6/21/2012 4:37 PM ET|
3 picks for the natural gas boom
Production is surging, but with US prices at rock bottom, investing isn't easy. It helps to know the global picture, and these stocks seem poised to profit from it.
How do you make money out of the current U.S. and global natural gas boom?
It's harder than it looks since the explosion in U.S. natural gas production -- a 21.6% increase from 2002 to 2011 -- has helped crush natural gas prices in the United States. Natural gas futures in New York closed on Wednesday at $2.52 per million BTUs. That's down from $10.36 in June 2008, a 75% decline.
With the break-even cost of producing natural gas in the United States somewhere between $4 and $8 per million BTUs, you can see how this might not be the most profitable time to be a natural gas producer. Shares of Chesapeake Energy (CHK), for example, were down 31% for the 12 months that ended on June 20.
But I think three recent news items give investors the skeleton of a strategy for profiting from what is a global boom in natural gas. I'll finish by putting some flesh on that skeleton with three stock picks in the sector.
The latest on gas
The first news story: On June 18, Exxon Mobil (XOM) announced that it was shutting down its efforts to find natural gas in Poland's shale formations.
This isn't the first bad news natural gas exploration companies have received in Poland recently. On early estimates, Poland looked as if it might provide a replay of the shale story in the United States -- the U.S. Energy Information Administration had estimated that Poland might have 5.3 trillion cubic meters of natural gas locked up in its shale geology. That would have given the country the largest gas reserves in Europe.
But more recent estimates by geologists working for the Polish government have trimmed those estimates to 350 billion to 770 billion cubic meters. That's still a lot of natural gas for a country that currently imports two-thirds of its 14 billion cubic meters of annual consumption.
But the Exxon Mobil pullout was actually more puzzling than simply more bad news. The company had drilled just two test wells before deciding to pull up stakes.
The suspicion among other exploration companies in Poland is that Exxon Mobil's decision had less to do with two dry wells in Poland than with its deal last week to develop shale oil reserves in Siberia with Rosneft, Russia's oil company.
My conclusion: I think Exxon Mobil bailed on Poland for two reasons. The first is time. The time needed to develop natural gas volumes in Poland is just too long, especially if you include the need to build infrastructure. The Polish government projects that the country could see its first commercial gas production in 2014-2015 at a very modest 0.5 billion to 1 billion cubic meters. And that only gets the gas out of the ground. Then there's the time and expense of developing the infrastructure to get the gas to Polish consumers and, potentially, to consumers outside Poland. The more time, the more risk. Although no one is sure how long it will be before large volumes of cheap liquefied natural gas will be available to Poland, current plans point to 2015 to 2018, with 2018 being more likely, in my opinion. Second, the economics of natural gas continues to decay. Exxon Mobil's preference for investing in Russian oil shale instead of Polish gas shale makes perfect sense if you consider that no one is certain where the bottom might be for natural gas prices -- or how long the current premium price for gas delivered in Europe or Asia might last.
The second news story, and it fits right in with where I've left Poland and Exxon Mobil: The U.S. Department of Energy estimates that production of natural gas liquids hit an all-time high in March and is now 50% above 2009 production. That has driven the price of some natural gas liquids down by 60% in the past year. Ethane, for example, now sells for just 8 cents a pound, and some market analysts think that producers could wind up simply giving away ethane later this summer. That is really bad news for natural gas producers -- particularly U.S. producers -- because they've been counting on sales of liquids such as ethane, propane and butane, which can be stripped out of the natural gas stream, to make up for plunging prices of natural gas itself. This has the effect of cutting cash flow at natural gas producers, and that's not good news for exploration and production. It adds yet another layer of uncertainty for natural gas producers.
My conclusion: With the economics of natural gas under pressure from this new direction, it's no wonder that a producer such as Exxon Mobil might decide to go with oil over natural gas. In addition, this new wrinkle undercuts the premium that investors have been willing to pay for the shares of natural gas producers with big positions in liquid-rich geologies in the United States. In other words, this isn't good news for companies such as Pioneer Natural Resources (PXD) or Concho Resources (CXO). Or for oil-services companies with exposure to U.S. exploration and development such as Halliburton (HAL) and, to a lesser extent, Schlumberger (SLB). It is good news for chemical companies, such as Dow Chemical (DOW), DuPont (DD) and LyondellBasell Industries (LYB) that use natural gas liquids such as ethane and butane for feedstock.
The third news story: Norwegian oil and gas producer Statoil (STO) has signed an agreement with Malaysia's state-owned energy company, Petronas, to deliver liquefied natural gas to a terminal in Malacca. Malaysia's first liquefied natural gas terminal is set to open this summer, with the first Statoil delivery due in August. (Statoil also opened its first liquefied natural gas trading station in Singapore on June 1.) Malaysia has traditionally been a major exporter of natural gas to Japan, South Korea and Taiwan, but with domestic demand rising and supplies failing to keep pace, the country sees itself becoming a net importer over the long term.
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My conclusion: While natural gas prices may have collapsed in the United States, they've soared in Asia. That's because of high demand from Japan -- the country is using natural gas power plants to make up from the shutdown of nuclear plants after the Fukushima disaster -- and increased demand for electricity across developing Asia. (In 2011, demand climbed 12% in Japan, 31% in China and 39% in India.)
Spot prices for liquefied natural gas have risen to $18 per million BTUs. The current spot price is a 35% increase in the past year and a huge premium to the $2.52 per million BTUs price in the United States. If they can get liquefied natural gas to the markets that want it, natural gas producers can make a very nice profit. Unfortunately, the first U.S. liquefied natural gas export terminal isn't scheduled to go into operation until 2015 or 2016.
How to jump in
I'd like to add the company with the first permit to build that export terminal, Cheniere Energy (LNG), to my portfolio at the right price. I added it to my watch list (registration required) on May 11 with an $11 buying price in my column, "10 stocks for the bad old summertime."
So Cheniere Energy is one of my three stock picks in natural gas for this column (even though it's not yet time to buy).
I'd also recommend Norwegian energy company Statoil, which is already a member of my Jubak's Picks portfolio. The company has the export infrastructure in place to ship liquefied natural gas -- its Snoehvit plant, which is capable of liquefying 5.8 billion cubic meters a year, is the only such production facility in Europe. And the company recently signed a deal to buy into exploration permits in Australia's Northern Territory. Australia is on a path to become a major platform for the export of liquefied natural gas to Asia by 2015.
My third pick in natural gas is BG Group (BRGYY). The company has equity stakes in liquefied natural gas terminals in Trinidad and Tobago, and in Egypt. It is building an export terminal in Queensland, Australia, with operations scheduled to begin in 2014. It has plans to open a U.S. export plant in Lake Charles, La., with construction to begin in 2014. And it is in site studies for a terminal in Tanzania. Tanzania may be an oil frontier that's new to you, but recent discoveries have almost tripled estimated natural gas reserves to 28.7 trillion cubic feet. Word of the latest discoveries came from BG Group in May and from Statoil on June 14.
And those are my three suggestions on how to profit from the natural gas boom.
Updates to Jubak's Picks
These recent blog posts contain updates to the stocks in Jubak's market-beating portfolios:
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- How will OPEC drama affect oil prices?
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At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column in his personal portfolio. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of BG Group, Pioneer Natural Resources, Schlumberger and Statoil as of the end of March. See a full list of the stocks in the fund as of the end of March is here.
Jim Jubak's column has run on MSN Money since 1997. He is the author of the book "The Jubak Picks," based on his market-beating Jubak's Picks portfolio; the writer of the Jubak's Picks blog; and the senior markets editor at MoneyShow.com. Get a free 60-day trial subscription to JAM, his premium investment letter, by using this code: MSN60 when you register at the Jubak Asset Management website.
Click here to find Jubak's most recent articles, blog posts and stock picks.
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VIDEO ON MSN MONEY
I'm still trying to sort out WHAT the 3 picks were??
A lot of extra fill included in the story...
These guys should be the last people we listen to for information and advice. If you want the truth, go to sites like Energy Bulletin, ASPO and The Oil Drum
"tural gas boom? More like a going away party. Gas fracking and extraction of "tight oil" is a sure sign the end of the rise of the oil era is near. We reached global peak production in 2008 (we'll never produce more than we are right now) and there are already signs this new production of shale gas and tight oil is slowing down.
These guys should be the last people we listen to for information and advice. If you want the truth, go to sites like Energy Bulletin, ASPO and The Oil Drum"
That's funny. The world just produced a *single day record* 91 million barrels a day with a 2 million barrel a day usage gap (highest since 1998).
"They gambled that natural gas would rise as gas prices went up and now are nervous with the market falling so they write this article .Since 2004 or prior these stocks have been going up and peaked just do a 10 year research and see for yourself they are ready to take a dive anytime ..These people writing the articles are invested and want you to buy up so they can bail with huge profits .."
If you look at JUBAX, there's a lot of other stocks in there besides oil or gas ones.
And who would argue against STO? It got driven in the entire oil Bubble to a 2008 peak, you can now buy it much cheaper and it's in a solid uptrend. With a great dividend and also the benefit of that dividend being paid in the Norwegian Krone, it's not subject to the Euro mess, and if the dollar devalues (which it will over the next few decades) that means you are getting a benefit of not having your value eroded by dollar devaluation.
"A way to play the increase in LNG demand and delivery from the terminals that already exist, as well as those to be brought on-stream in the next few years, is Teekay LNG Partners, L.P. (symbol TGP). Teekay LNG Partners generates cash flows from long-term, fixed rate contracts with major oil and utility companies around the world, by transporting LNG via its 32 LNG/LPG carrier seagoing ships and 11 conventional oil tankers."
I also found CQP which is the energy partner for LNG and actually owns the terminal in Sabine LA (first domestic export terminal scheduled to complete and actually approved thru congress).
Nice yield at 7.62%.
Also, Dominion Resources, D (which check out it's 20, 30 year chart). They are buying up pipeline and investing heavily in new energy resources, so not only is it a power distributor for nice utility yield and protection, it also is able to generate from others who may use their pipelines.
I owned D thru the 2008 collapse, and although it got taken down along with the whole market, it's fall was less than the S&P 500, payed a nice dividend the entire time, and has come right back. Look at the legs from 2009-2012. Has never broken its downtrend once, not in 2011 spring breakdown, not in the 20% market drop last fall, and not this year either. This is one of those "buy and hold" stocks that supposedly no longer exist.
A way to play the increase in LNG demand and delivery from the terminals that already exist, as well as those to be brought on-stream in the next few years, is Teekay LNG Partners, L.P. (symbol TGP). Teekay LNG Partners generates cash flows from long-term, fixed rate contracts with major oil and utility companies around the world, by transporting LNG via its 32 LNG/LPG carrier seagoing ships and 11 conventional oil tankers. TGP reported in a presentation made June 18, 2012 that it is the 3rd largest independent operator of LNG carriers. The case for increased shipping demand for LNG includes Japan's ongoing shift to natural gas fired electric power generation from nuclear power electric generation. This Japanese demand may well be a long term shift as none of its existing nuclear plants were operating as of June 18, 2012 (according to the TGP investor presentation), and many of its nuclear plants may never be restarted.
Just a thought. And yes, I am long shares of TGP, have been an owner of the shares for over a year, and given the yield, likely will be a long-term holder of the units. TGP is a master limited partnership, and MLPs, common in the energy/natural gas transportation segment, have unique tax aspects that all investors need to be comfortable with. I believe Jim has written columns about MLPs in the recent past.
STO, LNG, BRGYY.
STO is a huge buying opportunity. How often do you get US listing access to a company with a strong reserve currency and a strong divided? This is right in the sweet spot. 4.66% yield, just made a huge discovery in oil that is set to replenish their reserves for decades to come, and like Jim mentioned, a play into Natural Gas as well.
With Oil under pressure and every stock in Europe being unfairly nailed regardless of its business, this is a nice stock to own. One caution it just made a lower high than 2011 and came back down, though, it did make a higher low, so it's uptrend is still intact for now.
Like LNG for a few reasons, which it was still 2010 and this stock was still $2. It's frothy at $12 considering it has no income, no dividend. But the one thing it does have is the only approval of any domestic company to build an export terminal. Assuming it is able to maintain access to credit markets (which Corporate debt is well financed currently) it should be able to start exploiting the Natgas difference quicker than anyone else. $2 to produce here, anywhere from $15-25 in the rest of the world. Easy money if they can get it done.
I would add WPRT. Westport Innovations Inc, they specialize in technology to convert engines from diesel/gasoline to Natural Gas. Just recently got into a deal with Caterpillar for offhighway engines. This is like a services play in the oil fields except it doesn't require a high price of Nat Gas to be successful.
Both LNG and WPRT are speculative. But could be one of those set up for split after split after split into the future or just nice price gains. One of those you might wish you pulled the trigger on.
Natural Gas (and in particular it's going to be LNG, liquified natural gas) is going to reshape the future of the energy industry. With governments broke globally, solar power and wind power are on the way out (for who knows how long). Natural gas is cleaner than coal, cleaner than oil, and more abundant domestically. Even without fracking it's still a good bet (in particular in Texas, they aren't going to outlaw fracking in west texas in the Eagleford Shale).
I'm not a fan of playing the big suppliers, Exxon, Chesapeke, etc. Too dependent on having the price much higher than it is now and no export licenses (though, those will come). Exxon has many other segments and Nat gas won't push the stock price, Chesapeke could, but that seems like a broken company right now.
Play the services, the small exporters, or STO for a little bonus to their main business (and because it's a great international stock to have, dollar devalue makes you more, Norway one of the strongest world currencies, huge stable dividend for decades to come).
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