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The Profit Play on LNG Exporter No. 2
05/21/2013 5:00 am EST
The potential exporter is a private consortium, but it still has to use mostly public companies to build the infrastructure, writes MoneyShow's Jim Jubak, also of Jubak's Picks.
On Friday, May 17, the US Department of Energy approved what is only the second permit to export liquefied natural gas from the United States.
The permit went to the Freeport LNG project in Texas, a joint project of Freeport LNG Investments, ZHA FLNG Purchaser, Dow Chemical subsidiary Texas LNG Holdings, and Turbo LNG, a subsidiary of Japan's Osaka Gas. The permit will allow Freeport to export up to 1.4 billion cubic feet to gas a day. Subject to environmental review and final regulatory approval, Freeport plans to begin exports in 2017.
Like Cheniere Energy's (LNG) Sabine Pass project in Louisiana, the first project to get an export permit, Freeport began its life back in 2005 as a terminal to import liquefied natural gas into the United States. With the US boom in natural gas from shale, the flow has reversed.
A total of 19 other projects are waiting for permits. Without a permit, companies can export liquefied natural gas only to a short list of countries with which the US has signed free trade agreements. That list doesn't include big markets such as Japan.
Two Japanese companies, Osaka Gas and Chubu Electric, signed agreements in 2012 to acquire production from the first train at Freeport beginning in 2017. Freeport's current plans call for spending $10 billion to build three production trains with a capacity of 1.9 billion cubic feet a day.
I don't think this approval has a negative effect on Cheniere Energy. If anything it puts a time line on how long a lead Cheniere has in this market. Right now it looks like Cheniere will have two years when it has the US LNG export market pretty much to itself and then an even longer period before enough US competitors get their capacity on line and begin to depress LNG prices in overseas markets. Right now, natural gas sells for $4 per million BTUs (British Thermal Units) in the United States, $10 per million BTUs in Europe, and $15 per million BTUs in Japan.
But the big winners in the Freeport announcement—for investors anyway, since they can't invest in Freeport itself—are the engineering and construction companies, Chicago Bridge and Iron (CBI), Jacobs Engineering (JEC), and Fluor (FLR), for example, that will build these LNG plants.
The company in that group that benefits most from Freeport itself is Chicago Bridge and Iron, which worked on the front-end engineering and design for the plant, and is a frontrunner for a big share of additional contract work. (About $4 billion in total, I'd estimate.)
Chicago Bridge and Iron has one of the sector's biggest weightings toward LNG—the source of about 33% of the company's profits now. Estimates put total capital spending on LNG in North America at about $30 billion from 2015 to 2020. The company has also formed joint ventures to work on liquefied natural gas projects in Australia and Papua New Guinea.
As of May 20, I'm adding shares of Chicago Bridge & Iron to my Jubak's Picks portfolio, with a December 2013 target price of $74 a share.
Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Cheniere Energy as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund's portfolio here.
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