Natural gas prices recently reached 13-year highs amid the Ukraine-Russia war. And Wells Fargo analysts believe the strength will continue.
“The global liquefied natural gas (LNG) market is poised to grow much faster than overall energy demand through the end of the decade, at least,” the analysts wrote in a commentary. LNG is natural gas that has been converted to a liquid form for easy and safe transport.
“We attribute this positive outlook to several factors, including general energy demand growth, coal substitution/ESG [environmental/social/governance] factors, and the unintended consequences of the [transition to renewable energy],” the analysts said.
Further, “Russia’s incursion into Ukraine has elevated energy security as a goal and altered the
European Union's energy taxonomy for natural gas.”
Expanding Energy Demand
The analysts also cite “general global power/energy demand growth in developed and
developing nations and an abundance of untapped and under-developed natural gas resources.”
Meanwhile, “quite unlike oil and refined products, the LNG market tends toward just-in-time conditions,” they said That means wholesalers and end users don’t build up inventories, but instead purchase LNG just in time to use it.
“Global LNG owes this situation to the challenges associated with storing dry gas (requires a lot
of space), insufficient subterranean storage infrastructure outside a few regions, and a high cost
… for vessel storage,” the analysts said.
There Are Storage Problems
“The lack of viable storage options means regasification destinations must match in-take with off-take capacity. As a result, sufficient inventories cannot easily be built up during seasonally weaker periods of demand.”
Regasification is the conversion of liquefied natural gas back to natural gas.
The storage shortfall also means “regas capacity must be built for maximum demand, rather than for greatest efficiency,” the analysts said.
“Therefore, we expect LNG prices to remain more volatile than oil prices through our forecast window to 2030 at a minimum.”
The analysts cite several companies with exposure to LNG and the LNG lifecycle that investors might consider:
· BP (BPAQF) , an oil and natural gas producer,
· Chevron (CVX), an oil and natural gas producer,
· Shell SHEL an oil and natural gas producer,
· Exxon Mobil (XOM), an oil and natural gas producer,
· ConocoPhillips (COP), an oil and natural gas producer,
· Baker Hughes (BKR), an oil and natural gas field service provider,
· Chart Industries (GTLS), a maker of natural gas production and storage equipment.
Morningstar’s Take on BP
The company is “transitioning from an integrated oil company to an integrated energy company to achieve its emission reduction targets and position itself for the energy transition while growing earnings and improving returns,” Morningstar analyst Allen Good wrote in a commentary.
“Its strategy ranks as the most aggressive move away from hydrocarbons among its peers.”
