Original date of publication was April 10, 2012.
Beyond the cries and groans over high gas (petroleum) prices in the U.S., a very different picture for energy consumption is being painted. The U.S. in the last 5-6 years has established itself as the world’s natural gas giant. The supply is so strong that the U.S. natural gas market is in the midst of a crisis based on oversupply and weak demand.
The price Americans are paying for natural gas compared to other countries is astonishingly low. For example, in Australia an average consumer would pay over 6 times per million BTU (British Thermal Unit) for natural gas than would be charged in the U.S. This is astonishing in that if you were to use a gallon of petroleum selling for $4 and multiply it by 6 you’d get a result of $24 per gallon!
(As of March 2012)
Why does the U.S. differ so much in terms of natural gas pricing compared to other countries around the globe? Two main causes can be identified. First, hydraulic fracturing (often referred to as fracking), a relatively new phenomenon in the exploration and extraction of natural gas was born in the U.S. The U.S. market is now reaping the benefits of being an early adopter of this technology. Secondly, the ability and infrastructure needed to transport natural gas to the degree that oil is transported globally is lacking.
The world has two main indices for oil because it is a commodity that is moved throughout the world with relative ease. This is not true for natural gas. Part of the problem stems from infrastructure and part from the nature of natural gas. In the U.S. the development of ports to load natural gas for exporting purposes are few and far between. This is because it was not until the last few years that the U.S. was considered a candidate for the exportation of natural gas. Ten years ago natural gas prices were much higher and fears of shortages loomed. The entire conversation amongst those in the natural gas industry was how the U.S. would need to import liquefied natural gas (LNG) via cargo tanker. LNG is the other hurdle of why natural gas is not transported as readily as oil. When transporting natural gas on a cargo ship it must be in the form of LNG. Thus, the natural gas must be cooled to the point where the vapor becomes a liquid and then placed in a controlled container to make transportation viable and safe. This process is not as nearly direct as filling a barrel full of oil, sealing it and throwing it on a cargo ship.
Even with these hurdles, the markets around the world are demanding the discounted natural gas prices the U.S. is currently experiencing. To meet this demand a number of companies exist that operate LNG tankers. One such company at the end of March had an IPO. GasLog (GLOG) is a LNG transportation company operating a fleet of tankers. It is positioned well to benefit from low natural gas prices in the U.S. and high natural gas prices abroad. In December the company plans to begin quarterly dividend distributions at 11 cents. At current prices (approx: $11.30), this would mean the annual yield for an investor would be around 3.9%.
I am of the opinion that GLOG at current prices is a buy for long-term investors with a 2+ year time horizon. According to Exxon, world energy consumption of natural gas is expected to increase 1.6% annually of the next 30 years, while general energy demand is expected to grow at .9%. Thus, natural gas is expected to grow 78% ((1.6-.9)/.9) faster than the overall energy market. This increased growth rate will have ramifications. One of the ramifications being that GLOG will be providing a service that is demanded more and more throughout the world.