- The success of the FEED study for LNG conversion offers a highly attractive long-term option.
- Steady expansion of liquefaction capacity until 2016 and accelerated growth thereafter.
- The near-term uncertainty in earnings is already priced in the stock.
Golar LNG (NASDAQ:GLNG), a London based midstream liquefied natural gas ("LNG") company, is engaged in transportation, re-gasification and liquefaction, and trading of LNG. The company is also engaged in acquisition, ownership and chartering of LNG carriers and floating storage re-gasification units (FSRU), and the development of LNG projects.
GLNG faces near-term challenges but the long-term fundamentals remain strong. The near-term uncertainty in the earnings is already priced in the stock. However, the success of the FEED study for the LNG conversion offers a highly attractive long-term option. As we wrote in our recent pro article on GasLog (NYSE:GLOG) the LNG shipping market is expected to face challenges in the near-term (2014 and 2015) as new-builds arrive ahead of LNG supply. Liquefaction projects coming online in 2014-15 have already secured tonnage resulting in limited chartering opportunities for LNG ships in the near-term. However, the long-term prospects of the industry remain bright due to rapid growth in U.S. exports. Post 2015, overcapacity in LNG shipping should improve as vessels are absorbed by new liquefaction projects.
Similar to other companies in the LNG shipping sector (excluding GLOG), GLNG is expected to face challenges in securing employment in 2014-15 for its unemployed new-build LNG carriers that have started hitting the water. The company has 10 new-builds without contracts of which 2 have already been delivered and the rest are expected to be delivered during 2014. The company has the 2005-built Golar Viking, which operates under a short-term contract. As we mentioned earlier the charter market remains illiquid and the liquefaction projects coming online in 2014-15 have already secured tonnage Golar LNG's utilization rates are expected to remain low during this period. However, from 2016 onwards, the company should be able to secure employment for all of its new-builds.
FEED Study Adds Further Upside
In the last quarter of 2013, the company announced successful completion of the FEED study. The study was conducted for the conversion of the old Moss type vessels not currently in use to the floating liquefaction (FLNG) unit. The converted FLNG units are anticipated to be the cheapest LNG production facilities and provide GLNG an opportunity to exploit the un-utilized natural gas supplies that couldn't be developed until now. The final decision by the company to invest in the project is expected to be made by 2Q14, after any commercial agreements are being secured by the company. The company is planning to start production in 2016. GLNG is expected to bear a low cost of $400-$500 per ton or $1.0-$1.4 billion per unit and each unit is expected to have a liquefaction capacity up to 2.5-2.8 million tons per annum through 4 trains of 0.6-0.7 million tons per annum per unit. As an indication Cheniere's Sabin Pass is expected to cost over $600 per ton. Depending on where the FLNG units will be employed, the cost of delivering gas to Asia should be less than $9 per mmbtu.
The company is planning to either deploy its FLNG units under a tolling agreement generating higher returns than FSRUs (FSRUs currently earn around 15-17% unlevered EBITDA yields), or become an LNG producer by getting access to the gas supply, which should allow the company to maximize its returns. Based on the location of the natural gas supplies, 4-6 LNG vessels should be required to cater each FLNG unit. This would be a great opportunity for GLNG to deploy all of its unemployed vessels as well as develop new FSRU projects.
As the LNG carriers arrive ahead of the liquefaction projects being completed, the short-term LNG shipping market continues to face challenges. While we think the near-term uncertainty in earnings is already priced in the stock, in the long-term the prospect of the FLNG offers a highly valuable option. In the long-term the rates should remain highly profitable. The company's large order-book set for delivery should create significant FCF growth. Moreover, FSRU projects and liquefaction projects coming online in 2016 also offer significant upside. The success of the company's FLNG conversions in particular could add significant upside as GLNG realizes the benefits of the lowest cost LNG production facility in the world, takes advantage the large discrepancies in global LNG prices and deploys all its new-build carriers to serve its own LNG production.