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Wednesday, October 2, 2013 - 13:00

Do You Own These Natural Gas Losers?

Wednesday, October 2, 2013 - 1:00pm

After many years of debate about exporting natural gas worldwide, the U.S. is finally making headway.

There have been 31 applications for permits to export domestically produced natural gas as liquefied natural gas (LNG), with a cumulative capacity of almost 12,344 billion cubic feet (Bcf) a year, nearly 50% of current U.S. production.

The federal government recently OK'd the building of a fourth LNG production facility, and the Department of Energy has approved the exportation to countries without a free trade agreement with the U.S., specifically Japan.

Because natural gas in its original form is very voluminous, the U.S. is limited to exporting it by pipeline to Canada and Mexico. To deliver it to countries farther away -- say, Asia -- that aren't served by pipelines, natural gas must go through a costly, time-intensive process that condenses it into liquid form.

The push by the U.S. has come on the heels of Japan unceremoniously shutting down its nuclear reactor in Fukui two weeks ago. Since then, Japan's government has been pressured by its citizens and global opponents of nuclear energy to put its 52 reactors to rest.

Prior to the anti-nuclear backlash, Japan had relied on nuclear power for 30% of its electricity. Filling that gap with a combination of oil, gas and coal is expected to cost Japan an extra $93 billion by the end of 2013. That's on top of the $75.4 billion Japan already spent on LNG alone last year as it phased out nuclear capabilities, a figure that helped push LNG prices to three-year highs.

Source: EIA natural gas exports database

In fact, Japan and South Korea have consumed enormous amounts of natural gas, accounting for 52% of the world's LNG imports last year. In the first shipments alone, the U.S. could export as much as 15 million tons to Japan, a volume equal to 20% of the country's annual LNG imports. (South Korea is the only major LNG importer of those countries with which the United States has a free trade agreement.)

Analysts project that the U.S. could be a net exporter of gas by 2020, accounting for 9% to 12% of global LNG trade.

Japan is clearly motivated to do business with the U.S. on a number of fronts:

  • It will mean having to pay less for LNG. Japan forked over a premium $14.7 per million BTU in 2011, $15.40 in 2012 and, most recently, $16.60 per million BTU -- higher than China and South Korea.
  • Japan does not want a repeat of the $48.7 billion LNG-fueled trade deficit it sustained in the first half of this year.
  • Japan's government wants the nation's supply to come from a more dependable source outside Qatar. Every time tensions erupt in the Middle East, Japan is at risk of having its supply interrupted.
  • The desire for a LNG import-export relationship is definitely mutual. Natural gas suppliers and stockholders in the U.S. would stand to gain handsomely. Cheniere Energy (NYSE: LNG), Energy Transfer Partners (NYSE: ETP), Chesapeake Energy (NYSE: CHK) and Dominion Resources (NYSE: D) are just a few.

But what sectors stand to lose from the LNG revival? Any company reliant on low natural gas prices to make a profit. The trend has already shifted toward higher prices, but a boom in LNG exports in the U.S. will likely boost them even higher.

Source: BP Statistical Review of World Energy, 2013, June 2013, p. 27.

This is something to keep in mind if you own stocks in sectors that benefit from low natural gas prices.

Natural gas is a major raw material input in the production of nitrogenous fertilizers such as urea and ammonia, ranging from 40% to 70% of cost of goods sold. A higher natural gas price increases the cost of goods sold and compresses margins.

This in turn could weigh on the earnings and free cash flows for firms such as CF Industries Holdings (NYSE: CF), Potash Corp. of Saskatchewan (NYSE: POT), Terra Nitrogen (NYSE: TNH) and Agrium (NYSE: AGU) -- all beneficiaries of low natural gas prices over the past five years.

Utilities with a large amount of natural gas capacity and little coal capacity will be in a tough situation as well. Natural gas-dependent utilities at risk include Exelon (NYSE: EXC), PPL Corp. (NYSE: PPL) and Atlantic Power (NYSE: AT), which relies on natural gas for 58% of its generation capacity.

Risks to Consider: If you own any of the above stocks make sure you at least monitor the natural gas price trend in the U.S. Negative effects won't happen overnight, but it's always a good idea to have a plan for reducing or eliminating exposure over time.

Actions to Take --> If the LNG exporting business in U.S. continues to move forward, there's no reason not to invest in its producers and manufacturers.

P.S. Natural gas is poised to send shock waves through the automotive and industrial equipment industries. In fact, one small company may be set to "kill the gasoline engine." To find out this company's name -- and how you might be able to profit -- click here.

Karen Canella does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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