Huge Dividends From America's Energy Game Changer

By Dan Dzombak | More Articles 

July 7, 2011 | Comments (4)

Natural gas companies are selling gas to North American customers for peanuts when they could be getting much higher prices internationally. However, it is currently not possible to ship natural gas from the U.S. to the rest of the world. That will change over the next few years with the completion of multiple natural gas liquefaction plants. I've already revealed mysecret to commodities investing and an alternative way invest in increased natural gas production. Read along, and I'll explain why liquefied natural gas, or LNG, is a game changer, how it will affect natural gas companies, and a dividend stock to profit from LNG's expansion.

NatGas!In the past few years, new technologies and cheaper costs allowed producers to access gas trapped in parts of the U.S. previously considered unreachable. As more companies have tapped these unconventional plays, U.S. natural gas production has risen roughly 25% over the past five years, to 78 billion cubic feet per day, or Bcfd for short. Experts expect production to keep rising over the next 25 years, to 113 Bcfd by 2035.

Currently there is a rush to secure drilling leases in the U.S., which is keeping natural gas supply higher than demand. This has pushed down the price of natural gas to a very low $4.2/mcf, below many producers price of production. The low prices in the U.S. are a stark contrast to the rest of the world.

Source: World Bank Commodity Price Data (Pink Sheet).

So why don't U.S. companies just sell to Europe and Asia? To ship natural gas, you need to cool it to -260 degrees Fahrenheit so it becomes a liquid (hence the name, LNG) and can be safely transported. The problem is, while the U.S. has receiving terminals, we have no liquefying terminals. At a rough cost of $5/mcf to liquefy and transport to Asia, it formerly made no sense for North American producers to ship it, as they were better off selling gas on the continent.

International markets offer large long-term growth for the U.S. natural gas business. While Asian natural gas plays like InterOil's (NYSE: IOC  ) Elk and Antelope fields in Papua New Guinea will be able to meet some demand, Global LNG demand is expected to exceed supply under construction by 2017. So what's happening in the U.S.?

LNG in the U.S.The only exporting plant in North America is ConocoPhillips' (NYSE: COP  ) Kenai LNG plant in Alaska. The plant is in the process of being shut down as natural gas supplies in the Cook Inlet basin area have been falling. The problem was recognized years ago, and a pipeline was considered to connect the area to the main North American pipeline network, but the investment was never made, so no out-of-area natural gas can be processed there.

In the U.S. there are two large projects in the works. Freeport LNG is owned by Michael Smith, ConocoPhillips, Dow Chemical (NYSE: DOW  ) , and other partners. It is targeting a July 2015 start date and is expected to have a capacity of 1.4 Bcfd.

The project open to regular investors is Sabine Pass LNG owned by Cheniere Energy Partners (AMEX: CQP  ) with the general partner being Cheniere Energy (AMEX: LNG  ) . The company currently runs a 4.0 Bcfd receiving terminal with half its capacity contracted toTotal and Chevron with Cheniere Energy, taking the rest for themselves. The company plans on building a 2.6 Bcfd liquefaction plant so it can both import and export LNG. Targeting a 2015 start date, Cheniere Energy's shares got a boost in May when the Department of Energy approved its application to export LNG.

So why is this a game changer?Assuming roughly $5 to liquefy and ship, compared to selling natural gas to consumers in the U.S., 4 Bcfd of natural gas liquefied at Sabine Pass and Freeport LNG and sold in Asia at $14/mcf will allow natural gas producers to earn an extra $20 million a day, or $7 billion a year! This would made it possible for natural gas companies to thrive, compared to now, when they are selling gas below their cost of production in many cases.

Dividends!While Cheniere Energy Partners pays a large dividend of 9.4%, there is a better way to invest in the growth in LNG and still reap large dividends. I'm talking about LNG shippers.

LNG shippers will profit from the growth in LNG no matter where it is, and unlike Cheniere Energy Partners, they are not dependent on one complicated project working out. The two you can invest in are Teekay LNG Partners LP (NYSE: TGP  ) and Golar LNG Ltd.(Nasdaq: GLNG  ) .

Golar LNG owns four floating storage and regasification ships (floating LNG receiving terminals), which are under contract till the end of the decade. The company also owns six LNG carriers. The stock has taken off this past year, rising some 300%, and as such, the company only yields 2.8%.

The stock I like is Teekay LNG. The company is a pure shipper, providing marine transportation for LNG and crude oil under long term contracts. Over the past five years, it has grown from four LNG carriers and five tankers to 21 LNG carriers, five LPG carriers, and 11 conventional oil tankers. The company is organized as an MLP and has increased its distributions at an 8% CAGR to $2.52 per share last year for a 6.7% yield. The company is well-positioned to grow with the LNG market, wherever that may be.

Kosmos Says Transocean Rig Damage May Delay Ghana Drilling

By Jim Polson and David Wethe - Jul 7, 2011 11:05 PM GMT+0100

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Kosmos Energy Ltd. said damage to Transocean Ltd. (RIG)’s Marianas rig may delay drilling of a well off Ghana’s coast.

A force majeure notice was delivered to the government of Ghana and Ghana National Petroleum Corp. after an anchor- handling accident damaged the rig, Dallas-based Kosmos said today in a statement. The Marianas was scheduled to arrive July 10 for drilling, Kosmos said.

Kosmos said it anticipates that either the Marianas or a substitute rig will be “available soon” to drill the Cedrela-1 well in the West Cape Three Points Block. Yesterday 108 of 121 workers on the vessel were evacuated after it took on water while preparing to leave an Eni SpA drilling site roughly 40 miles off Ghana, the rig owner said.

The market for deep-water rigs in that part of the world is so tight that Kosmos will likely have to wait at least a month for a comparable drilling vessel, said Brian Uhlmer, an analyst at Global Hunter Securities in Houston. Moving an unused rig from the Gulf of Mexico could take about 45 days.

“There’s literally nothing in Ghana that can come back to work quickly,” Uhlmer said. “I think the most likely is to pull something from the Gulf.”

Towing for Repairs

Transocean expects it will take at least a week to tow and inspect the rig for damages, Guy Cantwell, a spokesman for the Vernier, Switzerland-based drilling contractor, said today in a telephone interview. No estimates can be made on the damage or where the repairs will take place until the inspection is complete, he said.

Some workers will return to the rig, “but not a tremendous amount,” Cantwell said, declining to give specific numbers. Workers are monitoring the situation and removing water from the vessel, he said.

The Marianas rig, which was used in 2009 to start drilling the Macondo well for BP Plc in theGulf of Mexico, may be out of service for as many as 180 days with most of the time taken up by moving it to a yard and final inspections, Uhlmer said. “It’s not like fixing your kid’s soccer ball,” he said.

The rig started drilling the Macondo well on Oct. 6, 2009, and was damaged a month later by Hurricane Ida, according to a report posted on Transocean’s website. Drilling was suspended while the rig was moved to a shipyard for repairs.

Bad Luck Rig

Taking its place at the well was Transocean’s Deepwater Horizon rig, which exploded and sank in April 2010, leading to the largest U.S. offshore oil spill.

“It’s a bad luck rig,” Uhlmer said.

Geoff Kieburtz, an analyst at Weeden & Co. in Greenwich, Connecticut, said he’s still trying to understand how serious the situation is after more than 100 people were removed from the rig.

“You don’t do that unless you’re reasonably concerned about something,” he said in a telephone interview. “On the other hand, you don’t leave 13 people on there if you think it’s an imminent threat. So, it’s all a little bit fuzzy to me.”

Kosmos rose 49 cents, or 2.9 percent, to $17.32 at 4:15 p.m. in New York Stock Exchange composite trading. Transocean rose 24 cents to $62.47.

While parts of the Marianas rig date to 1979, the rig was upgraded in 1998 and is able to work in water as deep as 7,000 feet (2,000 meters), according to a Transocean regulatory filing. The rig wasn’t drilling when the water was discovered and it was stable, Cantwell said yesterday.

Kosmos operates the West Cape block and holds a 30.875 percent interest, according to a July 5 statement. An Anadarko Petroleum Corp. (APC) affiliate also holds 30.875 percent, a Tullow Oil Plc (TLW) affiliate holds 22.896 percent, Sabre Oil & Gas holds 1.854 percent and E.O. Group Ltd. has 3.5 percent of the block. Ghana National Petroleum has a 10 percent interest.

Investment Floats a New Form of Wave Power

But the future of the wave energy industry could depend on the incentives introduced by the U.K. government.

• THURSDAY, JULY 7, 2011
• BY PHIL MCKENNA

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An unusual sea creature is emerging from Loch Ness in Scotland: a monster-sized floating doughnut.

Wave energy startup AWS Ocean Energy recently tested this novel wave power device on the surface of the famous lake. Now, thanks to a recent investment from Alstom, a large French power equipment manufacturer, a 60-meter-diameter version could soon produce megawatts of power as it bobs in the open ocean. 

The device is divided into cells, each consisting of inflatable rubber diaphragm and a bidirectional air turbine. Each cell faces toward oncoming waves. The diaphragm of each cell contracts under pressure from passing waves, forcing air through the turbines to generate electricity. The air is then fed either into a central collection chamber, or into the diaphragm of another cell elsewhere on the ring.  Each time air passes through a turbine, whether exiting or entering a cell, electricity is generated. 

"There is an exchange of air between cells which are out-of-phase," says AWS chief executive Simon Grey. "This exchange is taking place via at least two turbines, exiting from one cell and entering another, and the ring main, at any given time." 

On June 21, Alstom made a "multimillion" dollar investment that will allow the Inverness, Scotland-based company to scale up AWS-III, it's current generation of this wave energy device.

"AWS-III will generate two kilowatts for every ton of steel," says Grey. "No other device comes within a factor of four of that."

Philippe Gilson, ocean energy director forAlstom, says the size and modular nature of the device made it an attractive investment.  "You get economy of scale and redundancy," he says. "If one module fails, the others are still operating."

AWS completed tests with a prototype of the wave-power device in Loch Ness in July 2010. The recent investment will allow the company to test a full-size, single-cell device in ocean waters in 2012. Grey says the hope is to then deploy a 60-meter-diameter floating ring with 12 wave-cell absorbers by the end of 2014. The full-scale device should generate 2.5 megawatts of power, more than twice as much as other wave energy devices deployed to date.

Vicky Coy, a senior consultant with the London-based engineering firm Arup, says the size of the planned device could be a liability. "There are only one or two places in the U.K. that can build something that big," she says. "You would also have to have a large vessel to tow it into position, and finding ports that could accommodate it for servicing would be challenging."  

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China's shale gas play may reduce LNG, pipeline gas imports: analysts

Singapore (Platts)--7Jul2011/523 am EDT/923 GMT

China's appetite for LNG and pipeline gas imports over the coming decade could be reduced with the development of shale gas and other unconventional gas in the country, much like in the US where shale gas was a game changer, analysts from Bernstein Research said in a report Thursday.

Imports will face stiff competition from the economically more attractive shale gas, even though development costs in China would surpass those in the US, the analysts said.

Shale gas development is in its infancy in China, with the country's two oil majors, PetroChina and Sinopec, expected to produce 3 billion cubic meters by 2015, less than 2% of total domestic gas production.

"Exploration is at the early stage and it will take time to prove up resources and devise a commercial development plan. Moreover, there is still a large volume of conventional 'tight' gas to develop first," the Bernstein analysts said in the research report.