LGIH and the Oil Patch

There has been some concern on this board about the effects of oil industry problems on the sales of LGIH because they have a presence in Texas. This is certainly a valid concern to watch, but a recent article in IBD called Shale Gas 2.0: An Explosive Expansion Of The U.S. Chemicals Trade
While it does reveal some companies that might benefit long term from cheap Nat Gas (e.g. chemical and plastics makers), my point here will be to show how low oil/gas might not be bad at all for LGIH in Texas. This is because the low natural gas (feedstock) is luring companies back to and into the US, including TX.

Here’s a tip: Keep an eye out for terms like ethane, ethylene, cracker and ammonia. These are keywords linked to a resurgence of domestic chemicals’ manufacturing might. The boom is so broad that it’s altering the global competitive landscape and luring a large segment of the chemical trades back to U.S. shores.
At least 268 production projects are in the works, totaling more than $170 billion in corporate capital spending, according to the American Chemistry Council. Some 60% of that spending is direct foreign investment.
The root cause driving this industrial bonanza: natural gas from shale rock.
Shale gas and its associated liquids provide basic raw materials for plastics, fertilizers and a host of other chemical products. The biggest piece of that picture is ethane, used to create ethylene — the starting point for most plastics.
The buildup is focused along the U.S. Gulf Coast, already the stronghold of U.S. refining and chemicals processing. But it reaches north, east and west.
Dow is pouring $4 billion into new ethane crackers in Freeport, Texas, expected to start up next year.
Other big investors include Chevron Phillips Chemical (jointly owned by Chevron (CVX) and Phillips 66 (PSX)), which is spending $6 billion for new and expanded facilities in and near Baytown, Texas. South Africa’s Sasol (SSL) is building an $8.9 billion ethane cracker in Westlake, La. A liquefied natural gas export terminal under construction for Cheniere Energy (LNG) in Corpus Christi, Texas, has a $9.5 billion price tag.
Houston receives a strong dose of its natural gas liquids from the Eagle Ford Shale, the production area that runs south between Houston and San Antonio. Besides feeding the new and existing chemical-production facilities along the Gulf Coast, the Eagle Ford sets the stage for a vast export trade in gas liquids.
Chenier Energy began shipping the first U.S. exports of liquefied natural gas earlier this year out of its new Sabine Pass terminal on the border of Texas and Louisiana. It also has a $9.5 billion LNG export terminal under construction in Corpus Christi, which is set to come on line in 2018.

But, on the downside…

But there may be some subtractions to the U.S. capacity numbers. Most of the projects were launched before oil prices fell off their $100-per-barrel highs in mid-2014. The rise in U.S. shale oil production and the Organization of Petroleum Exporting Countries’ strategy change — creating the oil glut — were surprises. Weak demand among struggling global economies — particularly developing countries led by Russia and Brazil — have led some chemical industry players to reconsider their U.S. projects.
BASF confirmed in June that it will postpone a $1.4 billion propylene plant project in Freeport, Texas. On the same site, a $600 million ammonia-plant joint venture with fertilizer maker Yara International (YARIY) so far remains on track. That plant will use hydrogen as a raw material, supplied under a 20-year agreement already inked with Praxair (PX). To seal the deal, Praxair is spending $400 million to expand its hydrogen and nitrogen output and extended pipelines to the Eagle Ford Shale field.
In Louisiana, Houston-based G2X Energy reportedly delayed a $1.6 billion methanol plant in Lake Charles. France’s Total (TOT) appears to be sitting on plans to build a $2 billion ethylene plant in Port Arthur, Texas. Sasol said it would push back for one year the completion of a $14 billion gas-to-liquids operation being built in Lake Charles, in an effort to conserve cash.

Not sure how close any of these projects are to LGI Homes location in Texas, so take that for what it is worth, but low prices are not all gloom and doom.

Unrelated to LGIH but interesting:
Investors too often make the mistake of assuming that all commodity chemicals are a play on the gas-to-oil price ratio, Sharaf says. In nitrogen — produced by ammonia plants and used primarily in fertilizers — Sharaf contends that the applicable ratio is the one between natural gas and anthracite coal prices in China.
China’s slowed economic growth has pressured coal prices there, keeping nitrogen producers in the game and maintaining China’s stance as a net nitrogen exporter. On the ethane side, China still supplies nearly half of its ethane needs via imports. This gives the two markets — basically fertilizers and plastics — very different outlooks as the added capacity from new U.S. projects comes on line.


On a side note, here is a nice little 27 minute podcast on the “invention” of hydraulic fracking. It is part 3 of a 5 part series where they go through the process of buying 100 barrels of oil, truck it, pipe it, refine it, sell it and put the gas in a car.


He is the short version.
Back in the early days, some 31 year old engineer was put in charge of some shale fields and then a few months later was told that it was too expensive and they were probably going to shut them down. He figures he will lose his job, so like a good engineer he tries to reduce the costs. He finds that about 30% of the cost is due to the fracking “goop” they are buying from companies like Haliburton. You take this goop, shove it down the hole, frack up the rock to release the oil and gas. (the rock is like a dry sponge with lots of little holes holding the oil and gas).

So this guys wonders what would happen if he waters down the goop. He tries it a little, and it still works fine, so he has save a bit. Waters it down more, still good. Starts going to high dilution and the Haliburton guys are just smirking waiting for their “I told you so moment”, but it doesn’t come. The more diluted, the better it works. Now they are pumping more with less profit to Haliburton, so Haliburton starts charging bogus fees like a “horsepower” fee and a “dilution” fee. So at this point (if I recall right), he comes up with a new solution he calls slick water that cuts out the old suppliers, and it works great. And the rest is history as we now know it.

The reporters asked if he made any money off of it, and he did not. He said his bosses must have been much better businessmen than he was. In retrospect he wishes he had started his own company, but he was married, with a kid and that must have seemed like a big risk.



but low prices are not all gloom and doom

Indeed they are not…

Petroleum products are used in a lot of residential home building products, such as vinyl windows, vinyl fencing, roof shingles, PVC pipe, asphalt & various siding materials to name a few. When oil goes up, so do these materials, impacting the cost of the home quite easily.

Let alone fuel surcharges (when prices are high) on many deliverable items as well…