• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Energy

Novatek, the Big Elephant in the Global Natural Gas Room

Not everything is priced into these shares.
By ELIECER PALACIOS
Oct 01, 2018 | 06:27 PM EDT
Stocks quotes in this article: NOVKY, OJSCY, OGZPY, LUKOY

We sat down Monday with Mark Gyetvay, CFO of PSJC Novatek (NOVKY) , for a candid conversation about the power that Russia has on the global energy landscape, on the back of the Moscow Exchange conference in New York. Novatek is Russia's largest independent natural gas producer, and the seventh largest publicly traded company globally by natural gas production volume. We came out of the meeting with various premises that we think are not fully priced in the market:

The Nord Stream 2 project is not going away. The unspoken agenda of the Trump Administration has been to undermine the efforts of the Nord Stream consortium for two purposes: 1) weaken Russian foothold in the European natural gas market and using sanctions to effect this, 2) position U.S. LNG market for European consumption at a moment when Russia is strengthening its global footprint. However, Novatek thinks these efforts are futile given that Nord Stream 2 will bring the diversification away from Ukrainian pipelines, and U.S. will need to compete, not only with Russian gas but also, other international providers.

Novatek is poised to be the largest LNG producer by 2030, and this is predicated on 2 drivers: 1) Novatek is implementing technological innovation to lower their production costs allowing them to be more competitive than peers, 2) the development of liquid pricing hubs for spot trading, through investments like the transshipment terminal on Kamchatka Peninsula in the Russian Far East.

Novatek is in the process of implementing "gravity-based structures," meaning, efficient technologies to streamline LNG production by delivering solutions in one vessel or barge. This would allow to significant capex reductions. It is Novatek's target to decrease LNG production prices, to a level below $10/MMBtu, to be competitive versus alternative sources of power like solar and wind.

The Kamchatka facility on the East coast of Russia is meant to be the main trading hub for Asian countries, given the liquidity that this hub is expected to bring. As new liquefaction and regasification capacity comes online, over time, The LNG market is meant to evolve to a very liquid spot market, just like the U.S. gas market is today, where liquidity trading hubs provide near-term trading and delivery versus long-term bilateral agreements.

Japan is already at the forefront of this development with the JKM pricing market set to be the most active in settling gas-on-gas transactions, versus oil-linked ones. This allows for more accurate hedging of LNG commodity risk exposure versus baskets linked to crude oil prices.

Another wave of natural gas is expected to come from the Permian Basin in West Texas where there is a lot of natural gas associated with crude oil production. Today, around 2 billion cubic feet of gas is extracted for every 1 million barrels produced, or roughly, 34% of every oil barrel produced. This is an enormous amount of gas that will not find its way into the export markets until enough pipeline infrastructure comes on line after 2020. This creates negative value for producers today, which must find a way to deal with it, either by flaring it into the air, using it to power rigs or re-injecting it back into the ground to stimulate production.

Aside from natural gas, the U.S. has other bottleneck problems that other countries, like Russia, don't have. Ethane is one example. Ethane, a hydrocarbon used in industrial production, has also its own set of infrastructure challenges accessing the export or consumer markets. Russia, in contrast, according to Novatek, is blessed with access to a unique passage through the Arctic Circle that allows them to deliver commodities to Europe and China, cutting travel and cost expenses by 50%.

Finally, the cheap ruble over the last 12 months has propelled oil revenue for major Russian producers like Rosneft (OJSCY) , Gazprom (OGZPY) and Lukoil (LUKOY) . For Novatek, revenues are up 50% year on year and as they invest in production and development costs will continue to decrease to a point that will allow them to control margins despite volatile commodity markets.

For now, our top Russian oil stock is Rosneft given their leverage to crude oil production, however, Novatek has been the outperformer of those two over the last twelve months, 56% versus 78%, on the back strong production, margins and a bull thesis on global LNG export.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Palacios did not have any holdings in the stocks mentioned.

TAGS: Commodities | Markets | Energy | Investing | Stocks

More from Energy

Enphase Energy Is My 'Stock of the Week'

James "Rev Shark" DePorre
Dec 9, 2019 1:58 PM EST

ENPH has had huge, quick growth.

With Saudi Aramco IPO, Saudis Have Another, Huge Reason to Support Oil's Price

Maleeha Bengali
Dec 9, 2019 8:53 AM EST

And we could be in the middle of the perfect storm for oil markets, where prices can rise aggressively through the first quarter.

Weakness After Protracted Upside Move Causes Discomfort

James "Rev Shark" DePorre
Dec 5, 2019 10:52 AM EST

Some traders seem unsettled by a bit of downside volatility after not experiencing much of it of late.

Insiders at These Companies Didn't Wait for Cyber Monday to Buy

Bret Jensen
Dec 2, 2019 10:00 AM EST

A handful of midstream energy companies and a travel giant have seen insiders purchase their shares in recent weeks.

These Two 'Contenders' Fight for the Dividend Aristocrat Title

Chris Versace
Nov 30, 2019 10:17 AM EST

NextEra Energy and Lincoln Electric Holdings both appear lined up to become Dividend Aristocrats soon -- here they duke it out for top choice.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:02 AM EST BOB LANG

    Added Some Peleton

    This stock is starting to gain some traction, the ...
  • 01:06 PM EST CAROLYN BORODEN

    MRK and LVS Targets Coming Up

    View Chart » View in New Window »  LVS View C...
  • 12:01 PM EST BOB LANG

    Rolling Up Apple

    Just the other day we added some Apple calls on th...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2019 TheStreet, Inc., 14 Wall Street, 15th Fl, NY, NY 10005

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login