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David Fessler
Senior Analyst - Investment U Daily
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These days, natural gas producers are like the big homebuilders. Everyone hates them. Investment managers steer clients away from them, saying they have further to fall.
Why? Natural gas prices are the lowest they've been in years... at least in the United States. But a year from now, the situation will look a lot different. I expect natural gas to be trading 25% to 50% higher here in the United States than prices are today.
There are three reasons I'm so optimistic, and one way you can position yourself to take advantage of the coming price rise. But first, you need to know what caused the recent price drop in order to understand why a U-turn in natural gas prices is coming...
Supply Glut Holding Down Natural Gas Prices... for Now Over the last several years, natural gas companies like
Chesapeake Energy (NYSE: CHK),
Range Resources (NYSE: RRC) and a host of others have been surveying and drilling major shale gas fields all across the United States.
With so much recently discovered gas being dumped into the U.S. market, prices have plunged. Prices hovered near $4 per million British thermal units (mBtus) for more than a year.
Shale natural gas already accounts for 22% of the nation's supply... According to Energy Information Administration estimates, it could supply as much as 14% of all the gas in the world by 2030.
Right now, the oversupply and continued concern about weak prices is weighing on many U.S. shale gas leaseholders and conventional gas producers. Many are just sitting on their proven undeveloped reserves (PUDs), shutting in wells or not drilling them at all.
Some shale fields also contain natural gas liquids (crude oil), like the Eagle Ford shale play in Texas. Operators who have leaseholds in liquid plays are redeploying rigs there to take advantage of higher crude oil prices.
But the time is soon coming that these producers will quickly shift back to production.
Three Future Trends in Natural Gas Prices Prices will rise due to three major trends, causing a demand increase to meet this oversupply...
- Trend #1: Utility Customers Lining Up
While the natural gas producers are bemoaning the lower prices, electric utilities are lining up to buy. Nearly every new plant to come online in 2010 and 2011 uses natural gas as its primary source of fuel.
Historically, the only power plants that used natural gas as a fuel were peaking plants. Those are generators that utilities turn on only during peak times of energy use. They're expensive to run and utilities pay top dollar for the natural gas they use.
More recently, utilities are converting old, dirty coal-fired power plants to run on much cleaner burning natural gas. These are big, base load power plants, online all the time. That allows utilities to negotiate long-term lower priced contracts for the gas they burn.
- Trend #2: The Growing Aversion to Nuclear Power
Ever since Three Mile Island and Chernobyl, nuclear power has been on the back burner in the United States. The newest (and only) plant under construction by Southern Company doesn't have an operating license yet, and probably won't go online for at least a decade.
After the Fukushima disaster in Japan, plans for new nuclear power plants were either shelved or delayed all over the world. While Japan rebuilds, it's relying heavily on natural gas and other fossil fuels. Meanwhile, countries around the world are reassessing their nuclear power plant safety.
Germany announced it's getting completely out of nuclear by 2022. And New York Governor Cuomo is adamant about shutting down the Indian Point nuclear plant, just north of New York City.
All this generation capacity will have to be replaced by other sources, and natural gas is the fuel of choice.
- Trend #3: The LNG Shortage
Nearly every gas import terminal in the country (there are nine of them) applied for permits to install natural gas liquefaction plants. The reason? The demand for natural gas is booming just about everywhere else in the world.
Qatar, the world's largest exporter of natural gas, will soon hit its full annual export capacity of 77 million tons, in the face of global demand that can absorb nearly as much as the world can produce.
In the wake of the multiple disasters in Japan, it's importing an additional four million tons over the next year from Qatar. It's in negotiations to purchase even more.
Fatih Birol, the head of the International Energy Agency, commented on the opportunities for LNG producers in an article in
The Wall Street Journal: "Post Fukushima, there will be a lot of opportunities. Japan and Korea both have new long-term contracts in the next four years, and China's demand is booming. As of 2015 they will have to import as much as [all of] Europe today."
According to Frank Harris, an LNG expert at Wood Mackenzie, Asian demand for LNG is going to skyrocket to 241 million tons in 2020 from 138 million tons in 2010.
With worldwide demand on the rise and no new large-scale LNG projects set to come online in the Asia-Pacific region for at least the next five years, the door is open for the United States to provide some of the slack. Nearly every U.S. company that owns a LNG import terminal has plans to add export capability in the coming decade.
The Best Natural Gas Turn-Around Investment But perhaps the best way to invest in the coming rise in LNG exports is via
Cheniere Energy, Inc. (AMEX: LNG). It operates the Sabine Pass LNG facility, in Cameron Parish, Louisiana, and it's going to be the first LNG export facility to come online.
Cheniere recently received DOE export authorization to export LNG. Construction will begin in 2012, and Sabine is scheduled to come online in stages starting in 2015. It's also negotiating definitive long-term export contracts with numerous customers. It recently inked a big one with India.
It will take a little over a decade for the United States to switch from being a LNG importer to a LNG exporter.
Exporting LNG will also cause the price of U.S. natural gas to gradually rise, and $5 to $6 gas will be the new minimum floor. What a difference a few years - and 2,000 trillion cubic feet of natural gas reserves - makes.
Good investing,
David Fessler
P.S. My colleagues and I have recently agreed to publish select recommendations from our paid research services in a premium version of
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