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.
Summary:
• 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
