There is an increasing interest in natural gas today, yet many places that are producing natural gas do not have enough demand to meet production, which creates export markets. Natural gas has been used in power production, transportation and to meet domestic needs for many years. While solar and wind energy have recently seen more attention in the media, natural gas provides a faster and easier to deploy solution to meeting growing energy needs. One delivery method is pipelines, but when distances become too far, or geo-political issues limit pipeline development or usage, then the solution is natural gas shipping. In this article, I will give an overview of a few companies in this sector which investors may find of interest.
Rigzone.com has a great article explaining the process of liquefying natural gas. This allows more natural gas to fit into a smaller area. The process is much more efficient than simply compressing the natural gas, and allows a larger volume of natural gas to be shipped. Once natural gas is liquefied, it is called LNG, meaning Liquefied Natural Gas. After shipment and offloading, LNG needs to go through regassification in order to be sent through pipelines and put into use.
Currently the United States and Japan are the largest importers of LNG, though some moves have been made recently by U.S. based terminal operators to gain export licenses. It is hoped that many shale based unconventional natural gas developments will provide a greater production of natural gas, beyond the needs of the U.S. markets, which creates a need to export. One current barrier is the relatively low price of natural gas in U.S. markets compared to the rest of the world. There is a solid conventional natural gas supply, though I feel there is an over-emphasis on developing unconventional sources. Yves Smith of Naked Capitalism wrote a great article on unconventional natural gas, suggesting that the costs and lack of potential profits from some unconventional natural gas fields may make the land a more valuable source of revenue than actually trying to initiate production. If that claim is even partially true, we may not see natural gas prices continue to stay so low in U.S. markets. Low natural gas price levels in the U.S. are somewhat based upon the expectation of a large exploitable supply of natural gas. The recent decline in working natural gas land based rigs seems to suggest shale gas profit potential may be waning. Regardless of how this plays out, I feel that investments in LNG shipping currently are the best ways to invest in growing future natural gas demand.
There are numerous LNG terminals around the world where LNG ships can upload or offload Liquefied Natural Gas. Many of these LNG terminals around the world provide me with an ability to use ship tracking software to see which companies are working from certain ports. There are route restrictions on LNG carriers due to safety concerns, which are far more restrictive than for other types of commercial shipping. Some of the world fleet of LNG carriers is owned by national oil and gas producers, some are owned and operated by major oil companies, a few by larger companies that specialize in cargo transportation, and a relatively smaller group that are pure play LNG transportation companies.
While many followers of shipping look to the Baltic Dry Index for indications of changes in spot cargo rates, there has been little growth in LNG spot contracts. The Baltic Dry Index is not a good measure for this niche of shipping. Most LNG carriers operate under longer term contracts. This tends to keep rates and revenues more consistent than for other types of shipping. There is currently a world-wide oversupply of cargo ships, and some tankers, though demand for LNG carriers is still steady. I would expect the supply of LNG carriers to not exceed demand until 2015, when many more newbuilding ships will enter the market. At that point in time, I will re-evaluate the sector, though increasingly it seems that demand for natural gas and LNG may continue to increase, pushing demand for LNG shipping. One risk that has appeared a few times is that producers are unable to liquefy enough natural gas to keep LNG carriers busy, and this has happened for short periods of time recently in some parts of the world.
Keppel Nakilat shipyards in Qatar, pictured above, is one of the premiere LNG shipbuilding companies in the world. Hyundai Heavy Industries is the world's largest shipbuilder, and they built many of the current fleet of LNG carriers. Samsung Heavy Industries, not to be confused with the electronics manufacturer although related, is one of the largest shipbuilding companies in the world. They have built nearly a hundred LNG carriers of the current world fleet of about 375 ships, and have orders for many more newbuildings to be delivered over the next few years. Recent news indicates some prominent orders for new LNG carriers at Samsung Heavy Industries. I follow these companies to see who is ordering new ships, since many of the publicly listed companies use one or more of these three shipbuilders.
British Gas Group, or BG Group, is one of the primary natural gas producers that charters many of these vessels, though they also own and operate a few of their own LNG carriers. They are the largest supplier of LNG to the United States market, and operate in 25 locations around the world. When you read the reports of various LNG shipping companies, you may see their name come up often.
Chevron (CVX) is one of the largest companies with extensive natural gas developments in the world. Take a look through the announcements in the link I provide here, then you will find many recent LNG plant start-ups, and a few that should be coming on-line in the near future. As the shipping fleet of LNG carriers expands, these are the types of developments which LNG shipping companies will try to contract for longer term charters. Expanding production and new LNG plants will need more LNG carriers. Delays in these projects, and similar projects at other major gas producers, could slow revenue gains at LNG shipping companies for short periods of time.
GasLog Limited (GLOG) is a newly listed LNG shipping company. They have two ships currently in operation, the Gaslog Savannah and Gaslog Singapore, which makes it easy for me to track them. While these two ships have been busy, the real story behind Gaslog is their expansion plans through eight more vessels ordered at Samsung Heavy Industries, with delivery expectations in 2013 and 2014. If the expansion of the company is successful, they stand to increase revenues greatly beyond 2013. When they launched as an IPO recently, I was critical of the company and felt the valuation was not justified. The company stated they have funding lined up for all newbuildings. Now that share prices have fallen, it does not prove my earlier views, but it gives us a basis of comparison. Figures from TD Ameritrade research show that their debt to capital ratio is about 46%, price to book about 1.79x and price to sales around 8.5. Cautious investors may want to wait until more future earnings and revenues are reported, review those figures, then decide whether this is a good long term investment. My feeling is that an investor would want to hold through 2013, and perhaps into 2014, then see how the fleet expansion is affecting revenues and profits.
Golar LNG Limited (GLNG) is one of the larger publicly listed LNG shipping companies, with a fleet of nine LNG carriers, five FSRU vessels, and 13 newbuildings on order, with further options for an additional four vessels. They are also working on FLNG technology and may provide more information on future expansion in that direction. Amongst publicly listed LNG transport companies, they are leading the way to meeting future LNG shipping demand. FSRU is a Floating Storage and Regassification Unit, which allows regassification on the vessel; this can serve as an easy to install replacement for a land based regassification facility. The Golar Spirit was the first such vessel converted from an LNG carrier to an FSRU. One of their recent FSRU contracts is with Nusantara Regas, which will involve a conversion of one of the LNG carriers to an FSRU, with a contract running through 2022, with extension possible.
An FLNG is another technology development, basically a Floating LNG production facility, which can offload directly to LNG carriers. Golar LNG Limited have yet to launch an FLNG, though Shell (RDS.A)(RDS.B) is working on a very large version called the Prelude FLNG, which will become the largest floating structure ever built once it goes into operation. Figures for Golar LNG Limited from TD Ameritrade research indicate a 25% net profit margin, over 20% revenue growth, and a price to sales ratio of about 8.62. However, the company recently announced that profits have slipped 7.2% due to cost increases, though that may provide a buying opportunity during this time of overall market weakness. They are also expecting to de-list from the Oslo stock market soon, and recently announced a share buyback program. Golar LNG Limited currently pays dividends quarterly, the amount fluctuating with earnings changes, with the next ex-dividend date 11 June 2012.
Golar LNG Partners LP (GMLP) split off as a separate IPO from Golar LNG Limited in early 2011. They currently operate the Methane Princess and have a 60% interest in the Golar Mazo with Golar LNG Limited. Golar LNG Partners also operate three FSRUs and are looking to expand their FSRU fleet and capabilities. The company emphasis is more on FSRU deployment, which should provide a steady income stream. They may prove to be more reliable and consistent with revenues, though my feeling is that Golar LNG Limited will provide more growth potential in the long run. The recent contract with Nusantara Regas may see a move of one LNG vessel from Golar Limited to Golar Partners. One analyst at Dahlman Rose seems to think such a move will provide a solid upside to share prices of both companies in the near future. Research at TD Ameritrade indicates slightly better than 11% revenue growth, a 63% net profit margin, and price to sales ratio of 5.82. They have been a consistent dividend producer for investors, operating on a different time schedule than Golar LNG Limited. I consider them a complimentary investment, should you choose to invest in Golar LNG Limited, and I currently hold shares in both companies.
Teekay LNG Partners LP (TGP) is the third largest owner of LNG carriers, with a fleet of 27 LNG vessels. They also operate eleven conventional oil tankers and five LPG, or Liquefied Petroleum Gas, tankers. They are not as much a pure play LNG transportation company as the other companies mentioned here, though I think it is important to compare them. Recent revenue growth has been slow and research at TD Ameritrade indicates a 25% net profit margin, price to book of 2.14x, and price to sales of 6.27. They do provide a fleet postion update map on their website, which makes it easier to follow this company. One of their other useful industry overview tools is an LNG Market Update report. Despite their larger fleet, it seems that Golar LNG Limited is poised for stronger growth, though I encourage potential investors to do their own additional research.
The price ratio of oil futures to natural gas futures has fluctuated greatly in recent years. Some consider that the glut of natural gas may keep prices low, which might spur a resurgence of U.S. manufacturing activity. There are some ETFs that attempt to track the changes in the natural gas futures market, or other ways to play natural gas investments, though I think they are much more speculative choices. The best known of these is the United States Natural Gas Fund (UNG), which has seen a steady decline in share prices. The United States 12 Month Natural Gas Fund (UNL) is similar. Even more speculative is the iPath UBS Dow Jones Natural Gas Subindex Electronically Traded Note (GAZ), which I would suggest avoiding. It may be interesting to watch for changes in these, possibly indicating a change in natural gas prices, but I feel these are better for traders than long term investors.
Beyond shipping LNG for power generation, road based transportation, and domestic natural gas needs, there have been advances made recently to use LNG as a shipping fuel. Finland based Wärtsilä was recently contracted to supply 100 dual fuel ship engines that are able to run on LNG or heavy fuel oil as needed, in order to increase efficiency and lower emissions in various emission control areas around the world. It is likely many of the newbuilding LNG carriers will adopt this technology, which should also reduce operating expenses, allowing a potential increase in revenues and profits. While this new Wärtsilä engine development is more likely to be seen on newbuilding ships, there has already been one success conversion and retrofit of an older LNG carrier. Given the long working life of LNG carriers, we may see more conversions in the future. Using LNG directly as a fuel is not new technology, though coastal emission control areas are becoming more common in parts of the world, and LNG as a fuel on ships can help vessel owners meet those evolving port and coastal requirements. Privately held LNG specialist constructor Chart Ferox has a great overview of LNG as a shipping fuel and an overview of the advantages.
I feel that LNG shipping and Floating LNG technology vessels are the best positioned investments to take advantage of the growing future demand and usage of natural gas. These are expensive ships to build, yet provide for a long and profitable service life. This is a niche within the shipping industry. My original idea and interest in this sector began in early 2009, as my research led me to believe that natural gas would become more important over the next decade and beyond. Golar LNG was the first company I found that appeared to be looking far ahead into the future. I started my original small investment position in this company when shares were at 5.25 each. I have since added to that position, and invested in their offshoot company Golar LNG Partners. I am looking to increase my holdings in both these companies.
Additional disclosure: I may initiate a long position in CVX, RDS.A, RDS.B, or GLOG at some point in the next three months.