It may seem like a strange time to be talking up the resources sector, but while everyone else is running away I'm nipping in through a side door to get onboard one specific area of the resources industry. I'm talking about energy. But it's not oil that's grabbed my attention. It's something much more exciting and potentially much more profitable than that.
So profitable in fact, that it could soon be Australia's single largest export industry.
That's why, since last November I have been recommending two companies to subscribers of Australian Small Cap Investigator that I am certain will profit from a new wave of investment in this industry.
The industry is liquefied natural gas (LNG).
It's hard to imagine that in a country as rich with resources as Australia, liquefied natural gas production is still a relatively new industry. Overseas, the production of LNG has been going on for years. Here in Australia you can count on one hand the number of LNG terminals that we have.
There are just the two. One is based in Karratha to service the North West Shelf off Western Australia. The other is a ConocoPhillips facility in Darwin.
But the investment I've tipped to ASI readers isn't in either of those areas. That's because all the new investment in LNG is happening in Queensland. And it is thanks to the investment that explorers have been making in coal seam gas (CSG). There are at least four new LNG terminals proposed for construction at the Queensland port town of Gladstone.
The first new entrant to produce is likely to be one of the eventual winners in this new industry. The company I like the most is scheduled to be the first to get its LNG terminal ready for business. In addition, its LNG plant will be operational at least three years in advance of the competition. That's a significant head start, or first-mover advantage if you will.
So, why is now the time to be getting into LNG? And why am I recommending it in ASI and not our resources newsletter Diggers & Drillers.
On-shore and unconventional LNG product (coal-seam-gas) is virtually an untapped market in Australia. The opportunity for large-volume, high-dollar exports is enormous. It falls clearly into the category of a high growth play, even though it's what you might call a traditional "extractive" industry.
Australian companies haven't entirely sorted out the economics of the LNG market, on both the cost and revenue side. But it's the revenue side that makes it so appealing for small cap punters. According to industry sources, if the LNG industry develops successfully in Australia it could generate $20 billion in total exports by 2017.
Let me put that in perspective. By the time the production of this product peaks in Australia it could quite easily be our most lucrative money-winning industry in the coming years. Right now, coal and iron ore between them churn out nearly $30 billion a year in exports. Those exports are the profit lifeblood of household Australian names like BHP, Rio Tinto, Fortescue, and Macarthur Coal.
You're talking an industry that could be bigger than the ones that built BHP and Rio. That's why I believe the single most exciting industry for smaller companies is energy.
But don't just take my word for it. Robin West, chairman of consultancy firm PFC Energy, told the Financial Times last year that "Australia's gas reserves are potentially the biggest OECD gas reserves left in the world and are not subject to the same political constraints as non-OECD reserves."
And because of the expected growth in demand for gas, along with the maturing of many overseas gas fields, international companies are eager to get a slice of the action here in Australia. Not wanting to miss out, domestic companies are also keen to exploit it.
You only have to look at some of the recent corporate transactions in this area. You'll remember the USD$5 billion investment by US energy giant ConocoPhillips in a CSG joint venture with Origin Energy. And UK based BG Group's $5.6 billion takeover offer for Queensland Gas.
That is why Australia has the potential to become a major and important global supplier of LNG, and that's why I have recommended ASI subscribers invest in two of the best small cap LNG companies Australia has to offer.
Kris Sayce
for The Daily Reckoning Australia
Editor's Note: Kris Sayce is the editor of the Australia Small Cap Investigator. For more on his research into LNG stocks, go here.
P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-mail newsletter or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.
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About the Author
Kris Sayce began his financial career in the City of London as a broker specializing in small cap stocks listed on London's Alternative Investment Market (AIM). At one of Australia's leading wealth management firms, Kris was a fully accredited adviser in Shares, Options and Warrants, and Foreign Exchange. Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. In late 2006, he joined the Melbourne team of the leading CFD provider in Australia.
Comment by Robbie on 29 January 2009:
Is Santos a tip you recommend for investment in this area?
Comment by Pete on 29 January 2009:
(everyone, excuse my serial commenting...)
Robbie, IMO Santos looks promising because of its expansive reserves and Coal-seam prospects.
One very major drawback that makes me wary is that Santos has high debt. Perhaps a better play looks to be Oilsearch at this stage, who has lots of cash.
Kris/Dan suggest signing up to SmallCap Investor to learn of their growth stock suggestions.
*If I am wrong about any of this could someone please correct me, thankyou.
Comment by Greg Atkinson on 29 January 2009:
Remembering of course small cap mining/resources stocks equal big time risk..plenty of tears and headache to be had investing in that area..it isn't all high returns and happy days. I would suggest if you intend to venture into that area you plug yourself into some research from people who know the sector well..and I mean "know". (i.e. like people with mining engineering etc degrees on their CV's) Plenty of mining operations/companies look great on paper but getting the stuff out of the ground in a cost effective manner is another thing. Personally I found it easier just to invest in big diversified miners, energy companies or mining related LIC.
Comment by Tony Phelan on 9 February 2009:
I was an OSH bull until the gas price dropped.
Now I think all that noise about coal seam gas is just gas.
The enormous cost in building a plant to convert the gas to a liquid is the killer.
Such plants need a reasonable price for the LNG and secure customers.
Asia has reduced its LNG usage so for now dont buy.
when the price of LNG increases and there are firm contracts then buy.