This is Part 2 of 2 of the natural gas energy series titled 'The Answer to the Oil Dilemma? Natural Gas'. Please see Part 1 for the macroeconomic analysis of Natural Gas as a growing global transportation energy solution. This part concentrates on investment opportunities in this sector based upon the analysis.
The US, dubbed the Saudi Arabia of natural gas, has surpluses that are expected to be exported to Asia and Europe. While competing countries are coming online by the end of the decade, including China and Australia, the US is positioned as the first mover position in this market which has offered strong pricing advantages for those who can export the gas. This is done by liquefying it at -270 degrees, compressing the gas to 1/600th of normal volume and making it economic to ship by tanker. The companies that can liquefy the gas, ship and regasify it will benefit until gas production evens out across the globe in the next 10-20 years.
Countries like Japan and South Korea have historically relied on all imported gas. Japan has increased imports 12% in the first four months after the Tsunami. Germany, expected to turn down its nuclear reactors by 2015, will become a major LNG importer. China is expected to increase natural gas consumption 4-fold by 2030 in an effort to reduce reliance on coal. The country has five LNG terminals and is building six more to accept LNG imports. India is also looking to increase imports.
US companies will be best positioned to fill those import gaps in the next decade. The US currently has one liquefaction facility and shipbuilders are building LNG FSRU's as fast as possible to transport and regasify those inventories onsite at various demand locations.
In addition, as oil gets more expensive, infrastructure build outs in the US geared toward natural gas transportation will be a booming industry. Several companies are positioning themselves to take advantage of this industry shift.
What is the best way to capitalize on the growing market in natural gas? Several opportunities have presented themselves to the market based upon the factors just outlined.
Chicago Bridge and Iron (NYSE:CBI) provides engineering and fabrication services to the midstream energy and natural resource industries worldwide, which includes LNG liquefaction and regasification facilities and gas processing plants. CBI recently acquired Shaw Group, which builds downstream facilities that utilize gas. In addition, Shaw Group builds nuclear power plants, and will benefit from renewed nuclear growth sector as well. CBI is now well positioned as one of the largest energy construction and engineering contract firms in the world.
While some analysts were not bullish on the Shaw acquisition for $3 billion, the facts are the combined companies have a $28 billion backlog in orders and should be well positioned to finance the acquisition while growing earnings 10% in the first year according to company estimates.
Cheniere (NYSEMKT:LNG) owns and is developing 3 LNG terminals along the US Gulf Coast. They have additionally been granted rights to the largest US gas liquefaction plant. The plant cost them $5 billion in financing, $1.5 billion of which was contributed by Blackstone. The plant will position Cheniere as a leader in LNG exporting. The company owns long term, 20 year contracts which guarantee them income from buyers regardless if the plant is actually used, so financing the build out is already in place.
Their weakness is current financials. They will need additional funding between 20013 and 2014 to remain solvent, partly due to decreasing demand for receiving terminals in the US which is ripe in shale gas. If they can survive the next few years, the Sabine Pass liquefaction facility will offer strong revenue growth moving forward.
Chart Industries (NASDAQ:GTLS) specializes in providing equipment for natural gas market, and operates in three segments: Energy and Chemicals, Distribution and Storage, and Biomedical. The company is based out of Ohio and has international facilities in Australia, China, Germany, the UK, and Czech Republic.
Chart Industries will be a big factor in the LNG tank business if natural gas fuel expansion occurs in the US. Note that while the US only has 120,000 natural gas vehicles, the world count is up to 14 million. The biggest near term growth have been from companies transporting large volumes of natural gas.
Chart Industries will benefit from more LNG infrastructure stateside but may also suffer from competition from Chesapeake, Shell, and Cheniere. Also note that expansion has come at a cost of shrinking margins. The stock is priced high on expectations of earnings growth, but may be due for a slight correction.
Clean Energy Fuels (NASDAQ:CLNE) is a leading developer and operator of natural gas fueling stations in the US. Like Chart Industries, CLNE is a story stock benefiting from the coming natural gas conversion in the US. Clean Energy gets investment from gas producers looking to capitalize on increased natural gas transportation usage, including $450 million from Chesapeake to build 150 gas stations by 2013. The US lacks fueling stations nationwide to benefit from a conversion, but the rising cost of oil and lack of alternatives is driving future investments in this sector.
Revenues are growing but the company is yet to record a profit. They will have name recognition as natural gas consumption rises and may turn out to be a takeover target from one of the larger gasoline station companies. Financials are solid but investors want to see a profit from this company soon. Perhaps the 2013 station build out will help them reach that goal.
Westport Innovations (NASDAQ:WPRT) is a global leader in natural gas engines. The company has made the most headway in heavy duty engines, including a JV with Cummins. They also have alliances with CAT, GM, Volvo, Ford, Peterbuilt, Daimler Trucks, Canadian National Railways, and Navistar. They have purchased AFV and Emer to boost their natural gas technologies.
The company beat Q2 earnings and revenues estimates. They may not be profitable for two more years, but expectations of profits are forthcoming in 2015. One current weakness is that 35% of their business is in a tight Asian market, which has been reducing margins. They need the US and other Western markets to boost margins and lead the company to profits. So, this company hitches its fortunes to the same natural gas domestic growth model as the likes of Clean Energy and Chart Industries.
Teekay LNG Partners (NYSE:TGP) is one of the largest tanker companies in the word. They have 25 LNG carriers to add to their 11 conventional oil tankers.
The oil tankers are currently in oversupply to the market, and margins are falling. The glut is not expected to be alleviated soon. However, Teekay's revenues are bolstered by a strong LNG fleet. Teekay has contracted for 6 additional LNG tankers from AP Moller Maersk, which has been financed mostly by their JV partner.
Most of the tanker fleet is on long term contract, but two current LNG tankers come off soon and will benefit from higher current rates in the market than what the previous contracts had been worth.
The company is dependent on the debt markets currently, and has high current liabilities. However, they also have a steady stream of income and should increase LNG margins a bit in the future. Most likely there will be some share dilution here and dividends may need to be cut back to cover short term obligations. Right now, the dividend is very healthy at 6.7%.
Golar LNG (NASDAQ:GLNG) operates exclusively in the LNG tanker market so they have no downside exposure to oil shipping. They have 13 tankers operating with 13 more on order. 2 of their current fleet operate in the spot market and benefit from high shipping day rates.
Golar's revenues come mostly from three companies, BG Group, Shell, and Pertamina. Golar focuses both on LNG tankers and FSRU's, which offers the ability to regasify transported gas on site. Golar expects its current and future FSRU's offer an advantage in a market looking for fuel transportation and regasification from US exports. The number of importing countries has doubled since 2005, and 50% of all new LNG import markets have chosen FSRU's over land facilities according to company statistics.
Like many of the natural gas companies engaged in build out phases, Golar has a short term cash crunch which will need to be financed and may put pressure on profits and share price near term. In addition, the company faces pressures in currency conversions and floating interest rates that may reduce margins in the wake of current global economic conditions.
Overseas Shipholding Group (NYSE:OSG) receives most of its revenues from crude oil transport versus LNG, and is facing weak demand and overcapacity issues in the crude oil transportation market. The company is highly leveraged and has been drawing from a credit facility to increase cash on hand.
The company appeared to overbuild the oil fleet despite capacity issues, and continued to issue strong dividends while facing 2 straight years of losses. They finally suspended the dividend, but still need to prune their fleet and shed excess debt to recover. Current management does not appear to be embracing an aggressive fleet realignment strategy, however, and investors should beware this stock even given the cheap current share price.
Gaslog (NYSE:GLOG) is an international operator of 10 LNG carriers with 8 more on the way. Most of the new fleet has already been contracted and demand should drive profits in the future. Gaslog's fleet will be 1.9 average years old upon arrival of the new vessels which is the youngest in the industry and will be among the most efficient to operate.
The company has a large finance payment due in Q1 of 2014 but should be able to refinance given current assets. 2012 profits are expected to be weak due to staffing increases for the coming new fleet. Profits are expected to rise in 2013 and 2014.
An earnings call is scheduled for August 21 which may impact the stock short term. But this story is a medium term play. Once the company gets past its current financing challenges, annual earnings growth is full speed ahead.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.