Capitalizing on U.S. Liquefied Natural Gas Exports

NEW YORK (TheStreet) -- Liquefied natural gas, or LNG, is one of the fastest-growing energy markets globally, while the United States is the fastest-growing natural gas producer worldwide.

This combination is creating a compelling investment opportunity with LNG terminal and shipping master limited partnerships (MLPs).

The opportunity is being fueled by a U.S. LNG export market benefiting from three broader trends:

  1. Rapidly growing domestic natural gas production
  2. Favorable pricing in the U.S. vs. the rest of the world
  3. An energy industry already preparing for exports.

Production Growth

In 2005, the U.S. produced 18 trillion cubic feet (Tcf) of dry natural gas, roughly in line with annual production over the 20 years prior.

By 2012, the United States was producing 24 Tcf of dry natural gas, an increase of 33% over the course of seven years. Shale gas, which is recovered using hydraulic fracturing and horizontal drilling, accounted for approximately 30% of total production in 2012.

The U.S. Energy Information Administration further estimates that annual natural gas production will increase to nearly 27 Tcf by 2020 and to 33 Tcf by 2040.

The increase in supply means the price of natural gas in the U.S. should continue to remain under pressure keeping prices far below other regions across the globe.

Worldwide Pricing

The chart below shows the landed price of liquefied natural gas at ports around the world as of November 2013.

As you can see, pricing differentials exist throughout the world -- the price of LNG is in the low $3 range in the U.S., $10 in Europe and $15-$16 in Asia.

The substantial LNG price differential between the U.S. and other regions (namely Asia) will drive exports and as long as pricing remains favorable in the United States, exporting LNG will be a profitable and growing trade.

In fact, consultancy Wood Mackenzie estimates that global demand for LNG will nearly double from today to 450 million tons per annum by 2025.

LNG Export Preparation

The stage is being set for U.S. liquefied natural gas exports to begin in late 2015.

The Federal Energy Regulatory Commission (FERC) reports that there are currently 13 LNG export terminals in the United States that have been proposed to the organization (an additional ten sites have been identified as potential sites for export terminals but have not been submitted to FERC).

These 13 sites have proposed daily export capacity of nearly 19 billion cubic feet per day. This new export capacity would result in increased demand for natural gas equating to approximately 29% of current natural gas production.

Investment Opportunity

As investors in MLPs, we see several distinct opportunities to play the growth in exporting natural gas.

Export LNG Terminals: Investing in the MLPs that are currently constructing export terminals gives investors exposure to some of the first movers in LNG export.

Cheniere Energy Partners (CQP), which originally intended to import natural gas, has transformed its Sabine Pass facility for use in exporting LNG with operations beginning as soon as late 2015. It has already received authorization from FERC to export two billion cubic feet of gas per day. Cheniere looks to be the first mover in LNG exports, giving it a head start on the competition while offering an attractive current yield of roughly 6%.

Other possible plays include El Paso Pipeline Partners (EPB), which has announced plans to convert its existing Elba Island LNG import terminal and Energy Transfer Equity LP (ETE), which recently acquired the Trunkline LNG export terminal project. Dominion Resources (D) and Sempra Energy (SRE) have also said they are considering putting their LNG export projects into MLPs.

LNG Shipping: Another way to participate in the growth of LNG exports is through investments in the marine transportation of LNG. LNG shippers will directly benefit from the tremendous increase in seaborne transportation volumes.

Two MLPs offer pure play exposure to LNG shipping. Golar LNG Partners (GMLP) and Teekay LNG Partners (TGP) own tankers for the transport of oil and natural gas.

Golar also owns floating storage and regasification units for LNG. Both GMLP and TGP offer stable and high cash flows (6%-7% annual yields) via long-term charters on their fleets. They should benefit over time from rising global demand for cheap U.S. natural gas.

A broadly, diversified investment option to play the LNG theme is the Yorkville High Income MLP ETF (YMLP). The fund provides exposure to 25 MLPs across the upstream and downstream segments of the energy supply chain, and marine transport MLPs accounted for 23% of the portfolio as of 12/31/2013.

Yorkville expects MLPs to be prime beneficiaries of the build-out of LNG export infrastructure in the United States. LNG export projects and marine transportation expand the ways investors can participate in the U.S. energy revolution through MLPs.

At the time of publication the author had positions in all of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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