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Competing for Profits
Posted by: taipan (IP Logged)
Date: November 5, 2012 05:18PM

The natural gas industry is changing fast. For one of the first times in history, we are seeing a truly competitive market.

For one natural gas pipeline provider, November is off to a very good start. We're just five days into the month, and already nearly $1.5 billion is set to change hands.

This is a chance for me to mirror the words of one of the icons of the business world. Jack Welch knows a thing or two about what it takes to revolutionize an industry. When he puts his finger on a transformative trend, its best we see where he's pointing.

Today, he's touting the revolution that is America's natural gas industry.

"We have a chance in this country to make this the American century," the former GE boss said this morning. "This gas thing is huge. The gas that we have found is in the first inning -- it's like the Internet in 1990. This is the first inning of the great American century."

But old man Welch has missed a key idea.

This is not America's gas boom. Nope. I've said it before, and I'll say it 100 more times. This is a global boom. The billion-dollar news from TransCanada (TRP) this month proves it.

The company is taking full advantage of North America's yearning for cheap energy. As more and more gas is freed from ancient shale formations, TransCanada is rewriting the rules of the energy industry.

Its biggest moves so far this month come from below America's southern border.

With an already cheap labor force, Mexico will become a competitive furor if it can get its hands on a sustained source of cheap energy. That's why it's doubling down on its natural gas infrastructure. Late last week, TransCanada announced Mexico picked its bid to build and operate a huge new pipeline known as the Topolobampo Pipeline.

The deal is simple. TransCanada will shell out about $1 billion to build the pipeline. Once it's complete, though, the company locks into a 25-year delivery contract with the Mexican government. The 30-inch pipeline will stretch over 325 miles and, when it's completed in the third quarter of 2016, will move some 670 million cubic feet of gas each day.

But that's just the first deal.

The Canadians have much more business in Mexico. Just after the ink was dry on the Topolobamp deal, TransCanada hit the press with news of a second big contract. This one has the company stretching a 24-inch pipeline in the 250-mile span between El Oro and Mazatlan.

It will cost TransCanada about $400 million to build, but it will allow the company to move a contracted 202 million cubic feet of gas each day.

What's even more noteworthy, though, is a move TransCanada formalized last Thursday. It became the first company to ship Marcellus gas to Canada.

It's the ultimate role reversal.

Last March, the Canadians launched a $130 million plan to reverse the flow of natural gas through one of its key pipelines. As 400 million cubic feet of American gas now begin to flow into Ontario, the energy industry starts a new chapter.

For decades, America relied on Canada. But now that Uncle Sam has more than enough of his own gas, demand for Maple Leaf energy has dried up. For one of the first times in American history, gas is not flowing to the "only" market... it's flowing to the best market.

In other words, because it costs only $1.50 to carry a gigajoule of Marcellus gas into Ontario, and about $2.10 for the same quantity gas from western Canada, the market has the opportunity to chase efficiency. Until the slimy hands of government shut down the exchange, the energy markets will reach a competitiveness we've never seen before.

And it's because of that fresh sense of competition that Norway's Statoil (STO) is about to make a move that has not been attempted in over 40 years. It's going to put a pipeline under the Hudson River, and send a fresh source of cheap energy to Manhattan.

By this time next year, the pipeline is expected to reach New York's Penn Station. "On that side of the river," said the company's CFO, Torgrim Reitan, "prices are completely different from the New Jersey side."

Again, the market is striving for equilibrium.

For investors, all of this is phenomenal news. A competitive market is a predictable market.

Already, we are seeing TransCanada become a North American dominator. But just as it stretches fresh pipelines here at home, it has global competition doing the same overseas.

As the next decade unfolds, investors have a great opportunity on their hands. The more natural gas we discover across the planet, the freer the markets will become. And a free market always equals a profitable market.

We are in the first inning of this game. If you've missed out on the initial round of profits, don't worry. There are plenty of opportunities "in the pipeline."

Stocks Discussed: TRP, STO,
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