3 LNG Shipping Companies to Look At, Carefully

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Search the phrase “LNG imports” for news and you’ll discover evidence of increasing demand for liquefied natural gas, or LNG, across the globe. A major German utility signs a deal to import natural gas from an East Coast Canadian company. India ends LNG import duties. The Japanese trade minister pushes for U.S. LNG exports to help his country’s balance of trade. For investors, one way to capitalize on this trade is investing in the ships that actually transport LNG from suppliers to customers. Here are three to consider.

Big and diversified

Golar LNG (NASDAQ: GLNG) owns and operates 13 LNG carriers with 13 more on order for delivery by early 2015. Even better, Golar’s ships can do more than simply transport LNG from Point A to Point B. Four LNG carriers have been converted into floating storage and re-gasification units, ships designed to receive LNG from traditional carriers and to allow for re-gasification and transfer of the gas to an onshore facility. Using a floating re-gasification unit saves time and money over building or expanding a new onshore import terminal. Golar has two more such units under construction and is considering a third.

Financially, the company has generated growing profits and dividends in the past three years. The current dividend yields about 4.8%. For those willing to do the paperwork, there’s Golar LNG Partners, a master limited partnership that pays around 6% in distributions. Golar’s latest earnings report showed continued earnings and dividend growth with a reduction in its long-term debt.

Golar common stock currently trades near its two year lows, although it recently recovered from $31 a share earlier in the summer to just over $35 a share. Analysts had largely downgraded the stock in May and June. They may have made a mistake. Golar recently announced a deal with Jordan to provide a floating storage and re-gasification unit for 10 years. Golar also agreed to buy LNG from western Canada through its Douglas Creek LNG project and transport it to Asia.

Big and focused

Another LNG carrier is GasLog (NYSE: GLOG). GasLog owns and operates six such ships and anticipates delivery of six more between now and 2016. In fact, two of these carriers have been delivered this year, on budget and ahead of schedule. GasLog also benefits from 18 other LNG carriers operated by its wholly owned subsidiary, GasLog LNG Services.

From an investor standpoint, there is good reason to look at GasLog. The company projects its revenue will increase from $54 million in 2012 to $234 million in 2016 as it takes delivery of its new carriers. In fact, some project GasLog’s 2013 earnings as high as $0.59 a share, up from $0.03 a share in 2012. However, bear in mind that on a per share basis, the company currently pays more in dividends than it earns.

Another point of concern is GasLog’s customer base. GasLog leases most of its fleet to one customer, Methane Services Ltd (BG Group). While these tend to be long-term contracts, dependence on one customer is not good. For the record, Royal Dutch Shell also leases from GasLog.

Shipping LNG and oil and more

Teekay LNG Partners (NYSE: TGP) rounds out the list. Teekay, like Golar, operates LNG carriers and floating storage and re-gasification units. Teekay also operates oil tankers, but LNG carriers outnumber oil tankers by almost 3:1. Lastly, Teekay operates liquefied petroleum gas carriers, ships that handle butane, propane, and ethane.

Teekay operates profitably with net income growing over the past three years. Operating income declined in 2012 and in the two quarters of 2013. The company’s net income increased this past quarter due to “equity income” that included unrealized gains in derivative instruments. Teekay, like GasLog, currently pays more in dividends than it earns from operations.

What is Teekay doing about its future? Well, it's building or buying additional ships, but these are not slated to arrive until later this year with the last of its new ships arriving in 2016. Teekay also signed a charter agreement with Cheniere Energy for two LNG carriers, but cash won't come until 2016. During its recent earnings conference call, Teekay management also highlighted reduced worldwide LNG exports for 2013 and competition among LNG carriers will likely force shipping rates lower for the near term.

Why carefully?

According to the BP Energy Outlook 2030 (pdf), natural gas production and LNG exports look to significantly increase through 2030. Both China and Europe are forecast to increase their imports of gas via LNG. This means LNG carriers will be in demand. For the short term, things may not go well. Shipping rates for LNG containers fell after the winter heating season ended and have not recovered. 

China’s and Europe’s slowing economies, recent declines in Japanese and U.S. gas imports, added more downward pressure on shipping rates. In fact, spot rates hit a two year low in June. Until Asian or European economies pick up, LNG shipping rates will likely remain at relatively low levels.

Of the three companies here, I like Golar best. The company operates profitably, pays a growing dividend well below its earnings, and seems to be coming off an early summer sell off. Further, the company enjoys a broader customer base and a longer track record of earnings than its competitor, GasLog. While there are headwinds for the LNG shipping business in the short term, the future looks bright and Golar looks well-positioned to profit in the long run.

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