Editor's note: A previous version of this article stated that MLPs were legally required to pay out 90% of their earnings to shareholders, when in fact there is no such requirement. The Fool regrets the error.
The North American oil and natural gas boom is changing lives and doing great things for the American economy. For investors, there are dozens of ways to invest in this resurgence of the domestic energy economy, as well as the growth in global demand. One area that's showing strong potential, but is just getting going domestically, is the export of LNG from the U.S. to Asia and Europe, where the demand is high, access to resources is minimal, and the market price is triple or more than it is here. I wrote this in June as a starting point, but today's piece is a deeper look at the industry and several key players that you can invest in.
Some of the key players include Golar LNG (NASDAQ: GLNG ) and master limited partnership Golar LNG Partners (NASDAQ: GMLP ) , GasLog Ltd (NYSE: GLOG ) and MLP GasLog LP Partners (NYSE: GLOP ) , and MLP Teekay LNG Partners (NYSE: TGP ) . The thing is, each of these companies (and MLPs) have differences that investors need to be aware of, and investors in the MLPs need to understand the general partner of the MLP. Let's take a closer look.
Large scale LNG exports from the U.S. still a couple of years away
Cheniere Energy's export terminal and liquefaction facility in Louisiana won't begin major exports before late 2015, and it will be 2018 before the facility is at full scale. While there are a number of other export terminals in some stage of development that have received approval to export natural gas, they are all at least a couple of years behind the Cheniere Energy facility.
This is a really important point for investors to consider because it means that none of these companies will see massive revenue growth based on U.S. exports in the next couple of years. However, the U.S. isn't the only growing producer of natural gas, and demand isn't waiting on U.S. exports. Here are revenues since the beginning of 2012:
As you can see, there has been some growth, especially at GasLog, with revenues up almost 190% since 2012. Teekay LNG Partners has been relatively flat -- revenue is up about 4%, while Golar LNG and Golar LNG Partners are down about 19% when revenues are combined. But it's not that straightforward because Golar has ties to multiple other companies that John Fredriksen is involved with, and the sale of vessels (and contracts) between them makes it impossible to compare current and historical revenues.
Understanding MLPs, and the confusing corporate universe of John Fredriksen
John Fredriksen is a name that should sound familiar, especially if you've followed offshore driller Seadrill, of which he owns a massive stake. Fredriksen -- either directly or through family trusts -- essentially controls Golar LNG, which in turn is the general partner of Golar LNG Partners. In short, an investment in either of the two Golar companies is a demonstration of faith in Fredriksen, so expect using debt to aggressively grow, often combined with quite high dividends that can make a company's books look a little scary while the company is in growth mode.
Often MLPs are formed out of companies because they are efficient ways to access debt and capital and to pass income back to unit holders (MLP-speak for shareholders) in distributions (MLP-speak for dividends) in a more tax-efficient manner. With this in mind, MLPs very often pay out higher dividend yields than their general partners, especially when the general partner -- like Teekay -- engages in many different lines of business, versus the MLP which are often specialized like Teekay LNG Partners. In this case the general partner Teekay Corp is a relatively diversified shipping company, operating numerous kinds of vessels, serving different parts of the oil and gas business.
Here are the dividend yields for the five businesses at hand:
|Golar LNG Partners||Yes||5.8%|
|GasLog LP Partners||Yes||5%|
|Teekay LNG Partners||Yes||6%|
As you can see, the MLPs pay a much higher yield than their counterparts, but MLPs aren't the same as investing in a typical company. It's important to understand the companies behind them, which are often the general partner and thus responsible for managing the MLP. These companies often own a controlling stake in the MLP, so if you're not a fan of how a company is managed, it's not very Foolish to invest in an MLP it controls.
However, if you're looking for income and are happy with a company's management, MLPs can be a great way to invest, as long as you consider that the distributions aren't taxed the same way as dividends are. MLPs are pass-through entities, meaning they're not taxed on the corporate level. In short, understand how this affects your situation before you invest, because the tax implications could mean less income than you were expecting.
Understanding the acronyms
While the majority of exports will happen at large terminals that have liquefaction capacity on site, one growing area of interest is floating liquefaction, or FLNG, vessels. These are ships which can take on compressed natural gas from a pipeline and liquefy it offshore. These ships would then pipe the LNG to another vessel which would actually transport the LNG to the overseas market. Of the companies discussed here, Golar LNG is the only one that's actively talking about FLNG capability, and has one vessel currently under conversion to FLNG. It will take more than two years to convert this ship, so the technology -- much like U.S. export terminals -- is still years away from making a material impact on the LNG export market.
As a matter of fact, there aren't any FLNG units in operation anywhere in the world, but the potential is quite attractive. Not only would these vessels be mobile, but they would offer a way to export gas in smaller quantities from areas where it might not be cost-effective -- or politically feasible -- to establish onshore liquefaction.
Lastly, there's FSRU, which is floating storage and regasification units, which are able to store and regasify LNG offshore. Similar to FLNG being able to support offshore liquefaction for areas where the feasibility of onshore actions might be low, FSRUs can support regasifying LNG when the infrastructure doesn't exist onshore. Golar LNG has also been the leader in this area as well.
Final thoughts: It's much bigger than just American exports
The U.S. LNG export story is that it will take a long time to play out, and as you can see, there are several ways that you can invest in LNG exports and shipping that aren't just tied to the U.S. story. Whether you're interested in a "pure play" LNG shipper like GasLog and MLP GasLog LP Partners, or a more diversified player like Teekay LNG Partners or Golar LNG and MLP Golar LNG Partners, which engage in different areas of LNG transport, as well as crude oil and LPG, there's a lot to understand before diving in.
Where should you invest? Just like most sectors, it depends on your individual situation, and isn't "one stock fits all." Take this as a starting point, and do a little more research on your own.
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