America Exports More 'Freedom Gas' Than Ever

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Includes: APA, BOIL, DGAZ, GAZB, KOLD, LNG, UGAZ, UNG, UNL
by: Tortoise
Summary

Japan plans to idle some coal capacity and increase U.S. imports of LNG to fuel power generation.

If all coal-fired generation was replaced with natural gas, it would eliminate enough CO2 to achieve nearly 1/2 of the UN’s Climate Change Panel 2050 emission goal, per the IEA.

The Fed signals openness to an interest rate cut in response to the softening economy related to trade disputes.

Investor Day takeaways from one of the world's largest LNG exporters, Cheniere.

Hello, I am Matt Sallee, Energy Portfolio Manager at Tortoise. Thanks for joining us in this week’s Tortoise QuickTake Podcast.

In an otherwise quiet week for energy, there was plenty of macro news for the market to digest. First, let me start with a “Trumpdate.” The President was in Europe last week to commemorate the 75th anniversary of D-Day. During the visit, he managed to generate plenty of buzz, first calling the mayor of London a “stone cold loser,” I mean, I’ve never even heard that one before. Next, in what had to be one of the most awkward meetings of all time, President Trump and Queen Elizabeth met Monday. I found myself keeping an eye on the news coverage waiting uncomfortably for something hilarious to happen. Well, for better or worse, I guess better, the worst thing that happened was a slight breach of etiquette when he touched the Queen which, apparently, you’re not allowed to do. Who knew! This was followed by thousands of protesters who took to the streets with the 20’ tall Trump baby blimp to demonstrate their disapproval for the President. On a more serious note, Wednesday’s and Thursday’s activities were headlined by D-Day commemoration ceremonies that, as a distant observer, looked to be incredibly powerful and I’d like to recognize all those who served, and currently serve, to keep the world safe and free.

Moving on, the big market news last week was Fed President Jerome Powell signaling openness to a rate cut if needed. This action would be taken in response to the economy softening from uncertainty due to the ongoing trade disputes with China, Mexico and others. I found this fairly surprising given prior comments from the Fed and the fact that rates are already ridiculously low. Apparently, the market was surprised too and the Dow jumped over 500 points following the comments.

The possibility of a cut gained momentum Friday after a soft jobs number leading the market to rally further on increasing potential for a cut. I’m not buying it.

We were on the road last week at the investor day for one of the world’s largest LNG exporters, Cheniere (LNG), and came away with several meaningful takeaways.

  • As expected, Sabine Pass Train 6 received final investment decision. Also, with some debottlenecking and efficiencies, it increased capacity guidance per train by a little over 4%. This led the company to increase total run-rate EBITDA guidance to a $5.4 billion midpoint, translating to $9.00 per share of distributable cash flow. Not bad for a $65 stock. The cash flow per share guidance is up 12.5% thanks to Train 6 and the debottlenecking.
  • The company also provides much-anticipated capital allocation details. The plan calls for improving the balance sheet by reducing $3-4 billion of debt through the early 2020s, targeting mid to high 4x leverage metrics. Also, it plans to repurchase $1 billion of stock over the next three years and while it didn’t initiate a dividend it will revisit annually and implement as capital needs decline.
  • And, finally, the company announced a new capacity agreement with Apache (NYSE:APA). This is its first producer customer and an evolution of the structure where the contract effectively represents a fixed tolling fee to Cheniere which will market the gas for Apache and give it the spread between Permian and international gas prices. I’m guessing other producers would be very interested in this contract type.

Speaking of LNG, America is exporting more “Freedom Gas” than ever, in fact Bloomberg recently ran a story that because of the emergence of cheap U.S. gas globally, Japan is going to idle some coal capacity for the near term and increase imports of LNG to fuel power generation. This is a big deal because it doesn’t have the grid flexibility that exists in the U.S. to make a short-term switch. It has to make the commitment to shift generation for several months which it feels comfortable doing, thanks to the U.S. supply in the market. And, two days later its Ministry of Finance published a report indicating the shift to LNG may be a longer-term move and it increased the long-term LNG demand forecast 5% which, combined with renewable power, will replace coal and nuclear to achieve economic and environmental benefits. This reminds me, a recent study by the Paris-based International Energy Agency calculated that if all coal-fired generation was replaced with natural gas it would eliminate enough CO2 to achieve nearly half of the UN’s Climate Change Panel 2050 emission goal. This is not only realistic but it could be accomplished long before 2050.

I’ll finish with a comment on performance. Midstream continued its trend of recent resilience, adding nearly 3% in the past week despite huge swings in oil prices and a double-digit loss in NGL prices. It’s nice to see the correlation breaking down recently. It’s about time.

Disclosure: I am/we are long LNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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