less hurt by the diminished demand for hydraulic fracturing. Dahlman Rose maintained its Buy rating with a $92 price target. But a Weeden & Co, strategist who recommended shares in the wake of the December warning urged clients to take profits and wait for a better re-entry point.

Schlumberger remains a Best Buy at a 23 percent discount to our $100 buying point.

Stock Talk

Guest One



Add New Comments

You must be logged in to post to Stock Talk OR create an account