Shale Gas Revolution

The shale gas revolution has catalyzed the dynamic energy landscape in the United States. Domestic natural gas production has surged to record levels. This unexpected high shale gas output is primarily due to hydraulic fracturing technology, or fracking, which has allowed new discoveries of gas resources of reserves to pay off. These include Marcellus in the northeast, Bakken in North Dakota, and Eagle Ford in Texas.

LNG Landscape

Because of the high supply of shale gas, there has been a surge in applications for Liquefied Natural Gas (LNG) terminals to ship U.S. gas internationally. About 30 export applications have been sent to the U.S. Government Department of Energy’s (DOE) Federal Energy Regulatory Commission (FERC). However, it has been a challenge for LNG market participants to get these export permits approved. The DOE aims to limit the amount of U.S. LNG that can be exported to resist domestic natural gas price spikes. There is also pressure from power companies and/or petrochemical companies that use natural gas as feedstock for production of petrochemicals to restrain exports. Those include: DowChemical (DOW), Huntsman Corp. (HUN) Celanese (CE), and Eastman Chemical Co. (EMN).

Recently, the FERC approved an export license (subject to environmental review) for the Cameron LNG. This was a significant step towards final approval. Cameron LNG terminal is located near a major pipeline hub that serves about two-thirds of all U.S. natural gas markets. This application was submitted by Sempra Energy (SRE). Sempra Energy’s stock went up 1.5% topping at $94.21 per share that day. After the environmental review is completed, the next step will be the final regulatory approval.

The Cameron terminal is located near the Texas border near Hackberry, LA. A big proponent of this approval, Louisiana Senator Mary Landrieu, will soon be chairwoman of the Senate Energy and Natural Gas Committee. Cheniere Energy Inc. (LNG) is also building a $10 billion LNG export terminal. Given this upcoming senatorial change, export approvals may be expedited, which could be a plus for Cheniere.

Other players

Other companies in the energy sector that benefit are natural gas producers and drilling equipment suppliers. Schlumberger (SLB), Halliburton (HAL), and Baker Hughes (BHI) are benefiting from an increase in demand for services. Drillers, such as Exxon Mobil (XOM - Free Exxon Stock Report), Chesapeake Energy (CHK), and EOG Resources (EOG), may also experience a boost in earnings as these opportunities sprout.

Polar Vortex

There are other factors that are contributing to the volatile energy landscape, such as the weather. There are two reasons as to why natural gas has risen in popularity. Natural gas carries a more positive image in comparison to coal, crude oil, and nuclear energy. This is especially in terms of the environmental perspective—natural gas has substantially smaller carbon footprint than other energy sources.

Secondly, natural gas has become the most predominant heating fuel in the U.S.  However, the polar vortex that covered the country this winter led to an unexpected shift. With the cold temperatures, electricity (heating) demand increased, and therefore an increase demand for natural gas. This, in turn, significantly increased natural gas prices. Not only that, but natural gas infrastructure struggled. There were generation system outages as the equipment could not function in the low temperatures and pipelines could not keep up with the demand.

The result: The benchmark U.S. natural gas price recently rose to a five-year high. Despite the shale gas production boom, according to the U.S. Government’s Energy Information Administration (EIA), gas inventories were 27% below their five-year average earlier in February.

As natural gas prices surged and natural gas infrastructure wasn’t as reliable, organizations started to rely on other energy sources: coal, oil plants, and nuclear. In early January nuclear reactors accounted for 29% of the electricity generated in New England vs. 27% for natural gas power plants—a significant percentage drop for natural gas. One of the reasons for generation loss was because of natural gas pipeline constraints.

If anything, nuclear plants exhibited increased efficiency due to the cold temperatures. Apparently, without nuclear plants during the polar vortex there would have been blackouts.

Other Factors

Oil from wells was usually transported to refineries via pipelines. And, growth of Bakken production has soared to where it has outpaced the pipeline capacity. Therefore, a dangerous amount of oil is being transported via rail. Given the recent derailment and crashes, oil transportation via rail is potentially risky. This can lead to a further push for infrastructure improvement due to pipeline constraints.

This could lead to reevaluation of other energy sources and therefore a renewed push for nuclear energy, crude oil, and/or coal. But the stigma attached to nuclear, oil, and coal may remain too engraved allowing natural gas to remain the fuel of the future. In any case, engineering and construction companies (E&C) within Oil & Gas, Industrial & Infrastructure, Global Services, and Power Infrastructure sectors will benefit. This includes Fluor Corp. (FLR), URS Corporation (URS), Jacobs Engineering Group Inc. (JEC) and KBR, Inc. (KBR) which have had exposure to nuclear power facility construction projects, as well as natural gas infrastructure projects. It can be speculated that utilities will start building (more efficient and improved) gas generators that can withhold the low temperatures.

E&C companies could expect business construction contracts as export applications are approved, the need for improved infrastructure is increasingly realized, and from a possible nuclear energy boom. Fluor’s shares have been up 50% since last summer and may continue to be an appealing investment. Jacobs Engineering Group’s shares have increased 50% since 2012.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.