LNG Global Demand On The Rise
Demand for liquefied natural gas has been slowing over the last couple of years but it is projected to increase as gas becomes the second biggest energy source by 2030, with demand estimated to rise by 2.5% annually between 2013 and 2023, according to the International Gas Union. The slowdown was attributable to supply-side problems in Southeast Asia, namely Indonesia and Malaysia, as well as domestic issues in some of the biggest gas producers in the Middle East and North Africa. At the same time, over the five years to 2012 new markets emerged as LNG importers, including Brazil, Canada, Thailand, the Netherlands, Chile, Kuwait and Indonesia, coupled with stable demand from established markets such as China and South Korea, which together accounted for 52% of import volumes in 2012. To date, Asian, Middle Eastern and South American demand for LNG is continuing to be robust, and Europe has been re-exporting record-high volumes, boosting demand for LNG infrastructure and storage.
Although the volumes of liquefied natural gas fell further in 2013, as a result of liquefaction plant outages in Nigeria and Egypt and a delay in LNG production growth in Angola due to upstream problems, these are expected to go up by 7 million tons this year, followed by a further increase of 29 million tons in 2015, 54 million tons in 2016, and 79 million tons in 2017, reaching growth of 128 million tons in 2020. According to the International Gas Union, supply on the LNG market will be tight at least until 2015 as few new LNG projects are expected to be launched by the end of this year and some major ones in North Africa and Southeast Asia have been continually declining. At the same time, some new markets will join the LNG importers' club, including Israel, Malaysia, Singapore and Lithuania. These projections mean that there will also be increased demand for LNG transportation and storage capacity.
The Company
Golar LNG (NASDAQ: GLNG) is a global-presence operator of a fleet of LNG carriers and floating storage and regasification units registered in Bermuda and listed at the London Stock Exchange. The Company has a 35-year history of transporting and storing LNG and currently operates 22 vessels in total, seven of its own and 15 owned by its subsidiary Golar LNG Partners (NASDAQ: GMLP) , with a holding capacity ranging between 125,000 cu m and 170,000 cu m. It was the first company to convert a vessel into a floating storage and regasification unit and today boasts a leading position on this market. During Alpha Deal Group's initial due diligence call, Chief Executive Doug Arnell and CFO Brian Tienzo said the Company is focusing on strategic partnerships with a wide range of LNG market participants in order to pursue its strategic growth priorities.
The expected increase in global demand for liquefied natural gas will drive demand for as many as 225 new vessels by 2020. The U.S. Department of Energy alone has estimated it would need over 60 million metric tons per year in liquefaction capacities and it will require 90 vessels for projects that have already been approved. This highlights a considerable capacity gap, since of the 225 new vessels needed in the next six years, 110 have already been ordered, but at the same time around 30 will be retired, which creates a gap of around 145 vessels. Of these 145, just four have been ordered since the start of this year.
Robust Capacity
Not surprisingly, demand for FSRUs is also expected to grow, giving Golar a competitive edge as the Company is not only active in converting other vessels into FSRUs but also in building new FSRUs. To date, Golar has six long-term contracts of more than five years for FSRUs, which represent about 40-50% of the long-term market in the segment. Still, it will continue to convert smaller vessels of less than 3 million metric tons per annum into FSRUs, as this is a faster process and the Company will be able to respond more quickly to potential demand.
Golar recently signed a contract with Samsung Heavy Industries for the addition of more regasification capacity to its Golar Tundra vessel, which will bring the total to 170,000 cubic meters of storage and 750 million standard cubic feet of regasification capacity per day. The vessel will also be able to function as a LNG carrier only with dual-fuel diesel-electric propulsion. The target markets for the vessel are Southeast Asia, South America and the Middle East but the Company is also looking to South Asia and Africa as new potential sources of FSRU demand. The delivery of the vessel is set for the final quarter of 2015. The Company is also building a new FSRU, the Golar Eskimo, which will be chartered for Jordan in early 2015 under a ten-year contract. EBITDA for the first five years is projected at $46 million and for the second half of the period it is seen at $43 million. In the 2014/2015 period, Golar has also scheduled for delivery nine LNG carriers plus another one in 2015.
Competition and risks
Among the main competitors of Golar LNG are U.S. Teekay Tankers (NYSE: TNK), an international provider of shipping services but in a wider spectrum than Golar, shipping not just LNG but also liquefied petroleum gas and crude, and Belgian Exmar, which focuses on gas transportation. Teekay had a fleet of 27 LNG carriers as of the end of 2012, but no FSRUs. Exmar, for its part, has a fleet of five LNG carriers and eight regasification units.
Industry-wide, the main potential risks for the performance of LNG shipping companies would be the gap between supply and demand for LNG. At the end of 2012 the global liquefaction capacity was 280.9 million metric tons per year. Since then, Australia has been shaping up to be the leader in new liquefaction capacity, after Kuwait peaked in 2011. New projects there are estimated at some 62 million tons per year. The boom of shale oil and gas extraction in North America has also prompted the construction of new liquefaction capacities in the U.S. and Canada, but not all of these are expected to materialize. However, the build-up of new liquefaction capacities in politically stable regions could offset the geopolitical risks inherent in traditional producers in North Africa.
Golar LNG booked unaudited net operating revenues of $83.1 million for 2013. Golar Group, which includes subsidiary Golar Partners, registered revenues of $400.3 million. Golar LNG's EBITDA for the year was $18.9 million and the EBITDA of Golar Partners was $285.2 million. The Company has noted that since Golar Partners' IPO and the subsequent dropdowns, the main EBITDA contributions now come from the subsidiary. The net profit of Golar LNG for 2013 stood at $135.7 million and that of Golar Partners was $164.7 million. Dividend was set at $1.80.
Cash and cash equivalents at the end of December 2013 stood at $125.35 million. Total assets were $2.427 billion, including vessels and equipment, newbuilds, cost method investments, investments in affiliates, investments in available-for-sale securities and restricted cash. Long-term debt stood at $402.4 million, of which a current portion of $9.4 million. Shareholders' equity totaled $1.86 billion.
Golar's capital expenditure program for newbuilds is $2.74 billion, of which it has used up $1.29 billion. The remainder will be financed through $703 million of undrawn balance from an 8-unit $1.125 billion ECA facility, plus around $736 million from an executed ICBCL sale and leaseback transaction. The Company expects the dropdown of its Golar Igloo vessel to Golar Partners to leave it with net proceeds of $149 million.
Outlook
For its short-term growth, Golar LNG will rely on its new vessel capacities to be delivered this year and the next and on its low-cost liquefaction solution, which has passed through FEED with Singaporean shipbuilder Keppel, confirming its technical and economic viability, with a construction period of 30 months. The Company is also close to finalizing negotiations with Keppel and Black and Veatch on EPC conversion contracts. North and South America together with West Africa will be areas of special interest for Golar in view of their potential for long-term contracted asset opportunity creation, including shipping asset acquisitions in view of the Company's strategic priority of expanding its fleet profitably. Its long-term fundamentals that can make it an attractive choice for investors remain stable.
Conclusion
The immediate challenge for Golar will be managing to come out unscathed from the current market weakness. For this it will rely on the healthy efficiency of its fleet, boasting daily fuel savings of between $30,000 and $50,000, its cost control, stress-proof balance sheet and staying within its delivery timetable. The Company boasts an impeccable uptime record for chartered vessels and safety programs that place it among the leaders in the industry. The FSRU business will continue to add value for the Company's shareholders and strategic partnerships with national oil and gas companies, independent producers, marketers, portfolio players and local developers will support its long-term growth strategy, which rests on its leading position among 'midstream' players thanks to its FSRU conversion solutions and its floating LNG production projects. In light of our initial due diligence, we view this as an ideal entry point for long-only value market players.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: I am the lead writer and Analyst, one of the contributing Analysts among the group of writers and Analysts of Alpha Deal Group's Intelligence Unit who wrote this article, and I am involved in the initial due diligence on the company on behalf of potential buy-side clients, which may lead to a potential business relationship with or investment in the comp
Additional disclosure: I am the lead writer and Analyst, one of the contributing Analysts among the group of writers and Analysts of Alpha Deal Group's Intelligence Unit who wrote this article, and I am involved in the initial due diligence on the company on behalf of potential buy-side clients, which may lead to a potential business relationship with or investment in the company.