As we've written before here at StreetAuthority, when gold was discovered in the American West over a century and a half ago, many of the people who ultimately got rich were the ones who sold tools and goods to the miners. (Think Levi Strauss, who made his fortune not from gold but from the blue jeans he supplied to prospectors.)
These days, a different type of commodities rush is here -- U.S. natural gas production. Prices across the globe are up to four times higher for natural gas compared with domestic prices, and that disparity is primed to fuel an export boom over the next several years.
While the explorers and producers might do well, it will again be the companies that sell transportation and equipment that make the big money -- with much less risk.
Explorers Are Already Positioning
Despite the still historically low prices in natural gas, explorers are buying up fields and positioning for the boom. Atlas Resource Partners (NYSE: ARP) completed its $733 million acquisition of natural gas assets in the Arkoma Basin of Oklahoma from EP Energy earlier this year. Last year, total global oil and gas deals increased 7% from 2011, to $322 billion.
The market is not completely behind the game on this one. The race to add natural gas assets and positioning has boosted producers like Chesapeake Energy (NYSE: CHK), which is up 47% over the past year and now trades at an expensive 20 times trailing earnings.
The next phase in the rush is the export boom from the United States, where natural gas is trading around $3.85 per million Btu, to Asia and other destinations where the price is more than four times higher. This variation is expected to drive exports once the liquefaction and export terminals come online. In fact, the best play on the theme estimates that exports could skyrocket over the next six years to almost 250 million tons per year (MTPA).
But just like the gold rush in the Wild West, the real money might not be from exploration but from selling (or leasing) the equipment needed to move the fuel.
Teekay LNG Partners (NYSE: TGP) is the second-largest independent owner of liquefied natural gas (LNG) carriers in the world and structured as a master limited partnership (MLP) under Teekay Corp. (NYSE: TK).
Teekay LNG owns 67 vessels, 29 of which carry LNG, and are contracted to major oil producers across the globe. Not only is the company primed to take advantage of the demand for LNG shipping, another catalyst could drive shipping costs lower even as demand increases.
The newly expanded Panama Canal is set to open in 2015 and is expected to cut costs to Asia by up to 24% for larger ships that now must take a longer route. It is estimated that carriers hauling LNG will use the expanded canal 350 times a year, transporting as much as 12 million tons.
Teekay LNG has already booked two tankers to export on five-year contracts delivered in early 2016. The tankers are leased to Cheniere Energy (NYSE: LNG) which controls the Sabine Pass terminal. The tankers, 174,300-cubic-meter MEGI carriers, will be among the largest able to pass through the canal and fitted with a new electronically controlled engine that could reduce fuel use by up to 20%.
The expansion program for the canal was planned and started before the boom in U.S. natural gas exploration, and I do not think the market is pricing in the boost an expanded Panama Canal will provide for LNG transporters or exports.
Not All Carriers Are Created Equal
Just as every mining merchant was not as successful as Levi Strauss, not every energy transportation company will make for a good investment. As big as I think this play could be, especially over the longer term, there is a huge risk hanging over the carrier industry.
Over the next two years, the fleet of LNG carriers is scheduled to increase by 16%, outpacing the 10% increase in liquefaction capacity. An industry orderbook shows 100 new ships coming to market over the next two years, with 29 of them without existing rate contracts. These ships will need to be leased out on short-term rates on the spot market. While these rates are higher than long-term fixed contracts, utilization is lower because the ship is not making money after it delivers its load and must sail to the closest customer port while off contract.
The problem with overcapacity should not affect Teekay LNG as badly because of the company's focus on long-term contracts between 10 and 25 years. Teekay's entire LNG fleet is currently under fixed-rate contracts with a weighted average contract duration of 13 years and $6.9 billion in forward fee-based revenues.
Because Teekay LNG is an MLP, investors get a tax break since only a small portion of dividends are taxed as income. The rest is offset by depreciation and expenses, and goes to lower your cost basis in the shares. You pay higher taxes when the shares are sold, but that can be managed well into the future.
Risks to Consider: The buildout in LNG tankers this year is set to outpace the ability to convert natural gas into its liquid state. This could mean lower rates over the next year or two, but liquefaction capacity should soon catch up to the growing export demand.
Action to Take --> Decades from now, I think people will be talking about the first years of the U.S. energy boom when the nation reached production independence and exports surged. Just like the Old West, it's possible to make money off of picks and shovels (and Teekay LNG's current 6.5% dividend yield) instead of hunched over a stream exploring for nuggets.