Golar LNG Doubles Fleet Size As World Trade Grows

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Natural gas shipperGolar LNG ( GLNG ) 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 Reuters.

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.

Off-Loading Facilities

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 rates."

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 "profitable" level.

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 natural gas.

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 ( GMLP ) .

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 MLP.

Higher Multiples

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 LNG Partners?

"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."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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