Australian LNG Has Bright Future

Each month we host a joint web chat for subscribers of The Energy Strategist (TES) and MLP Profits. The chat is conducted by Igor Greenwald, managing editor for The Energy Strategist and chief investment strategist for MLP Profits, and myself.

We place a priority on answering questions about portfolio holdings and recommendations during the chat, but often get questions about companies we don’t currently recommend. Sometimes we may get questions that require an extended answer, or there may just be so many questions we can’t get to them all. For the most recent chat there were a few questions that warrant some elaboration.

Q: Do you have any thoughts on the immediate success of the Australians becoming really active in exporting LNG?

Australia has a lot of potential for LNG exports, and the country is ideally situated geographically to export to southeast Asia. Australia’s proved natural gas reserves have grown steadily over the past 20 years, from 1 trillion cubic meters (tcm) in 1992 to 2.5 tcm in 2002 and 3.8 tcm in 2012. Australia’s proved reserves would last 77 years at the current production rate. For perspective, US reserves are more than twice Australia’s at 8.5 tcm, but US production is also higher. The reserves to production ratio (R/P) for the US is 12.5.

In the US, growing gas output has been driven by shale exploitation. In Australia, it is coal seam gas (CSG) that is driving the current gas rush. CSG can be extracted like tight shale gas in the US, with hydraulic fracturing (fracking) of a coal seam (as opposed to a shale formation).

CSG is transforming Australia’s gas industry in the same way that shale gas has done in the US. Between 2004 and 2010 production of CSG increased by more than a factor of 20. CSG now supplies a third of eastern Australia’s gas, and some project that Australia will overtake Qatar as the world’s leadi! ng LNG exporter by 2020.

Currently, Australia has three operating LNG plants, and seven others are being built. The North West Shelf Venture is owned by an international consortium, and started exporting LNG in 1989.

Elsewhere, ConocoPhillips (NYSE: COP) is the majority owner and operator of the Darwin LNG facility, which began production in 2006.

The Pluto LNG project is a joint venture between Woodside, the operator, with a 90 percent interest, Tokyo Gas (5 percent) and Kansai Electric (5 percent). Pluto started production in April 2012.

In conclusion, yes, Australia has tremendous potential for greatly increasing LNG exports. It enjoys a major advantage relative to the US given proximity to Asian import markets, but there are also fracking bans in place in certain areas that may slow development. Those with projects already in place have a significant first mover advantage, but there is still lots of opportunity given the projections for Australia’s gas production growth.

Q: Do you have an opinion on Susser Petroleum Partners LP?

Susser Petroleum Partners (NYSE: SUSP) engages in fee-based wholesale distribution of motor fuels. The partnership also distributes petroleum products like propane and lube oil, and receives rental income from real estate.

SUSP went public in September 2012, and has advanced 45 percent since. The most recent quarterly distribution was $0.4687 per unit, or $1.87 on an annualized basis. At the recent closing price of $33.40, that corresponds to an annual yield of 5.6 percent.

Non-traditional MLPs like Susser and Lehigh Gas Partners (NYSE: LGP) have risks and opportunities that are different from the midstream mainstream. Such MLPs can provide some diversification from the midstream MLPs that make up the bulk of the space, with less commodity and execution risk than most upstream partnerships. On the other hand, they are unlikely to have the same potential upside and growth opportunities as most midstream names. I might consider Susser as part a broader portfolio of MLPs, but it wouldn’t be a core holding in my own portfolio.

Q: Any opinion on Lightstream?

Most investors may not have heard of Calgary-based Lightstream Resources (OTC: LSTMF), but they may have heard of its predecessor, PetroBakken Energy, which was spun out of Petrobank Energy and Resources. The latter struggled to make its novel Toe-to-Heel Air Injection (THAI) technology commercially viable, and partially as a result of Petrobank’s struggles, PetroBakken suffered as well.

So in May of this year the company announced it would break from its past and move forward under a new name, Lightstream Resources. But Lightstream struggled with some of the legacy issues from PetroBakken, like dividends that had to be cut and high debt levels, and shares declined. Following the name change in May, shares have fallen 36 percent.

In the US, we associate the Bakken mostly with North Dakota, but the Bakken formation also lies underneath parts of South Dakota, Montana, and southern Saskatchewan. Lightstream Resources is developing Bakken acreage in Saskatchewan. In addition the company is focused on growth in the Cardium formation in central Alberta, and in north-central Alberta it’s working on emerging light oil resource plays. Lightstream also has land holdings in the Horn River and Montney plays in northeast British Columbia.

While the company has struggled in recent years — and the share price has suffered — it may be turning the corner. Last week Lightstream unveiled its strategic plan and 2014 capital program and production guidance. The plan involves reducing 2014 capex while holding production flat for the year, cutting the dividend in half, eliminating the dividend reinvestment plan, and targeting $600 million from sales of non-core assets.

The immediate market reaction was negative, but these are all moves that should put the company in a much better financial shape. Further, the shares appear to be oversold at this point, and the company is trading at a discount to its asset value. On the downside, investors have been generally unhappy with management decisions, and the same managers continue to run the company.

For aggressive investors, though, this one could be worth the plunge. The downside looks fairly limited at this point, and if the quarterly results begin to show the positive effect of the recent changes, there is tremendous upside.

Q: Is the worst over for LINN?  Would you be taking a look at it now?

We got numerous questions about Linn Energy (Nasdaq: LINE) in the chat. I commented on this in last week’s MLP Investing Insider, but it bears repeating here as there is obviously still a lot of interest. Igor’s answer to this question was “I expect the merger to close by year’s end, but I think Linn has some structural issues that go beyond [pending merger partner Berry Petroleum (NYSE: BRY)] with its debt load and past acquisition quality, so I’m steering clear. There are better upstream MLPs in our portfolios.”

I would add that we have been pretty steadfast in believing that the SEC inquiry wouldn’t turn up anything substantive. However, we couldn’t recommend Linn with that inquiry hanging over the partnership. MLP investors in general are not looking to take on that kind of risk, and I suspect most didn’t think it was possible to see Linn drop like it did (down ~40 percent over the summer). This kind of volatility might be acceptable for aggressive speculators, but that doesn’t fit the profile of most MLP investors.

Now that the SEC cloud appears to be lifting and the merger with Berry seems imminent, we have taken another look at Linn. But after comparing it with peer upstream MLPs, we feel that there are safer options, especially given the increased purchase price Linn had to pay for Berry, and Linn’s relatively high debt level. The present dividend yield of nearly 10 percent is certainly attractive, but our view is that the downside risk will continue to be unacceptably high for conservative investors.

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