Is Cheniere Energy A Good Bet On The LNG Market?

| About: Cheniere Energy, (LNG)


The company's first tanker carrying U.S. shale gas is on its way to the Far East.

Cheniere has long-term fixed-rate contracts, which gives its earnings some measure of stability.

Global LNG demand is growing and the Asian markets will be a key battle ground.

Australia will become the largest exporter of LNG in the world by 2020.

Conquering the Asian LNG market will not be an easy task.

U.S. Shale gas has finally started to travel to the largest consuming region in the world. Cheniere Energy's (NYSEMKT:LNG) tanker is said to be on its way to the Far East, the region known as the largest consumer of LNG in the World. As the above-linked Bloomberg article explains, the expansion of the Panama Canal will play a vital role in growing U.S. LNG exports to Asia as well as South America. At the moment, majority of the LNG exports are to the South American buyers. The Panama Canal will reduce the trip times to South American buyers by 54%-80%. Some of these buyers are Chile, Colombia and Ecuador.

Cheniere is going to be a direct beneficiary of this expansion in exports as most of its capacity will be utilized. In order to have access to the U.S. shale gas, some countries and major companies like Shell and Total will be paying Cheniere to use its facilities. Since most of these contracts are long-term fixed-rate contracts, the earnings of the company will have a degree of security. Long-term fixed rates contracts are a norm in the LNG market. Although the oversupply concerns have prompted some producers to have crude oil linked contracts, most agreements remain on fixed terms.

However, expansion in the Far East will not be easy. Qatar and Australia will give a stern competition to the U.S. shale gas. Japan and South Korea and Taiwan are the largest consumers of LNG in the region, and these countries can also be said mature/developed markets for LNG. These countries are getting LNG from Qatar as well as Australia. South Korea has also reserved some capacity at Cheniere's facilities, indicating that the country is further diversifying its supply sources. There are fears that Japan and South Korea might opt for more nuclear energy and reduce their dependence on LNG. However, demand from Taiwan is expected to remain strong and the region as whole will show strong demand growth.

Real demand growth from Asia will come from its emerging economies. China and India are fast becoming two of the largest LNG importers and countries like Malaysia, Thailand, Singapore and Pakistan are also increasing their LNG imports. China mainly imports LNG from Qatar. However, some seasonal fluctuations force the country to reach the spot market to meet the increased demand. Qatar offered China an option to buy more LNG to meet these fluctuations. Global LNG market is still developing and the next five to 10 years will be important for this market. There will be a lot of volatility and the industry dynamics will change rapidly. Qatar's offer to China is one of the examples of how the natural gas producers are trying to manage these changing conditions. Natural gas prices still remain largely associated with the crude oil prices despite the best efforts of natural gas producing countries.

The market is further becoming complicated as the prospect of more suppliers is forcing countries like Qatar to renegotiate the contracts. In essence, the buyer is getting way too much power in the market and producers are no longer able to control or dictate the terms of the contracts. Qatar recently renegotiated its LNG export contract with Petronet, the Indian company responsible for importing LNG. Fixed rate contract meant the Indian company had to pay $12-$13 per MMbtu when the market price had come down to $6-$7. New terms of the contract allow India to import LNG at the current market price and Qatar also waived the penalty of $1.8 billion, which was accrued due to lower imported volumes. Agreement between India and Qatar was take-or-pay, which means the buyer had to buy a specific quantity or face the penalty.

Qatar usually signs agreements with the take-or-pay clause in order to have security. Its $16 billion agreement with Pakistan is also on similar terms. Pakistan is a newcomer to the LNG import market and the country has signed a 15-year import contract with Qatar. Under take-or-pay contract the country will be importing 2.25 mtpa, which will rise to 3.75mtpa by the second quarter of 2017. The Pakistani economy is suffering due to a shortage of power, and the long blackouts have forced the country to focus on growing its energy sources.

The country needs natural gas for its power plants as well as the fertilizer industry. Most of its power generation comes from the fossil fuels and the fertilizer industry is suffering heavily due to the shortage of natural gas. Being an agriculture-based economy, fertilizers play a vital role and farmer welfare often becomes the focal point of any political campaign. At the moment, fertilizers are being offered to the farmers with a government subsidy. The government cannot afford to extend this subsidy indefinitely, and it is important to establish a stable source of natural gas for the industry.

According to this research report, the majority of global natural gas demand growth is going to come from non-OECD Asia. This is in line with EIA reports in which the agency is expecting the non-OECD countries to increase their share of natural gas consumption from 52% to 62% by 2040. The global LNG market is fast changing and the demand is also growing in Middle East as well as Africa. If the political tensions remain in the Middle East, then the U.S. shale can also be a major exporter to the Middle East. These political issues are a big hurdle in the pipeline network between the Middle East nations.

Australia cannot be ignored in this market as the country will become the largest exporter of LNG as its development projects come online. The country has a total of $80 billion worth of projects in development and the completion of these projects will make it the largest producers of LNG. Its major buyers are the Far East mature buyers (Japan, Korea and Taiwan) as well as China and India. With these projects coming online, Australia is also planning a serious assault on the Far East LNG market. This will further give an incentive to the buyers as growing supply will increase their bargaining power.

I have tried to briefly explain the global LNG market and the potential for U.S. shale gas in this article. Despite the growing supply concerns, there is a lot of potential for U.S. exporters. Demand growth is strong and new venues of growth are coming online. Expanded exports might also have an impact on the domestic prices as the excess supply will be exported. As a result, natural gas prices should go up and maintain a healthier level for the natural gas producers. Cheniere's model gives it earnings security to some extent, and the expected market conditions mean the company can benefit further as the market expands. Cheniere can be a good bet on the global LNG market.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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