Golar LNG: Shipping returns

by Nathan Slaughter, editor Exploration & Paydirt

Golar LNG (GLNG) is one of the primary beneficiaries of the burgeoning global trade of liquefied natural gas (LNG).

The company owns a fleet of modern LNG tankers that are paid handsomely to transport chilled gas from port to port. Its fleet is 100% utilized, reflecting the lack of idle shipping capacity. Companies with available tonnage have almost been able to name their own price.

The Golar Grand has already been sent on a three-year charter at $110,000 per day. And Tokyo Electric locked up the services of the Golar Arctic for $137,000 per day to ship gas from the United Arab Emirates to Japan, which is leaning heavily on LNG imports.

Combined, the newly-chartered Grand and Arctic vessels will generate nearly $85 million in annual EBITDA. For context, Golar only banked a net profit of $47 million ($0.62 per share) all of last year.

Given the robust outlook (and contractually guaranteed income flowing in), Golar is in a position to return more cash to stockholders.

So I'm not surprised to see that the company just hiked its quarterly dividend payout by $0.025 to $0.35 per share. That lifts the annual distribution to a generous $1.40 per share, for a sizeable yield of 4.0%.

Of course, the shipping industry is well known for its boom and bust cycles. So these "high tide" conditions won't last forever. But they could be here for at least a few more years.

Shipping capacity is only expected to inch up about 3% this year (just 10 new vessels will be added to the existing fleet of 359). Yet, global LNG production is projected to climb by 21% (47 million tons).

And starting in 2014, there will be a sharp increase in LNG output as massive liquefaction facilities come online, first in Australia and then in North America.

Of course, shippers aren't blind to all of this. There have been 71 new vessels ordered since the beginning of 2011. But half of those have already been committed to charter customers even before they leave the shipyard -- so new capacity is being soaked up quickly.

Golar plans to take advantage of all this by adding 13 new LNG carriers over the next few years. A bigger fleet means heavier cash flows (and dividends).

Initially, I had some concerns that the company might be overreaching with this ambitious new build program.

But the latest order to Samsung Heavy (the shipbuilder) comes with a price tag of $200 million. Current charters are generating approximately $50 million in annual pre-tax profits.

Under these conditions, a new LNG tanker can pay for itself in just four years -- and continue generating income until well into the next decade. So I can't wait for these efficient new vessels to hit the water and start earning rent.

In the meantime, a higher dividend is on the way. And operating income is projected to surge more than 100% next quarter compared to last quarter. With all this in mind, I am elevating GLNG to my "Buy-First" list.

Learn more about this financial newsletter at Nathan Slaughter's Exploration & Paydirt.

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