29 August 2013
Investing in natural gas
British Columbia is best known for its beautiful mountain views and world-class skiing, but by 2015 it could be famous for something else: natural gas transportation.
That may not sound as exciting as a night out in Whistler, but if the Canadian province can successfully build North America’s first major liquefied natural gas terminal, it could dramatically alter the energy industry. With many people’s money tied up in energy stocks, it could boost the average investor’s returns too.
While other LNG terminals in places like Malaysia, Qatar, Yemen, Australia and Norway already send gas to Europe and Asia, it is cheap, abundant North American gas, that many utilities and gas companies are waiting to get their hands on. Demand for the commodity is highest in Asia.
One reason why people are excited about North American gas is that many gas-using companies want to buy from a locale that doesn’t face political risks, said Maartin Bloemen, a Toronto-based portfolio manager with Templeton Global Equity Group. European companies import a lot of gas from Russia, while Japanese and Chinese businesses buy from the Middle East.
Currently, natural gas sells for about $3.50 per 1,000 cubic feet in North America; it goes for $9 in Europe, and about $16 in the growing Asian market. Many investment experts think that once China, Japan and other markets get a hold of North America’s abundant supply of gas, the price gap between North American and Asian gas could close, said Ted Davis, portfolio manager at Denver-based Fidelity Investments.
A more global gas market could give people’s investment portfolios a boost. — Andrea Williams
A more global market could give people’s investment portfolios a boost, said Andrea Williams, a London-based portfolio manager with Royal London Asset Management. Since 2008, investors around the world have suffered from falling North American natural gas prices. The price of gas plummeted by about 85% over the last five years and that has impacted the earnings and stock prices of the many energy operations exposed to the region.
If North American gas prices rise, so too should the fortunes of the continent’s companies, said Davis. Conversely, if gas prices fall overseas — it’s likely they’ll drop somewhat after North American supply hits Asian shores, said Williams — the Russian, Middle Eastern and Australian companies that supply Europe and Asia now could be in trouble, she said.
While the first North American gas plants are still a couple of years away from being built, investors are already getting excited about North American investment opportunities, said Davis.
According to the US Energy Information Administration, North America produces the most natural gas out of any region in the world. With such rich resources, many companies will be able to grow production for decades, said Davis. Right now, all that production is a problem — there’s not enough domestic demand to reduce supply — but investors are anticipating that once gas goes offshore, that imbalance will be fixed.
Historically, European and emerging market producers traded at a premium to North American companies, but that’s starting to change. For example, Russian energy companies have traded at an average 24% premium over the past decade, but now trade at a 70% discount, said Davis. Major European energy companies have traded at a 26% premium over the last 10 years, but now trade at a 27% discount.
Despite the rising valuations, Davis still thinks that North America companies are the better bets in this changing energy environment.
The best bets are the mega-cap energy players, such as Chevron, Royal Dutch Shell and ExxonMobil, said both Williams and Bloemen. Many already have a stake in LNG terminals being built in North America. They are also buying stakes in terminals in Australia, which will help get gas off that continent, too. In addition, these heavyweight companies have a leg up on signing long-term contracts with utility companies.
“You want someone who already has projects on the go,” Bloemen said. “Newer projects are way behind the eight ball and you want to own a company that can scale up easily.”
Williams is partial to integrated producers — companies that sell gas, but also produce and refine oil as well. These operations are more diversified and should therefore be better able to withstand short-term volatility in the sector than a pure gas producer, she said.
While Davis is keen on the bigger players too, he also suggests looking at small North American exploration and production companies, such as EOG Resources and Apache Corp, which have been much more successful at finding resources than their European and Asian peers.
These operations aren’t necessarily involved in transporting gas overseas, but they are assisting other nations, such as China, Latin America and the U.K., tap into their own gas fields.
“These are the companies that took the risk and unlocked these resources over time,” said Davis. “Their technology will be applied elsewhere in the world.”
Energy experts say there’s no question that global demand for natural gas is increasing and that the industry will forever change once natural gas gets shipped from North America to Asia. While it’s likely big global companies that will benefit first, nearly all investors with exposure to the energy sector should see some bump in their portfolio starting in 2015, said Williams.
“We’re happy to invest in this sector,” she said. “As emerging markets become more westernised, the need for gas will just go up.”
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