Australia’s resource boom may be peaking, but there’s still at least one pocket of strength remaining: liquefied natural gas (LNG). In recent weeks, I’ve often wondered which sector is poised to take over from the mining industry and boost Australia’s economy until commodity prices rebound. And while LNG trade isn’t quite substantial enough to take up that mantle, it will still add significant value to the economy in the years to come. In fact, some analysts believe that LNG will be Australia’s main source of export growth over the medium term.

According to the latest edition of BP’s “Statistical Review of World Energy,” in 2012, Australia ranked 18th in the world for natural gas production, with a total output of 49 billion cubic meters. But it only consumed 51.8 percent of its production, leaving it free to store or export much of the balance.

Indeed, last year, Australia ranked 3rd in the world for global LNG trade, with exports totaling 28.1 billion cubic meters. While Qatar’s exports of 105.4 billion cubic meters dwarfed that number, Australia’s exports trailed second-place Malaysia by just 3.7 billion cubic meters, or 13.2 percent.

The two biggest consumers of Australian LNG are China, which imported 4.8 billion cubic meters from Australia, and Japan, which imported 21.6 billion cubic meters. While China is a major natural gas producer itself, ranking 7th in the world for total production, last year its demand exceeded domestic production by 34.1 percent, or 36.6 billion cubic meters.

And Japan imports virtually all of its natural gas, while at the same time, its demand has soared since the Fukushima Daiichi nuclear disaster in early 2011 prompted the country to idle its nuclear plants in favor of gas-fired power generation. Japan’s natural gas consumption jumped 23.5 percent over the past two years, to 116.7 billion cubic meters.

Although Australia is in proximity to other major natural gas consumers in the region, it’s yet to establish meaningful LNG trade with India or South Korea, which last year imported 20.5 billion cubic meters of LNG and 49.7 billion cubic meters of LNG, respectively. So these two countries offer opportunities for potential growth.

Of course, Australia’s LNG exports face stiff competition in the region from other prolific producers, including Russia, Indonesia, Brunei, Nigeria and the United Arab Emirates, among others, in addition, of course, to Malaysia and Qatar.

And Australia will eventually face additional competition from the US and Canada, once these major producers, who rank 1st and 5th, respectively, in global natural gas production, finally get their LNG export infrastructure in place. However, that’s still at least a few years away.

But even with the energy renaissance that’s currently underway in the US thanks to the shale plays, US demand for natural gas still exceeded production by 6 percent last year. In fact, demand has exceeded production in each of the past 10 years, though that gap has narrowed considerably from its level of 21.7 percent in 2002.

Still, the economics driving supply and demand in the US will likely change, with prices rising once domestic producers are able to tap a global market, where the prevailing price is much higher. For instance, while natural gas currently trades near $3.39 per million British thermal units (MMBtu) in the US, LNG imports presently trade near $16.56 per MMBtu in Japan. However, once the US starts exporting LNG, not all of that price differential will be pure margin, as the minimum cost to liquefy and ship natural gas overseas will likely be around USD10 per MMBtu.

By contrast, Canada’s natural gas production has exceeded its domestic demand in each of the past 10 years, though its annual production has steadily dropped from 187.9 billion cubic meters in 2002 to 156.5 billion cubic meters last year, a decline of 16.7 percent. Even so, the most recent level of production still exceeded consumption by 55.4 percent, or 55.8 billion cubic meters. So of these two nations, Canada could stand to benefit the most once it establishes its presence in the global LNG market.  

Meanwhile, the Australian dollar has fallen sharply in US dollar terms this year and currently trades near USD0.91, down 14.1 percent since its year-to-date high in early January. The Aussie had traded above parity with the dollar for much of the past two years, so a sustained decline, which most economists expect, should give it a competitive edge in the global market, particularly since natural gas is priced in US dollars.

With the Reserve Bank of Australia (RBA) currently in an easing cycle, the Aussie will face further downward pressure with each additional rate cut. Last week, the RBA lowered the cash rate by 25 basis points, to an all-time low of 2.5 percent. And most traders expect at least one more rate cut before the end of the year.

In fact, economists forecast a steady decline for the Aussie through 2016. While Bloomberg’s survey of economists shows the average forecast is for the Aussie to decline to USD0.86 by 2016, Credit Suisse famously forecast a low of USD0.73 by then, though that call is an outlier.

A declining currency could also make it more affordable for producers to undertake major LNG project in the country. Rising labor costs, high regulatory expenses, and unfavorable exchange rates have compelled numerous domestic producers to look for projects overseas. Indeed, Sanford C. Bernstein & Co has estimated that Australian projects typically have cost overruns ranging from 15 percent to 50 percent.

The trend for producers to head overseas was underscored by Woodside Petroleum’s (ASX: WPL, OTC: WOPEF) decision to scrap its USD45 billion onshore LNG project earlier this year. More recently, however, the government relented by granting the company permission to develop a more economic floating LNG processing facility offshore.

Despite these challenges, Australia’s Bureau of Resources and Energy Economics predicts that the country’s LNG export earnings will rise fivefold over the next five years, to AUD61 billion. That would make LNG second only to iron in terms of export revenue.

There are currently seven major LNG projects under development, and another three already in operation. The scale of these projects means that Australia could even overtake Qatar as the top global LNG exporter by the end of the decade.

According to the New York-based consultancy McKinsey & Co, from 2015 to 2025, these projects could add 2.6 percent per year to Australia’s gross domestic product (GDP), for a total of AUD520 billion, and create 180,000 jobs. A second phase of projects could add another AUD320 billion beyond that, though this forecast has greater uncertainty due to a rise in global competition.

So while we’ve been speculating that Australia’s real estate sector could help boost the economy, LNG is already much more certain to do so.

The Roundup

Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF) is a diversified real estate investment trust (REIT), which develops residential property, including land, housing and apartments, and also develops and invests in a portfolio of income-producing commercial and industrial properties. The security has a market cap of AUD2 billion and consists of a stapled group of ordinary shares and the units of three different property trusts.

As of the end of June, the value of the 69 properties in the REIT’s investment portfolio stood at AUD2.3 billion, up 2.2 percent from the end of 2012, and the income generated from this portfolio is expected to deliver about 65 percent of full-year operational earnings. These properties have a gross leasable area of 1.2 million square meters.

On a valuation basis, the portfolio is almost evenly split between industrial and office properties, with the greatest concentration of properties in Victoria (45 percent) and New South Wales (36 percent). And these assets are predominantly located in major cities, such as Melbourne, Sydney and Brisbane.

The portfolio has a capitalization rate of 8.06 percent. In general, the cap rate compares the net operating income a property generates to its original purchase price.

Rents grew 3.1 percent from a year ago, a sequential deceleration of one-tenth of a percentage point. Meanwhile, during the first six months of the year, Australand had renewals and new leasing activity on 141,000 square meters of property, with rents on renewals up 1 percent.   

A majority of the portfolio’s income is derived from tenants that are high-quality multinational firms (46 percent) and ASX-listed companies (33 percent).

After the first half of the year, the occupancy rate stood at 95.3 percent, down 2.3 percentage points from year-end, largely due to a 3.3 percentage point drop in the occupancy rate at its office properties. The portfolio has a weighted average lease expiry of 5.4 years, with expiries staggered at a fairly even pace of an average of 11 percent (based on income) per year over the next four fiscal years.

In late July, the firm reported that operating profit after tax, which is equivalent to the usual REIT profit metric known as funds from operations (FFO), fell 9 percent, to AUD62.4 million, versus the year-ago period. The decline in performance, which was in line with management’s earlier guidance for a weak first half, was driven by a sharp drop in earnings from its residential development segment, which fell 45 percent due to settlements that aren’t slated to happen until the second half of the year.

Based on contracts on hand as well as nine commercial and industrial development projects scheduled for second-half delivery, management expects development earnings will be higher during the second half of the year, with the development division’s full-year contribution similar to last year’s performance. This division had nearly 1,800 contracts on hand at the end of June, compared to almost 1,200 at year-end, and management believes a slim majority of 51 percent will be recognized by the end of the year.

Overall, Australand expects operating earnings to grow 3 percent to 4 percent for full-year 2013.

At the end of June, Australand had AUD110 million in cash on its balance sheet and AUD1.3 billion in long-term debt, for a debt-to-total-assets ratio of 35.4 percent.

Australand hit a five-year high of AUD3.80 on April 12 after a run-up resulting from several parties expressing interest in either the whole or part of the REIT’s portfolio. That sudden spike prompted us to cut our rating to a “hold” in early May.

These negotiations culminated in fellow Conservative Portfolio member GPT Group’s (ASX: GPT, OTC: GPTGF) renewed bid for Australand’s commercial and industrial portfolio after its earlier offer was rejected in December. GPT subsequently withdrew its follow-up offer in late May, when negotiations reached yet another impasse.

Since then, Australand has dropped as much as 15.1 percent, bottoming at AUD3.20 in late June. It then rallied on speculation that rival Stockland (ASX: SGP, OTC: STKAF) was considering a bid.

Earlier this year, Singapore-based real estate company CapitaLand Ltd, which owns 59.1 percent of Australand, had announced that it was exploring the possibility of selling its stake. But in late July, the company said that it intended to keep its investment in Australand because of the REIT’s stable stream of recurring income.

Australand currently trades near AUD3.44, down 9.5 percent from its April high.

The REIT paid a semi-annual distribution of AUD0.105 in early August and expects to pay out AUD0.11 for the second half of the year. Both payouts are consistent with the prior year. The stapled security current yields 6.2 percent. Australand was a “hold” in the Conservative Portfolio at the time this was originally published, but upon further review, we raised our rating to a buy under USD3.20 in the August issue.

Here’s when AE Portfolio Holdings will report their next sets of financial and operating numbers. Some have “confirmed” dates, while for others we’ve provided an “estimate.”

For most, this will cover the full fiscal year ending June 30, 2013. We’ve noted for others that report on a different schedule the period to which the announcement pertains.

Conservative Holdings

• Aberdeen Asia-Pacific Income Fund (NYSE: FAX)–N/A (fund, reports holdings on a quarterly basis)
• AGL Energy Ltd (ASX: AGK, OTC: AGLNF, ADR: AGLNY)–Aug. 28, 2013 (confirmed)
• APA Group (ASX: APA, OTC: APAJF)–Aug. 21, 2013 (confirmed)
• Australand Property Group Ltd (ASX: ALZ, OTC: AUAOF)–Aug. 15 Down Under Digest
• Australia & New Zealand Banking Group Ltd (ASX: ANZ, OTC: ANEWF, ADR: ANZBY)–Oct. 29, 2013 (confirmed)
• Cardno Ltd (ASX: CDD, OTC: COLDF)–Aug. 20, 2013 (confirmed)
• CSL Ltd (ASX: CSL, OTC: CMXHF, ADR: CMXHY)–Aug. 14, 2013 (confirmed)
• Envestra Ltd (ASX: ENV, OTC: EVSRF)–Aug. 22, 2013 (estimate)
• GPT Group (ASX: GPT, OTC: GPTGF)–Aug. 12, 2013 (2013 H1, confirmed)
• M2 Telecommunications Group Ltd (ASX: MTU, OTC: MTCZF)–Aug. 26, 2013 (estimate)
• Ramsay Health Care Ltd (ASX: RHC, OTC: RMSUF)–Aug. 29, 2013 (estimate)
• SMS Management & Technology Ltd (ASX: SMX, OTC: SMSUF)–Aug. 15, 2013 (estimate)
• Telstra Corp Ltd (ASX: TLS, OTC: TTRAF, ADR: TLSYY)–Aug. 7, 2013 (confirmed)
• Transurban Group (ASX: TCL, OTC: TRAUF)–Aug. 1, 2013 (confirmed)
• Wesfarmers Ltd (ASX: WES, OTC: WFAFF, ADR: WFAFY)–Aug. 15, 2013 (confirmed)

Aggressive Holdings

• Amalgamated Holdings Ltd (ASX: AHD, OTC: None)–Aug. 23, 2013 (estimate)
• Ausdrill Ltd (ASX: ASL, OTC: AUSDF)–Aug. 28, 2013 (confirmed)
• BHP Billiton Ltd (ASX: BHP, NYSE: BHP)–Aug. 20, 2013 (confirmed)
• GrainCorp Ltd (ASX: GNC, OTC: GRCLF)–Nov.15, 2013 (estimated)
• Mineral Resources Ltd (ASX: MIN, OTC: MALRF)–Aug. 16, 2013 (estimate)
• Newcrest Mining Ltd (ASX: NCM, OTC: NCMGF, ADR: NCMGY)–Aug. 12, 2013 (confirmed)
• Oil Search Ltd (ASX: OSH, OTC: OISHF, ADR: OISHY)–Aug. 20, 2013 (2013 H1, confirmed)
• Origin Energy Ltd (ASX: ORG, OTC: OGFGF, ADR: OGFGY)–Aug. 22, 2013 (confirmed)
• Rio Tinto Ltd (ASX: RIO, NYSE: RIO)–Aug. 8, 2013 (2013 H1, confirmed)
• Spark Infrastructure Group (ASX: SKI, OTC: SFDPF)–Aug. 26, 2013 (2013 H1, confirmed)
• Woodside Petroleum Ltd (ASX: WPL, OTC: WOPEF, ADR: WOPEY)–Aug. 21, 2013 (2013 H1, confirmed)
• WorleyParsons Ltd (ASX: WOR, OTC: WYGPF, ADR: WYGPY)–Aug. 14, 2013 (confirmed)