With LNG imports set to soar, plenty of great investment opportunities are opening up for companies in the United States that can either produce, process or export natural gas. North American natural gas prices are trading at just below $4 mmBtu, while Japanese spot prices are trading around $15-$16 mmBtu and European prices are $10-$11 mmBtu, giving North American companies a very competitive pricing edge.
This pricing edge can be clearly seen in Cheniere Energy Inc.'s (NYSEMKT:LNG) gross margins. For every 2 mtpa, or million tons per annum, that Cheniere sells, it generates $707 million in gross profit, or $6.80 per mmBtu. To generate these margins, Cheniere assumes US natural gas prices will be $5 mmBtu, and that it will be able to sell its LNG for $15 mmBtu. Considering Asian prices are trading above $15 mmBtu and that US prices are below $4 mmBtu, there could be plenty of pricing upside dormant in Cheniere's stock price.
Enormous amounts of growth
According to Cheniere, the European market is expected to import 28 million tons of LNG a year by 2015, growing to 98 million tons by 2030. While that is some stellar growth, it is off a low base compared to Asia. Cheniere sees the Asian market importing 200 million tons of LNG a year in 2015, almost doubling to 377 million tons by 2030.
Currently, the huge LNG markets are in Europe, Japan, Korea, and Taiwan. But what will really drive LNG demand is China, and its efforts to reduce pollution while still promoting economic growth. According to the EPA;
"compared to the average air emissions from coal-fired generation, natural gas produces half as much carbon dioxide, less than a third as much nitrogen oxides, and one percent as much sulfur oxides at the power plant."
To be fair, the production, transportation and processing of natural gas creates additional pollution, but clearly natural gas beats out coal on the environmental front. As China moves towards natural gas powered generation, the International Energy Agency expects China's gas demand to double by 2019.
For exporters it gets even better. By 2020, China's annual imports of LNG could grow from 18 million metric tons to 61 million metric tons. Last year, the biggest LNG importer, Japan, imported 87 million metric tons of LNG, meaning China will quickly catch up to the leader. While a surge in LNG export capacity is underway, one American company has a couple years head start.
America enters the fray
America will soon start exporting LNG, with Cheniere leading the way. Its Sabine Pass LNG export facility will start up in late 2015 or early 2016, and it has already received approval to export to both non-FTA and FTA countries. By being able to export to non-FTA countries, Cheniere Energy is able to sell LNG to countries like Japan and China, raking in large returns in the process. Cheniere Energy is also going to export LNG to European markets, with both offering plenty of upside.
Cheniere's LNG can have any final destination, meaning that it could still export to China even without a direct partnership with a Chinese company.
So far, Cheniere has contracted out 16 mtpa of the 18 mtpa of capacity from the first four trains of its Sabine Pass facility, with each contract lasting 20 years. By partnering up with Britain's BG Group, Spain's Gas Natural Fenosa, Korea Gas Corporation, India's Gail, France's Total, and another British firm Centrica, Cheniere will have a strong foothold in both European and Asian markets.
Huge streams of cash flow, but watch LNG prices
18 mtpa of LNG exporting capacity, fully contracted out, would generate ~$6.4 billion in gross profit based on the mid-point of management's guidance. If LNG prices fall to $10 mmBtu, then that number would fall to ~$2 billion. The surge in export capacity coming online could dampen Cheniere Energy's cash flow, which is a factor investors should keep an eye on.
The worst case scenario for Cheniere is North American natural gas prices rising to $6 mmBtu while LNG prices fall to $10 mmBtu, meaning Cheniere would make only ~$900 million a year from its Sabine Pass operations. On the flip side, if Henry Hub prices remain at $4 mmBtu, and demand from China creates another LNG importing juggernaut like Japan, boosting LNG prices to $20 mmBtu, then Cheniere could be making ~$11.7 billion a year.
The Sabine Pass facility is just the beginning. Cheniere is also building the Corpus Christi facility, which will be capable of exporting 9 mtpa once it is up and running in 2018. Farther out, Cheniere is going to add two new trains to its Sabine Pass operations and another one to its Corpus Christi facility, adding another 13.5 mtpa to its overall capacity. If margins stay strong, those facilities could boost Cheniere's stock price several times over.
Demand for natural gas is surging all across the world. While Japan, Spain, France, Italy, Taiwan, and Korea were the primary targets of LNG exporters, China will prove to be a formidable force in the future. There is a lot of excitement over the start up of US LNG exports, and Cheniere Energy is the best way to play the coming surge in LNG demand. Investors need to keep in mind that it will still take almost two years before the Sabine Pass is fully operational, so a long-term mindset is essential in making money off this stock.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.