If you read my columns, you know I've been spending quite a bit of time analyzing the global shipping industry lately. Reading trade publications, watching the bounce-back in the Baltic Dry Index -- today's London afternoon fixing of 409 put the BDI a solid 41% above its Feb. 11 low -- and talking to as many managements as possible. In the midst of all this research, I occasionally check my LinkedIn newsfeed (feel free to Link In with me) and while doing that today I noticed a monumental event had occurred in energy shipping.
On March 9, a liquefied natural gas (LNG) tanker, the INEOS Intrepid, left the port of Marcus Hook just south of Philadelphia bound for INEOS' petrochemical facility in Rafnes, Norway. The Intrepid is carrying 27,500 cubic meters of ethane sourced from shale gas produced in the Marcellus formation and shipped across Pennsylvania on Sunoco Logistics' Mariner East pipeline system.
So it's the first export to Europe of an Appalachian shale gas product. While Cheniere's (LNG) Sabine Pass facility in Louisiana has gotten all the headlines with its initiation of LNG exports -- the first shipment from Sabine Pass reportedly went to Petrobras (PBR) -- the completion of the Mariner East pipeline has the potential to revolutionize the shale gas industry.
Ethane and associated natural gas liquids (NGLs) have been the poor stepchildren of the gas boom. As prices plummeted for natural gas and crude oil, NGL prices fell through the floor. While it's hard enough for natural gas E&Ps to turn a profit with $1.80 per million Btu gas pricing, I have heard many tales of gas producers having to pay pipelines to take the associated liquids with their gas production, i.e., the realized price was less than zero.
Shipping Marcellus gas byproducts like ethane and propane out of Marcus Hook should ease pressure on NGL pricing in Appalachia.
It's a classic arbitrage situation. While European natural gas prices have plummeted, the Dutch TTF spot price was recently quoted at 12.30 euros per megawatt-hour, which equates to about $3.75 per million Btu. So, while the spread has narrowed considerably from two years ago when European gas could fetch more than $10 per million Btu, European gas prices are still more than double what we're seeing in the U.S. So, an industrial user like INEOS wants to secure a cheap, reliable (Russia is, of course, Western Europe's largest supplier of natural gas) source of LNG for its chemical operations. INEOS will use the ethane as both a fuel and a feedstock, and Rafnes plans to begin shipments to a sister facility in Grangemouth, Scotland, later this year.
I'm not predicting an immediate uptick in Appalachian gas prices as a result of ethane shipments from Marcus Hook, but the incremental demand helps in an oversupplied market.
The true beneficiaries of increased LNG shipments will be the shipping companies themselves. Stocks of LNG players such as Golar LNG (GLNG), Teekay LNG (TGP) and Navigator Holdings (NVGS) were all punished late last year as LNG prices capitulated in the face of crude's price implosion. While share prices in the sector have recovered from February's lows, I believe there are still attractive values there.
I'll be looking to add LNG names to my clients' portfolios to go along with our current shipping holdings in dry bulk names like Navios Maritime (NM, the preferred series G is my Real Money top pick) and oil tanker companies like Scorpio Tankers (SLTB, SBNB) and Nordic American Tankers (NAT).