Cooking With Gas

UPGRADES & DOWNGRADES:

Cooking With Gas

In a sign of the times, propane has overtaken diesel as the U.S.’s leading petrochemical export. The transition to natural gas, in all its forms, is gaining steam.

By Jack O’Connell

In March, the U.S. Energy Information Agency (EIA) reported that exports of propane rose 13 percent last year to a record 1.2 million barrels a day, supplanting distillate fuel oil (diesel) as the country’s top petroleum product export.

Propane, a natural gas byproduct, is widely used outside the U.S. for heating, especially in South America, where most propane exports go. Europe is another big destination along with fast-growing new markets in Asia and Africa. In the U.S., propane has grown in popularity as a result of the pandemic with stay-at-home workers using it in space heaters and restaurants utilizing portable heaters to accommodate outdoor diners in cooler climes.

Aside from heating, propane is widely used for cooking – as all you backyard grillmeisters know. And propane often fuels gas ovens and stoves in places where natural gas pipelines aren’t available.  

And, of course, natural gas in all its forms – including propane and butane – is a major feedstock for the chemicals industry (think plastics and synthetic fibers and ammonia fertilizers). The chemicals industry is, in fact, the single biggest consumer of natural gas, which is used to power and heat the plants as well.

Why is all this important? Because at a time when decarbonization has become all the rage, it’s encouraging to see exports of a clean energy product (propane) rising and a not-so-clean energy product (diesel fuel) falling. U.S. natural gas exports (LPG and LNG) now exceed its oil exports, in terms of barrels, and that’s another good sign.

Bridge Fuel

But exports are only part of the story. The big news is that natural gas, including LNG and LPG, is fast supplanting petroleum and coal as the world’s preferred energy source and providing a much-needed “bridge fuel” to a future powered by renewable energy.

“We see LNG as a bridging fuel that offers an immediate carbon-reducing option and can be used to future-proof vessels built in this decade and beyond,” says Antony DSouza, head of DNV’s Maritime Americas division, in this edition’s Executive Achievement. “In the deep sea segment especially, dual-fuel solutions and ‘alternative-fuel-ready’ solutions could smooth the transition by laying the groundwork for a future retrofit.”

The number of LNG-fueled, LPG-fueled and dual-fuel vessels is growing by leaps and bounds as the maritime industry rushes to meet its self-imposed clean energy targets. Last October, the first conversion of a VLGC (very large gas carrier) to LPG dual-fuel propulsion was completed when the 2015-built BW Gemini started week-long sea trials, part of a program that BW LPG is undertaking to retrofit vessels in its fleet to the more efficient and environmentally compliant fuel.

With the world’s largest fleet of LPG carriers, BW plans to retrofit a minimum of four and as many as 12 vessels to the dual-fuel configuration, seamlessly switching between diesel and LPG. In addition to the environmental benefits of using LPG (97 percent SOx reduction, 90 percent particulate matter, 25 percent greenhouse gas reduction), BW says it expects efficiency gains of up to 11 percent from LPG, creating significant improvements in fuel economics.

The next step forward? Ammonia. If LNG and LPG are sustainable bridge fuels to the future, ammonia is the future. And already the first step has been taken with an Approval in Principle from Lloyd’s Register (LR) for an ammonia-fueled, midsize gas carrier from Belgian shipowner Exmar, a pioneer in innovative design and engineering, having first introduced LPG as a fuel in 2012.

“This is a significant milestone in progressing alternative fuels for shipping’s transition to zero-carbon,” notes Ed Fort, LR’s Global Head of Engineering Systems. Wartsila Gas Solutions designed the ammonia fuel system for the 40,000 cubic meter carrier, which will be built at Jiagnan Shipyard in Shanghai.

Chemistry

You savvy MarEx readers know the difference between LNG and LPG, right?

We all know about LNG – liquefied natural gas, the stuff you freeze to minus 162o Celsius so it becomes a liquid and you can ship it in dome-shaped tankers to all parts of the world. And with natural gas plentiful and dirt cheap in the U.S., thanks to the miracle of shale technology, companies can make a profit on the price differential between low-priced U.S. LNG and higher-priced LNG in other parts of the world, particularly Asia and the Far East.

LPG, on the other hand, is liquefied petroleum gas, a byproduct of both oil refining and natural gas extraction. It’s the stuff you see being flared at oil wells, where much of it goes uncaptured, and it’s sometimes referred to as natural gas liquids (NGLs) or “wet gas.” It’s mainly propane or butane and other derivatives like ethane.

LPG can also be used as a fuel for automobiles and buses, and you may have seen a passing city bus or school bus with the words “Powered by LPG” stenciled on the LPG storage tank on its roof. LPG as a fuel is economical and efficient and offers all the clean-burning benefits associated with both LNG and natural gas.

But the real beauty of LPG is its ease of use. It doesn’t have to be refrigerated down to minus 162o Celsius like LNG. It’s a gas, but liquefies easily and can be transported in lightly pressurized containers. No need for sophisticated, multibillion-dollar liquefaction and regasification facilities.

So let’s take a quick look at some of the opportunities available in LNG and LPG investing.

How to Play It

On the LNG side, Cheniere (LNG) is the obvious choice. Founded in 2016, the company in five short years has become the largest producer of LNG in the U.S. and the second largest LNG operator in the world. It has two facilities along the Gulf Coast, close to cheap and plentiful sources of natural gas.

The first, at Sabine Pass in southwest Louisiana, operates five “trains” (processing facilities) with a sixth scheduled for completion next year. The second, in Corpus Christi, Texas, has two trains operating and a third about to start up. Total output when all nine trains are completed? Forty-five million tons.

Commenting on results in 2020, President & CEO Jack Fusco had this to say: “After a year in which the unprecedented became ordinary course, I am extremely proud to report fourth quarter and full year 2020 financial results that place us solidly within our original, unchanged Consolidated Adjusted EBITDA guidance range and above our Distributable Cash Flow guidance range for the year. We accomplished this while successfully managing a full spectrum of challenges last year, from a global health crisis and its wide-ranging effects to record-low LNG market pricing and two major hurricanes making landfall near our infrastructure. The results we reported today once again prove the resilience, stability, and reliability of our business through commodity cycles.”

A little bit of corporate-speak there, but you get the point: The company met its original expectations for the year and proved once again its resilience to cyclical ups and downs.

As for the year ahead, Fusco is even more upbeat: “I am confident we can continue to execute in 2021, and many tailwinds are present today. We are in the final stages of commissioning Train 3 at Corpus Christi and look forward to placing that project into service in the coming weeks. Additionally, the global LNG market has strengthened significantly since our last quarterly update, improving our outlook for the remainder of the year. Today we are raising our 2021 financial guidance and are confident in our ability to once again deliver reliable financial results.”

Even more compelling, especially for you ESG investors, Cheniere has a fine environmental record and takes pride in its sustainable products and operations.

The stock was trading recently around 70 and has more than doubled from its low last March, when the virus first struck. Its sister stock, Cheniere Energy Partners (CQP) – an MLP (master limited partnership) – is trading around 40 and pays a healthy six percent dividend.

On the LPG side, Dorian (LPG) remains my favorite. It plays in the VLGC space with 24 modern carriers and is a major exporter of propane. In its most recent earnings report, covering the fourth quarter of last year, Chairman, President & CEO John Hadjipateras stated: “I am happy and grateful to report that our seafarers and shore staff continue to be safe during these hazardous times. Also, thanks to a strong freight market, the Company generated very solid results in the last quarter.”

Those “solid results” included net income of $36 million on revenues of $89 million – essentially unchanged from the year-earlier period, but impressive nonetheless. Since the company doesn’t pay a dividend, it decided to reward shareholders via a stock buyback.

“With a modern ECO fleet, dedicated professionals supporting our customers, a healthy balance sheet and favorable market fundamentals, we are focusing on returning capital to our investors,” Hadjipateras explained. “Having considered various options, our board concluded that the tender offer provides optionality and represents a very compelling way to return cash while maximizing financial value for our shareholders.”

The tender, which expired in early March, resulted in the purchase of over eight million shares of LPG – about 17 percent of shares outstanding – at $13.50 a pop, thereby increasing future earnings per share and putting cash back into shareholders’ hands. A good deal if you can get it! 

Jack O'Connell is the magazine's senior editor.