food for thought

The Daily Reckoning Presents: 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...

Australia's Next Big Export Industry
by Kris Sayce

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.