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Chesapeake Energy Corporation (CHK): LNG Exports, Who Wins?

Japan’s nuclear disaster, and subsequent shift away from the power source, has left the country short on power. With few natural resources of its own, it has been importing what it needs. Natural gas is a big part of that, but The United States isn’t a player… yet.

Nuclear Concerns

Japan suffered one of the few nuclear power related disasters that have been seen in the world. However, it was a horrific, slow motion event that left permanent scars on the nation’s psyche. It also resulted in a major energy shift that has left the country dependent on foreign nations for its energy.

This dependance is unlike the often tense oil relationship that exists between The United States and the middle east. In a pinch, The United States has enough energy sources to live, perhaps uncomfortably, without foreign oil. Unless Japan is willing to restart its reactors, it has no choice but to deal with countries that it might otherwise choose not to. Natural gas is now a vital feedstock.

Who’s Gaining

Bloomberg reports that Japan is the largest importer of natural gas and that 2012 was a record year for imports of the fuel. Where is it getting this gas? “from nations such as Qatar, Russia, Australia and Indonesia. But the U.S. share of this business has been tiny.”

This is unfortunate. There are, of course, many reasons why we can’t supplant a country like Russia. The biggest is that The United States currently lacks the infrastructure to export large amounts of natural gas. Another reason is that some politicians seem to think that exporting the fuel is a mistake.

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Who Loses

The good news is it seems increasingly likely that natural gas will be exported. And it’s a good thing, too. Despite having an abundance of the fuel, there is so little demand in the States that the commodity is trading at historical lows. It is actually unprofitable for many drillers to bring the fuel out of the ground.

Indeed, the average industry cost for drilling fuel is around $7 per Mcf. It’s been trading well below that, recently hitting the $4 range. No wonder drilling activity isn’t as high as it was just a few years ago. While there’s a shift toward using natural gas for electric power in this country, it hasn’t been enough to keep demand and pricing high.

So, to date, drillers in the U.S. market have seen boom times and, now, bust times. It hasn’t been pretty, taking once dominant companies like Chesapeake Energy Corporation (NYSE:CHK) for a wild ride. When prices were high, the company aggressively expanded in the natural gas arena, buying land and taking on debt.

Chesapeake Energy Corporation (NYSE:CHK)Now that gas prices are low, a battle with a dissident shareholder left the CEO and co-founder out of a job. And Chesapeake Energy Corporation (NYSE:CHK) still trying to rework itself to compete in a world with lower gas prices. As long as gas prices remain low, Chesapeake is only appropriate for aggressive investors willing to bet on a successful turnaround.

Who Wins?

If an export market opens up for natural gas, via liquified natural gas (LNG) sales, it could be a life saving event for Chesapeake Energy Corporation (NYSE:CHK). More money coming in the door would make paying down its onerous debts that much easier. However, Ultra Petroleum Corp. (NYSE:UPL), among the lowest cost producers, would be one of the first to benefit.