Calculating ROE On Golar LNG's More Visible Projects

At the beginning of 2019 I chose the secular growth in worldwide production, transport, and usage of natural gas as my, "Top Idea for 2019".  Most of those stocks have done well with Teekay LNG (TGP) up 41% and the average return a respectable +14%.  However, that average is being pulled down significantly by the major loser; Golar LNG (GLNG) is down 41% YTD.

Source: Author

Thus, I thought it an appropriate choice for an update. 

Golar LNG (GLNG) recently made a presentation at the Barclay's Energy Conference.  What I found most interesting about this presentation was the slide included on page 5.

Source: Golar Presentation

This slide represents all the existing major contracted projects.  From it we can calculate both an expected earnings yield and return on equity 'ROE'.

Source: Golar Presentation and Author Calculations

A 16.2% contracted earnings yield on major projects is quite attractive.  Combine it with the ability to leverage those projects with 71% debt at a 6.4% average cost of borrowing, and it produces a whopping 48.6% expected ROE.  There's certainly risk remaining in the unfinished projects (Sergipe and Gimi), as there would be in any projects of this size, but 48.6% expected project ROE also represents huge potential benefit for shareholders.

In fact if one assumes these projects go as planned, and the counterparties for the Hilli ask Golar to implement train 3 'T3' before 2023 (also likely but not a given), Golar would exit 2023 at a $510 million EBITDA run rate.

Source: Golar Presentation

That's 28.5% in forecasted annual EBITDA growth for the next 4 years on a stock that currently trades for 16x EV/EBITDA.  Your getting the EBITDA equivalent of a .6 PEG without even including any of the additional benefits from less visible potential projects "in the works" including:

• Spin-off of the LNG ships
• Avenir
• Full utilization of Nanook capacity via bolt on downstream projects in Brazil
• Contracting an additional FSRU in Brazil (or two)
• Contracting an additional FLNG 

GLNG has been a big loser for us so far, and does admittedly have a lot of project risk.  This is why we assigned it a relatively low C+ risk rating. However, those projects which are already contracted plus the reasonably likely enactment of Perenco's option on Hilli T3 before 2023 also adds up to a lot of potential return.  We continue to hold GLNG and have in fact added to the position.

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