Monday, December 28, 2015

13th AIM Student Equity Update by Patrick Schulz: Golar LNG Limited (Ticker GKNG): Golar’s Stock Price Is Running Scared, But Growth Might Be Just Around the Bend!

Golar LNG Limited (GLNG): Golar’s Growth is Long Overdue
By: Patrick Schulz, Student at Marquette University

Image result for Golar LNG Limited logo


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary

Golar LNG Limited is a midstream liquefied natural gas (LNG) company. It transports, degasifies, liquefies, and trades LNG. The current commodity price environment is preventing Golar’s deserved growth in the short term, but longer-term this firm is poised for growth.

• Management has indicated the growth potential of their GoFLNG vessels - with strong return potential even in this weak commodity price environment.

• Their recently developed “Cool Pool” will have positive impact for LNG and their peers across the globe, offering a much needed improvement to the troubling market.

• Advanced GoFLNG vessels will become the most powerful and desired natural gas vessel in the world.

Golar LNG Limited (NASDAQ:GLNG) was not able to meet expectations in their most recent quarter, but this should have been expected considering the difficult spot rate and commodity price environment.  Golar reported revenues at $27.4 million and EBITDA loss of $5.9 million (compared to a Q2 loss of $25.3 million), yet they continue to maintain their current $0.45 quarterly dividend. Utilization rate improved from 33% in Q2 to 43% in Q3, whereas spot rates have remained relatively flat, trending around $35,000.  Besides from these mediocre financial results, Golar has been able to position themselves for success through Golar Partners and their advanced vessels.

Golar Partners is Golar’s wholly-owned subsidiary designed to own vessels with long-term charters in order to distribute the risk profiles of the different vessel types controlled by GLNG.  Golar Partners reported Q3 EBITDA of $94.9 million, $6.8 million of which was recognized by Golar due to their 30.4% ownership of Golar Partners.

In the FSRU market, Golar continues to be a leader, placing their 7th FSRU, the Golar Tundra, into the market with a finalized 5-year contract in Ghana with West Africa Gas Ltd.  This project is expected to start in Q2 2016 with EBITDA forecasts of $44 million.  Golar plans to continue their lead in this market as they have an 8th FSRU ordered for delivery in Q4 2017, with multiple opportunities being pursued for this vessel’s employment.

Golar is making significant strides to become the leading innovator of the FLNG market, producing vessels capable of the liquefaction and regasification of liquefied natural gas offshore.  Typically, liquefied natural gas must be converted into gas form offshore, then transported to large, expensive onshore regasification facilities before being brought to the market.  Golar is in the process of becoming the first company with the ability to regasify natural gas on their offshore vessels (called GoFLNG vessels), thus eliminating the need for offshore facilities and provides for a more efficient process in terms of timing and costs.

Currently, Golar has three GoFLNG vessels expected to come to the market in the near future.  The GoFLNG Hilli currently has an 8-year contract in place with SNH and Perenco for employment beginning in Q2 2017.  This vessel has four “trains” capable of this advanced process and EBITDA is projected to be $170-$300 million per annum, based on the utilization of only two “trains”.  The use of a third “train” would increase potential EBITDA to $240-$430 million per annum.  The GoFLNG Gandria has also made progress through a finalized 20-year contract with Ophir for a start-up date of early 2019 in Equatorial Guinea.  Although the GoFLNG Gimi has yet to be signed into a contract, Golar expects this vessel to be delivered in early 2018 and is confident it will have employment.  These advances in the FLNG market has led management to discuss the possibility of more GoFLNG projects in order to capture the market potential of this untapped source of revenue.

From a liquidity perspective, Golar continues to remain in strong standing.  They have $223 million in cash ($331 million including restricted cash) with several sources for additional liquidity in the near term.  Golar now has the option to refinance up to 6 LNG carriers, releasing $260-$320 million of equity and plans to sell the FSRU Tundra to Golar Partners, worth over $100 million.  Golar has also been able to fully fund the GoFLNG Hilli Project, as this will no longer be a drag on their balance sheet and liquidity.

Even more recently, “The Cool Pool” was designed in order to combine marketing efforts of Golar (GLNG), Gaslog (GLOG) and Dynagas (DLNG).  These three players currently represent 10 of the world’s 17 spot voyage charters and this collaboration will further improve utilization rates and decrease voyage costs.  “The Cool Pool” has been strongly accepted by the market and has already proven that this will reduce positioning costs and increase the ability to gain short term charter contracts.

What has the stock done lately?
Golar remains as a long-term growth potential despite the stock’s depreciation in recent weeks.  Since being added to the AIM International Fund at a price of $30.79 on October 26th, Golar’s stock as declined roughly 40% with no detrimental news to their business operations.  During this same time period, oil and natural gas have decreased by 26.9% and 31.9% respectively.  It has continued to drop throughout December along with other oil and gas related firms and if off over 30% for Q4.

Past Year Performance:  Although management has finalized their GoFLNG Hilli contract and a further LNG supply agreement with Russia, their stock has been down trending, currently down 55% YTD.  Golar trades nearly identical to the movements of commodity prices, despite management placing the company in the leading position of the most advanced vessel in the market.  Until the commodity price environment begins to stabilize, Golar will continue to endure this brutal volatile market.

Source: FactSet
My Takeaway

Despite the low commodity price environment and uncertainty of when prices will rebound, Golar LNG Limited has positioned themselves for long-term growth.  They are the clear leaders of the FLNG market and have proven their vessels to be the most technologically advanced.  Management has been able to preserve their balance sheet, thus allowing them to deliver several new vessels in the market during the near term.  Golar is due for a strong stock appreciation as they are trading near their 5-year lows and my belief is they will break their 52-week high of $51.89 within 6 months of oil and natural gas prices bottoming out. If you can wait it out until oil and gas bottom out - you will be rewarded!

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