I have something a little different for raptors to review this week. I’m going to a normally boring sector, public utilities. Yields are low but we are being paid to wait for what could be a huge payoff. see, the two utility companies I am delivering hold special, hard to acquire, permits. These permits are for the export of Liquified Natural Gas (LNG) from the United States. The country is awash in natural gas thanks to the shale boom. Domestic prices for gas have crashed but Asia and Europe remain hungry for LNG. The few companies that get these special export permits are going to make a lot of money over the coming decades. We just need to be patient as the process of building out the liquification “trains” takes a long time. That’s why I’m sticking with hybrid companies that already have a profitable business, rather than going with the pure play Cheneire Energy (which has also been bid up out of range.)
The first company in the space is Sempra Energy (SRE). It yields 2.5% but this is just a gravy payment while we wait on the big money from their Cameron, LA LNG export permit. This is an expensive proposition however as preparing the terminal is going cost over 10 billion dollars. For this reason, SRE has brought in GDF Suez, Mitsui & Co, and Mitsubishi as partners, Sempra will remain majority owner (50.2%) but will push off some of the 10 billion cost on partners. Sempra expects the exports to increase profits by 15% by 2018 and I expect the majority of the windfall to be returned to shareholders via dividends and buybacks.
Where is our money in the meantime while we wait on a multi-year construction project? In a word, utilities. Sempra serves 28 million customers in California with electricity and natural gas. Almost three fourths of Sempra’s earnings come from its utilities division. This is safe, stable, regulated cash flow that has grown over 15% since 2011. There is real security while we wait for the LNG export thesis to play out. Tune in Thursday for another utility company that has obtained one of these valuable LNG export permits.
Devour your prey raptors!