What happened
Shares of natural gas-focused companies Southwestern Energy (SWN), Tellurian (TELL), and NextDecade (NEXT -1.28%) were all screaming higher on Friday, up 14.7%, 19.3%, and 32%, respectively, as of 3:47 p.m. ET.
All three companies are involved in the liquified natural gas space, and President Joe Biden and European leaders announced a new natural gas deal on Friday to help ween Europe off of Russian supplies. That could spell increased business for these three companies over the next decade.
So what
On Friday, Biden and European Commission President Ursula von der Leyen announced a deal in principle to help Europe diversify its supplies of natural gas, which is primarily used for electricity and heating. Before the invasion of Ukraine, Europe depended heavily on Russia's natural gas for its supplies. Overall, Europe imported about 165 billion cubic meters (bcm) of natural gas from Russia last year, or about 40% of its usage, compared with just 25 bcm from the U.S.
As part of the new outline announced Friday, the U.S. will ship "at least" 15 bcm more this year, and those volumes are expected to increase going forward to at least 50 bcm per year through 2030. Furthermore, a joint task force will be established, with the aim of both increasing non-Russian supplies of natural gas before next winter, and also taking measures to mitigate demand. The initiative could entail new construction of liquid natural gas (LNG) import facilities in Europe, and perhaps more export facilities in the U.S. Currently, all current export facilities are at capacity, so some public or public-private financing partnership may be needed.
One can see how the new deal could greatly benefit Southwestern, Tellurian, and NextDecade. Certainly, the cutting off of Russian natural gas from the European market has the potential to raise prices for natural gas globally in the future, or at least keep them at current high levels for a long time. That will benefit Southwestern, which is a leading natural gas exploration and production company in Ohio, Pennsylvania, West Virginia, and Louisiana.
While Southwestern is primarily a natural gas producer, Tellurian has exposure to all parts of the natural gas supply chain, as it owns some natural gas production, marketing and trading, and is also beginning construction of the large Driftwood LNG facility, which will have 27.6 million tons per year of liquefaction and export capacity.
And NextDecade has its own LNG export facility in the works with its Rio Grande LNG terminal, with 27 million tons per year of capacity set to begin production in 2026. NextDecade just signed its second LNG customer, Guangdong Energy Group, to a long-term contract earlier this week, but it still only has about 3.5 million metric tons of capacity contracted, well short of the 27 million ton capacity of the project.
With the new European deal, it appears as though NextDecade could very well find new European customers to secure contracts and get its plant up and running as fast as possible.
A new deal could pave the way for more LNG exports to Europe. Image source: Getty Images.
Now what
The Russia-Ukraine conflict has the potential to be a boon for U.S. natural gas producers, pipeline operators, and exporters. While some may balk at buying these companies due to environmental, social, and governance (ESG) concerns, it should be noted that natural gas is less carbon-intense than coal, and is often talked about as a "bridge" fuel. Moreover, NextDecade is not only working on its LNG export facility, but it also has a carbon capture technology business. NextDecade looks to use its carbon capture and storage technology at the Rio Grande plant when it's up and running, which would make it among the most environmentally friendly LNG production facilities in the world. So it may be the more attractive of the three for ESG-minded investors.
Aside from ESG, it should also be noted that Tellurian and NextDecade are not profitable, as they are still pre-revenue from their LNG export facilities. However, when long-term contracts, typically 20 years, get locked in, it provides the clarity to get financing for the long-lived cash flows that de-risks construction. That's why when a new deal is announced, these stocks skyrocket.
While the U.S.-Europe announcement isn't a guarantee, it sure looks like the partnership could lead to more long-term contracts for these U.S. LNG facility projects from European customers. That's why it makes sense that these companies are up so big on Friday.
