Top picks 2012: Golar LNG

by Nathan Slaughter, editor Energy & Income

Golar LNG (GLNG) shareholders will have fond memories of 2011 -- the stock has delivered an impressive 196.0% return this year. But this rally isn't over yet, because the same tailwinds that led to this gain will continue blowing through at least 2014.

Golar is a play on the burgeoning global trade of liquefied natural gas (LNG).  Specifically, the company operates a fleet of modern LNG tankers, as well as floating storage and regasification units (FSRU).

These retrofitted vessels park offshore, warm the chilled liquids back into ordinary gas, and then offload the cargo directly to pipelines for delivery to its final destination. Golar is one of only three FSRU operators worldwide.

Global LNG demand is in the early stages of a powerful growth spurt. Annual production has already spiked 60% since 2005 and currently stands at 230 million tons.  

And energy companies such as Chevron are plowing $200 billion into new projects -- investments that mirror import growth from gas-hungry nations such as Japan and South Korea.

Natural gas can't get from production basins in Australia to buyers in Nagasaki all by itself. As with anything else, LNG shipping rates are a function of supply and demand.

From 2007 through 2009 more than 120 new ships entered service, and the glut of capacity caused daily spot market shipping rates to sink below $20,000 per day, down from more than $80,000 a day in 2006. Predictably, most companies stopped ordering new ships.

So now, only a handful of new vessels are trickling onto the market. And customers come knocking quickly. Last spring, when the tragic earthquake forced Japan to step up its LNG imports, there were no tankers available for hire -- not a single one.

Golar's average daily charter rates surged to $92,000 per day last quarter. And shippers will probably be willing to pay even more in 2012.

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

In other words, additional LNG production around the world will outpace new delivery capacity by a seven-to-one margin, tightening the shipping market even further.

Sensing what's on the horizon, charterers have been scrambling to secure freight tonnage up to two years before the voyages actually take place, just to avoid being left out. Golar just chartered the Golar Grand to a major energy firm at the robust price of $110,000 to $120,000 per day. And the company has ambitious plans to add eight new fuel-efficient carriers that will be booked solid under multi-year contracts.

Yes, this is a cyclical business -- but nobody minds that during an up-cycle. As an added bonus, a majority stake in Golar LNG Partners is generating enough income for GLNG to offer a sizeable 2.8% dividend yield.

Learn more about this financial newsletter at Nathan Slaughter's Energy & Income.