Biden's LNG Ban: Good News for Energy Stocks

Restricting new project development won't avert climate change but will extend the energy up-cycle and enrich shareholders.

It’s unlikely the Biden Administration shocked many energy industry folks last week—when the US Department of Energy announced it was suspending approvals of new export licenses for liquefied natural gas or “LNG” facilities, pending a full climate and environmental justice review.

What will surprise investors is how many energy companies will actually benefit from this decision.

Yes, some developers and their customers will take a financial hit. Privately held Venture Global LNG’s Calcasieu Pass 2 or “CP2” project on the Louisiana coast had already secured customers and financing, including a 20-year deal with Germany to supply 2.21 million metric tons of LNG annually. Overall, CP2 was forecast to cost $10 billion, exporting up to 20 million tons of LNG a year or enough to boost current US output by 20 percent.

LNG opponents had particularly targeted the CP2 project as a “climate bomb.” And an indefinite delay permitting is a dire threat to project economics, just as it is to the other 16 LNG export facilities now waiting on approval.

To this point, the DOE has given no indication how long the policy review will take. But given the politics, it seems likely they’ll go slow on LNG export applications at least until after the November elections. That raises the odds some of these projects will ultimately be written off, though I suspect most developers will wait to see who wins the White House this year.

Some argue restraining future LNG exports would increase available domestic US natural gas supplies, holding down prices. That’s possible. But remember fewer export opportunities are also likely to restrain investment and thereby reduce supply. And pipelines don’t currently exist to bring deeply discounted natural gas from places like Appalachia to energy-starved regions like New England.

This DOE action could actually increase global CO2 emissions. Swapping out coal for natural gas in generating electricity is the single biggest reason why America’s CO2 emissions have declined steeply the past decade. US LNG exports are demonstrably inducing other countries to quit coal as well. So restricting future supply runs the risk of keeping coal-fired power plants running longer—emitting acid rain gasses, particulate matter and mercury as well as twice the CO2 of LNG.

Nonetheless, the investment winners from the LNG permitting ban still far out number the losers. That starts with the best in class Australian and Canadian companies we track in our Energy and Income Advisor coverage universe.

LNG buyers in China, Japan, Germany and other countries have long recognized the need to secure multiple long-term sources. And Australia and especially Canada offer massive potential incremental LNG export capability.

Earlier this month, Pembina Pipeline (TSX: PPL, NYSE: PBA) and the Haisla Nation of western Canada selected partners to build a floating LNG facility targeted for completion by 2028. That’s just one of several to be fed by TC Energy’s (TSX: TRP, NYSE: TRP) now completed Coastal GasLink pipeline, bringing heavily discounted Montney shale gas to global markets. Both Canada and Australia also have the advantage of far shorter shipping times to Asia than the US Gulf Coast, and without the challenges of navigating the Panama Canal.

Ironically, the biggest winners from slowing down LNG export permitting are likely to be the owners of the 8 already operating facilities in the US, as well as the 10 fully approved and under construction.

Nothing in the DOE rule changes affects them. And developers now face the favorable prospect of far less competition for customers and available natural gas supplies, as well as for needed resources to build and maintain facilities. These include increasingly scarce labor as well as financing, which are both serious threats to jack up the cost of any multi-year infrastructure project.

I believe developers like Cheniere Energy (NYSE: LNG), Sempra Energy (NYSE: SRE) and TotalEnergies (Paris: TTE, NYSE: TTE) are ironically now more likely to push ahead with their already permitted projects. That could even include Energy Transfer LP’s (NYSE: ET) Lake Charles, Louisiana expansion, though the DOE has previously refused to extend export authorization to accommodate longer than expected construction times.

Assuming all currently DOE permitted projects are built, overall US LNG exports will come close to doubling from current levels by the end of the decade. That adds up to a massive earnings increase for developers. It’s also a huge investment opportunity for natural gas producers, as well as owners of pipelines and processing facilities operating near the Gulf Coast.

There’s also a scarcity factor in play here. The previous North American energy up-cycle ended in 2013-14 with investment at a peak. Sector capital spending then dropped sharply in subsequent years as commodity prices came lower, hitting bottom in the pandemic year when the price of a barrel of oil in Texas briefly cut below zero.

In contrast to previous energy cycles, sector CAPEX has remained well below historical levels ever since despite rising prices. Rather than investing, companies have instead used cash flow windfalls to cut debt, buy back stock and make acquisitions. And that in turn has steadily increased the scarcity and value of operating energy assets.

By stalling the permitting process, the DOE is ensuring LNG won’t be overbuilt anytime soon. That means existing facilities will remain fully contracted and profitable for the foreseeable future, reliably rising in value as well.

That’s very good news for stocks of the strongest North American energy companies, which will benefit directly from those rising earnings and asset values. And any retreat on this LNG news should be viewed as an opportunity for investors to build positions.

I also expect to see more sector mergers. With investment opportunities restricted by regulation, joining forces with rivals is the surest way to get stronger financially while growing earnings and dividends. Visit www.energyandincomeadvisor.com to learn more.