This Natural Gas Producer Has a New Strategy to Profit Off LNG. Why It Could Be Risky.

A LNG terminal in Texas. (Callaghan O’Hare/Bloomberg)

Natural gas is a product that sells for $3 per million British Thermal Units (BTUs) in the U.S., but more than $11 in Europe and Asia for the same amount.

Most natural gas producers have been content with eking out a profit on the $3 payout—but one company is now making a bold play to sell gas directly to Europe and Asia, adding new risks but potentially supersizing its returns.

Pittsburgh-based EQT , one of the dominant producers in the Appalachian Basin, has signed three contracts over the past three weeks to buy liquefied natural gas from export terminals in Texas and Louisiana. The latest agreements total 4.5 million tons a year, or about 5% of current U.S. exports.

After buying the cargoes from the terminals, EQT can sell them to Europe and Asia at much loftier prices than it can get in the U.S. EQT CEO Toby Rice told Barron’s that the company will contract with tanker companies to transport the LNG.

Rice said he’s planning on setting up a team to trade liquefied natural gas on overseas markets, a business that is currently dominated by European trading houses and energy companies like Shell and BP . “Our strategy is to be direct with the customer,” he said. Doing so allows EQT to cut out the middlemen who take much of the margin on these deals, Rice added. EQT has also amassed a pipeline network to transport its gas through the U.S., another middleman business.

Normally, a producer like EQT is stuck at the other end of the supply chain—getting the gas out of the ground and then never seeing it again. The benchmark price for natural gas at the Henry Hub pipeline network in Louisiana is around $3 per million BTUs, enough for a producer to earn an operating profit margin around 20%. When prices fall below $2, as they did last year, margins for some producers turn negative.

An increasing amount of U.S. natural gas is exported overseas, where prices are much higher: Europe and Asia simply don’t have enough of their own natural gas supplies, so they’re willing to pay more to have it shipped over. About 10% to 20% of U.S. natural gas ends up at liquefaction plants that turn dry gas into a liquid, using super-cold temperatures and chemistry. Once it’s in the right form, most of those plants sell the gas to trading houses that ship it overseas to whichever buyer is willing to pay the most. Companies that dominate those transactions today include BP, Shell, and privately held trading firms such as Trafigura, Vitol, and Gunvor.

EQT already has a trading desk with more than 40 people selling the gas the company produces in the U.S. “We will bolt on an LNG trading desk,” Rice said. A handful of other U.S. energy producers, including ConocoPhilips, also trade overseas, but it’s relatively rare. Refiner Phillips 66 has reportedly begun to consider the strategy.

EQT is buying into a growing market: U.S. LNG exports are on track to double by 2030. The risk with this strategy, however, is that EQT could be outmaneuvered by bigger players—the company is a relative newcomer to this business, and will be going up against companies with decades of experience.

The LNG market also is sure to be volatile in the years ahead. In fact, analysts expect LNG to be seriously oversupplied by 2027, causing international prices to fall. If the price of U.S. gas and international gas converges, then trading firms will lose their margin. Rice said that EQT’s contracts are for LNG that will hit the market after the gas glut clears around 2030.

Leo Mariani, an analyst at Roth Capital Partners, is “not a huge fan of this move” despite his general confidence in EQT’s record. Competing against the likes of Shell, ConocoPhillips , and Vitol, as well as large international LNG exporters like Qatar, will be a heavy lift.

“Not where I would choose to compete, especially since I am sourcing higher cost U.S. shale gas,” he wrote in an email to Barron’s.

Others are more positive on the deal. Rob Thummel, senior portfolio manager at Tortoise Capital, wrote in an email that he likes EQT’s ability to sell into a variety of end markets. “The diversity of pricing points is value added to shareholders,” he wrote.

If nothing else, the new business could make EQT more attractive to generalist investors who want to play the growth in natural gas demand—without having to buy several stocks in each portion of the supply chain.

Write to Avi Salzman at avi.salzman@barrons.com