Thursday, December 6, 2018

A Current AIM Program International Equity Holding: Golar LNG Limited (GLNG) by: Ben Schmidt. "Smoother Sailing Ahead"

Golar LNG Limited (GLNG, $25.25): “Smoother Sailing Ahead”
By: Ben Schmidt, AIM Student at Marquette University

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.


Golar LNG Limited (NASDAQ:GLNG) is engaged in the transportation, regasification and liquefaction of LNG. They operate through three main segments: Vessel Operations, FLNG and Power (i.e. FSRUs and power generation infrastructure)

• Golar’s Hilli Episeyo FLNG finally came 100% online in 3Q18 and contributed $54.5 million in revenue which should recur every quarter

• Avenir LNG limited, a leading provider of small scale LNG for the Power, Bunkering, and Trucking markets, was privately placed with the help of Golar, Stolt-Nielsen and Hӧegh LNG

• Revenues have increased at a 67.7% quarterly CAGR since Q1 of 2017 with more growth expected from its FLNG division.

• Vessel operations had TCE earnings of $41,200/day ($48,100 for TFDE vessels and $11,000 steam vessels) up from $19,600 in 2Q

Key points: 

Golar is now turning the corner on profitability. With the tightening of the LNG market, higher top and bottom line growth can be expected. LNG supply is supposed to continue to outstrip the supply of vessels available to move this product which is expected to lead to spot rates of $150,000/day by 2020. One to two years ago, the spot rates hovered around $20,000/day. Golar finds itself in a lucrative position with a fleet of 14 operational vessels available to meet this demand. They were able to jump on the TCE increases from Q2 to Q3 and are likely to do the same in Q4 of 2018. From management’s guidance, every $10,000 increase in TCE, adjusted EBITDA will grow by $40 million per annum.

Moving from GLNG’s vessel operations to its FLNG segment, the same narrative of better future profitability holds. In 3Q of 2018, their Hilli Episeyo FLNG operated for the full quarter and helped Golar post its record high EBITDA totaling $84m. Golar has been seeking new opportunities to take advantage of the FLNG segment such as its BP’s Tortue agreement and interest in Delfin’s LNG LLC FNLG project.

During the past four years, Golar has been in an investment phase taking on increased debt loads to fund these decisions. Their D/E has increased 1.4x as of FY 2017 up from .96x and 1.06x in 2015 and 2016, respectively. Given their weak operating cash flows from low spot rates in the past, it has raised the necessity of higher rates to cover current interest payments coming due.

What has the stock done lately?

In the past three months, GLNG has fluctuated within the $24-30 range. It has been strongly tied to the changes in spot rates in the market. Before the increase in rates, analysts were worried about GLNG’s hitting earnings and being able to continue to pay their dividend. As rates have rebounded, it has led to a direct increase with a 5.5% gain being posted on November 28th, 2018.

 Past Year Performance: 

YoY, GLNG experienced a rise and drop attributable to its agreement with BPs FLNG unit and missing earnings. When the news came out about the preliminary agreement with BP, shares rose $4 from $30.6 to $34.6 or 13%. It subsequently declined a couple weeks thereafter when it missed its first quarter revenues and earnings.

Source: FactSet

My Takeaway:

Despite the tight financial situation Golar finds itself in from its investment phase, it should be a large beneficiary from the rise in spot rates and its FLNG projects. These rates are expected to increase as more LNG supply continues to come online. Over the next couple years, it is expected that this LNG supply will still outpace the rate at which vessels are manufactured. With this being said, rates should rise to levels that have only been seen twice since 2008, and Golar has made large profits on it both times. Moreover, the first of GLNG’s FLNG projects was fully operational this quarter and helped generate some its best earnings in five years. Also, BP’s Tortue project is on pace for its 2018 FID. This FLNG segment has relatively low costs to operate and will expand their EBITDA margins in the coming quarters and years.

Source: FactSet