Profit from US Energy Exports Today

By Published On: March 13, 2013

Frenzied drilling in US shale plays enabled the nation to overtake Russia as the world’s leading producer of natural gas. However, this title comes at a significant price for exploration and production firms, which have watched the spot price of this energy commodity to plummet in recent years, overcome by an excess of production.

Source: Bloomberg

As we noted in Breaking down the US Onshore Rig Count, producers sought to compensate for this downtrend by shifting their drilling activity to plays that also contain significant volumes of crude oil and natural gas liquids. Meanwhile, the industry continues to seek additional release valves to offset the glut of natural-gas supplies.

Pipeline exports of US natural gas to neighboring Mexico and Canada have surged, increasing at an average annual rate of 16 percent over the past three years.

Source: Energy Information Administration

Although shipments to both countries hit a record high in 2012, we expect the volume of natural gas exported south of the border to continue to rise, thanks to Mexico’s declining output and robust demand among industrial users in the northern part of the country. Accordingly, midstream operators are pursuing a number of additional projects that would pipe additional supplies to Mexico.  

Nevertheless, the volume of these cross-border shipments represent only 6.2 percent of annual US natural-gas production; average price realizations on pipeline exports have largely tracked spot prices at the Henry Hub, the delivery point for futures contracts that trade on the New York Mercantile Exchange.

Source: Energy Information Administration

Looking for arbitrage opportunities, the US oil and gas industry has pushed hard for regulators to approve increased exports of liquefied natural gas (LNG) via specialized tankers. A quick glance at the difference between Henry Hub prices and international prices underscores the appeal of US LNG exports.  

Source: Bloomberg

The hype surrounding the potential for US producers to achieve the higher natural-gas price realizations available in Asian and European markets has many investors salivating.

In particular, investors have bid up shares of Cheniere Energy Partners LP (NYSE: CQP), the lone company to have secured approval from both the US Dept of Energy and the Federal Energy Regulatory Commission (FERC) for LNG exports. The master limited partnership expects its first natural-gas liquefaction train at its Sabine Pass terminal to come onstream in late 2015. Meanwhile, several other proposed sites, the majority of which would commence operations in 2017 or 2018, await regulatory approval.

Given the capital-intensive nature of these projects and Cheniere Energy Partners’ significant leverage, investors seeking a near-term play on US energy exports shouldn’t overlook the global market for liquefied petroleum gases (LPG), a category that includes propane, butane and isobutene.

Surging US propane exports reflect the intersection of several trends, including favorable US prices relative to international benchmarks, expanding export capacity on the Gulf Coast and robust demand growth for seaborne LPG cargoes in emerging markets.

Source: Energy Information Administration

The appeal of US imports to Asian and European utilities and petrochemical companies is simple: Not only do these purchase contracts diversify their supply base away from the volatile Middle East, but these agreements also offer favorable pricing in the current market. More important, US operators can take advantage of the wide differential between domestic propane prices and international benchmarks.

Source: Enterprise Products Partners LP

For investors looking to add exposure to this trend, we highlighted our export-terminal owner in Focus on Undervalued Distribution Growth and our favorite shipping names in Betting on US LPG Exports


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