For any well-rounded investor, the depressed price of natural gas has become a well known issue for gas drilling companies in America. A price depression brought on by the massive over-supply of natural gas through a process called hydrofracking. As a result, giants like Baker Hughes (BHI) and Chesapeake Energy (CHK) have dropped to their knees because of the onslaught of natural gas prices. In the midst of this disaster is a company that actually profits tremendously on the depressed natural gas price: Cheniere Energy (LNG).
So what does Cheniere Energy do? It is a master of arbitrage during a once-in-a-lifetime opportunity for making arbitrage profits from current domestic natural gas prices. Cheniere Energy is an intermediary which, through a complex process they specializes in, freezes natural gas to such a cold temperature that it condenses to 1/600th its normal volume. Then the company stores this frozen liquefied form of natural gas onto tankers that export the natural gas. Countries like China, India, Japan, and South Korea import this natural gas at a very steep premium to domestic natural gas prices; fetching prices up to 10x the current prices in America.
Why is this the case? Well, although we're experiencing a natural gas glut in America, other countries are experiencing a natural gas shortage. So what has happened is vast disparity in natural gas prices between us and other countries. Cheniere Energy's ability to liquefy and export the natural gas allows it to take advantage of this price disparity and capitalize tremendously on it. It already has contracts lined up, bringing in $2.5 Billion after operational expenses.
Wait, it only gets better. Cheniere Energy currently holds an exclusive exporting license, which allows it to export natural gas to none-U.S. free-trade associated countries. This allows it to export natural gas to the largest importers of natural gas like China, Japan, and South Korea. Other natural gas exporting companies in America can only export natural gas to U.S. free-trade associated countries, which account for a small portion of all natural gas imports.
Just last week, Cheniere Energy was given approval for a $10 billion expansion project, which will allow it to operate a total of 4 LNG (liquefied natural gas) train terminals. When finished, this will allow Cheniere Energy to export 876.6 billion cubic feet of natural gas per year; most of which has already been purchased by Gas Natural Fenosa, Kogas, BG Gulf Coast LNG, and Gail Ltd.. The expansion should be completed by 2015, essentially giving Cheniere Energy the first-movers advantage in this natural gas exporting game.
A major concern that involves Cheniere Energy though is its ability to finance this $10 billion project. As of now, financing is already set for developing the first 2 LNG trains, but that poses the issue of how Cheniere will finance the other $5 billion. Debt? Stock issuance? Bonds? From this point, it's still unsure, but I suspect it will borrow more funds from institutional investors seeking to jump into the action.
I believe that Cheniere Energy may be one of the greatest long stocks to invest in because of its near monopolistic position in exporting natural gas to capitalize on the unique arbitrage opportunity.