Much digital ink has been spilled in the past few months in the debate over the U.S. export of liquefied natural gas - LNG. Companies such as Cheniere Energy (LNG), ConocoPhillips (COP), Exxon Mobil (XOM), and Sempra Energy (SRE) all stand to benefit enormously from the export of LNG. These companies intend to profit from the arbitrage opportunities that exist between the U.S. where natural gas is approximately $3.60/million BTU and Europe ($12-14 per million BTU) or Japan ($14+ per million BTU). Frequently lost amidst the story of LNG export approvals is the expansion of maritime uses of LNG and a drastic increase in the number of LNG tankers under construction.
Although the first LNG powered vessel was launched nearly 10 years ago by Norwegian shipbuilder Kleven Shipyard, the technology is only just now beginning to make inroads into shipping fleets. The past few years have witnessed a sharp increase in the amount of LNG powered vessels put on order with some of those vessels just now beginning to enter service. Operators and environmentalists have found common ground in the introduction of LNG powered ships. Today's LNG vessels utilize approximately 25% less fuel than their traditional marine diesel oil burning counterparts and emit 24% less CO2, 84% NOx, 100% less SOx and 95% less particulate matter. Due to their efficiency, shippers have begun to embrace the vessels in capacities ranging from self-powered barges to tugboats to forage carriers to container ships.
Earlier this year the Central Commission for the Navigation of the Rhine and the United Nations Economic Commission for Europe granted permission for LNG fueled vessels to operate on international inland waterways. As a result, shippers have begun to introduce LNG powered barges and tugs into their fleets. Just yesterday (December 12, 2012) the first refueling of an LNG barge in a Belgian port was performed in the Port of Antwerp, the second largest port in Europe by total freight shipped. Last week, General Dynamics (GD) announced the finalization of a contract for the design and construction of two 764-foot LNG powered container ships to operate between Jacksonville, FL, and San Juan, Puerto Rico. General Dynamics also has an option for three more LNG powered vessels. This increased utilization of LNG as a marine fuel will help drive worldwide demand for LNG and enable producers and oil field service companies to recognize even greater profits.
In the short to mid-term, there exists an opportunity for LNG exporters to further profit from LNG arbitrage as the number of LNG tankers coming out of shipyards exceeds the capacity of LNG exporting facilities. Analysts estimate that day-rates for short-term contracts will fall from a record $150,000 this year to $110,000 next year. The rates will most likely surge higher as Cheniere Energy and others bring their export facilities online, but until then the potential for even higher profits exists as transportation costs have fallen nearly 27%. With transportation costs representing approximately 30% (with the liquefaction process accounting for another 30% and the natural gas around 40%) of an exporter's total costs, a 27% transportation savings is quite significant. Unfortunately for U.S. exporters, their export capacity won't come online until 2014 or 2015 when export capacity and transport capacity are predicted to balance out and rates return to normal.
The prospect for both increased profitability in the short-term as transportation costs temporarily fall and long-term as more LNG powered vessels drive increased demand for natural gas should be heartening for investors. Numerous approaches exist to tapping into the LNG revolution. Investors can choose the exporters themselves - Cheniere, Exxon Mobil, Dominion (D) and Sempra along with a few privately funded ventures such as Freeport LNG. Barring unforeseen delays, Cheniere will be the first to bring its export facilities online and open the floodgates of U.S. LNG to foreign buyers. Or investors can choose an upstream producer such as Conoco Phillips (which incidentally has a 50% stake in Freeport LNG), BP (BP) or Chevron (CVX). Finally, investors can choose to profit at the midstream level such as Kinder Morgan Energy Partners, LP (KMP) or with service companies like C&J Energy Services (CJES), Halliburton (HAL) or Schlumberger (SLB).
Each of the above companies present various investing options ranging from limited partnerships with preferential tax treatment (Kinder Morgan) to blue chip energy giants (Exxon Mobil) to growth oriented companies (C&J Energy Services). Regardless, the LNG market is poised to grow even more rapidly than it has in the past few years and investors would be well advised to consider adding an LNG play to their portfolio.