Natural gas shipperGolar LNG (
) has been spared the usual punishment meted out to companies
that report disappointing earnings and sales.
Instead of another Wall Street slaughter, the stock dropped
only 1.8% last Monday after posting earnings per share of 28
cents, a 33% increase from the prior year, well below the
consensus estimate of 52 cents by analysts tracked by Thomson
The reason: Investors aren't holding the Bermuda-based company
for near-term results. They're looking ahead two years when Golar
should have an expanded fleet commanding high day rates from
shippers, analysts say.
"They are still in the transitional phase, before any new
ships are delivered or any new projects bear any fruit," said
Evercore Partners analyst Jonathan Chappell. "People own this
stock for 2014 and 2015 earnings and cash flow, not the 2012
fourth quarter or even the first quarter of 2013."
Analysts expect earnings to rise 34% in 2013 to $2.23 a share
and 81% in 2014 to $4.04.
Commercial waiting time for the LNG carrier Golar Maria and a
planned Golar Spirit carrier dry-docking were principal
contributors to reduced revenues from the prior quarter, the
company said in a press release.
LNG carriers are restricted to off-loading their cargoes in
ports with re-gasification facilities that turn the LNG back to
its gas form. FSRU vessels enable a shipper to transport LNG to
ports that don't have re-gasification facilities. (FSRU stands
for floating storage and re-gasification vessels.)
The company will take delivery of 13 new vessels by early
2015, which should drive substantial earnings growth in 2014 and
2015, says Chappell.
Despite the fourth-quarter showing, Golar had begun to gain
steam after going through a tough stretch with the rest of the
industry. From 2006 to mid 2010, the LNG shipping industry was
suffering from an imbalance between new liquefaction capacity and
the number of new LNG ships coming online.
But as global liquefaction capacity started to ramp up in 2009
and by mid 2010, the market started to firm, says Jefferies
analyst Douglas Mavrinac. Then came the March 2011 tsunami in
Japan that triggered the Fukushima nuclear plant meltdowns and
caused the power plants to go offline. Demand for LNG spiked,
primarily in Japan, says Mavrinac. The strong demand caused LNG
shipping rates to soar to about $150,000 a day at the end of 2011
from $30,000 to $40,000 a day in 2010.
"Golar is one of the few publicly traded players in this
market that had vessels that weren't already signed to long-term
contracts at fixed rates," said Chappell. "It had ships on
short-term contracts and was able to benefit from the higher
Golar's ability to benefit from the higher rates has helped
fuel its earnings growth, analysts say.
"The gradual ramping up of charter rates caused Golar's
earnings to pick up," said Mavrinac.
Over the last year, rates have plateaued, says Mavrinac. He
figures they're at about $120,000 a day, which is still a
He expects the next "move up" in rates to come in 2014.
Golar has a fleet of 13 vessels, which will double once it
gets delivery of the 13 ships on order.
From an operational standpoint, one thing that still separates
Golar from its peers is the majority of its assets are in the
spot market, with short-term contracts, normally not longer than
three months in duration.
So when new capacity comes online, Golar commands whatever the
market rate is at that time.
That's important, Mavrinac adds, when you look at the amount
of new liquefaction capacity coming online, he adds. He expects
the amount of capacity coming online to grow by double digits
starting in 2014 and extending every year for the foreseeable
future -- and that's at a minimum.
The climate for Golar's business is heating up. Natural gas
demand is strong because it's a cheaper and cleaner fuel than oil
and coal, says Chappell.
And the demand for natural gas remains buoyant in Japan, where
only two of its 52 nuclear power plants are operating today --
post tsunami. As a result, Japan is replacing nuclear power with
Chappell says the strong Asian demand has created a price
arbitrage, where gas sells for nearly $20/mbtu in Japan vs. less
than $4 in the U.S.
Natural gas is being produced abundantly in the U.S.,
Australia and Qatar and is moving to Asia, primarily Japan, China
and South Korea, says Chappell.
Golar also benefits from having a majority stake in a master
limited partnership,Golar LNG Partners (
In a report, Mavrinac said Golar's stake in Golar LNG Partners
was an "attractive differentiator" for Golar, since it enables
the company to generate liquidity for new projects and new builds
by "dropping down" longer term contracts to the partnership while
receiving the benefits of incoming distributions from the
A case in point: In February, Golar sold its interests in the
company that owns and operates the LNG carrier Golar Maria to
Golar LNG Partners for $215 million.
What was the advantage of Golar selling the carrier to Golar
"MLPs trade at higher multiples than corporations because they
pay robust and relatively secure dividends as most of their
assets are on long-term fixed rate contracts, which enhances cash
flow visibility," said Chappell. "Retail and income-oriented
investors pay up for this cash flow/dividend visibility and
stability. Therefore, if the Maria is at Golar LNG Partners,
which trades at a higher multiple than Golar, then the asset is
valued more attractively. And as a majority owner of the Golar
LNG Partners, Golar LNG not only gets the cash from selling the
asset to the partnership at a premium to what it bought it for,
but it also gets higher dividends from the partnership."