By Avi Salzman
It has been a particularly cold start to winter in central and northern Europe, and people have been using a lot of natural gas to heat their homes. The winter chill has boosted the price of natural gas in recent weeks.
Prices haven't quite reached the stratospheric levels they hit after Russia invaded Ukraine in 2022, but they've risen enough to lift the stocks of companies involved in selling liquefied natural gas. That includes New Fortress Energy, Golar LNG, and Cheniere Energy.
The momentum for those stocks could continue, Stifel analyst Benjamin Nolan says in a note. "We believe that there should be further upward pressure on LNG prices through the winter," he wrote.
Liquefied natural gas, or LNG, has been a lifesaver for Europe since Russia turned off the spigot to its natural gas pipelines after it invaded Ukraine.
About half of the LNG that Europe imports comes from the U.S., which has ramped up its export capacity to meet the need. European countries have been stockpiling LNG in advance of winter, trying to fill storage tanks to more than 90% of their capacity. But extremely cold winters can lead to demand spikes, and cause prices to rise. In recent days, prices of LNG have risen to $15 per million British Thermal Units, from around $12 in November and annual lows of $8 in February.
Other meteorological phenomena have also caused prices to rise. Natural gas is used for both heating and electricity. In the electricity market, it competes with wind turbines and solar panels. And Germany experienced a long stretch of days last month when the wind barely blew, forcing power plants to use more gas.
But weather isn't the only factor. Nolan predicts the price of LNG will stay strong for several other reasons.
For one thing, Europe hasn't stocked up quite as much natural gas this year as it did in previous years. Reserve levels are around 86% of Europe's gas storage capacity, 10 percentage points below last year, Nolan wrote. The numbers could dwindle even more: Gas has been pulled out of storage at a faster rate than any year since 2016. Asia is also using more natural gas, causing competition in the market.
In addition, Russia is planning to reduce its gas exports to Europe by even more. The contract for a pipeline through Ukraine runs out on Jan. 1. If it isn't reinstated, that could reduce supply to Europe by about 5%.
"The pipeline currently feeds Slovakia, Austria, and Hungary," Nolan wrote. "Given the current state of the conflict, we believe a pipeline shutdown is likely."
In addition, some projects that were expected to bring more LNG to the market have been delayed, reducing expected supplies.
Companies involved in exporting LNG should benefit. New Fortress Energy, which operates natural gas infrastructure, is "clearly the biggest winner, as 15%-30% of their 2025 LNG exposure is market-priced with an ability to toggle the level," Nolan wrote.
Golar LNG, which operates floating platforms that convert natural gas into LNG, should get a boost. "For every $1/mmBtu move in prices, the company's Ebitda [earnings before interest, taxes, depreciation, and amortization] should rise by $3.2 million annually," Nolan wrote.
Cheniere Energy, the largest U.S. exporter of LNG, has contracted almost all of its volumes to customers.
"The recent move in LNG prices has likely pushed up 2025 cash flows for Cheniere by over $300 million," Nolan wrote.
The industry's growth isn't endless, however. The European Union projects that the continent's LNG demand will peak in 2024, because decarbonization efforts will shift energy demand to cleaner sources. An LNG surplus could develop by 2027, according to ACER, the EU's Agency for the Cooperation of Energy Regulators.
Write to Avi Salzman at avi.salzman@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 04, 2024 15:33 ET (20:33 GMT)
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