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Coverage Initiation: Golar Limited (GLNG)
Value Line is initiating coverage of Golar LNG Limited (GLNG), which operates a fleet of ships that carry and process liquefied natural gas (LNG), in The Value Line Investment Survey. A unique aspect of Golar’s business is its collection of floating storage and regasification units, which process natural gas at sea rather than simply transport the commodity from port to port. The increasing supply of natural gas, due to technological advances in the drilling process, and the fact that natural gas burns more cleanly than oil or coal, provides this company with material growth prospects.
Golar LNG was founded in 1946 as Gotaas-Larsen Shipping Corporation. This entity entered the liquefied natural gas shipping business in 1970 and was ultimately acquired by Osprey Maritime Limited in 1997. In 2001, World Shipholding Ltd., a company indirectly controlled by John Fredriksen through certain trusts, acquired Osprey. The liquefied natural gas assets of Osprey were acquired by Golar LNG, with the resulting company listed on the Oslo Stock Exchange in July 2001 and on the NASDAQ in December 2002.
Since that time, through various transactions, Golar has purchased or built a fleet of 12 vessels. Its fleet contains eight liquefied natural gas carriers, representing the core of its current business, and four floating storage and regasification units (FSRUs), which serves a niche market the company hopes to use as a growth platform. It has a number of ships on order with expected completion dates in 2013 and 2014. Although a number of ships operate on the spot market, it has a collection that are on long-term charter contracts with expiration dates as far out as 2024.
Basing its operations out of Bermuda, Golar operates in two key “mid-stream” businesses, the transportation of liquefied natural gas and its floating storage and regasification operations. The former is relatively conventional, in that the company’s ships simply transport liquefied gas from one point to another. Such operations make up the core of the current business, but they are not a particularly differentiating factor. The floating storage and regasification units, however, fill a unique niche. These ships essentially act as floating processing facilities for natural gas liquefaction.
Although natural gas transportation is not a new business, historically speaking, natural gas was treated as a local business with transportation taking place only over short distances (between Canada and the United States, for example). Moving natural gas across long distances, such as from the United States to South America, is something of a new phase in the natural gas industry. The expense and time needed to develop infrastructure around this transportation is significant. Offering ships that can handle a material portion of the processing aspect allows Golar to enter markets that would otherwise be out of reach.
FSRUs may also provide a longer-term solution for locations where building a permanent facility is undesirable, prohibitively expensive, or politically difficult. Thus, the company’s FSRU fleet looks to provide both a near-term solution for countries or regions that are still gearing up for liquefied natural gas processing and, potentially, a long-term solution for other areas. Although the prospects of this market are exciting there is no guarantee that the expected long-term benefits will materialize, as the market for FSRUs is still in its infancy.
There are other issues related to the company, as well. For example, company Chairman John Fredriksen owns or has control of a material number of shares, which provides him with significant voting power. Indeed, he may use such voting rights to effect change at Golar. Although this may allow a longer-term outlook for the business, as Fredriksen’s voting rights can provide cover for management, it may also result in decisions that benefit Fredriksen as the expense of other shareholders.
In addition, Golar is heavily reliant on a small number of customers. As such, the loss of any one customer could materially hurt the company’s top and bottom lines. The generally long-term nature of charter contracts helps to mitigate this risk to some degree, but it does not eliminate it. Moreover, when charter contracts end, Golar has to recharter its ships—which may or may not happen at similar pricing. If a long-term charter is not signed, the ship may find itself on the so-called spot market, in which payment for services varies based on market fluctuations, which can be extreme in the shipping business.
On a day-to-day basis, Golar is subject to a number of issues, including the costs of staffing and maintaining its ships, regulation of both the shipping and natural gas markets, and even piracy. Over the long-term, the company is subject to the conditions of the liquefied natural gas market, and the costs, which are extremely high, and timing of building or acquiring new ships. Taking the later point into consideration, it is important to note that fleet expansion is largely the only way for Golar to expand its business. Any problems with issuing new shares or selling new debt could stall the company’s growth plans.
Golar operates in a competitive and capital-intensive industry, but fills a unique niche. If that niche proves valuable, the company offers an intriguing opportunity to invest in the natural gas industry. Subscribers interested in Golar shares should monitor Value Line’s quarterly updates, while keeping an eye out for Supplemental reports on late breaking news.
At the time of this article's writing, the author did not have positions in any of the companies mentioned.