Gas exports from U.S. surge as sanctions undermine Iran

At a time when sanctions are causing a slump in Iranian cargoes of liquefied petroleum gas, the U.S. is exporting more fuel than ever, driving up tanker rates for BW Group Ltd. and other ship owners.

U.S. sales (EPD) jumped 27 percent last year as those from Iran fell 18 percent, according to the Energy Department and Joachim Grieg & Co., an Oslo-based shipbroker. Tanker rates will rise 6.7 percent to a record $32,000 a day in 2013, RS Platou Markets AS estimates. The U.S. surge is boosting demand for export terminals and shares of Enterprise Products Partners LP, which operates one in Houston, will gain 10 percent in a year, analyst forecasts compiled by Bloomberg show.

Iranian sales are being curbed by European Union sanctions that prohibit any vessel insured in the 27-nation bloc from carrying the country’s energy products. That applies to about 90 percent of the world’s merchant fleet. LPG, which is used for cooking and in petrochemicals, is a byproduct of natural-gas output and the U.S. is producing more than ever as it taps deposits from previously inaccessible shale rocks.

“In Iran you clearly see the declining trend, but don’t forget the U.S. is expanding, so there’s some substitution,” said Steve Engelen, the Oslo-based head of research at Joachim Grieg. “More buying and selling and shifting trade tends to be positive for shipping.”

Minute Steaks

Spot earnings for so-called very large gas carriers averaged $30,000 daily in 2012, 25 percent more than in 2011, according to Platou. Seaborne trade will expand 8.4 percent this year, from 4.5 percent in 2012, Oslo-based Pareto Securities AS estimates. Each vessel hauls about 44,000 metric tons of cargo, or enough gas to grill about 1 trillion minute steaks.

Extracting natural gas yields 10 percent propane and butane, accounting for about 60 percent of global LPG supply, according to the Paris-based World LP Gas Association. The rest comes from refining crude oil. Residential demand accounts for 49 percent of consumption, according to Pareto.

BW Group, based in Hamilton, Bermuda, operates the largest VLGC fleet, with 22 vessels. The closely held company’s $500 million 6.625 percent bond due in June 2017 rose 22 percent in the past year to 108.50, within 1 percent of an all-time high reached Dec. 20, according to Trace, the reporting system of the U.S.’s Financial Industry Regulatory Authority.

Investors demand a yield premium of 384 basis points to hold the bond rather than benchmark U.S. debt, from 843 points in February. The notes, which yield about 4.5 percent, are rated Ba2, the second-highest junk rating, by Moody’s Investors Service and an equivalent BB at Standard & Poor’s.

Capacity Expansion

Enterprise Products Partners, based in Houston, expects to complete an 88 percent capacity expansion at its export terminal this month, the company said in December. Sales of natural-gas liquids account for 38 percent of the company’s revenue, according to data compiled by Bloomberg. Its shares rose 16 percent to $54.55 in the past year and will reach $60.19 in 12 months, the average of 16 estimates shows.

Combined crude-oil output from the 12-nation Organization of Petroleum Exporting Countries has declined for four consecutive months, according to data compiled by Bloomberg. That may reduce LPG supply because less crude will be processed. Saudi Arabia, the largest LPG producer after the U.S., is extracting the lowest amount of oil since October 2011.

Growth in demand for seaborne cargoes may slow as the largest consuming nations increase crude refining. China, the second-biggest LPG user after the U.S., will process 4.4 percent more oil by 2013, according to data from three state oil companies and the government. The nation of 1.3 billion people imported 0.8 percent less LPG last year, customs data show.

New Terminals

Further gains in U.S. LPG shipments may be constrained by a lack of available processing and loading facilities. The Houston shipping channel is crowded and projects to build new terminals have been delayed, Engelen said. The 54-mile-long Houston Ship Channel already receives the most foreign vessels of any U.S. port, according to the Army Corp. of Engineers.

“Low propane prices in the U.S. are attractive on the world market,” said Matthew Meloy, the chief financial officer of Targa (NGLS) Resources Partners LP, which operates an export terminal in Houston. “It’s just about getting it out. We have pieces of the puzzle to get it out, and the pieces we don’t have we’re putting in place.”

Targa said Jan. 8 it bought land, a dock and a rail siding on Houston’s ship channel to enlarge capacity. Its existing terminal will be able to load four VLGCs a month by the third quarter, and that may as much as double next year, Meloy said. Shares of the Houston-based company will gain 19 percent to $46.73 in the next 12 months, the average of 11 analyst estimates shows.

Gas Carriers

LPG cargoes are a small source of revenue for most shipping companies. Other publicly listed owners include Teekay LNG Partners LP (TGP), which has five LPG carriers in its fleet of 43 vessels. A.P. Moeller-Maersk A/S has 17 VLGCs and 11 smaller gas carriers out of more than 1,000 ships.

The LPG tanker fleet will expand 3.4 percent this year as demand gains 5.1 percent, Platou estimates. Outstanding orders at ship yards are equal to 14 percent of existing capacity, down from a peak of 51 percent in 2006, according to IHS Inc. (IHS), an Englewood, Colorado-based research company.

Rising rates for VLGCs contrast with a slump across most of the rest of the merchant fleet, which is enduring a capacity glut. The Baltic Dry Index, a measure of the cost of hauling coal and iron ore, plunged 60 percent last year and the Baltic Dirty Tanker Index, reflecting rates for ships carrying oil, tumbled 18 percent.

Producing Weapons

Iran’s exports are being constrained by sanctions aimed at pressuring the country to abandon its nuclear activities. The U.S. and EU say the program is aimed at producing weapons, which the government in Tehran denies. The EU extended its sanctions in October to cover propane and butane shipments.

The U.S. is pumping the most oil since 1993 and extracting the most natural gas ever, according to the Energy Department. The price of propane in Texas slumped 34 percent in the past year, according to data compiled by Bloomberg.

“Given the prospects for shale oil and shale gas, U.S. LPG exports are set to continue to rise,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 20 percent in the past year. “The overall volumes picture is positive. BW Group is sure to benefit.”