For its part, this final post concentrates on investment opportunities in the natural-gas arena.
The U.S., dubbed the 'Saudi Arabia' of natural gas, has surpluses that are expected to be exported to Asia and Europe. While competing countries are due online by the end of the decade -- think China and Australia -- the U.S. is positioned as the first mover in a market that's got strong pricing advantages for those who can export the gas. For those with the capability, natural gas is prepared for export first by liquefying it at -270 degrees, then compressing it to 1/600 of normal volume, which makes it easy to ship by tanker. Those companies that can liquefy the gas, ship and regasify it will benefit until production evens out across the globe in the next 10-20 years.
Global Demand
Countries like Japan and South Korea have historically relied on imported gas. Japan increased its imports by 12% in the first four months following the Tsunami. Germany, expected to turn down its nuclear reactors by 2015, will become a major liquified natural gas (LNG) importer. China, too, is expected to increase natural gas consumption four-fold by 2030 in an effort to reduce its reliance on coal. The country has five LNG terminals and is building six more to receive LNG imports. India is also looking to increase imports.
In the U.S., companies will be best positioned to fill that import demand in the decade to come. The U.S. currently has one liquefaction facility and shipbuilders are building LNG floating storage and regasification units (FSRUs) as fast as possible to transport and regasify those inventories onsite at various demand locations.
Infrastructure Bonanza
In addition, as oil gets more expensive, infrastructure build-outs in the U.S. geared toward natural gas transportation will be a booming industry. Several companies are positioning themselves to take advantage of that industry shift.
What's the best way to capitalize on the growing market in natural gas? Several opportunities have presented themselves to the market based on the factors outlined above.
The Players
Chicago Bridge And Iron (CBI) provides engineering and fabrication services to the midstream-energy and natural-resource industries worldwide, which includes LNG liquefaction, regasification facilities and gas processing plants. CBI recently acquired Shaw Group, which builds downstream facilities that utilize gas. In addition, Shaw Group builds nuclear power plants and will benefit from the renewed nuclear-growth sector as well. CBI is well positioned as one of the largest energy construction and engineering contract firms in the world.
While some analysts were less-than-bullish on the $3 billion Shaw acquisition, the fact is that the combined companies have a $28 billion backlog of orders and should be well positioned to finance the acquisition while growing earnings 10% in the first year, according to company estimates.
Cheniere (LNG) owns and is developing three LNG terminals along the U.S. Gulf Coast. It has, additionally, been granted rights to the largest U.S. gas liquefaction plant, which cost LNG $5 billion in financing, $1.5 billion of which was contributed by Blackstone. The plant will position Cheniere as a leader in LNG export. The company owns long-term, 20-year contracts that guarantee it income from buyers whether or not the plant is actually used. So financing the build out is already in place.
Its weakness lies in its current financials. LNG will need additional funding between 20013 and 2014 to remain solvent, partly due to decreasing demand for receiving terminals in the U.S., which due to the recent surge in shale-gas discoveries, has rendered that type of facility all-but un-needed. Still, if it can survive the next few years, the Sabine Pass liquefaction facility will offer strong revenue growth moving forward.
Chart Industries (GTLS) specializes in providing equipment to the natural-gas market and operates in three segments: Energy and Chemicals, Distribution and Storage, Biomedical. The company is based out of Ohio and has international facilities in Australia, China, Germany, the UK and Czech Republic.
Chart Industries will be a big factor in the LNG tank business if natural gas fuel expansion occurs in the U.S. Note that while the U.S. has just 120,000 natural-gas vehicles, the world count is up to 14 million. The greatest near-term growth has been from companies transporting large volumes of natural gas.
Chart Industries will benefit from more LNG infrastructure stateside but may also suffer from competition from Chesapeake, Shell and Cheniere. Also note that expansion has come at a cost of shrinking margins. The stock is priced high on expectations of earnings growth, but may be due for a slight correction.
Clean Energy Fuels (CLNE) is a leading developer and operator of natural gas fueling stations in the U.S. Like Chart Industries, CLNE is a story stock benefiting from the coming natural gas conversion in the U.S. Clean Energy gets investment from gas producers looking to capitalize on increased natural-gas transportation usage, including $450 million from Chesapeake to build 150 gas stations by 2013. The U.S. lacks fueling stations nationwide to benefit from a conversion, but the rising cost of oil and a clear lack of alternatives is driving future investment in the sector.
Revenues are growing but the company has yet to post a profit. It will have name recognition as natural-gas consumption rises, which may make it a takeover target from one of the larger gasoline-station franchises. Financials are solid but investors want to see a profit from this company soon. Perhaps the 2013 station build out will help it reach that goal.
Westport Innovations (WPRT) is a global leader in natural-gas engines. The company has made the most headway in heavy-duty engines, including a JV with Cummins. It also has alliances with CAT, GM, Volvo, Ford, Peterbuilt, Daimler Trucks, Canadian National Railways and Navistar. WPRT purchased AFV and Emer to boost its tech prowess in the natural-gas space.
The company beat Q2 earnings and revenues estimates. It may not be profitable for two more years, but expectations of profits are forthcoming in 2015. One current weakness is that 35% of its business is in a tight Asian market, which has been reducing margins. WPRT needs the U.S. and other Western markets to boost margins and lead the company to profits. So, this company hitches its fortunes to the same natural gas domestic growth model as the likes of Clean Energy and Chart Industries.
Teekay LNG Partners (TGP) is one of the largest tanker companies in the word. It has 25 LNG carriers to add to its stable of 11 conventional oil tankers.
Oil tankers are currently in oversupply and margins are falling. The glut is not expected to subside anytime soon. However, Teekay’s revenues are bolstered by a strong LNG fleet. Teekay has contracted for six additional LNG tankers from AP Moller Maersk, which has been financed mostly by its partner, JV.
Most of the tanker fleet is on long-term contract, but two current LNG tankers come off soon and will benefit from higher current rates, which are more valuable than the previous contracts.
The company is dependent on the debt markets and has high current liabilities. However, it also has a steady stream of income, which should increase LNG's margins a bit in the future. Most likely there will be some share dilution, here, and dividends may need to be cut back to cover short-term obligations. Right now, though, the dividend is very healthy at 6.7%.
Golar LNG (GLNG) operates exclusively in the LNG tanker market so it has no downside exposure to oil shipping. It has 13 tankers operating with 13 more on order. Two of its current fleet operate in the spot market and benefit from high shipping day rates.
Golar’s revenues come mostly from three companies, BG Group, Shell and Pertamina. Golar focuses both on LNG tankers and FSRU’s, which enables it to regasify transported gas on site. Golar expects its current and future FSRU’s to give it an advantage in a market looking for fuel transportation and regasification from U.S. exports. The number of importing countries has doubled since 2005, and 50% of all new LNG import markets have chosen FSRU’s over land facilities, according to company statistics.
Like many of the natural-gas companies engaged in build-out phases, Golar has a short term cash crunch that will need to be financed, which could put pressure on profits and share price near term. In addition, the company faces pressure from currency conversions and floating interest rates that may reduce margins in the wake of current global economic conditions.
Overseas Shipholding Group (OSG) receives most of its revenues from crude-oil transport (versus LNG) and is facing weak demand and overcapacity issues in the crude oil transportation market. The company is highly leveraged and has been drawing from a credit facility to increase cash on hand.
The company appeared to overbuild the oil fleet despite capacity issues, and continued to issue strong dividends while facing two straight years of losses. It finally suspended the dividend, but still needs to prune its fleet and shed excess debt to recover. Current management does not appear to be embracing an aggressive fleet realignment strategy, however, and investors should beware this stock, a cheap share price notwithstanding.
Gaslog (GLOG) is an international operator of 10 LNG carriers with eight more on the way. Most of the new fleet has already been contracted and demand should drive profits in the future. Gaslog’s fleet will be 1.9 average years old upon arrival of the new vessels, which will make it the youngest in the industry and among the most efficient to operate.
The company has a large finance payment due in Q1 of 2014 but should be able to refinance given current assets. 2012 profits are expected to be weak due to staffing increases for the coming new fleet. Profits are expected to rise in 2013 and 2014.
An earnings call is scheduled for August 21, which may impact the stock short term. But this story is a medium-term play. Once the company gets past its current financing challenges, annual earnings growth is full speed ahead.