Investing in Liquefied Natural Gas Stocks

Natural gas is an abundant resource. It’s also cleaner and cheaper than other fossil fuels such as oil and coal.

However, natural gas has a significant disadvantage. Gas must travel from wells to terminals by pipeline. Unfortunately, it’s not easy to build pipelines over oceans, putting many international markets out of reach. Companies must turn natural gas into a pressurized liquid and transport it using specialized ships that can carry it to overseas markets.

Energy companies are investing billions of dollars in building liquefaction facilities in hopes of cashing in on growing international demand for liquefied natural gas (LNG). Here’s a look at what’s ahead for the sector and the companies in the best position to cash in on the growing global LNG demand.

An overview of the LNG market

Global LNG trade reached 381 million tonnes (MT) in 2021, according to industry leader Shell (NYSE:RDS.A)(NYSE:RDS.B). That’s 6% higher than 2020’s level, driven by growing demand from China and South Korea. China surpassed Japan to become the world’s largest LNG importer in 2021.

Shell expects global LNG demand to reach 700 MT by 2040. The primary driver has been growing demand in Asia; Shell predicted in 2021 that Asian countries could absorb as much as 70% of the new LNG volumes coming to the market over the next two decades.

Europe, however, is emerging as a potentially important LNG market following Russia’s invasion of Ukraine in 2022. Russia had been a key gas supplier to the continent, providing roughly 45% of Europe’s imports. However, a desire to diversify supplies away from Russia has many European countries looking at securing LNG supplies.

Several companies are investing to meet the future needs. They are exploring for more natural gas resources and also developing LNG export and import infrastructure. These investments could pay big dividends for LNG-focused companies provided the demand grows as expected and pricing stays attractive.

What are the top LNG companies?

Many of the world’s largest LNG producers are state-controlled companies. Qatargas, owned by the government of Qatar, is the world’s largest LNG producer.

However, while state-owned companies are a force in the LNG market, they’re not alone. Several publicly traded energy companies rank among the LNG sector’s biggest producers. Here are three top LNG stocks for investors to consider:

1. Cheniere Energy

Cheniere Energy was the first company to export LNG from the lower 48 states in 2016. It has since become the leading U.S. LNG producer and the second-largest producer globally. The company operates two LNG facilities along the U.S. Gulf Coast that export gas to foreign buyers:

• Sabine Pass: Located in Louisiana, this LNG facility has six fully operational liquefaction units, or ​“trains.” Sabine Pass has the capacity to produce about 30 million tonnes per annum (mtpa) of LNG.
• Corpus Christi: This Texas facility has three currently operational LNG trains with the capacity to produce roughly 15 mtpa of LNG. Cheniere is also moving forward with Corpus Christi Phase III. The project will add seven mid-scale trains that could produce more than 10 mtpa of LNG when completed in 2025.

Cheniere Energy’s LNG operations buy natural gas on the open market and have it shipped to its facilities via third-party pipelines, as well as those it operates. It then liquefies the gas and sells roughly 85% to foreign buyers such as utilities under long-term, fixed-fee contracts. It makes the remaining supplies available to other buyers at the going market rate.

The company’s contracted volumes provide it with predictable cash flow. It uses that money to repay debt, invest in expanding operations (e.g., Corpus Christi Phase III), and reward shareholders through dividends (which it initiated in 2021) and share repurchases.

Cheniere’s strategy of selling the bulk of its LNG via long-term contracts is a stabilizing force for the company as it navigates the challenges of the global energy market. It allows the company to generate relatively predictable cash flow. Combine with its visible growth from Corpus Christi Phase III, and it’s an intriguing U.S.-centric option for investors.

The company also is working to deliver even cleaner LNG. Cheniere has a collaboration agreement with Shell to supply it with carbon-neutral LNG cargoes by purchasing carbon offset credits from Shell’s global portfolio of nature-based projects. Such initiatives should enable Cheniere to play a role in the energy transition to cleaner fuel sources.

2. Shell

Shell was an early pioneer in the LNG market and has grown into a dominant force over the years. The company has LNG supply projects in 10 nations. It also has interests in a couple of regasification plants that turn LNG back into gas so it can flow through local pipeline systems.

Shell operates an integrated gas business. It controls supply by producing gas from a variety of fields. The company also operates LNG export facilities and markets LNG -- from its own facilities and those operated by third parties -- to customers around the world. This combination enables Shell to keep costs low so it can maximize the value of the LNG it produces.

The company has several integrated gas projects under construction to maintain and increase its LNG output. Meanwhile, it has many more in development, as well as potential expansion of existing facilities, to fuel growth in the years to come. Because of that, Shell will remain one of the driving forces in the LNG market.

3. TotalEnergies

TotalEnergies has made LNG a priority in recent years. The French energy giant rebranded in 2021 to reflect its strategy shift toward cleaner energy. That includes a focus on investing in renewable energy, electricity, and natural gas. It aims to have gas -- natural gas, hydrogen, and biogas -- supply 50% of its energy mix by 2030.

The company has acquired and developed several LNG projects in recent years. The investments pushed it up the global rankings for production capacity. Combined with its third-party supply agreements, it was the third-largest global LNG player in 2021.

Like Shell, TotalEnergies’ LNG operations are both integrated and global. It operates several production facilities around the world that supply gas to liquefaction complexes. It also runs a large-scale marketing and distribution arm that sells and delivers gas to customers. This integration helps it to get the most value from the LNG it produces.

TotalEnergies expects to continue expanding its LNG empire in the coming years. It set a sales target of 50 million tons of LNG by 2025, making it the second-largest player globally. That growth could enrich its investors if LNG demand expands as expected.

LNG has a bright future

The world’s economies will need an increasing supply of cleaner fuel in the decades ahead to help combat climate change. Due to its abundance and lower carbon emissions compared to other fossil fuels when burned, natural gas appears poised to provide a significant portion of that supply. LNG gives it the global access needed to reach key markets.

LNG demand and prices surged in 2021 as the global economy rebounded from its pandemic-driven lows. That has only accelerated in the wake of the Russian invasion of Ukraine, which has pushed LNG prices to record highs. LNG stocks could do exceptionally well in the coming years as companies benefit from a global need for this vital fuel.