LNG Exports Are Set to Surge. Is Shell or Energy Transfer the Smarter Way to Play It?

Shell (NYSE: SHEL) is doubling down on liquefied natural gas (LNG), recently agreeing with partners to expand the capacity of a Canadian LNG export facility. It's a $23 billion investment, so Shell, which is already a major global player in LNG, is making a sizable bet on more LNG demand growth. Before you buy Shell, however, you may want to consider Energy Transfer (TXSE: ET). The big reason? Commodity risk. Here's what you need to know.

Shell sees what's happening and is reacting

Natural gas is being used as a transition fuel as the world moves toward cleaner energy sources. However, natural gas is very difficult to transport outside of a pipeline. It must be cooled and turned into a liquid, a process that is costly. But the geopolitical conflict in the Middle East has upended the energy market, leading many countries to reconsider energy security. Liquefied natural gas from economically and politically stable countries, such as Canada, is likely to see increased demand.

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Shell is leaning into that demand by expanding an LNG export facility in Canada. That's good news, but it doesn't change the company's inherent business model. While it is an integrated energy company, it still has material exposure to oil and natural gas price volatility. You can play the same LNG trend without taking on so much commodity risk with Energy Transfer.

Energy Transfer is a toll taker

Energy Transfer doesn't produce oil or natural gas; it simply moves these fuels on behalf of its customers. It charges fees for this service, generating reliable cash flows regardless of the prices of the commodities it moves. To be fair, the pipeline business isn't exciting, and growth is likely to be slow over time. But you don't have to worry about the large, often dramatic swings in energy prices that frequently drive the stock price of an energy producer like Shell.

And Energy Transfer is currently offering a very attractive 6.7% distribution yield. Shell's yield is much lower, at 2.9%. Meanwhile, Energy Transfer is targeting distribution growth of around 3% to 5% a year. Add the yield to the distribution growth, and you get roughly 10%, which is about the return investors expect from the market over time. So you aren't exactly giving up much with Energy Transfer, other than the commodity risk.

Energy Transfer is focused on slow and steady

To be fair, Energy Transfer isn't perfect. It cut its distribution in 2020 to focus on reducing leverage. That process is complete, and now the goal is slow and steady growth. If you want LNG exposure but aren't so excited about taking on commodity risk, high-yield Energy Transfer could be a good option, assuming you are willing to look at the 2020 distribution cut as the business reset it was intended to be.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.