In the past decade natural gas has gone through a ferocious boom bust cycle marked by epic hurricanes followed by so much new production that the market became over supplied. These high level forces have played out resulting in North American natural gas prices that are substantially discounted relative to the rest of the world. This existing divergence between North American natural gas prices and global natural gas prices has kicked off an operational arms race to converge natural gas prices globally. An operational arms race in which LNG shipping companies will do quite well.
It appears, at least in my opinion, that the path of least resistance towards global convergence is via liquefied natural gas (NYSEMKT:LNG). Liquefied natural gas is a product created through a process in which natural gas is chilled to the point that it liquefies, loaded onboard a specially designed vessel, and shipped wherever it is in highest demand throughout the world.
One factor that has posed as a hurdle preventing global convergence is that long term LNG contracts, historically, have been priced using benchmarks linked to oil prices vs. natural gas prices. This created a situation in which LNG prices have remained quite strong despite stable to lower natural gas prices. The terms of the deal are starting to change.
According to the Financial Times, "Japans liquefied natural gas industry, the world's largest, is starting to move away from using crude oil-linked contracts and is instead partially pricing agreements to US gas quotes - a critical step towards the creation of a truly global natural gas market." The article goes on to note that historic contracts that were originally struck some 20-30 years ago are coming up for re-negotiation. As a result Japanese utilities and trading houses are negotiating changes in the terms of their deals which will result in a reduction of the cost to import LNG.
Japan is not the only country negotiating new pricing terms. According the FT article, "the move away from oil linked contracts is already well under way in the European gas market, where German utilities in particular have demanded more flexible prices and contract terms from Gazprom, the Russian gas producer."
As more and more companies throughout the world decouple LNG deal pricing structures away from oil prices, in favor of natural gas prices, the global LNG market can be expected to become more and more liquid as it natural gas prices begin to converge globally. As the global LNG market continues to develop the global LNG transport companies will have increasingly excellent prospects for growth and strong margins as the market becomes more and more active (i.e. more imports and exports).
Golar LNG (NASDAQ:GLNG), a global LNG shipping company, is positioned for some excellent success in the coming years. They manage a stable of LNG shipping vessels, and have several on order to be built over the coming 5-7 years. Additionally, they also manage a modest fleet of floating storage re-gasification units (FSRU). The FSRU vessels provide a competitive advantage for the company because they circumvent the need for the importing host countries to develop (at least to some extent) re-gasification facilities. Re-gasification is a process in which LNG is converted from a liquid back into a gas.
In recent weeks GLNG has sold off some 10%. GLNG pays a dividend (which has been increasing nicely overtime) of 42.5 cents per share which is an annual yield of about 4.4% based on recent market prices. The company, to the benefit of shareholders, is paying the first quarter 2013 dividend in the 2012 calendar year so that existing shareholders can retain a little bit more of the cash the company has earned (and will earn in Q1) as opposed to waiting until taxes rise in 2013. On some level this is a good faith gesture of goodwill that the managers of GLNG are being strong fiduciaries of shareholder capital.
One of the tools that I find pretty nifty is the analyst stock price forecast on the Financial Times website. The price forecast for GLNG, which is based on 10 stock analysts, currently indicates that there is more upside than downside in GLNG share prices over the next 12 months- particularly after the recent 10% reduction.
Global natural gas price convergence is a theme that will take years to fully play out. As the global natural gas market continues to develop some companies will be positioned to capture some terrific windfalls as they will provide the direct operations that must be utilized to cause the convergence in the first place. I believe GLNG is an example of a company that is strategically positioning itself for prosperity as this theme continues to play out over the coming years.
Thanks for your time.