My 2019 Long Levered Natural Gas Bull Thesis
Kumar’s Natural Gas Sector Bull Thesis
Disclosure: My gambles here from least risky to most risky were $FCG, $UAN, and $TELL. I now believe the nat gas bull thesis is strong, but I believe picking the winners is harder now and the thesis is now mainstream. This is not investment advice.
Disclosure: My gambles here from least risky to most risky were $FCG, $UAN, and $TELL. I now believe the nat gas bull thesis is strong, but I believe picking the winners is harder now and the thesis is now mainstream. This is not investment advice.
"In short, China 1000x'd the number of compressed natural gas vehicles in their country in 15 years. They rely heavily on imported natural gas. America is the mecca of natural gas with 65M homes that have natural gas piped in. We often ask 'who killed the electric vehicle' when we should ask 'who killed the compressed natural gas vehicle." - Me in early 2019
Tldr: My ongoing thesis is that natural gas consumption / kwh will go up for mankind as a %. Feel free to dm me at twitter.com/datarade or tweet to me there.
I began with this thesis in December 2019 and made my bets right around then to March 2020. Published here in mid-2021-ish.
I began with this thesis in December 2019 and made my bets right around then to March 2020. Published here in mid-2021-ish.
- Nuclear power plant shut downs, delays, commissionings, regulations
- There are ~440 nuclear power plants on the planet.
- Currently it’s difficult to track, but I estimate that there’s ~40 that are being shut down and deactivated. Would love to get more accurate numbers on this.
- Every plant shutdown creates an additional 100M-200M cubic feet of daily natural gas demand.
- 3.8% CAGR - https://www.alliedmarketresearch.com/nuclear-power-plant-and-equipment-market#:~:text=The%20global%20nuclear%20power%20plant,3.7%25%20from%202018%20to%202025
- I believe that regulatory power will act against nuclear energy across the world, everywhere except China.
- In the United States, Only 2 nuclear plants were built in the last 25 years. Frequently Asked Questions (FAQs) - U.S. Energy Information Administration (EIA) .
- Even if publicly gaining popularity, nuclear power plants have a strong NIMBY effect. Often localities do not wish to have nuclear power plants.
Air Quality Problems
- breezometer.com
- Viable non-US nation states will provide increasing incentives to clean up air quality issues. Natural gas burns clean.
Natural Gas Vehicle and Station Proliferation
- Egypt
- Egypt is going to 1k stations by the end of 2021. They currently have 200.
- Egypt is subsidizing the conversion of 400k vehicles, approximately 1 in 10 vehicles in the country.
- https://www.zawya.com/mena/en/business/story/Egypt_plans_to_operate_1000_natural_gas_fuelling_stations__Minister-SNG_218134824/
- All new cars sold in the country are mandated CNG: https://www.bloomberg.com/news/articles/2020-07-12/egypt-to-require-new-vehicles-to-run-on-natural-gas-sisi-says
- India
- India is going from 2500 stations currently to 10K in < 8 years.
- India has 2,713 stations as of January 2021
- 60% of the gasoline and diesel prices are driven by tax.
- CNG is effectively 1.5x-2.4x cheaper than diesel and gasoline right now.
- China
- China went from 6000 CNG vehicles to 6M CNG vehicles from 2000 to 2017.
- 1000x multiple in 17 years. I don’t know the numbers right now on CNG vehicles and stations in China.
- By the end of 2018, ownership of motor vehicles in China reached 327 million units including 240 million cars, and accordingly there were up to 110,000 filling stations and at least 9,000 natural gas stations across the country, according to a new reports by Research and Markets.
- The South China Sea has 180T cubic feet of natural gas.
- China consumes 10T cubic feet of natural gas annually.
Natural Gas Peaking Plant expansion
- CAGR of ~5%
- https://www.grandviewresearch.com/industry-analysis/natural-gas-fired-electricity-generation-industry
Other
- Fertilizer 2.5% CAGR for the next 5 years.
- Renewables Proliferation = more natural gas consumption/kwh
- 36 states have substantial renewable goals due by 2025. State Renewable Portfolio Standards and Goals (ncsl.org)
- Many states have renewable mandates due in 2025 and 2030.
- For the grid to function in a way American’s expect, many states can not truly hit their Renewable mandates without relying on stable sources of energy (such as Nuclear or fossil fuel).
- Out of the big 3 fossil fuel, natural gas emits the least amount of carbon.
- To fill in the gap between mandate and reality, states/regulatories may start redefining natural gas as green.
- Natural gas could be a major player in the “renewable” space ie how the US’s oldest source of energy “Wood” has been redefined as a renewable source “Biomass”. Biomass explained - U.S. Energy Information Administration (EIA)
- Because natural gas is simply hydrocarbon, there are already countless “green” ways to produce such as from food waste, anaerobic digestion etc even without a re-definition.
- Tax Policy - Governments provide discounts to Natural Gas adopters vs. Gasoline + Diesel adopters
- Natural Gas Commercial vehicles have lower maintenance costs.
- Natural Gas Pipeline expansion
- The reason the USA has not adopted CNG vehicles at scale is completely politically driven and has little to do with economics or technicals of natural gas. https://news.ycombinator.com/item?id=1045211
- The median/general break even price for natural gas producers is $3.00 per MMBtu Are Natural Gas Prices Below $3 Sustainable? - Enerdynamics
Added by people other than Kumar:
- For nearly 2 entire years (2019 and 2020), natural gas was below the general break even price. And much so in certain months.
- Haynesville break-even is as low as $2.05 with median near $2.25
- Marcellus break- even is as low as $1.55 with median near $1.85
- For the past 6 years, natural gas prices have been near or the break even point. https://www.eia.gov/dnav/ng/hist/rngwhhdm.htm
- (opinion) To recoup past losses, suppliers will naturally increase price (or shut down) irrespective of many demand trends for a sustained period of time.
- Natural Gas supply (U.S.)
- ~135 Bcf of supply from US (from Rystad Energy).
- Permian operators will be able to ramp gas production (+25 to 35% in next 3 years) with new pipelines going to Mexico, Corpus Christie (LNG export), and local markets
- Haynesville operators have increased rig activity and location advantage to Gulf Coast LNG export
- Marcellus and Utica (North East) will meet US demand but actively seeking ways to get to Gulf Coast via new gas pipelines
- EQT largest independent natgas producer; using electric & dual-fuel fleets to complete wells and others watching to see how the company reduces diesel costs and increase use of “field” natgas
- Global: 10 billion boe (barrels of oil equivalent) discovered in 2020
-
Risk:
- FERC implementing new policies to restrict pipeline development;
- bitcoin and other crypto miners burning gas (first “stranded” or “to reduce flaring” in permian, perhaps ultimately gas that’d otherwise be economical to take away)
- US Commercial Vehicles, Demand
- Logistics continue to grow to increased imports, ecommerce, and short-haul demand
- LNG / CNG has better energy density and fits heavy-duty long distance requirements
- Dual-fuel engines from CAT are aggressively being adopted by oilfield companies. CAT is deploying across Mining and other industries
- Fedex contracted CNG truck fleet for long-haul and electric fleets for short-haul
- Top 3 commercial vehicle fleet have ~300,000 trucks/tractor-trailers
- LNG Supply / Demand
- LNG production is expected to reach 672 Mt in 2040 with US, Middle East, and Mozambique. Good graphic on gas markets supply/demand
- China adding 2-3 LNG terminals and currently has 22 LNG plants able to receive 81 Mt/y
- CNPC expected China's pipeline gas imports to reach about 100 Bcm by 2025, nearly double from the 2019 level
- Risk: US policy, if Biden limits export capability
- Idiosyncratic market
- Important to understand that natural gas/LNG market is not analogous to oil market
- Difficult to transport and store; high fixed costs of midstream, floating and fixed liquefaction, regas, etc. infrastructure
- Mostly producers and end-users drive the market; unlikely there will be a “global benchmark price” or hyper liquid spot/derivatives market that resembles Brent or WTI
- Risk: US policy, if Biden limits export capability
- Important to understand that natural gas/LNG market is not analogous to oil market
- Global Natgas Demand
- S&P estimates ~5% increase in 2021
- Shell demand estimates
- 1% global CAGR in
- Asia
- 3% CAGR gas demand
- 4% CAGR lng import (600 BCM by 2040; currently ~ 300 BCM)
- BP
- statistical review of world energy
- https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/energy-economics/statistical-review/bp-stats-review-2021-full-report.pdf
- statistical review of world energy
- Renewable Natural Gas
- Not sure if you include this but methane from landfills have lower carbon intensity
- RNG primer - https://www.mjbradley.com/sites/default/files/MJB%26A_RNG_Final.pdf