We live in a world of shaky power sources. While coal is plentiful, most of the developed world is working to reduce reliance on this form of energy. Since the nuclear accident in Japan, former nuclear stalwarts Japan and Germany have announced plans to phase out that source of power, as well. Solar and wind, often touted as the future, are not yet commercially viable in most places, and these two sources' intermittent, decentralized nature has proven somewhat incompatible with the 20th century 'grid' model.
That leaves just one power source: Natural gas. Natural gas demand has been increasing all over the world, but has been doing so especially in energy-hungry, industrialized Asian countries. Unfortunately, Asia has relatively few sources of natural gas, and so gas must therefore be imported.
You might be wondering how that is even possible. Transporting gas accross the world in its natural form would be both cumbersome and silly. Instead, the gas must be super-cooled, shipped, and finally regassified at its destination; a difficult and capital-intensive task.
That's where LNG shippers come in. As the distance between point of supply and point of demand grows, so too will demand for LNG. In fact, demand for LNG is expected to grow by 5% each year until 2025.
This chart sums up the situation pretty well. While there is excess shipping capacity right now, within just a few years demand will overwhelm supply, and the end result will be either much higher charter rates or many new LNG ships on the high seas. Either way, the LNG carriers will prosper.
Look for the independents
While in the old days LNG shipping was limited to just the big, integrated players, over the last ten years, independent companies and partnerships have been coming to the fore. One of the more established yet focused LNG shippers is Golar LNG (NASDAQ: GLNG ) .
Golar has been less than nimble over the past few years, and that has resulted in weak performance over the recent quarters. Repeated LNG export terminal delays, particularly in Africa, have resulted in a lower ship utilization rate for Golar. Currently Golar has a fleet of 26 carriers, nine of which are under construction. Nine of those 26 carriers are also available for spot chartering, with three others as candidates for conversion to "floating" LNG, a promising technology where the gas is liquefied, at the point of extraction and on the ship itself, thereby avoiding all the onshore politics. With all of these new builds, It will take at least another 12 months for Golar to bring its fleet utilization rate back to normal.
An income-oriented way to play the LNG trend is Teekay LNG Partners (NYSE: TGP ) , an LNG-focused master limited partnership and spinoff from Teekay shipping, which owns 37% of the partnership. Like most LNG carriers, Teekay LNG has high cash flow visibility: Its average contract life is 13 years. Teekay LNG owns 28 LNG carriers, with plans to add another 6 by 2017. Currently, Teekay LNG yields 6%, and its distributable cash flow is a respectable 1.1 times distributions.
Golar LNG and Teekay LNG partners are two ways to participate in the global LNG boom, but they are certainly not the only two ways to do so. I believe that these names merit further research from anyone who is thinking about investing in the LNG industry.
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