As expected, President Trump struck a soft tone at Helsinki, sending mixed signals to the market as he continues to provoke what we call the Trump-Putin-Merkel standoff and concerns about energy security.
Nevertheless, we can distill the following trends.
Focused on North Korea, But Little on Iran Denuclearization
The meeting between Russian President Putin and President Trump offered very few details on what the outlook would be for Iran's sanctions, thus leaving price volatility on the table. Russia kept their view on Syria, but stayed away from mentioning Iran, a call that's been Trump's message over the various summits. Trump reiterated that Iran won't be allowed to benefit from the success of the campaign to eradicate ISIS.
Russian Pipeline vs. US Floating Gas
Trump expressed his views about "competing" with Russia on exports to Europe (pipeline vs. tanker), which continues to be a great endorsement for the industry as Trump emphasizes the US position as a leading natural gas provider. Putin reiterated that Russia plans to transit its commodity through the Ukraine, refueling tensions between the West on the annexation of Crimea.
North Stream Pipeline
Trump reiterated he could free Europe from Russian gas flow by providing cheap US gas. A strong E&P gas name to benefit from this global positioning is Range Resources (RRC) given their exposure in the Marcellus and Utica, and Golar LNG (GLNG) on the transportation side.
A Takeover Trade on LPG
On the back of this global gas trade we have a bullish view on Dorian LPG (LPG) , an operator of 22 vessels: nineteen 84,000 CBM ECO-VLGCs and three 82,000 CBM VLGCs. LPG is currently fielding a takeover offer from BW LPG, 9% owned by Seacor Holdings (CKH) . LPG was co-founded by Greek magnate John Hadjipateras and Charles Fabrikant. Since the bid was rejected by LPG's board of directors, we think BW LPG could sweeten the price or another contender could join the bidding.
Israel Security
Israel was thrown into the mix by Trump and Putin today. Our take is that Israel has an "ace under its sleeve" with the slow but sure development of its Leviathan field, operated by Noble Energy (NBL) with a 40% stake and Delek Drilling with ~45% stake. The field is strategically located with direct access to southern Europe given its location in the Mediterranean.
Geopolitics Call For Bullish Global Gas Trade
While Trump continues to alienate European trade partners with his approach to Russia, natural gas and NATO, the US natural gas industry will continue to look to Asia for long-term off-take agreements instead of Europe. Europeans could likely move to buy foreign LNG when US exporters are trying to get deals done. Cheniere Energy (LNG) and Tellurian (TELL) are our top LNG long plays and we would continue to recommend buying on dips.
Long-Term Contracted Offtake Capacity
No matter what happens at the macro levels, players like Cheniere Energy have already contracted substantial amounts of LNG to Europe locked in 20-contracts, thus we will continue to recommend buying LNG on any dips. As for Tellurian, we favor their long exposure to natural gas via their Exploration & Production unit. TELL provides a clear picture of the bullish LNG trade in its latest Corporate Presentation.
Trump-Merkel "Mexican Standoff" Would Spike Additional Trade Tensions
Germany, a large consumer of Russia natural gas, is likely to continue this trend despite Trump's calls for fostering Russia ties. Angela Merkel doesn't really see Trump as a threat since they have their energy supply secured and direct US sanctions to German companies for doing business in Russia carries too much geopolitical and international trade risk. Steel tariffs is already a sour point for steep pipe manufacturers like Tenaris (TS) and Vallourec, which will continue their downward trend.
Long Crude Oil Volatility Better Than Directional Bets
Crude volatility will likely move on geopolitical risk as the pieces of the power play fall into place. Rather than taking directional views on US Oil (USO) , we prefer to recommend owning CBOE Crude Oil ETF Volatility Index (OVX) which closely correlates with the VIX and is a better way to leverage crude oil volatility spikes.
How to Play the Russia, Saudi Arabia De-Facto Duopoly
Given the balance of power between OPEC and Russia on one side, and US producers on the other, we think Iran's sanctions will continue to weight on commodity prices. We anticipate Russia pressing on this issue today and going forward. Iran has said the market would be better off if sanctions are relieved rather than Trump moving on his call to use the US Strategic Petroleum Reserve (SPR) to put an artificial 'cap' on prices.
The two leaders conveyed a friendly, warm tone with Trump promising more meetings.
"Today's meeting is only the beginning of a longer process, but we've taken a step towards a brighter future," Trump said. "I'm sure we'll be meeting again in the future, often."
