LNG exports will drive up North American natural gas prices

Canadian producers will be beneficiaries

A number of deals have been signed to bring U.S. Liquified Natural Gas (LNG) exports up to 156 million tons per year by 2026, and a further 22 million tons are expected to be exported from Canada’s Kitimat facility (now under construction) and one in Mexico. 176 million tons of LNG per year equates to 25 billion cubic feet (BCF) per day of natural gas production.

European natural gas prices today are US$84 per gigajoule while Henry Hub prices are just over US$9.00 a gigajoule. Producers will prefer export markets to domestic. That will put upward pressure on North American natural gas prices unless there is a significant increase in domestic production. The inane “climate” policies of Biden and Trudeau have seen capital flee the energy industry and without some relaxation of the limits on pipeline construction and shale drilling, a supply response will be tepid at best.

Governments change and policies reflect the choices of those in power. If Biden is succeeded by another Democrat and Trudeau remains Prime Minister, the outlook for natural gas prices is robust and producers will enjoy what may shape up to be very high prices. If Republicans return to office in United States in 2024 and Canada is fortunate enough to run Trudeau out of office, energy markets may become sensible and energy investors will have to be satisfied with ordinary levels of profit and cash flows. If Pierre Poilievre becomes Prime Minister, pipelines will once again be constructed in Canada and our energy industry will expand. If Trump or De Santis succeed Biden, America will push towards energy independence and likely achieve it quite quickly.

The current gusher of cash flows in the Western Canadian Sedimentary Basin in Canada and the Permian, Bakken and Marcellus are making energy investors reap substantial gains which seem to be entrenched unless and until left-wing governments are replaced by those who recognize that CO2 is harmless and “climate change” policies are toxic. However, if common sense returns to the electorate it will be time to shift out of energy names which will go back to being cyclical commodity plays that are best suited to traders.

Energy investors need to pay attention to geopolitics. Right now, the political environment and climate policies are tailwinds for energy investors. But not likely forever.

For the time being, the energy trade is robust. For now, I have no intentions of selling my oil & gas stocks which continue to benefit from institutional stupidity.

Watch as the market discounts high quality companies in other industries, semiconductors and banking in particular. A time may be reached when a switch to MFC,INTC, QCOM, CM, TD, BMO, or C may be warranted. Why did I mention these names?

MFC trading below 10 times earnings, yielding ~5% and benefitting from rising interest rates which reduce its reserves for life insurance policies

INTC trading below 10 times earnings and close to book value while investing in new fabs

QCOM at 11 times earnings and still a mainstay of mobile technology

CM trading below 10 times earnings and trading at 130% of book value

C trading at 50% of book value and improving on all ratios

TD and BMO are best in class (in my opinion) among Canadian banks with yields of ~4% or so.

There is a growing risk of a major recession; virtual certainty of higher interest rates in North American; and, weak leadership in Canadian and American governments, all of which point to a deepening market decline. I expect the sell off to present great opportunities for investors with the courage to ignore the tape and buy when there is blood on the floor.