Another Reason to Invest in Liquefied Natural Gas

by David Fessler, Senior Analyst, Investment U

Tuesday, August 2, 2011: Issue #1569

I’ve written extensively about the glut of natural gas in the United States on numerous occasions.

Our overabundance of supply has come about largely from the explosion of horizontal drilling, fracking and extraction of gas from America’s abundant shale gas formations.

Over the last two years, we’ve added hundreds of trillions of cubic feet to our reserves. They now stand north of 2,000 trillion cubic feet. That’s more than a 100-year supply.

As technological advances continue to be applied to shale drilling and fracking processes, that reserve number is bound to jump even further. I believe it could double in the next five years. And there’s another great way to invest in this boom…

Technology and Natural Gas Presents U.S. With Opportunity

Technology presents the United States with a number of wonderful opportunities. Shifting large trucks over to run on the fuel would make a significant dent in the amount of imported oil we use.

Utilities, taking advantage of record-low gas prices, have switched a lot of old coal-fired plants over to run on natural gas. It’s almost exclusively their fuel of choice for new power plants.

Natural gas-fired plants are cheap to build, and easy to fire up and shut off. That makes them versatile for both baseload power and as peaking plants when the inevitable heat waves come along.

But the best opportunities for natural gas lie ahead for the United States. Those will come from the export of liquefied natural gas (LNG).

LNG takes up 1/600 of the space it takes up in gaseous form. That makes it possible to transport it overseas in specially designed tanker ships. But where will it end up?

The World’s Biggest Importer of LNG Just Got Bigger

Even before the earthquake/tsunami/nuclear disaster, Japan was already the world’s largest importer of LNG.

As you can see from the graph below, courtesy of the U.S. Energy Information Administration (EIA), Japan’s LNG use is at record levels so far this year. For the first five months of 2011, it’s above both its 2010 levels and its five-year average use levels.

LNG consumption from Japanese Power Company 05-11

And for good reason: Only 19 of the country’s 54 commercial nuclear plants are operating since the earthquake struck. The total generating capacity of Japan’s nuclear plants are 49 gigawatts (GW).

Right now, less than 18 GW are being produced. That leaves the 31 GW of power taken out by the disaster having to come from some other source. Most of it’s coming from natural gas-fired peaking plants that are now running 24/7, providing desperately needed baseload power.

As a result, Japan’s imports of LNG are well above historic levels and prices, as seen in the EIA graph below. It represents a golden opportunity for anyone with the wherewithal to supply it.

LNG prices and imports in Japan 03-11

Japan’s nuclear problems won’t be fixed any time soon, and most of its citizenry will likely insist on cleaner, safer alternatives like natural gas-fired plants to replace damaged nuclear facilities.

But Japan is just one country, and it’s increased appetite for natural gas illustrates a much larger trend: Natural gas will be the fossil fuel du jour in the coming months and years as world supplies of oil continue to dwindle.

Coal will certainly have its use as a fuel in the steel-making industry, but natural gas is increasingly being noticed as a cleaner, cheaper alternative for power generation.

A Long-Term Play on the LNG Boom

Foster Wheeler AG (Nasdaq: FWLT) is a great way to play the emerging LNG boom. It designs, engineers and builds both onshore and offshore oil and natural gas processing facilities, LNG liquefaction and regasification terminals, and other natural gas-related infrastructure.

Foster Wheeler is up about 14 percent in the last year, but currently trades well off its high of $39.75 reached back in February. Current market uncertainty coupled with a lousy first quarter make shares look like a bargain. It currently trades in the mid $20s.

Analysts hammered the stock after a disappointing first quarter, when the company reported lower-than-expected earnings and orders.

My recommendation is keep an eye on it, but don’t rush into the stock. Earnings will be announced at market open on August 2, and could put further pressure on shares.

Long-term investors could view that as a potential starting point to begin nibbling away at Foster shares, gradually building a position as more and more business comes its way. With natural gas use on the rise – and LNG terminal construction along with it – that part of the equation is inevitable.

Good investing,

David Fessler