How to play the coming LNG boom

Many readers are familiar with recent changes in the natural gas situation. To recap: new drilling techniques (fracturing and horizontal drilling) have unlocked an enormous new source of gas. The traditional markets for natural gas have not been able to absorb the supply, and much of the additional gas has gone to lower-valued uses such as electrical generation. Moreover these same drilling techniques are now being used for oil, and are producing copious natural gas as a byproduct. The surplus is probably baked in for several years.

While this is happening in the US, the situation in the rest of the world is much tighter. Gas from older exporters such as Russia and newer ones like the Mideast and Australia are priced against oil. The final cost to the consumer may be double or triple the US price. There are many shale deposits in Europe and Asia as well, but extraction is many years off.

I can think of a few ways of investing in this...

First, it is clear to me that there will be a large and growing demand for the higher-tech drilling needed to carry this out. For the next few years, this will be in the US, but eventually it will go worldwide. The problem for investors is that much of the technology is owned by gas producers, who are suffering from the very gas glut they created. Names in the equipment and service space include Baker Hughes (BHI), Halliburton (HAL) and Helmerich & Payne (HP). Some of these stocks have been hit pretty hard since August.

Second, it is likely that the US - world price discrepancy will be arbitraged. Some think this will occur as nontraditional markets for gas are developed in the US (think vehicle fuels). I do not agree with this. The cost of the infrastructure modification is just too great. Instead, it is more likely that the US becomes an exporter of gas. Several companies are starting to look at this. One, Cheniere energy (LNG) actually has signed contracts with two overseas buyers. I have invested in the associated MLP (CQP). This has a 10% return backed by an associated pipeline. If the LNG export plan is successful, it would be a huge upside.

Another winner from the US - world arbitrage is likely to be LNG tanker owners. There is currently an overcapacity of oil tankeers, but LNG is a different animal. I like TeeKay (TK) and the associated MLP TeeKay Partners (TGP).

Finally, for those with a longer term horizon, companies with a position in European shale acreage are interesting. Western Europe will probably be wrangling over environmental issues for years, but the eastern Eur countries will go quicker. Poland is starting right now. Companies there include Marathon (MRO), Nexen (NXY) and the small cap San Leon (London SLE). Shell is in Ukraine. Another way to play this would be to short Gazprom (OGZPY), the main Russian exporter.Of course, the political situation in Russia will likely overwhelm other fundamentals.