Why This LNG Shipper Is Struggling and 2 Superior Alternatives

Three major factors will drive global demand for natural gas in the coming decades: population growth, environmental concerns, and strong economic growth in developing nations. From 2008 to 2035 these trends are expected to increase global gas demand by 44%, 84% of which will come from developing nations. China in particular is expected to experience 5.9% annual demand growth, and China and India are working to triple their LNG import capacities by 2018.

Current world supply of LNG is 281 million metric tons (mtpa) with another 110 mtpa under construction. Twenty proposed LNG export projects in the US could add another 190 mtpa, a 50% increase in global supply. Although not all US projects will come to fruition, global demand for LNG tankers is expected to rise and outstrip supply by 35 ships by 2018. 

However, short-term problems have arisen lately in the form of too many new ships coming online before major LNG export projects are completed. For example, through 2015 61 tankers are scheduled for delivery, 20 of which are without contracts. This is causing massive short-term weakness, with spot (short-term) day rates falling by 50% (from $140,000/day to $70,000/day). 

This temporary decline is of major concern for Golar LNG (NASDAQ: GLNG  ) because it has the most exposure to the weak spot market. Golar LNG owns eight tankers with eight more scheduled to be delivered through 2015. Currently only two of these vessels are contracted and one of those contracts ends in 2015. 

The rest of Golar's fleet is at the mercy of the spot market, with three of those vessels candidates for conversion to FLNG ships. These vessels are capable of liquefying natural gas on board for 20%-33% cheaper than land-based LNG export terminals.

Analysts have recently cut Golar LNG's 10-year growth projections down to 6% earnings growth, and the outlook for dividend growth is even worse.

Company/MLP Yield Projected 10 Year Annual Distribution/Dividend Growth 10 Year Projected Annual Total Return
Teekay LNG Partners 6.30% 4.20% 10.50%
Golar LNG 3.20% 3.54% 6.74%
Golar LNG Partners 5.80% 6.84% 12.64%

Sources: S&P Capital IQ, Yahoo! Finance

Golar LNG has typically dropped down contracted ships and FSRUs (floating LNG import terminals) to its MLP, Golar LNG Partners (NASDAQ: GMLP  ) , which for the first time offers superior yield to its general partner, as well as superior distribution growth prospects. With all of its vessels under contract (average remaining contract 6.2 years) and a contract backlog of $2.5 billion, Golar LNG Partners represents a safer and faster growing investment than Golar LNG. 

A strong growth catalyst for both Golar LNG and Golar LNG Partners is the fact that Golar's first FLNG project will soon be completed. High demand for these vessels means a long-term contract and because each FLNG requires three to five tankers to service it, this conversion could remove a lot of short-term pressure from Golar LNG by gaining contracts for some of its tankers.

I would recommend investors choose Golar LNG Partners over Golar LNG because of its lack of exposure to the spot market and the likelihood that Golar LNG drops down its new builds after first obtaining long-term contracts for them. This will fuel strong fleet, revenue, and distribution growth for Golar LNG Partners while avoiding the risk of lower utilization (ships being idled) that Golar LNG is currently experiencing. 

Teekay LNG Partners (NYSE: TGP  ) represents the safest investment in LNG shippers, due to its exclusive reliance on long-term contracts, and its large diversified fleet. Its average remaining contract is 13 years and only two of its 28 LNG tankers are rolling off contract through 2016. 

With a distribution coverage ratio of 1.1 and distributable cash flow up 12% in the first quarter, investors can rest easy knowing that the current yield is safe. Long-term growth in the distribution is likely due to two major joint ventures. 

The first is the Yamal LNG export project in Siberia. This 16.5 mtpa facility will require six icebreaker LNG tankers, and Teekay was recently awarded the contract for the 50/50 joint venture that includes 25 to 27 year contracts beginning late 2017.

The second joint venture is with Exmar, for 12 liquid petroleum gas (LPG) carriers. Teekay took delivery of the first ship in April and these two joint ventures will grow its fleet by 16-19 additional ships through 2018. This represents 21%-24% fleet growth, which will provide the growth catalyst for Teekay's already generous yield.  

Foolish bottom line
With strong growth in demand over the next several decades, LNG shippers are a great way for long-term income investors to profit from international energy markets. Of all the LNG shippers I cover, Golar LNG concerns me most due to its lack of long-term contracts. I would recommend Golar LNG Partners as a superior alternative due to its 100% utilization rate and strong contract backlog supporting its generous distribution. Teekay LNG Partners represents the blue chip of this industry, with the largest fleet, and least exposure to short-term pricing weakness. With a high yield and moderate projected distribution growth, Teekay LNG Partners is likely to outperform the market over the next decade. 

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