The U.S. is going through a boom in natural gas production and the trend is expected to accelerate over the next few years. According to the EIA, U.S. natural gas reserves are about 482 trillion cubic feet, but due to new drill technology (horizontal drilling and fracking) an abundance of previously untapped natural gas deposits have been unleashed, and estimates of natural gas reserves are being revised up almost yearly. Therefore, as production continues to increase the U.S. may become soon a net exporter of natural gas. As U.S. natural gas prices are much cheaper compared to the rest of the world, the opportunity to sell natural gas to foreign countries is huge. Previously, I've recommended Gaslog (GLOG) as a way to play this theme. Another alternative is Golar LNG Limited (GLNG), an operator of liquefied natural gas [LNG] vessels that is also very well placed to benefit from this opportunity.
LNG is natural gas cooled to very low temperatures reducing considerably its volume, making it practical, from a physical and economic perspective, to transport gas over long distances. The two main ways of transporting gas over long distances are pipeline and LNG shipping. In some instances only one or the other is viable, as LNG ships cannot operate on land, and pipelines are prohibitively expensive over long sea distances. A growing emergence in disparity between location of natural gas reserves and the nations that consume natural gas has resulted in a rise in the percentage of natural gas traded between countries, to 31% nowadays from about 16% about two decades ago, a trend that should continue to persist over the next few years. Therefore, LNG vessel operators face strong demand for its services which should lead to improved financial results over the long-term.
Golar LNG Limited is one of the world's largest independent owners and operators of LNG carriers with over 30 years of experience. The company's core business is LNG transportation, but it has also operations on floating storage & regasification units [FSRU] and floating liquefaction. Its goal is to become an integrated midstream player in the LNG industry. The company is incorporated under the laws of Bermuda and listed on the NASDAQ since 2002. It has currently a market capitalization of about $3 billion, and its main shareholder is World Shipholding with an equity stake of 45%.
In 2011, it performed the IPO of Golar LNG Partners (GMLP) a limited partnership formed in 2007 by Golar LNG Limited to hold some of its assets. In 2008, Golar LNG initially contributed to Golar Partners interests in three vessels, followed by a fourth vessel in April 2011. Currently, Golar Partners owns 8 vessels. From the period of the IPO to December 2012, Golar Partners was treated as a controlled subsidiary but following its first annual general meeting of unitholders the company was deconsolidated from Golar LNG Limited consolidated financial statements. As a result, Golar LNG recognized a change of control gain of $864 million which boosted its 2012 financial results. Golar LNG still controls 51% of Golar Partners, which is accounted under the equity method.
Golar's fleet currently consists of thirteen vessels, of which four are dedicated to midstream floating solutions and nine under dedicated time charter or available for spot employment. Its current fleet average age is high, but Golar has eleven vessels which are expected to be delivered over the next few months which will reduce considerably the average life of its fleet. The total cost of these 11 vessels and 2 FSRUs under construction is about $2.7 billion. However, its fleet will remain older than compared to Gaslog, which has an average fleet age below 3 years old. Like Gaslog, its newbuilds are under construction in Korea. Its chartered vessels are assigned to Petrobras (PBR), Dubai Supply Authority and Nusantara Regas. The company also manages eight vessels owned by Golar Partners, which are operated under medium to long-term charters with the same customers referred in addiction to BG Group (OTCQX:BRGYY). Petrobras is the company largest customer, accounting for about 22% of its revenues in the past year.
In 2012, Golar's revenues amounted to $410 million, an impressive increase of 37% from the previous year. Its operating profit was slightly above $200 million, reaching a very high profitability level taking into account its operating profit margin of 49%. Its net income was almost $1 billion, but without the previously mentioned gain of $864 million it stood at about $100 million. Going forward, Golar's growth should be supported by rising global LNG demand and relatively high barriers to entry. LNG tankers are quite expensive and take more than two years to build. At the end of 2012, there were about 375 ships on operation globally, and during 2013 is expected that another 22 LNG takers will be operational. This means new capacity is added slowly, and will probably not be enough to meet demand as gas natural production continues to increase.
Regarding its dividend policy, the company's long-term objective is to pay a regular dividend to its shareholders. The company has been increasing its quarterly dividend since the beginning of 2010, and its last quarterly payment was $0.45 per share or an annualized dividend of $1.80 per share. At Golar's current stock price, it offers an attractive dividend yield of about 4.8%. However, a high-dividend yield is usually a sign that the dividend is risky. That is Golar's case due to its debt level and high funding requirements to finance its growth, which can pressure its free cash flow generation and ability to pay dividends.
At the end of the second quarter, its net debt was about $1 billion which corresponds to a net-debt-to-EBITDA ratio of 4x. Golar's debt levels should increase even further over the next two years as the company still has to pay about $2 billion to shipyards related to newbuildings, which it expects to be financed 50% to 70% through debt. Indeed, in past July the company executed a $1.1 billion financing agreement to fund the first 8 of its 13 newbuild vessels and FSRUs with a 12 year repayment profile, but still has about $700 million to be funded.
Golar LNG Limited is an attractive small-cap company for income investors who search both high-dividend yields and good dividend growth prospects. The LNG industry should continue to achieve good growth rates over the medium to long-term, which will support the financial performance of shipping companies like Golar. Its fleet is expected to double over the next two years which should lead to higher earnings and a rising dividend over the next few years, making Golar LNG Limited a risky but attractive play for income investors.