US Companies are benefiting from LNG. In this show, we explored the current obvious arbitrage opportunity that exists in this space and take a quick look at some companies that are benefiting from this very real domestic economic opportunity. I walked through a simple explanation of LNG, what the opportunity is, and why the United States is in a position to capitalize on it.
What is LNG?
Liquified Natural Gas or LNG is created by freezing natural gas to 40 degrees below zero Fahrenheit. This freezing process condenses the natural gas to make it easier to store and transfer. From there it easy to ship it to Europe to take advantage of the obvious arbitrage that exists in the marketplace today
Natural Gas Arbitrage
- $34.35US per million BTUs in EU
- $10US per million BTUs in United States
- Spread is nearly $30US per million BTUs
- Cost of Shipping is $1.5 MMBtu to Europe
Just like any arbitrage opportunity, when exercised, the spread narrows which has happened in the WTI – Brent Crude trade as well as what we are starting to see in the LNG marketplace. Domestically, the price of natural gas has risen in part to this arbitrage opportunity. There has been a global race to secure market share in this lucrative trade. We have seen Natural Gas prices raise to all-time highs in the US as it has gone from $5.2MMBtu to $10.0MMBtu
Elaborate Pipeline System
In the United States, we have an elaborate pipeline system and the infrastructure in place to take advantage of this arbitrage opportunity. A company which we own, Kinder Morgan (KMI), engages in the infrastructure business. They operate pipelines and essentially collect money from the use of their infrastructure. It takes huge amounts of capital to get this infrastructure in place, and the US has it in droves.
After the natural gas has been shipped through this pipeline system, it then needs to be condensed to LNG for shipping. A company that we do not own at this time, Cheniere Energy, Inc (LNG), engages in the business of liquefying natural gas as well as other competitors.
The United States has an early mover advantage when compared to other countries that have Oil and Gas Reserves. Take a look at Poland. They are a large coal producer which typically means that they would have large oil and gas reserves as well. Where there is coal there is oil and gas. So why don’t they produce much?
- Poland lacks the infrastructure
- Regulations in Europe are very tight (when compared to the US historically)
- Lack the Intense capital requirements to ramp up (and it takes years)
US Infrastructure and large spread means there is an economic opportunity in this space for domestic manufacturers.
Colorado Natural Gas and Oil Reserves
In just the State of Colorado, there are enormous untapped reserves. It has been estimated that in that great State alone, there is enough energy reserves to supply the US energy needs for approximately 70 years. But, today, it is politically incorrect to do anything with these reserves. It is unpopular to suggest that the oil & gas industry is not responsible for Global Warming.
Staying Active in Retirement
We know that:
- When people stay busy in retirement, they have healthier outcomes
- It is easier to stay financially healthy if you remain gainfully employed
If you have an active mind, as most do, the mind must stay active, or it tends to feed on itself. Stress and worry are huge detriments to physical and mental wellbeing. By staying actively engaged through whatever activity keeps your mind and body active produces much healthier outcomes. I have seen it firsthand. I don’t like to use this term very often, but I guarantee with me I worry much less about the daily iterations of the news cycle when I am active. I do my worrying at 3 AM if I wake up and can’t get back to sleep rather than 3 PM when I can actually take action to resolve issues while busy at work.
And think about it like this, if you are still gainfully employed post retirement, you have the advantage of not having to draw on your large pot of cash that you have accumulated during your working years. And, right now, is the probably the best time I can remember to actually be able to stay gainfully employed. This includes being an active personal investor. Which, if done properly, is a full-time job. If you enjoy the sport of it like I do.
Listen to the full podcast below for the 2nd hour of the Tom Dupree Show by clicking the link below.