Given how long it takes to bring liquefied natural gas (LNG) export terminals online, it’s not exactly a surprise that 2019 will be a monumental year for the domestic industry. Investors saw it coming years ago. But that doesn’t make the growth any less impressive.
The United States boasted an LNG export capacity of about 3.6 billion cubic feet per day (Bcf/d) in late 2018. The Sabine Pass facility owned by Cheniere Energy (NYSEMKT: LNG) contributed approximately 2.8 Bcf/d of that total, while the Cove Point terminal owned by Dominion Energy tacked on the rest. That was it.
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By the end of 2019, however, the United States is expected to add four more LNG export terminals and more than double its export capacity to 8.9 Bcf/d. That will make the United States the third-largest exporter of the liquefied fuel in the world behind Australia and Qatar. It should also put the opportunity on the map for long-term investors.
Spreading the riches of LNG
While many LNG export terminals are massive projects costing tens of billions of dollars to build, they’re still constructed in a modular fashion. All of the process equipment responsible for cooling natural gas into a liquid is called a liquefaction train, and multiple trains combine to give an export terminal its full capacity. That allows companies to build facilities in a piecemeal fashion, secure offtake agreements halfway across the world in an orderly fashion, and rest assured they’ll get predictable function from each new train added.
For instance, Cheniere Energy brought the first liquefaction train in the country, Sabine Pass 1, online in the first quarter of 2016. It will soon begin commercial operations of Sabine Pass 5. That has allowed the business to grow like clockwork thanks to its tiered ramp-up and the structure of its long-term supply agreements. It grew year-over-year revenue 30% in the third quarter of 2018, while operating income jumped 43% in that span. It turned a net loss of $289 million in the third quarter of 2017 to a $65 million profit in the same period of last year.
The financial strength will only continue to improve. In addition to ramping exports at Sabine Pass, Cheniere Energy will soon begin operations at its second LNG export facility in Corpus Christi, which will one day boast a production capacity of 2.14 Bcf/d to go along with up to 4.2 Bcf/d when Sabine Pass is operating at steady state.
That said, the insatiable global demand for LNG, especially from energy-poor Asian countries desperately looking to transition away from dirtier coal-fired power plants and industry, means there’s plenty of LNG riches to go around. Dominion Energy and Kinder Morgan are likely to remain relatively small players in the industry, but players nonetheless. Sempra Energy (NYSE: SRE) figures to be a more prominent supplier of the energy source with its Cameron LNG terminal, while privately held Freeport LNG is the majority owner of a project bearing the same name.
It will take time for these LNG export facilities to ramp up and reach their full nameplate capacity, but they should generate massive sums of cash flow for years to come once they do. That should keep investors happy during what’s expected to be a relatively quiet period after a furious 2019. The United States is expected to add only 1.1 Bcf/d of LNG export capacity — from expansions of the projects listed above — in 2020 and 2021, according to the U.S. Energy Information Administration.
That hardly means the opportunity to invest in LNG stocks has passed investors by, however.
This year is only the beginning
Given the United States is slated to become the world’s third-largest LNG exporter virtually overnight, it may be difficult to believe that 2019 — and 8.9 Bcf/d of total export capacity — will only mark a beginning for the industry. But that’s just the capacity of the first wave of facilities.
Up-and-coming companies such as Tellurian (NASDAQ: TELL) and NextDecade (NASDAQ: NEXT) are looking to follow in the footsteps of Cheniere Energy as the next pure-play LNG businesses, while established multinationals such as ExxonMobil are moving ahead with massive export facilities of their own. Royal Dutch Shell recently announced a $31 billion project in Western Canada that will have an export capacity of 2.1 Bcf/d — roughly one-third of the country’s total gas demand.
Even the growth represented by the next-wave of facilities in the table above might only be scratching the surface. A tally of all 26 LNG export terminals approved by (12) or proposed to (14) energy regulators shows that the United States could one day have an export capacity of a staggering 44.2 Bcf/d. While some of those facilities may never get built, the growth potential is difficult to comprehend.
Don’t pass up the opportunity in LNG
As 2019 will demonstrate, LNG is one of the main investing themes for energy investors, although not all opportunities are created equal. Supercooled natural gas is unlikely to move the needle for Dominion Energy and Kinder Morgan, although it represents one important area of diversification (and growth, for the latter’s pipeline network).
Cheniere Energy — a pure-play LNG stock — will continue to dominate the industry and investing opportunity, but that could change if Tellurian successfully executes its vision. NextDecade could also provide a unique investment opportunity, but a string of delays might imperil the company and should be viewed as a serious red flag by investors. Nonetheless, any burgeoning industry will create winners and losers. That doesn’t change the fact LNG is here to stay — for both investors and the United States.
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