“The Dept. of Energy’s Mysterious $400 Billion ‘Cameron Parish Project’
“In a muddy Louisiana bayou town, the US government is quietly sponsoring a breakthrough experiment set to solve one of the greatest energy problems of our time…
“But only a handful of companies have the green light to exploit it for huge gains…
“INSIDE: How the “Cameron Parish Project” could pay you $16,500 or more every year… for the next 20 years and beyond….”
The intro to this ad is perfect, it should be used for the “investment copywriting 101″ class for those who want to be hype-meisters … we’ve got a mystery, a government boondoggle, a limited number of companies in on the secret, and the promise of huge gains — including, of course, the mention of your big annual profit from this investment without any mention of what exactly you’d have to put up to enjoy those $16,500 gains.
If they’re going to hit all the bases like that, the least we can do is sleuth our way through the ad for you and name the companies they’re secretly recommending, no? That is, after all, why your friendly neighborhood Gumshoe rises with the sun each morning to toil in the deep, dank teaser mines beneath Gumshoe Manor.
The ad this time is from Sara Nunnally over at the newly renamed Contrarian Profits, who’s pitching her newsletter for potential subscribees (her letter is still called Macro Trader, by the way). She had her share of good picks and stinkers over the years like most of ‘em, but her (heavily teased) pick earlier in the year of Capstone Turbine (CPST) has indeed done well so far on the back of some new orders and a new wave of investor enthusiasm, so we’ll give credit where it’s due on that one.
What’s she teasing today? Here’s some more of the intrigue:
“… Cameron Parish has been down on its luck for some time now…
“But all of that is about to change… quickly.
“You see, this remote community could soon be the source of billions of dollars in wealth…
“You might not be able to find it on a map, but what happens in Cameron Parish may singlehandedly dictate much of the world’s energy future.
“In a cove off the Gulf Coast, behind a large security gate, a mysterious project is being built under the watchful eyes of the US Department of Energy.
“The breakthrough experiment conducted inside the massive building will have sweeping ramifications for American foreign policy, international energy security and the financial markets.”
It’s like the beginning of a sci fi movie, no? You fly over the poor town and zoom in on the giant security gate at the end of the rural road, site of a massive, secretive government project — maybe that’s where they’re keeping the aliens now that everyone knows about Area 51.
But no, it’s not really secret — just not frequently in the headlines in most of the country. She’s talking about LNG Exports, and the LNG Liquefaction plant being built to export US natural gas to Europe and Japan.
Here’s more from the ad:
“This complex science is what turned Qatar from a desert outpost to the richest country in the world.
“But this technology had never been tried in the US.
“Until the Cameron Parish Project.
“Now the US companies that have this technology are on the verge of becoming kingmakers.
“But here’s the thing…
“The Dept. of Energy has kept a tight lid on this experiment – and the companies that can use this breakthrough technology for profit.
“Only two companies are currently approved to move forward.”
Well, that’s a little bit silly — the “complex science” is done all the time in the US, we just have historically done a lot more of the “gasification” of liquefied natural gas than we have the “liquefaction” of natural gas. The US has several plants for importing shipborne LNG on tankers, mostly from Trinidad, Qatar and Yemen — we just don’t use them much because natural gas prices in the US have been so low that we’re really only importing what we’re contractually obligated to buy.
We also have lots and lots of smaller scale liquefaction plants in operation, particularly those that prep gas for local shipment via tanker truck, or for fueling trucks that use natural gas engines like those from oft-teased Westport Innovations (WPRT) (some trucks use compressed natural gas, but the big long-haul trucks usually need liquefied natural gas for more energy density). It’s not a secret or unknown science, it’s just that liquefaction on a grand scale requires big, complex plants.
Oh, and yes, US companies haven’t generally been allowed to export natural gas via LNG Tanker, with small exceptions (there has been a LNG export terminal in Alaska for decades that sometimes ships to Japan and occasionally to other countries, though it’s tiny and I think it shut down for a while), but the US has been exporting natural gas via pipeline to Canada and Mexico for many years, and in increasing quantities.
But to get to the real customers who pay the highest prices, mostly Japan and South Korea, you need LNG export plants and tankers — you can’t reach Asia by pipeline. So US companies have been trying, since the shale gas boom began, to figure out how to buy gas at $4 in the US, liquefy and ship it, and sell it in Japan for $15 (or whatever the spread is at the moment — it’s always high, and particularly has been appealing in recent years because Japan’s shutdown of their nuclear power plants increased the demand for natural gas). That means getting approval to build new liquefaction plants and getting export licenses, since the government has kept a tight lid on gas exports in the interests of domestic prices (remember, low natural gas prices in the US are a huge boon for many industries, from agriculture to chemicals, so much so that low energy and input prices have spurred a wave of investment in new US chemical and manufacturing plants, and they also keep electricity prices and home heating prices lower … and every voter has an electric bill and likes the idea of “energy independence”).
So the approvals for these new plants have been very slow in coming, though that might change — it could have been that just getting the first plant or two approved will open the logjam to a wave of approvals of some of the other 20 or so proposed LNG export projects, we’ll see.
But anyway, this huge transition to cheap natural gas is being heavily promoted and teased both by newsletters and by the mainstream media — there’s talk of real “energy independence” in the foreseeable future (thanks also to Bakken oil), and there are lots of different ways that folks have pitched for profiting from that renaissance, whether it’s the natural gas transport and storage infrastructure (Chicago Bridge and Iron (CBI) and Chart Industries (GTLS)) or the use of natural gas in fertilizer (Agrium (AGU) and CF Industries (CF)) or in engines (Cummins (CMI) and Westport (WPRT)), well, you get the idea. What, then, is Nunnally’s way to profit from this?
Here’s some more from the ad:
“While the United States has imported natural gas for many years, we have NEVER exported it.
“Now there are companies trying to turn their existing import terminals into export terminals in order to capitalize on the huge global demand for gas from the United States.
“But it’s not that easy… not like flipping a switch.
“Converting these import terminals to export facilities is a highly complex process that takes billions of dollars and several years to do.
“Some companies are trying to build new terminals completely from scratch, which takes even more time and money.
“These terminals are massive facilities. They must cool huge amounts of natural gas to -260°F. It is only at this super-cold temperature that natural gas turns into liquid.
“And few companies in the energy industry have the kind of expertise to build or operate the terminals or the specialized tankers for shipping the gas.”
OK, so we know that’s an exaggeration — the US has been a net exporter of natural gas for at least a couple years now, just not much LNG. But the basic premise is true, we’re not a significant exporter of seaborne natural gas yet. And actually, we’re not an LNG exporter at all at the moment — I just checked, and that one LNG export facility, Nikiski in Alaska, again suspended exports in the Spring because there isn’t enough surplus local gas (from the Cook Inlet fields) to justify operations. If they find more gas there, more than Anchorage needs, they could resume again — this is the only plant that can currently operate that’s allowed to sell to Japan and China, the biggest customers, though I think anyone with a load of LNG could theoretically sell to South Korea since it’s now a free trade partner after that agreement was signed last year.
Pretty much all of the US LNG export activity over the last 50 years, whether permitting or licensing or actual exporting gas, has involved this one LNG plant in Alaska. That changed a couple years ago with the first permit issued for a new plant, and more recently the second permit was approved, so now we’re moving on to what Nunnally is actually teasing: The next wave of exporters. Here are her clues:
“‘Cameron Parish Project’ Company #1: A $7 Billion InfusionFrom Hungry Foreign Energy Giants
“This company just recently received approval from the Department of Energy to ship out natural gas abroad.
“So it’s building an export terminal on the shores of Louisiana.
“But get this…
“Three international energy giants are so eager to cash in on the globe’s ravenous appetite for natural gas that they signed deals to invest $7 BILLION into this company’s liquefied natural gas project.
“In exchange, these two Japanese conglomerates and this giant French energy player will receive all of the natural gas from the company’s Louisiana project.
“The project is forecast to yield 12 million tons of liquefied natural gas annually for 20 years.”
And the other stock she teases? Clues for you:
“Cameron Parish Project’ Company #2: America’s First-Ever Natural Gas Exporter
“The second opportunity I want to share with you is a bit more conservative than the first.
“That’s because this company was the first to gain government approval to export liquid natural gas overseas, a market that until now has been dominated by Russia and Qatar.
“And as this company has gotten further along in the process, its stock has started to rise.
“However, this company stands to collect gobs of income from the contracts it’s already signed for the next 20 years, thanks to its position as a first mover.
“It’s inked six major contracts with natural gas giants in Britain, Spain, South Korea and India, and most of these deals have terms of 20 years or more. That’s not even including the big 20-year deals it’s already signed with Chevron and Total.
“And the company has plans for the development of a second liquefaction plant in Corpus Christi, Texas.
“It’s an ideal location because of how close it is to South Texas’s Eagle Ford Shale, a massive oil and gas field set to surpass North Dakota’s Bakken this year in terms of oil growth rate.
“Investment banking giant Blackstone recently snapped up a huge $2 BILLION worth of this company’s shares.
“Better still, because both of these exporters have locked in these long-term contracts at specified rates, they’re immune to fluctuations in price that wreak havoc on others in the energy world.
“So whether natural gas prices move up or down… the profits for these companies will keep rolling in.”
What are our two companies?
Well, it won’t surprise you to learn that yes, the two companies she’s teasing are two of the US companies who are first out of the gate to get permits to build LNG export plants in the modern (shale gas) era: #1, Sempra Energy (SRE) and #2, Cheniere Energy (LNG, or CQP for the Master Limited Partnership)
Sempra Energy is a Southern California utility company, so most of its business is boring regulated utility stuff — which means that when you add on their other projects like this potential 2017-ish LNG export facility, you get … a really expensive-looking utility, with a forward PE of less than 20 and a yield of just under 3%. Not horrible, but not a utility that would jump out of the pack for you unless you were really bullish on San Diego or you think this LNG project of theirs is going to be a gold mine. To be fair, they have plenty of other projects too, including some South American and Mexican investments in utility and natural gas midstream assets to go along with their California utilities — you can get a pretty good picture of the company from their recent investor presentation here.
There’s a pretty good NY Times article explaining the LNG export project here if you’d like more detail. Not a bad company, but the LNG project is not going to move the needle in any positive way for at least five years. Unless they sell it in some kind of windfall deal if it becomes far more valuable between now and when it’s anticipated that it could begin production.
And Cheniere Energy is pretty much just a LNG liquefaction export pure play, and they are the first company to receive that approval to build a LNG export facility — the Sabine Pass facility, which is actually owned by Cheniere’s controlled subsidiary Cheniere Energy Parntners, a MLP (ticker CQP). Since Nunnally talks about this being relatively more conservative, it’s possible she’s talking about CQP here instead of LNG, CQP is larger and does have a current distribution yield of about 5.6% … but I have no idea where that cash is coming from. They are currently estimating that CQP should have distributable cash flow of about $3 per share once trains 1-4 are operating at Sabine Pass, but that won’t be for a few years, and presumably they’re going to have to keep borrowing money to pay out the distribution if they’re going to pay out the current $1.70 a share for the next couple years, in addition to the other debt they’re taking on the fund the Sabine Pass project. The fact that Nunnally notes Blackstone is a major investor points us to the MLP, of which Blackstone controls about 20%, but the talk about their next project, the Corpus Christi Liquefaction plant that they’re proposing, points us to the parent — the MLP is not yet involved in Corpus Christi as far as I can tell.
LNG’s revenue is very low from other segments of their business, and they’re probably going to be losing money at least until their facility starts exporting in about 30 months, with continuing huge capital investments for the several years after that as they finish building the facility (“Trains” 1 and 2 are expected to start by late 2015 and are about 30% built, 3 and 4 just started, 5 and 6 are envisioned and all six have gas sales deals in place — a train is a processing line for the gas, going from purification to compression to condensation, etc., then to loading of the tankers). You can see Cheniere’s investor presentation here.
Given the fact that both of these large and interrelated companies are wholly dependent on the Sabine Pass liquefaction and export facility and its 2015/2016 startup and profitability over the following several years, and that the first installment of this massive project is only 30% done right now, I’d be hard pressed to call this a conservative investment. They have gas sale agreements with partners for the first 20 years, but I assume the profitability of those agreements will depend on the gap between US domestic natural gas prices and European/Asian LNG import prices remaining very high — currently it costs something like $6 to liquefy gas and ship it to Asia, and $4 or $5 to liquefy and ship to Europe, so presumably the gap needs to remain substantial for LNG or CQP to be very profitable in the next decade or two (that’s on top of the price of the actual gas in the pipeline in the US — so you need to sell for more than $10 in Japan to make a profit, no problem currently with prices around $15 there). That might benefit LNG and CQP in the early days, since they’ll presumably be exporting meaningful quantities before anyone else in the US, but it’s possible that other projects around the world (there are several big gas exporting projects planned in Australia and Oceania, closer to Japan and Korea, as well as probably more from the Middle East and Africa) or other US export projects will narrow those Asian LNG premiums over time.
I have a hard time getting super excited about either of these at current prices, frankly, I’m more comfortable with the service companies and the companies that benefit more directly and immediately from current low US gas prices … but I have not looked that closely at these stocks today — to the extent that I don’t even really understand why Cheniere has any cash flow at all right now, so I could be missing something. If you see something to like in LNG, CQP or SRE, or have other LNG-related ideas you’d like to share, feel free to toss your thoughts out to Gumshoe Nation with a comment below.