Two Catalysts are About to Hand You the Best Energy Investment of the Decade
The sudden development of significant unconventional natural gas reserves has put the U.S. in the catbird’s seat.
This “super shift” is so profound, it promises to create a new American dawn.
With enough natural gas to meet current consumption levels for nearly 100 years, America’s growing largess has changed everything we used to think about natural gas.
And today, we’re waking up to a “gas-driven” world.
Now two unrelated factors, thousands of miles apart, are transforming the U.S. into one of the world’s largest liquefied natural gas (LNG) exporters, and sending the share price of my favorite investment through the roof.
Let me explain…
Catalyst No. 1: The Panama Canal Opens Up Asia… Again
A century ago, the opening of the Panama Canal changed the face of global trade.
By joining the Atlantic and Pacific oceans, ships from the East Coast no longer had to make the treacherous 8,000-mile trip around Cape Horn to reach the markets in Asia or on the West Coast.
Now, 100 years later, the 50-mile long canal is doing it all over again.
Under a $5.2 billion expansion, the canal just completed a makeover that allows it to accommodate ships as long as three football fields, with the capacity to carry almost three times the amount of cargo as before.
The “new” canal will help jump start U.S. energy exports to Asian countries that are lining up for them.
Capitalizing on the Gigantic Asian Markets
For U.S. LNG producers and investors, the expansion of the Panama Canal means new marketing opportunities at precisely the right time.
Until recently, the 100-year-old canal could only accommodate ships of up to 950 feet long and 106 feet wide, with a maximum draft of 39.5 feet. Dubbed “Panamax” vessels, these ships were once the world’s largest.
But not anymore…
Today’s largest ships, including the supertankers that carry LNG, had to either take longer routes around Cape Horn or through the Suez Canal, or not make the trip at all.
The longer trip adds both time and costs to ocean-going transport, sometimes making the trip economically unfeasible.
Fortunately for investors, that’s all about to change.
With the nine-year project to expand the canal now completed, the canal is finally able to accommodate ships that are roughly 20% larger and can carry almost three times as much cargo. That means modern supertankers, including LNG-carrying vessels, are able to navigate the locks of the canal.
For U.S. firms, that could cut the transport time to Asia by 11 days. It also makes it easier and cheaper to transport U.S. natural gas between the East Coast and West Coast, without the limitations of pipelines.
But it’s the second catalyst that will really change the fortunes of U.S. LNG companies…
Catalyst No. 2: The U.S. Is About to Become the World’s LNG Leader
You see, up until recently, the LNG produced in the U.S. stayed in the U.S. Exports of LNG were forbidden by the federal government.
But today, with fracking and shale gas causing U.S. natural gas production to skyrocket, the regulations have completely changed.
Thanks to a recent loosening of export regulations, U.S. companies can now send tankers of LNG to every corner of the globe.
Already, the Department of Energy and the Federal Energy Regulatory Commission (FERC) have received dozens of applications for export authorization from companies eager to send their LNG overseas.
As of February 23, 2016, 48 applications had been approved, with five more pending.
This trend is so strong and unstoppable that it has the power to change the world. It’s the end result of one of the biggest reversals of fortune I have ever witnessed.
Just eight years ago, everyone agreed (myself included) that the U.S. would be using LNG imports to meet 15% of its gas needs by 2020. Now, even Russia’s gas behemoth Gazprom acknowledges that the U.S. could be providing between 8% and 12% of all worldwide LNG exports in just five short years. That’s up from zero LNG exports a couple of years ago.
With our newfound abundance of natural gas, U.S. LNG exports could ramp up very quickly.
The U.S actually has over 110 existing LNG facilities right now. But most of these are related to America’s internal pipeline system, or are used for the storage of LNG for domestic use.
However, over the last few years, something very interesting has happened. America’s quantum leap in fracking technologies has completely changed the domestic energy game.
Investing in a Stunning Reversal of Fortune
A large number of U.S. coastal terminals originally slated for LNG imports are now in the process of converting into export stations.
Once approved, these terminals could export the liquefied equivalent of 25 billion cubic feet of natural gas per day. Even at today’s low U.S. natural gas prices, that’s over $22 billion a year in domestic revenue.
And as more terminals are built, that number will skyrocket.
So why is LNG such a game-changer?
It’s simple. LNG allows companies to move natural gas anywhere in the world. LNG is simply natural gas that is cooled to -260° Fahrenheit until it becomes a liquid. This process reduces its volume by about 600 times – similar to reducing the volume of a beach ball to the volume of a Ping-Pong ball.
In this state, it can now be shipped anywhere in the world by train, ship, or truck.
As a liquid, natural gas is neither explosive nor flammable, making it relatively safe to transport. Freed from the limits of pipelines, LNG is a valuable global commodity.
A few U.S. LNG tankers have already begun arriving in Europe – and once this trend intensifies, Russia’s stranglehold on European and Asian gas supplies is over.
And the U.S. has plenty of LNG to transport.
According to the U.S. Energy Information Administration (EIA), the U.S. became the world’s largest producer of natural gas in 2013, producing over 66 billion cubic feet per day. In 2015, that number had grown to 75.3 billion cubic feet per day. The EIA forecasts that number to increase to 76.8 billion cubic feet per day in 2016, and 77.3 billion cubic feet per day in 2017.
With U.S. natural gas production growth outpacing competitors like Russia and Saudi Arabia by 200%, notes the EIA, that advantage is likely to continue.
Cashing In on a Major Market Advantage
The U.S. has another advantage over its natural gas competitors: Its gas is much cheaper.
Thanks to the shale gas revolution, the price of natural gas in the U.S. is about 50% lower than prices in Europe, Asia, and South America, and sometimes even less.
Even with the costs of transporting LNG – and remember, the expanded Panama Canal will drastically reduce those costs – U.S. natural gas exporters can undercut virtually any other natural gas producer in the world.
The Best Way to Play This Unstoppable Trend
When U.S. exports of LNG begin in earnest, one of my favorite companies, Cheniere Energy Inc. (LNG), will be leading the way.
There are several reasons why I think the sky is the limit with this stock.
First, the company’s Sabine Pass Liquefaction facility is the first fully-operational LNG export facility in the U.S. As of now, over 80% of the facility’s volume is already spoken for in six huge multi-billion 20-year export contracts.
In fact, Cheniere shipped the first LNG tanker to leave the U.S. from its Sabine Pass terminal in February, 2016.
Second, the company’s second major project, the Corpus Christi Liquefaction Project, already had 57% of its projected capacity locked up in 20-year contracts in 2014, even though it won’t become operational until 2018. That equates to more than $550 million in annual fixed fees. Plans have since been announced to increase capacity by 66% in order to meet demand.
And these are “take-or-pay” contracts. Even if buyers don’t take all of the LNG specified in their contracts, they have to pay as if they did. That’s as close to a guarantee as you can get.
In total, Cheniere’s operations have already secured $3.5 billion in future annual fees.
So why are other countries rushing to lock up processing and exporting capacity years into the future?
Because the global demand for LNG is skyrocketing.
Europe is expected to import 28 million tons of LNG this year, and 98 million tons by 2030. Asia is projected to import 200 million tons this year alone, and almost double that by 2030. The Middle East and North Africa will demand 533% more LNG over the same time period.
Plus, Cheniere isn’t just selling high volumes of LNG. Its margins are strong, too.
As a result of the discrepancy between natural gas prices in America (approx. $2 mmBtu) vs Japan (approx. $5 mmBtu) and Europe (approx. $4 mmBtu), Cheniere can offer very competitive prices overseas and still book healthy margins on every sale.
The comparison is even stronger when looking at alternative energy sources, such as crude oil. Currently, worldwide LNG prices are approximately 11-19% of crude oil prices for the same amount of energy.
Even if countries in Europe and Asia could import all of the crude oil they needed to satisfy all of their energy demands – and they can’t – they’d still choose LNG. Because it’s a fraction of the cost.
Long story short, the company’s prospects have never been brighter.
Not only does Cheniere have blanket permission from the U.S. Department of Energy to begin LNG exports, but as the first mover in this space, Cheniere has the best chance to make a big splash in this new market. It’s expected to export 10% of global LNG production by 2020.
And more than any other company, this one is set up to positively explode once the Panama Canal expansion begins being utilized by LNG tankers, since it will open up the lucrative Asian markets overnight.
In short, Cheniere is a play on the future from a company that’s better positioned than anybody else to take advantage of it.
And with LNG exports about to start in earnest, I believe Cheniere could be your ticket to big profits, too. To me, this is the best investment opportunity of the decade.
Dr. Kent Moors
Editor, Oil & Energy Investor