Investing in liquefied natural gas stocks

Dave Gilreath: ©Sheaff Brock Investment Advisors

In their undergraduate chemistry and physics courses, many physicians learn about the work of a renowned 19th-century English scientist, James Faraday.

In the early 1820s, Faraday achieved a first by turning gases into liquids, using high pressure and ultra-low temperatures — a landmark achievement in mankind’s understanding of states of matter and the behavior of gases.

Nearly two centuries later, the knowledge base that began with this achievement has led to a new export industry: liquefied natural gas (LNG), an offshoot of the natural gas industry.

Natural gas is transmitted domestically by pipeline. As the U.S. has some of the greatest deposits of natural gas in the world, it’s particularly well-positioned to export it to lesser-endowed regions, but strictly in liquid form.

Liquid Advantage

Exporting natural gas in its gaseous state isn’t economically feasible because it takes up too much space. But shipping this gas in its highly concentrated, liquid state is another matter entirely because this enables dramatically increased shipping volumes. 

Faraday’s work paved the way for the global industry of sending natural gas around the world in special ships containing huge, heavily insulated aluminum tanks, acting as a kind of thermos to keep temperatures around minus 260 degrees Fahrenheit.

At destination terminals, this liquid is turned back into gas (re-gasified) using a reverse process, before being transported via pipelines to users.

A little more than a decade ago, this export industry in the U.S. was embryonic. Now, it’s a $34 billion industry annually — twice the size of U.S. movie and television exports, greater than the value of soybean and corn exports, and more than half the value of the U.S. semiconductor industry exports, according to a comprehensive study by S&P Global.

Still in its infancy, the LNG industry is projected to grow enormously over the next 20 years — so much so that it presents a strong case for long-term investment.

Despite obviously having been good students, physician investors who may have been less than alert during physics/chemistry lectures on Faraday’s brilliant work may now be able to benefit from alertness to potential returns from investing in the industry to which his work has led.

Yet, in addition to being alert, they also need to be patient.

Natural gas is a commodity, so it has a potential for severe price swings over brief periods. Prices of LNG-related stocks are naturally affected. However, over the long term, these price swings tend to average out.

For investors with the discipline to stay the course and resist the self-defeating temptation to sell shares when prices dip, LNG appears to have substantial potential as a profitable long-term investment.

Economic Impact

Here are some key points of the S&P Global study:

• The U.S. is the world’s largest supplier of liquefied natural gas. U.S. exports of LNG have replaced nearly half of the Russian natural gas exports disrupted by the war in Ukraine. 
• Global annual U.S. LNG exports equal the energy needed to heat more than 80% of European Union households for a year.
• Since 2016, LNG has contributed more than $408 billion annually to the U.S. gross domestic product (GDP), supporting 273,000 jobs.
• Over the next 15 to 20 years, the domestic LNG industry is projected to triple in size, supporting 500,000 American jobs and adding $1.3 trillion to the GDP.

Of course, these eye-opening industry projections indicate promise for individual companies that position advantageously to exploit this growing demand.

The industry is currently benefiting from a variety of drivers, including natural gas’s essential, growing role in replacing coal as fuel worldwide for generating electrical power. Natural gas is a lower-polluting alternative.

It’s also an answer to the escalating demand for electrical power created by electric vehicles, all manner of rechargeable consumer products and devices, proliferating data centers with power-thirsty servers running artificial intelligence software, cryptocurrency mining, and whatever comes next in this world of printed circuits bristling with chips that voraciously consume electrical power.

As the global demand for power increases, the potential for existing electrical utilities to keep the power grid humming with enough juice is increasingly in doubt. This will likely mean more natural gas-fired power plants globally. Wind and solar power solve pollution problems, of course, but currently they’re supplementary power sources, at best.

Of course, these are long-term demand drivers. Over the shorter term, any energy investment can be frustrating because of the herky-jerky pricing resulting from various factors, including weather and global supply. And to a large extent, the fortunes of LNG are tied to those of this substance in its gaseous state. Though a cold winter in the U.S. has been good for natural gas demand, various factors point to troubled months ahead. Not the least of these is a potential increase in supply —suppressing price — that could result from a potential resolution to the war in Ukraine.

Though a big dip in natural gas prices and, hence, LNG stock values in the coming months might be a bummer for investors who just bought such stocks, this event should be top of mind. Rather, as in most investments, the best mindset is to keep eyes on the long-term prize.

Mixed Energy

Generally, natural gas investors are challenged by the difficulty of distinguishing investments in natural gas from those in oil. The two industries are naturally intertwined, as oil and gas are found in the earth together and extracted by the same drilling entities.

And, although LNG is fully discernible from natural gas and the broader energy category (which necessarily includes oil), there aren’t many choices for pure-play investments.

One is long-established Cheniere Energy Inc. (LNG) and another is Venture Global (VG), a huge company that’s been trading well below its opening price after going public in January. There’s at least one ETF dedicated to liquefied natural gas — Range Global LNG Ecosystem INX(LNGZ) — or largely dedicated, as many of the companies it owns deal in natural gas and some, unavoidably, in oil as well.

In a way, LNG is an industry that, to some extent, creates its own demand. As re-gasification terminals and pipelines are built around the world, enabling conversion of LNG and its sale at export destinations as natural gas, this can introduce a new form of energy in places where it didn’t previously exist — regions with little or no natural gas deposits.

As of 2024, construction of re-gasification plants was expected to grow by 53% by 2028, as more nations (particularly in Asia) adopt or expand their use of natural gas. This is an end-to-end industry, in which companies have liquefaction plants at the originating shipping terminal — in the U.S., typically in coastal Louisiana and Texas — and re-gasification plants at receiving terminals worldwide.

And there’s currently an abundance of LNG ships, many of which are powered by LNG, with more under construction and expected to come online in the next year or two.

A few years from now, some projections hold, there will be more LNG ships than oil supertankers—ready infrastructure for exports to meet global demand.

Dave Sheaff Gilreath, CFP,^® is a founder and chief investment officer of Sheaff Brock Investment Advisors, a firm serving individual investors, and Innovative Portfolios,^® an institutional money management firm. Based in Indianapolis, the firms are managing assets of about $1.4 billion, as of December 31.
Investments mentioned in this article may be held by those affiliates,Innovative Portfolios’ ETFs or related persons.