The Ukrainian crisis does not change any fundamentals for the North American natural gas industry. This is not the time to jump into liquefied natural gas (LNG) export plays. In fact, this might be a good time to exit LNG.
According to the Federal Energy Regulatory Commission, there is one LNG export facility in North America. Approximately 37 more are in various stages of development. Companies like Cheniere Energy (LNG), Dominion Resources (D), Sempra (SRE) lead the pack. The remaining facilities may or may not be built.
Most LNG facilities will not be built because they are incredibly expensive; they cost about the same as a new nuclear power plant. Like nuclear power plants, LNG export facilities can take years to plan, permit and build.
To finance LNG facilities requires many owners to sell their production forward. In fact, most of Cheniere and Dominion's production has been presold. With, or without the Ukrainian crisis, presales mean there is little extra LNG available for new customers.
North America is not the world's only source of LNG. It is also not the cheapest source. Other countries like Qatar and Australia have already invested tens of billions of dollars in their LNG export facilities. Qatar sits on top of the North Field, one of the world's largest sources of conventional gas wells. Their reserves are enormous. Their lifting costs are small. Their feedstock costs are near zero. Their competitive advantage is significant.
Australia also sets atop massive amounts of conventional natural gas. They are also geographically closer to the world's largest LNG consumers. This closeness reduces costs.
Natural gas is not bounded by countries. There is a lot of conventional gas beneath the oceans. This is why Royal Dutch Shell (RDS.A) is constructing the world's largest ship. They plan to sit atop offshore gas wells and produce LNG on the spot. According to Forbes, Shell's floating liquefied natural gas (FLNG) ship is huge. It is expected to be approximately 1,600 feet long and 250 feet wide. It will weigh about 600,000 tons when fully loaded with equipment and LNG. By comparison, an aircraft carrier is smaller at about 1,100 feet and 100,000 tons.
Exxon Mobil (XOM) and Total (TOT) also see the benefits of FLNGs. Consequently, each is building FLNG vessels which will be approximately the same size as Shell's FLNG.
Whether it is FLNG or conventional gas, these new entrants have one strategy in common. By focusing on conventional gas wells and using refined processes, they seek to become the industry's cost leader.
Cost leadership is a threat to North America's shale gas. Most all of North American LNG producers must buy their feedstock at market prices. Those market prices will always be higher than the costs for Qatar, Australia or FLNG. To compete, North American natural gas must either reduce its margins or find consumers willing to pay elevated prices.
Speaking of profitability, investors should review Cheniere's financials. Its cash flow is negative. Because Cheniere leveraged its export facility with debt, its leveraged cash flow is underwater. Yet they have a market capitalization value of about $12 billion. This could be dangerous for long-term investors.
For short-term investors, the LNG carrier market may make sense. Golar LNG Partners (GMLP) and Teekay LNG Partners (TGP) are two leaders in this market. Golar also owns floating storage and regasification vessels, which act as movable LNG import facilities. However, most of their LNG assets have been under long-term contracts which reduce exposure to short-term Ukrainian-induced opportunities.
Teekay owns approximately 27 LNG tankers, including several that are owned in joint ventures. Despite its name, Teekay's business also includes transporting liquefied petroleum gas (LPG) and crude oil. As such, its stock is not a pure play on LNG.
For long-term investors favoring LNG fundamentals, FLNG may make the most sense. From a production point of view, FLNG will be the cost leaders and the suppliers to beat. After FLNG are conventional wells and liquefaction facilities in Qatar and Australia. Following that will be shale gas.
Chasing after world events is fraught with risks. The Ukrainian crisis will be overcome by events before any new LNG export facility can be built. In addition, there are alternative solutions for energy-starved Europe and the United Kingdom. Some of those solutions do not include LNG.
For investors who like LNG and want to avoid the crowd, Shell and Exxon Mobil may be their best bet. It is true their LNG positions are part of a larger portfolio. However, these companies will be the last ones standing when others face competition.
