LNG (liquified natural gas) shipping is an excellent alternative strategy to cash in on America's shale gas boom. For example, the Marcellus shale has increased its production 14-fold in the last seven years and is expected to double production again by 2035.

With natural gas prices still much higher in Europe (double U.S. prices) and Japan (triple U.S. prices) there is immense incentive for global trade in LNG, especially to Asia. In fact, though global gas demand is only expected to increase 44% from 2008 through 2035, 84% of that increase is expected to come from developing nations, mostly in Asia. China's demand for natural gas is projected to grow by 5.9% CAGR through 2035. LNG import capacity is set to double in China and India by 2016, and triple by 2018. 

This incredible growth in demand, when combined with the fact that the proposed 20 LNG export projects undergoing review in the U.S. could increase global LNG export supply by 50%, means that global LNG trade is likely to be one of the strongest economic megatrends in the coming decades -- it is expected to double by 2030. 

Investors who want to participate in this incredible growth opportunity can buy LNG shippers, such as GasLog Ltd (NYSE:GLOG) and Golar LNG Ltd. Higher yields can be had from the MLPs: Golar LNG Partners, Teekay LNG Partners (NYSE:TGP), and recently IPOed GasLog Partners (NYSE:GLOP) and Dynagas LNG Partners.  

However, interested investors should be aware of both the short-term challenges facing this industry, as well as the long-term potential.

Short-term overcapacity ahead
According to Teekay's management, there are 61 LNG carriers scheduled for delivery in 2014-2015, and 20 of these do not have contracts.

From Golar's last quarterly presentation, we learn that additional LNG export capacity, 90 million annual tons' worth, is coming online by the end of 2016. This capacity will require an additional 100 LNG carriers, of which only 90 are scheduled for delivery in that time frame. Add in the 20-30 older carriers expected to be scrapped, and one can see that the market for LNG carriers should strengthen substantially beginning in 2016 (Teekay is predicting a deficit of 35 LNG carriers through 2018). 

Three great LNG shippers
Gaslog, which I have covered in more depth in a previous article, as manager of BG Group's tanker fleet, stands out for its exceptionally experienced management team and torrid growth rate: S&P Capital IQ analysts are projecting 46% compound EPS growth for the next 10 years and a dividend growth rate of 28%.

This quarter's results were nothing short of fantastic:

  • Revenues surged 161%
  • Adjusted EBITDA up 206%
  • Adjusted EPS up 160%
  • Number of vessels owned up 186%
  • Number of vessels managed up 35%
  • Average fleet day rate up 3.4% (in a tough pricing environment)
  • Fleet utilization 96%
What's more, the company has nine new ships under construction, with long-term charters in place for half, and an option for one more. 
One of the most exciting developments for GasLog was the IPO of its MLP -- GasLog Partners. This MLP's fleet consists of three state of the art LNG carriers, which are chartered with BG group through 2025. 
With a projected yield of 5.2% 
and parent GasLog acting as general partner, investors should consider owning both. Why? Because with 75% growth of its fleet by Q2 2017, GasLog is likely to drop down many of its ships to GasLog Partners. This would mean very fast growth at the MLP, including its distribution. This in turn would trigger very large and fast growing IDR fees (50% of marginal distributable cash flow past a certain distribution), which would send the parent company's profits soaring and result in the kind of dividend growth rate that analysts are projecting. 
The other LNG shipper I'd like to mention is Teekay LNG Partners, the second largest independent LNG shipper in the world. This MLP yields 6.2% and recently announced two major growth initiatives. 
The first, was a 50/50 joint venture to supply six icebreaker LNG carriers for the Yamal LNG project in Siberia. These are 25 to 27 year charters that go into effect starting in 2017.
The second major event for Teekay LNG Partners was its Exmar joint venture took delivery of the first of 12 LPG (liquid petroleum gas) carriers. 
The two joint ventures provide Teekay with an expected growth of 17 to 20 ships (21%-24% fleet growth) over the next four years. 
Teekay only has two carriers scheduled to roll off contracts through 2016, making it the least exposed LNG shipper (to the industry's short-term weakness) and well worth considering for any income portfolio. 

Foolish takeaway
Despite weakness in short-term LNG shipping rates for the next two years, the long-term investment potential for LNG shippers is strong and will likely mean high, growing income and market-beating capital gains for decades to come. GasLog, GasLog Partners, and Teekay LNG Partners are three solid picks for income investors to consider to take part in this exciting megatrend.