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Friday, March 29, 2013

The Natural Gas Secret Nobody is Talking About

Liquefied natural gas (LNG) tanker, section vi...
Liquefied natural gas (LNG) tanker, section view from front. (Photo credit: Wikipedia)
By Investment U

Washington, Mar.29, swing trading .- The Department of Energy currently has 16 applications on file for companies that want to export liquefied natural gas (LNG). It's been so overwhelmed with applications it instituted a moratorium on filing them.

And one company is beating all the rest. Now if we're just talking LNG, most investors would correctly guess Cheniere Energy, Inc. (NYSE: LNG) is in the lead.

But I'm going to tell you a secret about a company that's beating Cheniere at its own game.

Investors who follow the LNG sector are familiar with Cheniere's plans to export LNG.

There's just one problem, and it's a big one: Cheniere's Sabine Pass, Louisiana export facilities won't be ready until 2016 at the earliest.

And the company I'm writing about today is already exporting natural gas.

We'll get to them in a moment, but first let's look at the motivation behind wanting to export natural gas in the first place.

It's no secret that hydro-fracking and horizontal drilling have given the United States a tremendous gift: an estimated 100-year supply of natural gas. America has numerous natural gas shale formations.

One of the largest is the Eagle Ford Shale in west Texas. It's also one of the biggest producers of all the shale formations. According to an article in Eagle Ford Shale, the Eagle Ford is currently producing about three billion cubic feet per day (bcf/d).

But by 2018 or earlier, that production could triple. That's too much natural gas to be used in south Texas. That nine bcf/d will need customers...

And there are only two places all that gas can go outside of the United States.

One is, it can be turned into LNG and shipped overseas. But as we mentioned earlier, Cheniere's facilities won't be ready until 2016.

The second option is shipping it to Mexico.

As you can see from the graph below, courtesy of the Energy Information Administration (EIA), natural gas exports to Mexico have been rising rapidly since 2010.

Just last year, natural gas exports from the United States to Mexico reached 1.69 bcf/d. This is the highest level since data collection started in 1973.

What's Going on in Mexico?

Plenty. Mexico's using more natural gas than ever. The country is in the midst of converting a number of oil-fired power plants over to natural gas. It also has several new ones under construction.

Altogether, Mexico plans an additional 28 gigawatts of additional generating capacity over the next 14 years. According to Mexico's electricity provider, the Comisión Federal de Electricidad (CFE), most of this additional capacity is required in the industrialized north. (We've told you before that cheap labor and a weak peso is driving a manufacturing boom within our neighbor to the south.)

Ironically, Mexico has plenty of unconventional shale fields of its own. The gas-rich Eagle Ford extends into Mexico. Why isn't Mexico developing its own gas reserves?

Several reasons. Petróleos Mexicanos (PEMEX) is the Mexican state-owned oil and natural gas company. Both the policies of Mexico and PEMEX are more focused on exploring and producing oil rather than gas. As a result, Mexico is reluctant to begin development of its vast gas shale deposits.

Mexican demand for natural gas, however, has risen on average 7% annually since 1995. While Mexico is unwilling to tap into its own natural gas reserves, it's more than happy to tap into those north of the border. In fact, it's spending $8 billion to expand its 5,500-mile network of pipelines.

This Company's Going to Benefit... Big Time

So what lucky company is going to supply all of this natural gas to Mexico?

It turns out it's none other than Kinder Morgan Energy Partners, L.P. (NYSE: KMP). This natural gas pipeline giant already has a number of pipelines that cross the border into Mexico.

But take a look at the map below:

It turns out five of the six expansion projects shown belong to Kinder Morgan. When all six are completed, they will add up to 3.5 bcf/d of natural gas crossing the border. These will double the existing capacity.

According to analysts at Trefis, 28% of Kinder Morgan's value comes from its natural gas pipeline division.

Clearly, this huge increase in gas demand coming from Mexico will have a big impact on Kinder's bottom line. Investors who want to capitalize on Mexico's growth and insatiable appetite for natural gas might want to consider adding a few shares of Kinder Morgan to their portfolio. Heck, you'll even grab a cool 5.9% yield while you wait....

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