by Aaron Levitt | December 20, 2013 10:57 am
At this point, it’s no secret that natural gas has become the fuel du jour for a variety of nations looking to power their electricity-generation needs. As the fracking has taken hold in North America and huge deposits of gas are being found in the Middle East and offshore Africa, natural gas’s place in the sun is almost assured.
Overall, the Energy Information Administration (EIA) predicts that global natural gas demand will rise by 64% to reach 185 trillion cubic feet in annual demand by 2040. That’s the most growth of any fuel type out there — except maybe hydroelectric power.
However, that torrid growth in gas demand does pose an interesting dilemma. Not every country wanting to use gas has direct access to supplies and can drill on its on soil. Pipelines make sense, if you’re moving gas between neighbors. But what if you trying to ship natural gas, from say a port in Texas to emerging Singapore?
That takes a certain special kind of tanker ship to handle liquefied natural gas (LNG), and over the long term, the companies that own/operate these specialized ships should profit handsomely as natural gas demand continues to grow.
For investors, now is the time to play the LNG shippers.
When it comes to natural gas exports, most of the attention has been squarely focused on the purveyors of new LNG export and liquefaction facilities such as Cheniere Energy (LNG). Natural gas needs to be cooled under pressure at minus-260 degrees and converted to a liquid in order to be transported overseas. That requires some pretty sophisticated (expensive) facilities.
As such, operators of these liquefaction plants can charge a hefty fee to energy producers in order to ship their products. So that focus by investors is certainly warranted. However, these firms are just one step in the puzzle, and most haven’t actually begun exporting any fuel just yet.
Enter the LNG and liquefied petroleum gas (LPG) tanker ships. These ships physically take the compressed gas and move it across the oceans. And as natural gas demand from Asia and Europe continues to grow — at around 10% annually — so will these firms’ bottom lines.
Currently, there are only about 350 or so LNG ships in operation. That’s a huge problem because most of these ships are tied to long-term contracts. Given the long lead time to produce new LNG/LPG vessels and high safety regulations for the industry, day rates for those ships that come off contract or are tied to spot pricing are surging.
Last year, day rates to rent a LNG tanker hit nearly $150,000 per day. Day rates have since fallen to around $80,000 per day. However, this is mostly due to the fact that shippers have switched to shorter contract periods. That allows them to take advantage of rising rental rates more quickly. As such, analysts estimate that LNG charters will hit around $97,000 this year before surging much higher in 2015.
Meanwhile, those firms that operate LPG tanker ships are in even shorter supply. Demand for propane and butane — which are used in fuel blending and as a feedstock in many chemicals — is rising just as fast as LNG. Analysts now predict that day rates for the limited amount of LPG carriers will rise from $37,000 today to more than $300,000 by late 2015.
Given the rosy future for rising day rates, investors may want to strike on the purveyors of LNG/LPG tanker ships. Now could be the best opportunity because the lower current day rates have zapped much of investor enthusiasm from the shares.
For investors wanting to play the low-term rising demand in LNG, the pair of Golar LNG (GLNG) and Teekay (TK) — as well as their respective master limited partnerships (MLP) Golar LNG Partners LP (GMLP) and Teekay LNG Partners LP (TGP) — could be the best of the bunch.
Golar operates 13 different LNG tanker ships firms and is controlled by the Warren Buffet of shipping — John Fredriksen. That pedigree has allowed GLNG to book an impressive backlog of contracts, hitting nearly $2.5 billion worth of charters for the next seven years. GLNG has also benefited from its relationship with GMLP.
Like most MLPs, Golar has been able to “drop down” assets in GMLP at advantageous rates. That provides plenty of IDRs and tax-efficient distributions back to GLNG shares. Those distributions have made their way to shareholders in the form of hefty dividends — GLNG and GMLP yield 4.8% and 7.4%, respectively.
One the flipside, Teekay is a monster in the shipping industry, owning nearly 170 different vessels of all kinds, including 63 LNG/LPG tankers. And like GLNG, Teekay has benefited from its MLP relationship. TGP has received 32 different LNG ships from its parent via “drop downs” as well as other floating gasification infrastructure. This has translated into 12% cash flow growth at TGP over the last year.
Overall, both TGP and TK feature an impressive backlog — $15 billion for the parent firm — and continue to rack up new medium-term contracts. That includes the previously mentioned Cheniere Energy for two ships for charter at its Sabine Pass export facility.
The Bottom Line: LNG shippers offer one of the best opportunities to take advantage of growing global natural gas demand.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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