Teekay LNG: Japan's Disaster Creates a Tipping Point in LNG Shipping

Includes: TGP, TK
by: Todd Campbell
Disaster often forces irreversible change and the significant disruption of Japan’s energy capacity is likely to reverberate for years. With nearly 28.9% of Japan’s domestic electricity production coming from its nuclear infrastructure, Japan’s future energy policy is likely to create a seismic shift in the LNG (liquefied natural gas) marketplace. As Asia turns away from nuclear solutions, LNG will play a much larger role and shippers, including Teekay LNG MLP (NYSE:TGP), will be the lynchpin of energy policy.
Globally, nuclear development programs are being sidelined for evaluation. China, the fastest growing market for nuclear power, has idled its plans to build 28 additional nuclear facilities. Previously, China had expected to grow its current 10.8 gw of nuclear production to 40 gw or higher by 2020. Will China continue its ambitious nuclear investment program? Maybe. But, Japan may not be offered the same luxury. And, if nuclear comes off the table, Japan’s options become quite limited.
Currently, LNG investment in Qatar has produced significant supply available in the global marketplace, with annual production capacity of 77 MMT/Y. However, the infrastructure in the form of vessels and terminals is still lacking. How much LNG would be needed in Japan to replace its nuclear capacity? Estimates suggest as much as 11 million tonnes. That’s good and bad news for LNG investors given vessel capacity prior to the disaster was tighter than in years.
At year-end, there were 366 LNG vessels with another 27 more on order. However, in the past two years, only nine new LNG vessels have been ordered. Also, 156 of the vessels are owned by independent operators, of which TGP is the third largest. With additional LNG projects in Australia, Russia and Canada slated to come online this year and next, analysts expect an additional 57 vessels would be needed to handle the extra capacity.
Most of this capacity is heading to Asia, which consumes half of all LNG production globally. By 2015, Asia is expected to consume two-thirds of all production. Likely, Japan’s catastrophe brings that demand forward. Estimates peg growth in LNG volumes of 60% over the coming decade. And, the business of shipping LNG is highly fragmented with operators owning 10 or fewer vessels controlling 27% of the market. Tight capacity and rising demand will prove bullish for pricing. Ahead of the catastrophe, spot charter rates had tripled from their lows last June. TGP’s cash flows from vessels rose to $68.3 million last quarter, up from $59.7mn the prior year.
Teekay LNG is well positioned to capture its share of this new business. It has one LPG and two multi gas newbuilds scheduled for delivery this year. And the company has an offer to acquire the 33% stake its parent, Teekay Shipping (NYSE:TK), holds in four LNG carriers slated for 2011 and 2012 delivery. Back in November TGP bought a 50% interest in two vessels from Exmar. All of these vessels are already under long-term contracts. In total, TGP added five vessels to its fleet in 2010, bringing its total fleet to 30, of which 19 can carry LNG.
Analyst estimates call for 13% earnings growth in 2011 and a more anemic 2% in 2012. Estimates will likely move much higher as demand from Asia increases and newbuilds come online. All of this is good news for investors, given it means a higher payout from the MLP. Currently, TGP yields 6.5%, attractive given anemic alternatives.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in TGP over the next 72 hours.