China retaliatory trade sanctions are sending a clear signal to the market: China is strong, big enough to matter among allies, and if willing, able and ready to hurt the U.S. economy in our most pressing exporting sector, natural gas.
China imports of U.S. LNG are set for a 10% tariff, extending a trade dispute at a moment when U.S. LNG developers are in the midst of negotiating long-term offtake agreements with major buyers in Asia, casting a shadow over U.S. export terminal projects.
These agreements are a cornerstone for developers to secure much-sought-after financing so they can bring such projects into reality. This uncertainty leaves us with the question of what to do with our listed LNG stocks, like Cheniere Energy (LNG) and Tellurian (TELL) as the U.S. is forecasted to export over 1,000 billion cubic feet (bcf) of gas as LNG in 2018.
Our trade is a relative value one: long LNG and short TELL. And here's why:
Cheniere is up more than 50% over the last 12 months, while Tellurian is down almost 15% for the same period. We think this spread will continue to widen as Cheniere secures additional long-term agreements while executing on delivery, and Tellurian slowly carries on its multi-prong growth strategy.
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Despite trade sanctions, allies are showing commitment to U.S. natural gas -- demonstrating that long-term deals are not dead: Vitol, one of the largest crude oil traders, signed a 15-year sale and purchase agreement with a subsidiary of Cheniere Energy to purchase approximately 0.7 million tonnes per annum. In addition, Germany has elected to build an LNG terminal as a gesture to the U.S., and German utilities like Uniper (UN01) and RWE (RWE) are ready to import LNG with planned terminals near their storage facilities.
The U.S. House of Representatives passed a bill in early September, the Ensuring Small Scale LNG Certainty and Access Act, that would allow expedited approval of small-scale shipments of LNG (less than 0.14 billion cubic feet per day), which will open up new markets in the Caribbean, Central America, and South America, and preserve existing environmental laws to ensure that small scale export facilities receive the proper review.
While this is great news, it is only one of the legs of support as developers still need to secure long-term offtake contracts to move forward. All the big LNG players are in Barcelona for the Gastech conference this week, to wine and dine their Asian clients -- and lure them into signing 20-year agreements.
The issue lies with President Trump risking constraining the U.S. gas export industry, which is seeking about $130 billion to fund more than a dozen projects, while Chinese Prime Minister Xi Jinping threatens to raise the cost of his initiative to eliminate smog by burning less coal.
Despite China tariffs, we recognize the LNG import market is vast and increasingly more liquid, allowing buyers to meet their needs from a variety of sources, where the U.S. will continue to play an ever-increasing role.