Energy

Why 3 Major Energy Companies Should Be Huge LNG Winners

Lee Jackson

Published: March 6, 2019 7:06 am

Last Updated: January 11, 2020 10:27 am

One thing that is almost universally agreed upon in the energy world is that the future for liquefied natural gas (LNG) is tremendous. LNG is natural gas that has been cooled to a liquid state, at about −260° Fahrenheit, for shipping and storage. The volume of natural gas in its liquid state is about 600 times smaller than its volume in its gaseous state.

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LNG is normally warmed to make natural gas to be used in heating and cooking, as well as electricity generation and other industrial uses. LNG also can be kept as a liquid to be used as an alternative transportation fuel. With the incredible world demand, and a burgeoning infrastructure, the growth in the industry is almost unmatched.

A new Stifel report offers a wide-ranging synopsis of the firm’s recent LNG bus tour. The report noted this when discussing the industry outlook and the opportunities for investors the analyst prefers:

New Gulf Coast projects will certainly cross the finish line, but price is unquestionably the most important factor unless you have the balance sheet wear risk. Consequently, we come away believing the support functions such as equipment and pipelines may be the best way to play U.S. LNG growth.

Three major U.S. companies show up as big players in the segment, and while one is more of a major producer, they all make sense for investors looking for exposure. In addition, they all pay outstanding dividends, and their stocks are rated Buy at Stifel.

Anadarko Petroleum

This top stock is still down a stunning 30% from highs printed in October, and it is a top pick across Wall Street. Anadarko Petroleum Corp. (NYSE: APC) operates through three segments. The Oil and Gas Exploration and Production segment explores for and produces natural gas, oil, condensate and natural gas liquids (NGLs). The other segments are Midstream and Marketing.

Anadarko has the capacity to sustain planned stock buybacks at current levels, providing support to close a value gap that many on Wall Street see at 50%. Strong free cash flow, enabled by advantaged Brent leverage, has competitive free cash compared with traditional large-cap “yield” names, but with competitive growth potential. The company has made a transition toward compelling value with growth and yield.

The Stifel team said this when reviewing the company’s LNG progress on the company’s Mozambique project:

Anadarko already has a fully staffed LNG trading and shipping office in Singapore. With respect to the existing contracts, the majority of the volume is destined for Asia, but specifically India and Japan. Importantly the Japanese have been very hesitant buyer of U.S. LNG recently and appear to prefer Mozambique for their future needs as Japanese buyers a) are less interested in Henry Hub and 2) do not want to risk dealing with a small development company.

Anadarko Petroleum shareholders are paid a 2.69% dividend. The Stifel price target for the shares is $80, which compares with a Wall Street consensus price objective of $68.44. The stock closed trading on Monday at $44.76 a share.

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Kinder Morgan

Executive Chairman Richard Kinder has bought a ton of shares of the company recently, and that is a huge positive for shareholders. Kinder Morgan Inc. (NYSE: KMI) is one of the largest energy midstream companies, with diverse operations across the midstream energy value chain. Businesses include natural gas pipelines, liquids terminaling, CO2 production, as well as products pipelines.

Kinder, also the co-founder of the energy pipelines company, continues to buy more Kinder Morgan stock. From February 15 through 21, he bought more than 519,100 shares for a total of $9.9 million, or $19.05 per share on average, according to forms Kinder filed to the Securities and Exchange Commission. Kinder now owns 237 million Kinder Morgan shares in his personal account and 11.8 million more shares through a limited partnership.

Stifel sees the stock as a solid play on LNG and noted this about the company:

Kinder transports approximately 40% of U.S. natural gas production with its pipeline network that covers the lower 48. The company owns an LNG export facility that is in the process of entering service and is expected to ramp over 2019. In addition, the company’s owns a significant Texas intrastate system and sanctioned two greenfield Permian natural gas takeaway pipelines that are slated to enter service in the fourth quarter of 2019 and the fourth quarter of 2020.

Kinder Morgan shareholders receive a solid 4.03% dividend. Stifel has a $23 price target for the sector giant, while the posted consensus target price is $21.37. The shares were last seen trading at $19.85 apiece.

Williams Companies

This top energy stock is also a solid pick for more conservative accounts looking for exposure to LNG. Williams Companies Inc. (NYSE: WMB) is now largely a pure-play domestic natural gas infrastructure company that has a 74% ownership interest in its underlying master limited partnership, Williams Partners.

The company has a lower risk, fee-based business model with some volume sensitivity. Natural gas demand continues to be driven by LNG exports, power generation and industrials. In addition to steady demand growth, Marcellus production and associated gas in the Permian are expected to continue to be primary supply drivers.

The Stifel report said:

Williams handles 30% of U.S. natural gas production through its long-haul pipeline network and gathering and processing footprint. Transcontinental Pipeline (Transco), which stretches from New York to South Texas. Transco currently serves four of the six operating/under construction LNG exports facilities with 2 Billion cubic feet per day of contracted capacity. Management believes Transco is well positioned to serve the second wave of projects given its Gulf Coast connectivity and optionality

Williams Companies shareholders are paid a very sizable 5.56% dividend. The $35 Stifel price target compares with the $31.94 analysts’ consensus estimate. The stock closed most recently at $27.40 per share.

These three top ideas to play the LNG explosion are all measurably safer ways to be involved as they are all mature and exceptionally well run. Toss in the solid dividends, and they also are great total return ideas.