1 Excellent Way to Profit From the Coming LNG Shipping Boom

LNG exports are a fast-growing global industry that is riding a mega-trend likely to last for decades. Short-term weakness in this industry is likely to offer investors an attractive entry point for superior long-term positions.

Adam Galas
Adam Galas
Apr 13, 2014 at 3:30PM
Energy, Materials, and Utilities

One of The Motley Fool's key tenants of successful long-term investing is buying into a strong and clear growth catalyst. One of the easiest ways to accomplish this is by investing into a megatrend that is also a decades-long global socioeconomic trend. One of the strongest examples is LNG (liquefied natural gas) shipping. There are four primary catalysts fueling this megatrend. 

First, the UN is projecting the earth's population will increase from $7 billion to $9.6 billion by 2050. This will naturally increase the need for energy.

Second, the growth in the developing world will ensure that global economic growth from nations such as Brazil, China, India, and Russia (as well as the continent of Africa) will drive global economic activity. This will boost demand for gas as an energy source and for industrial uses. 

The third reason is environmental. Gas-fired power plants are far cleaner burning than coal or oil plants, and for nations such as China (which struggles with famously unhealthy levels of pollution) this will become a priority in the coming decades. Also, consider Japan's post-Fukushima energy conundrum. After extensive safety evaluation only half its nuclear power plants will be allowed to restart and no new plants are likely to be commissioned within a decade (necessitating extensive LNG importation).

The final reason is geo-political security. The recent Russo-Ukranian crisis over the Crimea illustrates the need for western nations such as Europe (which imports 30% of its natural gas and 35% of its oil from Russia) to diversify its energy sources. 

Currently, the global LNG capacity is 281 mtpa (million metric tons per annum) with an additional 110 mtpa under construction. The U.S. has over 20 proposed LNG export projects undergoing regulatory review that would add an additional 190 mtpa (a 50% potential increase in global capacity). This enormous LNG capacity is being serviced by 362 LNG tankers with another 104 under construction (76 to be delivered in 2014-2015). Analysts are projecting short-term tanker pricing weakness through 2015 due to the large number of new tanker deliveries. The situation is expected to reverse itself beyond 2016 due to new LNG export capacity coming online. Certain companies (and partnerships) make excellent investments to participate in this megatrend. 

In 2001 GasLog Ltd. (NYSE:GLOG) took over management of BG Group's (world's largest producer and trader of LNG) fleet of LNG tankers. Today it owns a fleet of 18 ultra-modern (fuel efficient) LNG tankers with four more scheduled for delivery in 2016. 15 tankers are under long-term contracts. This ensures long-term predictable cash flows that allow for fast dividend growth (9% annually since the company went public in 2012). In addition to general industry potential, GasLog has three specific catalysts that make it an appealing investment. 

First, it has some of the most experienced management in the industry.

  • Chairman Peter Livanos is the owner of Ceres Shipping, GasLog's largest shareholder (its original parent company) and one of the largest shipping companies in the world.
  • CEO Peter Wogan was CEO of Teekay Tanker Services for eight years. He also served as an independent director of Clarksons, the world's largest shipping broker.
  • CFO Simon Crowe served as Vice President of Strategy and Planning for Transocean (world's largest offshore oil driller).
  • COO Graham Westgarth has 40 years industry experience. He formally served as Vice President of Innovation, Technology and Projects for Teekay Shipping.
  • Thor Knappe, Senior Vice President of Commercial Services, helped build the LNG division of Maersk (world's largest shipping company).

Second, the company is considering creating an MLP for its assets. This would turn GasLog into a general partner and grant it both high-yielding distributions and incentive-distribution rights. In other words, GasLog would become the financier of its MLP. This would likely result in higher profitability and faster dividend growth. 

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Finally, GasLog's global market share is projected to be just 5% in 2016. This leaves a large potential growth runway, specifically in the form of tanker acquisitions, such as, the 2010 $162 million acquisition of STX Pan Ocean's 153,600 cubic meter tanker. 

Other great investments in the LNG tanker space include Teekay LNG Partners (NYSE:TGP), Golar LNG Limited (NASDAQ:GLNG), and Golar LNG Partners (NASDAQ:GMLP). Golar (part of the John Fredrikson family of companies famous for their high dividends) is a play on short-term LNG tanker prices while Teekay is the second largest independent LNG Tanker operator in the world. Golar's fleet is under shorter-term contracts, and eight of ten new builds being delivered in 2014 are yet un-contracted. Teekay focuses on long-term contracts (average contract has 13 years remaining) and a $6.8 billion backlog ensures strong distribution coverage for its generous 6.8% yield. These three investments are worthy of more in-depth coverage and will receive their own article in the future.

Bottom line
LNG tanker companies (and partnerships) offer long-term investors an excellent opportunity to profit from one of the strongest megatrends of the coming decades. High (and growing) yields and capital appreciation are ripe for the plucking if investors know where to look and patiently buy during times of temporary market weakness.