It takes a brave investor to bet on the outcome of Vladimir Putin’s saber rattling around his neighbor Ukraine. One result of the Ukraine crisis seems more predictable: The European Union will look to cut its dependence on Russian natural gas, which currently accounts for 40% of consumption. Companies from Norway to Texas might benefit.
The simplest way to replace Russian flows, if you were sitting over a game of risk on a rainy afternoon, would be US liquefied natural gas. America has more gas in the ground than it can use domestically. LNG output jumped 42% year-on-year in the first half of 2021.
It could climb another 80% over the next five years, says Randy Giveans, head of energy maritime equity research at Jefferies. Top producer
Cheniere Energy (ticker: LNG) is earning $100 million on every shipload right now, Giveans estimates. Its stock has risen by two-thirds over the past year.
Finding the next Cheniere Energy story is anything but simple, however. Multibillion dollar LNG projects require core customers who will commit to 20-year contracts. These kind of customers are scarce despite the current boom. “There are a lot of conversations going on, but a dearth of final investment decisions,” Giveans says.
Jefferies is playing the bull gas market through infrastructure suppliers like
Golar LNG (GLNG). This company operates “floating storage and regasification units” that can sail around the world to where demand is hottest. Giveans so likes
GasLog Partners (GLOP), a specialist LNG shipper.
Russia’s new wave of aggression is “more likely to spur oil than gas investment,” as Putin stokes worries about crude supply, thinks Leo Mariani, an oil and gas analyst at Keybanc Capital Markets. US shale oil producers have learned the lesson of previous bull cycles when they pumped enough to crash the market. “US production will probably rise by 800,000 barrels a day this year, not 1.4 million like in the old days,” he says.
That’s good news for some smaller producers who can fly under investors’ radar, like
SM Energy (SM) and
Talos Energy (TALO), Mariani says.
In Europe itself, Russian tensions are breathing new life into some old alternatives. This year the Netherlands government was set to close its Groningen gas field, exploited since the 1960s by
Exxon Mobile (XOM) and
shell (SHELL.Netherlands). Instead, the economics ministry doubled its output target, and it could keep pumping until 2026, says Kateryna Filippenko, global gas supply analyst at Wood Mackenzie.
A surer thing is Norway’s
Equinor Energy (EQNR), the company formerly known as
Statoil. Equinor pushed natural gas output to a record last quarter, and has a lot more runway. Half the reserves at its giant Troll field remain untapped, the company says. Equinor shares have soared 40% in the last six months.
Europe will stay energy-dependent on Russia for the foreseeable future—particularly Germany, which buys fully half its gas from state-owned monopolist
Gazprom (GAZP.Russia). “For now, Russia has market power in Europe,” says Ben Cahill, a senior fellow in energy security at the Center for Strategic and International Studies.
But alternatives have already mutated Moscow’s most realistic supply threat, cutting gas flows through Ukraine.
“Europe’s additional levers can get it through this year and fill up next year’s storage” in that event, Filippenko says.
Additional levers could also prove profitable for alert investors.