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Friday, October 28, 2011
Cheniere Energy just signed a game-changing deal.
On Wednesday, the liquefied natural gas (LNG) terminal operator signed an $8 billion deal with international natural gas giant BG Group. The 20-year agreement includes BG exporting natural gas – from the U.S. to Asia and Europe – through Cheniere's Sabine Pass plant in Louisiana.
The Sabine Pass is an 850-acre LNG transportation facility. It has a 40-foot ship canal and five tanks capable of storing over 17 billion cubic feet of natural gas. The facility is 90% owned by Cheniere. It's expected to export LNG oversees by 2015.
Following the news, Cheniere's stock soared 70%.
As I explained last month, a deal to export natural gas was inevitable. Based on current demand, the U.S. is sitting on nearly 100 years' worth of the clean fuel.
At $3.60 per million British thermal units, U.S. natural gas prices are cheap right now. But natural gas prices in Asia have doubled over the past six months – following the earthquake in Japan. The price for natural gas in Asia is roughly $17 per million British thermal units. That's 370% higher than they are here.
With our huge supply and natural gas prices trading almost four times higher overseas, it was just a matter of time before major oil & gas companies figured out a way to export the clean fuel.
I expect Cheniere to ink further deals with natural gas-producing giants over the next few years. But I don't think the company is the best way to play the boom in demand for natural gas.
For example, the $8 billion deal with BG Group will bring in roughly $400 million in revenue a year (for 20 years) to Cheniere. But the company is not expected to turn a profit any time soon. In fact, Cheniere will probably use the recent price gain to raise cash to fund its expensive expansion plans at Sabine Pass.
Sure, Cheniere could move sharply higher from these levels – especially if the company announces another major deal. But I'd rather own small-cap natural gas producers with assets in promising areas like the Bakken, Eagle Ford, Marcellus, and Utica shales.
These companies were crushed during the summer downturn. Some are still trading at a 30% discount to their 52-week highs. Several names are also profitable – and seeing strong insider buying.
I currently have three natural gas related companies in my Penny Stock Specialist newsletter with huge upside potential. I wouldn't wait long to add some small-cap natural gas names to your portfolio.
Earlier this year, Frank wrote about an energy company with massive upside. Its market potential is a staggering $240 billion... but its market cap is a mere $1.5 billion. Shares are up 18% since July. Get the full story here: Another Huge Win for Natural Gas.
If you're bullish on natural gas in the long term, you may think this popular trade is a good "one click" way to park your money. You'd be wrong. Find out why Brian Hunt calls it "a contender for world's worst investment."
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