Natural Gas has been rallying along with oil, but I have still preferred to stay away from investing in it, as the gluts that plague natural gas are local and less easily rebalanced than the global gluts that currently plague oil. But, there is one opportunity I see in natural gas – and that’s in LNG – Liquid natural gas. And the still best stock in that space remains Cheniere Energy (LNG).
The natural gas market is not like oil, in that it is not a global market – the markets that price natural gas are unique to where it is used, with prices in Europe that hover at a $5 premium to U.S. prices, and in Japan at as much as a $10 premium.
The model at Cheniere has been a very a simple one: Capture the arbitrage between plentiful and cheap natural gas here in the U.S. and extremely strong demand and dear prices in Asia.
But less simple is how to capture that arbitrage: The mechanics of turning gas into a liquid for transport requires frigid temperatures and extreme pressures and specialized tankers to contain it. Building even one LNG plant is a multi-billion dollar endeavor, which Cheniere has done successfully in the Sabine Pass in Louisiana (and soon will finish in Corpus Christi, Texas) –but it required a choking amount of debt in order to accomplish.
In addition, market action could quickly destroy that U.S./Asia premium: We’ve seen U.S. natural gas prices reach upwards of $10 in the early years of the century and…