Kent Moors
LNG Stocks Are Set to Take Off
As I have discussed over the last two years, liquefied natural gas (LNG) is going to be a complete game-changer.
And along the way, a small group of LNG stocks will become the main focus for investors.
Remember, the LNG process cools natural gas to a liquid form, allowing it to be shipped over long distances. Upon arrival, the liquefied gas is returned its original state before being injected into pipeline for delivery to foreign consumers.
Already, the construction of LNG receiving terminals in Asia and Europe is accelerating.
Here's why.
The European and Asian markets have the biggest need for imports. These markets have a need to meet rising demand and restrain the prices commanded by long-term pipeline-delivered gas.
Luckily, LNG can do both.
Traditionally, natural gas has only been able to develop regional "spot" markets. These are locations where the availability of volume provides an opportunity for traders to execute a price for a quick sale (usually within 72 hours).
This is because the availability of product depends upon the development of import pipelines, which are multi-year, capital-intensive projects.
LNG, on the other hand, can be delivered to a terminal, so it can provide an immediate increase in available local supply.
To the extent that the LNG trade can be sustained, new spot markets are immediately formed around the hubs that develop at the intersection of terminal and delivery pipelines.
And now Qatar – one of the world's largest producers of conventional gas (that is, from freestanding gas fields) – has banked on LNG being the wave of the future.
Qatar has become the first country to commit all of its production to the LNG trade.
And that is a huge vote of confidence for this market.
Considering the number of new tankers involved, this single decision jolted the global shipbuilding industry into one of the most significant increases in business ever recorded.
The Qatari decision was just the first step…
A Global Boost for LNG Stocks
New export terminals are being built by other major gas producers – Russia, North Africa, and Canada. Our neighbors to the north have clearly signaled where the U.S. will be moving next.
A project is moving forward at Kitimat, British Columbia, on the North Pacific coast. It is scheduled for completion in 2014.
Developers originally intended this project to be an LNG receiving facility. But by the time the construction began, the intended flow of gas had changed by 180 degrees.
Today, this facility will be 100% committed to exporting LNG.
And the reason is the same one that is prompting so much U.S. discussion…
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Natural Gas Q&A: Lies, Damn Lies, and Statistics
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It has been a while since I responded to your many emails.
So, as we await the latest developments in the European debt mess, today seems like a good time to answer a few. This time around, I am addressing some of your questions and comments that deal with natural gas.
By the way, my staff and I read all of the input and feedback you send our way, and we're very grateful for it. Please email me at customerservice@oilandenergyinvestor.com. (I can't offer any personalized investment advice, but I can address your questions and comments in future broadcasts.)
Let's get started…
Q: I've just read recently several articles stating that the EIA has revised downward its estimate of our natural gas shale reserve potential by deciding to accept, unconditionally, the most recent U.S. Geological Survey stating that the Marcellus, Eagle Ford, Barnett, and other shale formations hold only 20% of the heretofore accepted reserves. This is an 80% reduction! This changes everything if true.
That's the question – is this bogus, or is there factual evidence to conclusively support this new estimate? ~ Howard B.
A: Howard, this reminds me of a famous statement from the 19th-century British Prime Minister Benjamin Disraeli (though the comment is also variously ascribed to Mark Twain, Alfred Marshall, and many others): "There are three ways to hoodwink the masses – lies, damn lies, and statistics."
The Energy Information Administration (EIA) – a unit of the U.S. Department of Energy – continues to wrestle with the distinction between reserves and extractable reserves.
The first is the volume of gas indicated by field tests and analysis. The second is gas available for extraction at current methods. I would also stipulate as "extractable" reserves only the volume that market conditions allow.
When you equate the two, we are still in the same ballpark.
Current estimates put no more than 20% of known reserves as "extractable." As technologies improve, that figure could improve, too.
For now, the EIA estimate falls in line with most others.
So to answer your question, nothing much has changed here, aside from some government bureaucrats wanting their figures to be more accurate.
Q: Kent, your work appears to be expanding into areas of advisement that could affect the future profitability and wellbeing of nations and their business relationships with existing partners. A delicate balancing act if there ever was one! If such arrangements are not handled carefully, could sanctions and/or military skirmishes be the outcome? Are we facing the possibilities of "gas wars"? ~ Fred P.
Russian Disaster Reveals Growing Problem in Supply Access
Earlier this week, an oil platform sank off the Russian Pacific coast in frigid, stormy waters.
The Kolskaya had been stationed off far northeastern Russia, and capsized when engineers were moving the jack-up rig from ongoing drilling projects in the Sea of Okhotsk to the western coast of Sakhalin Island. Accounts from the 14 survivors mention waves in excess of 20 feet.
That is enough to flood the operations base and sink the rig.
Details are still coming in on how this tragedy occurred.
But the question of why is one that deserves reflection.
The Kolskaya disaster is a sobering reminder of a growing problem for Russian producers as they push offshore in search of more and more crude supplies.
But it is also a warning that tragedies like this will likely occur again if budget shortfalls and company shortcuts continue to intensify in the years ahead.
The Russian Push North
Russia is now the world's largest producer of crude oil.
However, as I noted earlier this month, Moscow is moving offshore into very hostile conditions to compensate for accelerating crude oil extraction declines in the traditional production basins of Western Siberia.
I have never been on the Kolskaya ("Kola" in English, pictured below), but I have spent time on similar class jack-up rigs.
A jack-up is a floating platform resting on movable legs set in a stationary position on the sea floor. The legs can be raised or lowered to compensate for water depths (usually to a maximum of about 400 feet).
These are amazing pieces of equipment, with facilities to house more than 100 personnel, and the ability to drill dozens of wells at a time. Once the rig has completed a project, a production platform is towed into place, and the jack up moves on to its next job.
And that's what was happening when disaster struck.
The Kamchatka Peninsula-Sea of Okhotsk-Sakhalin Island corridor is a prime target area for Russia's offshore expansion. Current production from Sakhalin (which is due north of Hokkaido, Japan) is essential to ongoing crude oil and natural gas extraction figures, with the future demanding even greater volume from continental shelf development.
As I noted in early December, we know the vast majority of remaining oil and gas is positioned in offshore waters. Much is both north of the Arctic Circle and under effective Russian control.
However, these projects lack sufficient equipment and technology, are incredibly expensive, and are already running well over budget.
As with all of the far northern projects I reviewed during my recent trip to Russia, there is a lack of drilling rigs and a multiple-year delay in getting access to available production platforms. Most of the platforms must be ice-resistant and are constructed from scratch.
The Changing Nature of Global Gas Projects
I wrapped up my recent trip to Russia at 4 a.m. last Friday in a Moscow airport.
One thing is certain about my trips to Russia – the time schedule is always off.
But I can't complain; the weeklong visit provided many benefits.
As I told you two weeks ago the primary purpose of my trip was to evaluate natural gas projects in northern Russia. It's becoming increasingly necessary to estimate global-wide gas prospects in order to determine effective price levels.
That's because the age of "spot" market prices in the gas sector is rapidly approaching.
And it's about to change the way the markets operate for everyone involved.
On the Spot
Spot markets allow for a very short-term exchange of volume (usually 72 hours) and serve to undergird longer-term contract pricing.
The spot markets tend to offset longer contract terms by providing volume at what is usually a discount to the contracts, which are more properly futures contracts on natural gas.
However, natural gas has not had featured spot sales except in those areas that serve as major centers for pipeline interchange. Those areas then become provisional benchmarks for wider markets.
This is different than crude oil, which can be moved by tankers to virtually anywhere there is a decent port, allowing the establishment of local spot markets. Gas, on the other hand, has been limited by how far pipelines extend.
But the acceleration of liquefied natural gas (LNG) trade – in which gas is cooled to a liquid state, transported by tanker, and then "regasified" on the other end – has altered the picture.
Completely.
Indeed, with more than 90 new terminals set to open, under construction, or in the final stages of approval worldwide, LNG is one of the most decisive changes to hit the energy sector in decades.
LNG imports are essential to meet energy needs in parts of the world where there's little domestic supply. Exporting LNG also provides a new outlet in those regions where new unconventional gas volume strains local demand and threatens adequate price levels for producers.
This latter consideration affects all major shale gas production basins in North America, from the Horn River and Montney in Western Canada to the Marcellus, Barnett, and Fayetteville in the United States.
And, as I have noted on several occasions, the rise of LNG trade can serve as a major excess production drain off for the United States.
What LNG does not do, however, is address a growing global concern.
See, it is one thing to provide an end market for additional production. It is quite another to integrate the production assets into the equation.
Let me explain.
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An Inside Look at Europe's Energy Challenges
I am in Frankfurt, Germany right now attending three days of meetings, and I must say they're shaping up to be quite interesting.
The focus is on structuring a new financial and organizational approach to developing Polish shale gas.
A successful outcome would have an impact on both continental energy sources and the ongoing European debt crisis. And the stakes have become even higher in the past several weeks.
In focus this week are the rising energy needs across Europe and what securing considerably greater sources of domestic natural gas will mean to the debt crisis. Meanwhile, we have to consider the potential for some North American companies to generate significant profits by meeting these growing energy demands.
As I noted during my last advisory trip to Poland, Warsaw has decided to fast- track its shale gas development. With reserves now estimated to be much higher than initially thought, the country has the opportunity to become self-sufficient and to start exporting gas to other European countries and elsewhere as early as a decade from now.
That would have a serious impact on the energy balance in Europe as a whole. With the prospects of additional domestically produced energy, the balance of payments will be improved, and with it the debt picture.
Now reinvigorating the Polish picture is not going to do this on its own. Here is where it gets very interesting.
What takes place in Poland will expand elsewhere into Western Europe. There are shale gas reserves in Germany, Hungary, Austria, France, the Baltic countries, Sweden, and even the U.K.
Political opposition has suspended activities in France, and the Greens in Germany have given notice that they intend to target shale gas operations after their successes in phasing out the country's nuclear power stations.
Poland, however, has no significant opposition to drilling. At least, not at the moment. But as I advised the government in September, that situation is likely to change as the number of wells increases. In order to combat any opposition, the country is going to need to access to drilling technologies developed in the Western Hemisphere, technologies that address the primary concerns about hyrdofracking and horizontal drilling.
The North American Advantage
The eight- to 10-year head start North America has had on the rest of the world means there have been significant technological and operational developments in the U.S. and Canada to meet a number of the environmental and logistical problems related to hy drofracking and horizontal drilling.
It's these two advances that have ushered in this whole new world of energy in the United States.
Now eight to 10 years may not sound like a huge advantage…
But it most certainly is.
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Double Your Profits in the New Age of Natural Gas
I recently got an e-mail from one of my Oil & Energy Investor subscribers, who posed a very interesting question. Take a look:
I bought a nice position in Cheniere Energy Partners LP (AMEX: CQP). It is not clear to me if they are in a position to benefit earnings-wise from future expansions of the business. Is a future dividend increase in the cards?
- Harry M.
The broadening initiative to export liquefied natural gas (LNG) from the U.S. to Europe and Asia has put a few companies in the spotlight.
Cheniere is certainly one of them.
Actually, we are dealing here with two tradable securities – Cheniere Energy Inc. (AMEX: LNG) and Cheniere Energy Partners LP (AMEX: CQP).
With Cheniere, we have both the company pioneering the LNG exports (Cheniere Energy), and the partnership controlling the company's Sabine Pass terminal on the Gulf of Mexico at the border between Louisiana and Texas (Cheniere Partners).
As my Energy Advantage advisory service subscribers will tell you, we're always discussing the new age of natural gas. This includes the impact LNG trade will have on profitability, and the position of Cheniere in this process. And Cheniere Partners is just one of the high dividend/high return stocks I have identified for them.
Lucrative LNG
As you probably already know, LNG is a major remedy for the accelerating glut of American and Canadian unconventional natural gas production, which runs the risk of oversaturating the market and depressing prices.
Exporting the gas, on the other hand, taps into widening international demand and carries the prospect of actually improving profitability for gas producers in North America, even while the domestic need for the energy does not keep pace with rising supply.
In so doing, U.S. and Canadian producers are simply paralleling developments already in place in Australia, New Guinea, Russia, and above all Qatar – the first dominant gas producer in the world to commit all of its exports to LNG shipping.
This worldwide trend has transformed the LNG trade from import to export.
As recently as five years ago, we were still talking about importing more LNG into the United States, as conventional production declined.
Now with shale gas (along with coal bed methane and tight gas), the unconventional sources provide more available gas than we ever imagined.
The issue now is how to export the surplus gas.
Enter Cheniere's Sabine Pass terminal.
To continue reading, please click here…
The Narrowing Spread Means Higher Crude
I just left Baltimore, where I met with the Oil & Energy Investor and Money Morning editorial teams to discuss some interesting new developments.
This was followed rather quickly by a flight to Frankfurt, Germany, for meetings on a potentially major push in the European approach to a rapidly changing energy landscape.
I will fill you in on both later, because today we need to talk a bit about an important matter unfolding in oil…
The Crude Spread is at a Four-Month Low
On Friday, the spread between the Brent price in London and the quote for West Texas Intermediate (WTI) in New York declined to below 20% of the WTI price.
The straight nominal difference of $17.27 is now the lowest it's been since July 6.
And at 18.46%, the spread as a percentage of the closing WTI price (the better way to gauge its actual impact on prices in the United States) is narrower than at any time since June 29.
These changes have been rather dramatic – and quick.
On Oct. 20, the same figures were $25.57 and 30%.
Recall that what has transpired for the past 306 consecutive daily trading sessions, continuously since Aug. 13, 2010, is itself unusual. For that entire period, the market has priced Brent higher, despite it being an inferior grade of crude relative to WTI.
I have discussed the reasons before, but this time around, we need to consider what the shrinking spread actually reveals.
A part of the explanation lies in where the market is going.
However, another part – perhaps even the primary explanation – reflects how traders have been maintaining the spread as other pressures were building in that same market.
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An Unlikely New Supporter for Alternative Energy
During a biofuels conference at Mississippi State University last week, Navy Secretary Ray Mabus announced that his branch would be leading the charge to lessen the U.S. Department of Defense's (DOD) dependence on fossil fuels.
This involves a rather large chunk of traditional fuel usage.
On average, the federal government consumes about 2% of the fossil fuels used in the United States – and the DOD accounts for about 90% of that.
With the Obama administration emphasizing a move to alternative and renewable fuel sources, Mabus is signaling that the military is on board – sort of.
The Trouble with Foreign Oil
As a former governor of Mississippi and ambassador to Saudi Arabia, Secretary Mabus knows something about the position of oil in American foreign policy.
He noted during the conference that, for every $1 rise in the cost of crude oil, the Navy has to come up with at least $32 million.
So when the Libyan crisis hit earlier this year, and oil spiked $30 a barrel, that translated into almost $1 billion of additional costs to the Navy. It's no wonder, then, that Mabus is committed to meeting 50% of the Navy's onshore and fleet fuel needs with non-fossil sources by 2020.
Additionally, in what is now mantra from both sides of the political aisle, reliance on foreign oil sources presents a national security problem.
"When we did an examination of the vulnerabilities of the Navy and Marine Corps, fuel rose to the top of the list pretty fast," Mabus said. "We simply buy too much fossil fuel from actual and potentially volatile places. We would never allow some of these countries we buy fuel from to build our ships, our aircraft, our ground vehicles – but because we depend on them for fuel, we give them a say in whether our ships sail, our aircraft fly, our ground vehicles operate."
The push seems serious enough, and it does reflect similar statements coming from other branches of the military.
But questions remain: What are the alternative sources? How much volume can each genuinely give to the effort? And what are the possible drawbacks of such alternatives?
Biofuels to the Rescue
From the Navy's perspective, biofuels have shown some serious promise.
In certain theaters of operation, bio additives are already in use for both jet fuel and lighter vessel options. And the initial results have been quite encouraging.
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M&A Heating Up in the MLP Sector
The announcement Saturday by Kinder Morgan Energy Partners LP (NYSE: KMP) that it would acquire El Paso Corp. (NYSE: EP) is shaking up the pipeline picture.
The $38 billion deal involves cash, stock, and warrants (with KMP also absorbing about $17 billion in EP debt).
It will create the largest pipeline holding in the United States, the fourth-largest company in the country, and by far the largest midstream service company.
It is this last factor that will have the biggest impact – for two reasons.
First, the merger puts renewed focus on other similar actions among midst reams. These are the companies that connect producing fields (upstream) with refineries, distribution, and retail sales (downstream). Midstream services include gathering, initial processing, feeder pipelines, transport (certainly by larger intrastate and interstate pipelines, but also by tanker and barge), terminals, and storage.
Storage is especially important in this era of surplus production in natural gas, and excess crude oil volume sitting in Cushing, OK (where the daily West Texas Intermediate (WTI) benchmark price is determined for NYMEX trade).
You see, m idstream companies that control storage (which usually includes a large percentage of available pipeline capacity, as well as underground stockpiling sites) generate revenue whether product is moving or staying put.
However, another element in this transaction may be even more important and, in the process, may telegraph where we should expect to see the sector move with further mergers and acquisitions (M&A) action.
What M&A Means for the MLP Sector
This newly announced merger brings together two Master Limited Partnerships (MLPs).
MLPs are designed to move all profits to the partners, avoiding corporate taxes altogether. They act the same way an "S" corporation does for individual taxpayers. When an MLP decides to spin off an equity issue, the portion of profits reflected by the stock must be passed through to the shareowners.
That means an MLP equity issue provides genuine potential for both price appreciation and a dividend well above market averages.
Among the El Paso assets included in the merger is El Paso Pipeline Partners LP (NYSE: EPB), which primarily controls interstate regulated pipelines (and provides a nice complement to KMP assets).
All told, the new $94 billion giant will control more than 80,000 miles of pipeline.
Typically, the initial announcement results in the acquiring company's share price declining and the acquired company's share price moving up.
That's why traders' reactions to this mega-announcement were most unusual. In this case, both were up strongly early this week.
The KMP-EP announcement will be followed by others as the sector continues to consolidate.
That will only create more opportunities for the individual investor.
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