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Time to Choose a Side in the LNG Debate

Goldman Sachs (GS) just warned that demand for a key global resource is waning.

Meanwhile, one of the world’s top fund managers, Seth Klarman, recently increased his bet on the very same resource.

Klarman now has a whopping $429 million at stake.

So which party, Klarman or Goldman, blew the call?

Or is it possible that they’re both right?

World trade in liquefied natural gas (LNG) has more than tripled over the last 15 years. The price of the resource is presently around $3.99 per MMBTU in the United States.

In addition to conventional reserves, vast resources of unconventional gas are now being unlocked by technological advances in horizontal drilling and hydraulic fracturing. For example, shale gas – once considered uneconomic to produce – is now ripe for production.

Currently, about 10% of all natural gas production finds its way into the LNG market.

The market is expected to continue its rapid expansion, too.

As I see it, LNG is strong on both sides of the supply/demand equation.

1.)    On the supply side, better production technology means the development of more gas reserves.

2.)    On the demand side, the world’s appetite for clean-burning energy sources continues to heat up.

Goldman’s Warning…

In its report filed last week, Goldman cautioned that LNG growth would slow to 5% annually, representing a full percentage point decline from its previously projected growth of 6%.

As a consequence, the bank said that LNG projects in Africa, Canada, and Australia will now face delays or even cancellation.

The United States is expected to approve more than 40 million metric tons of new gas production over the coming year… And the Energy Information Administration is forecasting that production could one day shoot as high as 512 billion cubic feet (bcf) per day.

Nonetheless, analysts maintain that an LNG pullback is coming.

Still, when I spoke to Wall Street Daily’s Chief Resource Analyst, Karim Rahemtulla, he cautioned against reducing investment exposure to the booming LNG market based on Goldman’s report alone.

“LNG prices are going to be affected in the short term by lower oil prices and higher supply. But the outlook for LNG is excellent, especially for American companies that have a major cost advantage over the competition.” – Karim Rahemtulla

Klarman’s $429-Million Bet…

In full disclosure, Seth Klarman’s maneuverings pre-dated the Goldman report.

As a long-term value investor, though, I highly doubt that Klarman’s investment thesis has been impacted by the predicted LNG pullback.

Klarman’s celebrated fund – the Baupost Group – presently holds 5,987,930 shares of Cheniere Energy (LNG), worth $429 million.

Cheniere comprises nearly 8% of Baupost’s entire portfolio.

In the latest quarter, Klarman added even more shares.

So to say that Klarman is bullish on LNG would be the understatement of the year.

Cheniere is firmly entrenched in the LNG market, as it benefits from both the transport and development of the resource, which makes for an incredibly diverse position in any portfolio.

Among its prized holdings, the company owns and operates the critical Sabine Pass LNG terminal in Louisiana – a deepwater shipping channel less than four miles from the Gulf Coast.

The facility has five LNG storage tanks with capacity of approximately 16.9 billion cubic feet equivalent (bcfe) and two docks that can accommodate vessels with a capacity of up to 265,000 cubic meters.

Forget the Goldman report.

Let’s position ourselves alongside Klarman with the March 2015 $80 calls, which are currently trading around $7.10 per contract.

With call options, you’ll control 100 shares of Cheniere for every contract you buy.

It’s a cheap, low-risk way to play the LNG boom.

When oil prices reverse and push back over $100 per barrel, it’s hard to imagine these calls not trading for at least $9.50.

Onward and Upward,

Robert Williams

Founder, Wall Street Daily

Robert Williams