We’re less than three weeks into 2018, but several notable trends have emerged affecting the names in our International Portfolio, which primarily comprises positions in Canadian and Australian energy companies. These developments bear watching and will create challenges and opportunities over the next 12 to 18 months.
Trend No. 1: LNG Supply and Demand Growth
Australian exports of liquefied natural gas (LNG) have reached record levels, with the Chevron Corp (NYSE: CVX)-led Wheatstone project starting to ramp up.
International Portfolio holding Woodside Petroleum (ASX: WPL, OTC: WOPEY), which also holds an interest in the project, reported that the first liquefaction train is nearing full production after experiencing some delays. The bulk of the supply agreements associated with this facility are linked to Brent crude oil, which has rallied significantly in recent months.
US LNG exports will also reach a record level this year, driven by robust global demand and the start-up of new capacity.
Dominion Energy (NYSE: D) has started to commission the export capacity at its LNG terminal in Cove Point, Maryland, though recent reports have suggested that commercial operations may be delayed until March or April.
Sempra Energy (NYSE: SRE) has pushed back the completion date for its Cameron LNG facility, but Kinder Morgan’s (NYSE: KMI) Elba Island joint venture remains on track to start up later this year and reach full capacity in 2019.
Outside North America, large projects in Africa continue to move ahead with the backing of Eni (Milan: ENI, NYSE: E) and Exxon Mobil Corp (NYSE: XOM). All told, some 35 million metric tons of liquefaction capacity is slated to come onstream in 2018.
Canada, on the other hand, remains on the outside looking in, despite the vast reserves of natural gas in Alberta and British Columbia, and the huge discount at which the AECO Hub trades relative to the Henry Hub and international benchmarks.
Developers usually don’t make a final investment decision on a prospective LNG export facility until they’ve secured sufficient long-term contracts to justify the up-front costs. However, once the capital-intensive construction phase comes to an end and commercial operations ramp up, these assets generate significant amounts of cash flow.
And if global energy demand continues to grow and the transition away from coal accelerates, the world will need this recently constructed capacity and a lot more supply.
Bloomberg New Energy Finance estimates that the global LNG trade expanded by 10 percent in 2017, the fastest rate of annual growth since 2011. This same report calls for the market to increase by another 7 to 10 percent in 2018, bringing the total dollar value to about $120 billion.
As with most commodities, China remains the main driver of global demand. The Mainland faces an air- and water-quality crisis caused by a heavy reliance on coal for electricity generation, powering heavy industry and heating homes. In Hebei province, for example, the local government mandated that 2.6 million households heat their homes with gas instead of coal.
South Korea has also implemented policies that favor natural-gas consumption, and demand has also ramped up in Bangladesh and Pakistan.
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Elliott and Roger on Oct. 29, 2018
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