Liquid Natural Gas
"The liquid natural gas (LNG) business will never make money and the facilities will be mothballed," says our man in Houston, who has been in the oil and gas business for 45 years. "When the pro-formas were done, gas in Japan was above $16/mcf (thousand cubic feet), and in Europe, it was above $13/mcf. Now those numbers are falling! It costs $4/mcf to gather, compress, freeze to minus 260 degrees, and ship in a reinforced tanker (read: oceangoing bomb) to the markets. So, the U.S. producer will get $1/mcf at the wellhead. Not for long ... no one is drilling ... when gas is $2/mcf, Brazil, which is already broke (before the Summer Olympics and it usually is afterward), needs the LNG because the drought caused an ethanol shortage. ... Remember: They were 'self-sufficient' and even exporting."
If he's right, this can't be good for Cheniere Energy (LNG), which says it expects to export 8-10 cargoes of LNG in the next two months out of the Sabine Pass terminal on the Texas-Louisiana border, a company spokesman said last week.
Further, Cheniere has contracted to sell 42 cargoes of LNG from its Sabine terminal to EDF Trading between 2016 and 2018, and roughly 12 cargoes per year to French multinational Engie between 2018 and 2023. My bet is that these contracts get seriously renegotiated downward or pushed out.
Meanwhile, Carl Icahn has two board seats and is squeezing the board to produce near-term cash flow. For instance, the company has halted engineering work and permitting that was in progress in a facility in Corpus Christi, Texas. The board removed CEO Charif Souki in December, and a search is on for a replacement.
Last week, Goldman Sachs (GS) forecast $3/mcf for gas and $50/barrel for oil. Forbes magazine also published an article saying natural gas prices have to bounce by year end.
"Wishful thinking," our man in Houston says. "If that is right, it will be very helpful in clearing the market because that won't save anyone! Fifty dollars a barrel is as bad as $35/barrel, so the rig count will continue to drop (from 514 to under 400), majors will reduce dividends as their business model has failed below $70-$75/barrel, and all the marginal will still fail. The market will clear in 2017. Conventional natural gas will lead the recovery on the value-per-dollar-invested rankings."
Maybe we can get a "dead-cat bounce" in the group because it is oversold. But it will only be a trade. The fundamentals don't support a strong comeback yet. Historically, energy stocks do OK in the winter and then one wants to sell them in May. They tend to underperform in the summer. Thus, it feels like we will be looking for a bottom for the next few months and then start to see the group do a bit better in the fall as it anticipates a real turnaround in 2017. We will revisit the fundamentals regularly. Meanwhile, it's still too early for investors to take any serious stands.