Written by Matthew Carr, The Oxford Club

Monday, 02 April 2012

"It seems like a no-brainer..." That's what one member wrote in concerning the future of the U.S. liquefied natural gas (LNG) export industry.

On the surface, it does seem that way. We have a natural gas supply glut. Prices for natural gas are the lowest they've been in a decade. So, it makes sense that we should sell that natural gas as LNG overseas to higher-priced markets.

And a number of companies have filed with the government to make that happen, including Cheniere LNG (AMEX: LNG) out of its Sabine Pass facility, Sempra (NYSE: SME) out of its Cameron LNG terminal in Lake Charles, and Dominion (NYSE: DOM) out of its Cove Point facility.

These three have received government approval to export LNG. If everything goes as planned, Cheniere will be the first out of the gate, maybe sometime in 2015, and it already has long-term contracts for the majority of its LNG. Sempra got the thumbs-up from the Department of Energy (DOE) on Friday, and is eyeing 2017 for its first shipments. And Dominion received approval last October, but is still waiting - like Sempra - to see if it can get approval to ship to countries that don't have trade agreements with the United States.

But there are some hiccups with these plans... First being that they still need to be built.

Second, there's the political side and the anti-LNG movement that exists. Congressman Ed Markey - a longtime LNG opponent - introduced two bills in February that seek to block U.S. exports of LNG until at least 2025. And he introduced an amendment to the transportation bill to ban natural gas exports, as well.

The irritating point in all of this is, when the United States wanted to import LNG, Congressman Markey opposed the plans because he said the tankers and terminals were prime terrorist targets.

Now, he doesn't want the United States to export LNG because of economic reasons. He's stated, "This is America's natural gas and it should stay here."

Markey's bills will likely never get off the ground in a Republican-controlled House, but he isn't without his supporters, like the American Chemistry Council (ACC) and the American Public Gas Association (APGA). Plus, environmental groups like The Sierra Club have renewed petitions to ban U.S. exports of LNG, claiming it's "dangerous," "environmentally destructive" and a host of other scary things those groups like to summon.

Now, if I was a betting man, Markey's legislation has about as much of a chance as passing as the NAT GAS Act does, which has languished in Congress for years.

And that brings us to my next point: The United States is a consuming economy, not an exporting one. We're already the largest natural gas consumer in the world. That's why we wanted to build import terminals just a handful of years ago - we didn't have enough to supply ourselves and were projected to be a major LNG consumer... Of course, all that changed in 2007 with the start of the shale gas boom.

Now we want to use even more natural gas (like the NAT GAS Act wants to promote) as a transportation fuel. The question is, can the U.S. do both - consume more and be a major export player?

I don't think it's likely. And will exist on a more limited scale. But that means there's a small universe of U.S. companies poised to benefit from exporting or re-exporting LNG.

So, if you want to invest in the future of a U.S. LNG export industry, I'd stick to companies that have the majority of their ducks in a row. And that means Cheniere. It'll be a volatile run, the stock trading on news since the first exports are years away. But buying into Cheniere at $17 or better is a good deal, with a lot of long-term upside potential.

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