(LSE: RDSB) Gas-To-Liquid Market Heats Up: Is Shell a good play for investors?
The data is coming out on gas-to-liquid (GTL), and big-time investors are starting to sit up and take note. One company they’re eying is Royal Dutch Shell (LSE: RDSB), which has a head start on the field in this potentially lucrative market, especially with its high-profile “Pearl” GTL project. Royal Dutch Shell is also ranked highly by the Climate Disclosure Project (CDP).
Back in 2011, Shell announced it had shipped the first cargo of gasoil manufactured from natural gas at its flagship Pearl GTL plant in Qatar, and its been rolling along ever since with a specific goal in mind. “Pearl is Shell's most expensive project and will be by far the largest GTL plant in the world when it reaches full production,” states Shell.
At full capacity, Pearl produces about 1.6 billion cubic feet of gas per day from Qatar's North Field, which, when processed, delivers 120,000 barrels per day of condensate, liquefied petroleum gas and ethane, and 140,000 barrels per day of high quality GTLs fuels and lubricants.
For investors, Shell’s liquefied natural gas (LNG) and GTL play seems like the right products at the right time.
According to energy industry data, the entire market, including GTL, coal-to-liquid (CTL) and biomass to liquid processes, was worth $8.4 billion in 2014. That figure is expected to grow from $8.6 billion in 2015 to $11.8 billion in 2020, with a compound annual growth rate of 6.5 percent over the next five years.
Investors should keep in mind that the LNG and GTL markets have suffered their share of setbacks, but it appears that they are making up ground, and fast. Over a decade ago, major energy companies announced and then cancelled large-scale projects. But Shell survived, and its Pearl GTL plant in Qatar has opened some eyes for energy investors who’ve seen their oil and gas positions take a beating in 2015, as energy prices have cratered.
Shell’s Pearl play offers those investors a path to profits in the beleaguered energy sector. According to company statements, Shell’s Pearl facility also produces LNG and is capable of producing 140,000 bpd of synthetic fuels, making it one of the largest liquid-to-gas plants in the world. Shell sees LNG as filling a valuable energy producing need around the word, particularly for electricity generation, home and commercial building heating, and for chemical feedstock.
The company is also going outside to build its burgeoning LNG brand, acquiring BG Group plc (LON:BG) for $70 billion in early 2015 (although the deal has not been formally approved yet by global regulators). With that purchase, and with its Pearl platform percolating along in the Middle East, Shell analysts say the firm will produce twice the LNG production as ExxonMobil Corp (NYSE:XOM) in the next three years, and is well positioned to feed LNG supplies to high-demand countries along the Pacific Rim, like China and India.
So far, so good with its LNG strategy. Last week, for example, Jordan agreed to buy 18-20 shipments of liquefied natural gas from Shell, which the Middle-Eastern country plans to use to cover 40 percent of its energy power needs in 2016 and 2017.
LNG a Big Arbitrage Opportunity
For investors, the chief attraction of LNG is the arbitrage opportunity between the price of oil and the price of gas. “Since 2009, the natural gas price has decoupled from the crude oil price in the North American market, which has led to increased interest in building GTL facilities on the continent,” says Visiongain, in a recent research report which tracks the gas to liquids industry. “Also, as the recently established plants in Qatar are operating at full capacity and turning over large amounts of revenue, the rest of the oil and gas sector has begun to feel more confident about the viability of GTL on a large-scale.”?Visiongain estimates capital expenditure on GTL reached $2.6 billion in 2014, primarily on engineering, procurement and construction, large-scale GTL facilities, and research and design.
Royal Dutch Shell (LON:RDSB), which is currently selling at $1,805 per share, with a market cap of $115 billion, has seen its stock drifting downwards in 2015 (it stood at $1,900 per share in early August, and reached five-year pricing lows in September), but that’s primarily due to lower energy prices, and stands as a good value opportunity for energy investors, not only given the energy behemoth’s LNG success, but its value and dividend benefits, as well.
There’s also a school of thought among investment industry analysts that Shell’s stock price has bottomed out, and that the oil and gas giant is well-positioned to ride out a sluggish market for oil prices. In the last month, Shell’s stock has gained 17.8 percent, and company executives have guaranteed stable dividends for the next few years (Shell is currently paying out 6.7 percent in dividend payments.) Add into the mix capital spending reductions, job cuts, and a stable, solid management, and Shell is well positioned to move forward - and its LNG Pearl project out in Qatar should only accelerate its stock performance.
Companies To Watch
* BP (LSE: BP) British Petroleum has been good to its investors throughout the recent oil price decline, stabilizing its dividend in 2015, at a 6.3 percent yield. Now, with signs of recovery in oil and gas prices, and BP share prices, down, there’s plenty of optimism for this major global energy provider.
* Royal Dutch Shell (LSE: RDSB) As stated above, Shell’s Pearl LNG play gives it a turbo-boost going into 2016. The dividend remains solid at 6.7 percent, and the stock price is rebounding after fallen to five-year lows last month. Rumors of a massive stock buyback program if its $70 billion purchase of BG Group passes muster with regulators, which should occur in November 2015.
Brian O’Connell is a a Doylestown, Pennsylvania-based freelance writer with 17 years experience covering business news and trends, particularly in the energy sector. A former Wall Street bond trader; O'Connell is an an author who’s placed two business books in "The Book of the Month Club" and is a business writer whose byline has appeared in dozens of top-tier national business publications, including CBS News, Bloomberg, Time, MSN Money, The Wall Street Journal, CNBC, The Street.com, Yahoo Finance, and Forbes.