It was a lightly reported story. It didn’t even warrant more than a short blurb in your local newspaper. Unless you are an industry insider or Washington Beltway junkie, you may have missed it entirely. But last month, the White House orchestrated a landmark agreement paving the way for exports of liquefied natural gas (LNG) to China. 

Right now, U.S. producers are largely shut out of this lucrative market. Most of China’s LNG deliveries come from Australia or Qatar. But that could be changing soon. 

As with most commodities, China has a hungry appetite for LNG. In fact, it’s the world’s third-biggest consumer, behind only Japan and Korea. Last year, China imported 26 million tons of LNG, an increase of 33% — making it the world’s fastest-growing market. 

Wood Mackenzie put pencil to paper and attached a potential dollar amount to this deal. Assuming current prices and projected usage, China could be importing $26 billion worth of LNG a year by 2030. 

The question is, how do we get it there? 

A Multi-Billion Dollar Innovation
Until recently, shipping natural gas overseas was infeasible from a cost standpoint. But all that changed when a way was discovered to chill methane to minus 260 degrees Fahrenheit, a temperature at which the gas can be compacted to 1/600th its normal volume. 

For context, that would compress a 17-inch beach ball to the size of a ping pong ball, making for economical long-distance shipping. On the other end of the journey, the super-refrigerated liquid is then warmed back to gaseous state and pumped into pipelines for delivery to power plants, factories, utilities and other users. 

There are currently 24 LNG liquefaction and export facilities in 18 countries globally. The United States accounts for a drop in the bucket (less than 1%) of the world’s LNG trade. 

But again, that could be changing soon. The Federal Energy Regulatory Commission (FERC) has already given the green light to almost a dozen other facilities, half of which are already under construction. The map below shows LNG operations currently approved for construction.

With this additional capacity (and many other applications still pending), the United States is expected to become a major export hub. In fact, the Department of Energy is forecasting the United States to be the world’s third-largest LNG exporter by 2020. 

Needless to say, anytime tens of billions of dollars change hands, there will be immense profits spread around, which is why many savvy investors have jumped into the LNG space with both feet. But others have remained skittish. It’s not a question of technical capability or commercial acceptance, but lingering regulatory concerns. But the new administration is clearly supportive. 

In any case, global LNG trade is rising briskly for a number of reasons, not the least of which is growing electricity usage (coupled with government mandates to switch away from coal to cleaner-burning gas). 

#-ad_banner-#So what does that mean for us?

Well, quite a few things actually. First off, the ability to connect with higher-paying customers is a big positive for local shale producers. Of course, the owners of these liquefaction and export facilities will also be natural beneficiaries. And not just any ship can transport this stuff. It travels in double-hulled tankers specially equipped to haul this chilled liquid overseas. Vessel owners are well paid for their services. 

Even before we get that far, an engineering and construction firm must design and build the complex plants. Companies supplying propane used in the freezing process also stand to benefit. 

But there’s one company squarely in the middle of all this. During the last up-cycle, it received eight years worth of orders in a 12-month span. And the next one could be right around the corner.

The World’s No. 1 Maker Of Cryogenic Equipment
If the future of energy involves chilling stuff down to -260 degrees, then I want to be involved with cryogenic equipment — and the latest pick in my premium newsletter, Scarcity & Real Wealth, is the world’s No. 1 manufacturer. 

You can’t build a modern LNG plant just with ordinary materials like concrete and steel. They require the installation of brazed aluminum heat exchangers, vacuum-insulated pipes, and other customized products. Needless to say, these things aren’t available at your local hardware store. There are only a handful of reputable suppliers worldwide, and this company is either the dominant market share leader or a close second in every market it serves.

But let’s back up a step. 

Even before natural gas is magically liquefied, it must first be processed. Raw gas coming out of the wellhead contains water, sand, sulfur, carbon dioxide and other impurities. These fluids and contaminants must be stripped out before the gas is considered “pipeline quality.”

That’s 70 billion cubic feet of domestic natural gas per day (25 trillion per year) that needs to be cleaned. And much of that contains ethane, propane and other valuable byproduct natural gas liquids (NGLs) that need to be removed and sent to fractionators for further processing.

There are several different processing technologies to do all this, but one of the most widespread involves cryogenic extraction. Again, this plays right into my pick’s strength. So it’s not just LNG that is fueling demand for the firm’s products, but the much larger processing, fractionation and petrochemical markets. 

The company’s broad product base extends well beyond natural gas into equipment that is used to produce and store atmospheric gases (oxygen and carbon dioxide) and industrial gases, as well as other fields, most notably healthcare (portable oxygen tanks) and biomedical (cryogenic freezers to store blood, stem cells and other samples). That means a more diverse revenue stream and customer base. 

Combined, these operations generated $204 million in sales last quarter. All three of the primary divisions showed a 5% or better increase from a year earlier, while a healthy 14% uptick in incoming orders pushed the backlog up $6 million from the prior period to $348 million. 

The latest deal was a contract for 20 large air-cooled heat exchangers that will be installed in a natural gas gathering and compression project in the Permian Basin of West Texas. This equipment will come from the firm’s Tulsa, Oklahoma, plant. But keep in mind, this is a global organization with growth opportunities throughout Asia, Europe and the Middle East. 

Going forward, management expects activity to strengthen significantly starting in 2018 and enter another five-year up-cycle as LNG demand heats up — particularly in China and India. And thanks to a temporary slowdown in demand, its stock is trading at just 6.8 times cash flow — less than half the S&P 500 average of 13.2 and one-third the industry norm of 17.5. 

I don’t know if the stock will revisit triple-digit territory again anytime soon, but it should at least command 10 times cash flows, which would imply potential gains of 60% or more.

“Pick And Shovel” Investing In The 21st Century
Today’s billionaires, like Cornelius Vanderbilt and John D. Rockefeller before them, recognize the same truth: Investing in safe, steady payouts is a better way to build wealth than relying on volatile commodities. And the best way to access these returns is by investing in what I call “pick and shovel” companies. I’m talking about companies that benefit from surges in commodities, but are steady and adaptable enough to get by without them.

Like the merchants who made a fortune selling picks and shovels in the days of the Gold Rush, companies that support commodity production today stand to make a fortune off of increased commodity production and consumption, regardless of which individual producers end up on top. Trends are lining up such that these companies, particularly my cryogenic manufacturer pick from above, could see double-digit gains this year alone, with even more growth slated for the years ahead.

But out of respect to subscribers of my premium newsletter, Scarcity & Real Wealth, I am not going to share the name of this industrial giant here. If you want the name of this company, as well as my other picks for companies perfectly positioned to benefit from the coming commodities “gold rush,” I invite you to click here.