Is A Meaningful Rebound On The Horizon For U.S. Natural Gas?
Cheniere Energy has long been my favorite contrarian indicator in the U.S. natural gas market. For those unfamiliar with the term, a contrarian indicator is an event which suggests that a broadly and firmly held view–in this case, the view that U.S. natural gas supplies will grow and remain cheap for decades–is about to begin a reversal.
As the company shipped its first cargo of U.S. liquefied natural gas (LNG) for export earlier this year, the glut of cheap U.S. natural gas seem to vindicate Cheniere’s plans. I, on the other hand, imagined that the shipment was not confirmation of Cheniere’s assumptions, but a contrarian signal that natural gas production was about to dip and that prices were finally going to turn higher in a sustained way.
I say this based on the timing of Cheniere’s last scheme, a U.S. natural gas import terminal that now sits unused next to its newly built LNG export terminal in Louisiana. The import terminal received its first LNG shipment in April 2008, just two months before U.S. natural gas prices peaked around $13 per thousand cubic feet, collapsing to a low of $2.06 by September 2009. For comparison, last week U.S. natural gas futures for September delivery closed at $2.59.
Cheniere’s stock price went from above $40 in 2007 to around $3 by September 2009, having gone below $1 at one point. When Cheniere planned and built the import terminal, most everyone believed that U.S. natural gas production would soon go into decline. But, only months after the terminal was operational, there was no longer any reason to bring LNG into the United States. It was just too expensive to compete with cheap domestic production which continued to grow.
So, Cheniere got the idea that it would reinvent itself as an LNG exporter. After all, because of the so-called shale revolution U.S. natural gas production was supposed to rise for decades, keeping U.S. domestic gas cheap. The rest of the world, Europe and Asia especially, would be hungry for LNG supplies and would pay dearly for them.
That was then. Now, of course, LNG prices have collapsed because of worldwide overexpansion of LNG capacity and flat demand in a world struggling to grow. Prices which had been above $11 in Europe and between $15 and $18 in Japan in 2012–while Cheniere was building its export terminal–have now swooned to $4.51 in Europe and$6 in Japan. Even back in 2012 Cheniere’s foray into LNG exports seemed like a risky proposition to me.
What’s worse for Cheniere is that the first signs of a U.S. natural gas production decline have appeared. Shale gas, the main driver of U.S. production growth, is expected to decline. That means that at some point supplies will shrink enough that U.S. prices will rise and likely make the margin between the U.S. price and European and Asian prices even smaller. And, as it turns out, the peak in U.S. natural gas production may arrive by 2020 if it hasn’t already.
I have not scrutinized Cheniere’s financial statements. I do not know the structure of its debt. Nor have I studied the arcana of the company’s existing contracts for delivery of LNG cargoes. Cheniere reports that 87 percent of its capacity is under long-term contracts where all the price risk is taken by the buyer. If Cheniere makes money, it will make money based on service fees.
With LNG prices as low as they are and a glut of new LNG facilities still planned, will other buyers from other new facilities take all the price risk which seems only to the upside? Will they insist on a more equitable sharing of that risk? Will the low spot price of LNG lead to more short-term arrangements for the time being? These are all good questions for those contemplating an investment in LNG facilities.
An earnings report from Cheniere released last week missed estimates and may or may not indicate a problem. Famed short seller Jim Chanos–who has no doubt done all the analysis I’ve failed to do–thinks the company has many problems.
In December of last year I suggested that one possible surprise in the year ahead was that several approved U.S. LNG projects might be delayed or canceled, something that seemed unlikely at the time. In late July Royal Dutch Shell announced that it was delaying a decision on whether to build an LNG export facility in Louisiana. Earlier in the month, the company announced a delay for a similar project in British Columbia.
Just last week Sempra Energy announced a delay in further work on an expansion of its Louisiana-based LNG export operation.
Outside North America a cancellation in Australia and a delay in Cameroon show that the problem is worldwide.
Possibly making matters worse in the long run are planned natural gas deliveries by pipeline from Russia to China starting in 2019 that might sell for around $10 to $11. If that becomes the ceiling price in China, LNG from the United States will almost surely be unable to compete for the large Chinese market.
Because Cheniere is taking no price risk on almost all of its exports, the company may make out just fine no matter what happens to U.S. natural gas or world LNG prices. (I leave it to the financial analysts to figure out, for instance, whether Cheniere’s arrangement with Britain’s BG Group to supply gas at 115 percent of the Henry Hub price plus a $2.25 per million BTUs liquefaction fee will provide adequate cash flow.)
But, I’m guessing that Cheniere’s first exports of LNG will, in hindsight, likely mark a bottom for U.S. natural gas prices–just as its first imports of LNG nearly coincided with the top of the gas market in 2008. U.S. natural gas production is likely to shrink in the coming years, and Cheniere is proposing to take more and more of that shrinking supply and export it. And, so are several other companies(though I doubt that many of them will complete their projects).
The question for investors is whether U.S. LNG operators will make money or simply destroy capital as Cheniere did in the past with its LNG import operations. The question for policymakers is whether shipping U.S. natural gas abroad is a good idea even as the country continues to import natural gas to meet its needs.
石油圈
