Liquefied natural gas, or LNG, is natural gas converted to a liquid form for storage and transport. This occurs when natural gas is cooled to approximately -162 Celsius or -260 Fahrenheit. At this stage, LNG receives a higher reduction in volume than compressed natural gas (CNG) so that the energy density is 2.4 times greater than that of CNG. As a result, LNG becomes cost efficient to be transported by specially designed ships or LNG carriers. Once it arrives at its destination, it is regasified and distributed as natural gas.
In order for an LNG facility to go forward, LNG suppliers sign long-term contracts with customers for LNG. Once the customers are confirmed, the LNG plant owners then proceed with gaining governmental and environmental approvals for construction.
Japan Plans To Launch First LNG Futures Contract
Japan is currently the world's biggest buyer of LNG. They plan to list the first futures contract for LNG on the Tokyo Commodity Exchange within two years. The futures contract will be cash settled in U.S. dollars and based on an index price for spot cargoes delivered to Japan.
The purpose of this contract is to help consumers and producers hedge prices. Japan had a record trade deficit last year as the country consumed more LNG as the nation switches away from nuclear reactors. Currently in Japan, the price for LNG is linked to the price of oil.
Last year, Japan paid an average of $16.70 per million British thermal units. The average price for natural gas in the U.S. last year was $2.83 per million British thermal units. Japan used a record 87.3 million metric tons of LNG last year at a cost of more than $64 billion.
Many state-owned energy firms from Asia are quickly turning East Africa into a new form of gold rush. In the past, it was the supermajors such as Exxon Mobil (XOM), BP (BP), Chevron (CVX), Royal Dutch Shell [(RDS.A) (RDS.B)], or Total (TOT) that had the cash and resources to develop new projects. Now these state-owned energy firms are backed with cash from their governments and are looking to secure energy supplies to meet their respective nation's growing demand.
Nowhere is this more evident than in Mozambique. It is estimated that the fields off the coast of Mozambique in the Indian Ocean hold enough gas to supply the entire globe for two years. Last month China National Petroleum Corp. paid Italy's Eni SpA (E) $4.2 billion for a share in the fields and planned LNG plant. That field now consists of firms from China, India, South Korea and Thailand amongst its owners.
The two companies behind this field in Mozambique are Eni SpA and Anadarko Petroleum (APC). The planned production capacity will be 20 million tons a year. This would make it the second largest export site behind Ras Laffan in Qatar.
The best way to play the growth of LNG in East Africa is through Anadarko Petroleum. Besides its partnership with Eni in Offshore Area 4, Anadarko has successfully drilled 15 wells in Offshore Area 1. Anadarko operates this lease in Mozambique with its partners Mitsui, BPRL Ventures, Videocon, and PTT E&P. The exploration of Area 1 will continue through this year and into next. Anadarko is also launching an exploratory program in nearby Kenya where it holds an operating interest in about 5 million acres. Anadarko has been able to use its success in the Jubilee development off the coast of Ghana to implement these projects in East Africa.
In looking at Anadarko's stock, we see that it has a market cap of $41.13 billion and a forward P/E of 15.95. Return on equity is 11.97% and operating margins come in at 16.31%. There's $2.47 billion in cash on the balance sheet to $14.46 billion in debt.
Considering the costs to develop the fields in East Africa and according to the Wall Street Journal, Anadarko is looking to sell 10% of their stake to fund the project. This makes sense for Anadarko to reduce its stake slightly and bring in a partner with deeper pockets. Exploratory talks have already been held with Royal Dutch Shell and Exxon Mobil.
Of the analysts that follow Anadarko, 16 have it rated as a Strong Buy, 11 a Buy, and 3 a Hold. Price targets on the stock range from $90 to $138. Anadarko is trading just above $82.
Canada looks set to capture the Asian appetite for LNG before the U.S. Canada has a favorable regulatory environment for exporting energy and has already approved 3 LNG facilities for export compared to just 1 in the U.S. The first facility to export to Asia from Canada looks to be in operation mid-2015, 8 months before Cheniere Energy's (LNG) Sabine Pass facility in Louisiana.
Chevron Corp. is focusing all of its efforts on exporting LNG in Canada. Besides a friendlier regulatory environment, western Canada is closer to Asia and will cut down on shipping costs. Chevron in December bought 50 percent of the Kitimat LNG project. The other half of the Kitimat LNG facility is owned by Apache Corporation (APA).
The third LNG facility in Canada is backed by Royal Dutch Shell in British Columbia. These 3 facilities will have the capacity to export 4.66 billion cubic feet a day once they're operational.
The Japanese government is stepping in with $10 billion in loan guarantees to Japanese companies investing in Canadian LNG projects. By providing loans, the hope for Japan is to speed up Canadian projects. By providing capital, Japan hopes to secure more favorable terms when negotiating contract prices for LNG. Japanese companies that are already invested in Canadian LNG projects and likely to take advantage of the Japanese government's offer include Mitsubishi, Japex and Inpex.
Australia had grand ambitions to be the world's largest exporter of LNG. However, cost overruns have hurt investor's prospects in the region. Last week, Australia's Woodside Petroleum shelved plans for a $45 billion LNG plant in western Australia. According to the NY Times, Woodside will instead look to building a facility in Canada for LNG. LNG projects have just become too expensive and the investment returns are now too low.
Outlook For LNG
I see the LNG sector having a very promising future. Countries in Asia are turning to LNG for their energy needs. Mozambique looks to be the next frontier and Anadarko Petroleum is very well-positioned in that country. In Canada, multiple companies have entered the market and there's not a pure play on Canadian LNG. Rather as more LNG facilities gain approval and get built in Canada, look for Encana Corporation (ECA) to benefit as the company supplies the LNG facilities with gas.