Chevron Corporation (CVX), Royal Dutch Shell plc (ADR) (RDS.A) – Liquified Natural Gas: Two Large-Cap Winners on the Horizon

With demand rising at 5% to 2020 (versus oil’s +1.2% growth), Liquified Natural Gas (LNG) is the world’s fastest growing energy commodity. But the sector is changing fast. Multiple new supply sources and the growing incremental demand are shaping the market. Besides, thanks to the shale revolution that is going on in the US, supply is poised to become more global, bringing regional prices closer together (nowadays, price spreads are huge: while LNG’s price in the US is below $5 per metric cubic feet, in Europe prices can go as high as $10). Let’s look at two companies that might benefit enormously from the growth and development of the LNG markets.

An American champion

Chevron Corporation (NYSE:CVX) is not only poised to benefit from the growth in the LNG market, the company is also is a top performer. Chevron Corporation (NYSE:CVX)’s strong dividend growth, share buybacks, solid balance sheet (with $5 billion more cash than debt), and high upstream margins make it a great long-term holding for any portfolio. Despite having reduced dry gas drilling in North America to minimal amounts, Chevron Corporation (NYSE:CVX) is growing its natural gas production by 7% year-over-year (yoy) focusing on international projects. Among its main projects and dealings related to natural gas and LNG I must specially mention:

(1) The long-term sales and purchase agreement with Chubu Electric on 1 million metric tons per annum (MTPA) of LNG from the Wheatstone project in Australia.

(3) Chevron’s Angola LNG project, which should contribute an average of 60 million barrels oil equivalent per day (mboed) once the resources are fully developed.

(4) Chevron Corporation (NYSE:CVX)’s agreement with YPF to invest in the Vaca Muerta shale formation in Argentina, which is supposed to be the world’s second largest shale-gas reserve in the world. Even if Chevron has not yet started to invest heavily in Vaca Muerta, it is expected to do so as soon as Argentina’s government reaches an agreement with Repsol. Repsol (which still holds 12% of YPF’s shares) is expecting to get as much as $10.5 billion for its former 51% stake in YPF, which was expropriated during April 2012.

Chevron Corporation (NYSE:CVX)’s worldwide production is expected to increase by 1% yoy until 2014 and then begin to grow at 5% as new projects, mainly Australia LNG and West Africa, begin production. Paying a 3.4% dividend yield and trading at 2013 9.6 times P/E, I think Chevron Corporation (NYSE:CVX) is the best bet among the American oil majors.

One European bet ready to boom on LNG

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) is committed to growth. The Anglo-Dutch company has 35% of its capital tied up in new projects. The company is projected to add 700 mboed of new production (20% of last year’s production) through 2017-2018. If the objective is fulfilled, Royal Dutch Shell plc (ADR) (NYSE:RDS.A) will generate $175-$200 billion in total cash flow from 2013 to 2015 compared to its capital spending of $120-$130 billion. The increased cash-flows should allow the company to keep on investing while raising the dividend and buying back shares.

Natural gas is a key component of Royal Dutch Shell plc (ADR) (NYSE:RDS.A)’s growth strategy. According to the company’s last quarterly statements, gas production was +3% yoy and +8% sequentially, led by LNG projects. Besides, the company has been working on some key undertakings: