Real Time Stock Picks at Guru Focus is interesting as it allows investors to track most recent Guru Picks and Golar LNG (GLNG, Financial) has seen plenty of action from Gurus in 2015. In particular, James Barrow (Trades, Portfolio) increased his holding to 2,074,979 shares at an average price of $32.04 per share. With Golar LNG currently trading at $41.7, the benefit of tracking Gurus is evident.
This article will discuss the fundamental factor that will drive long-term growth for Golar LNG as I am also bullish on the long-term prospects for the company. Golar LNG has trended higher by 14% in YTD15, and I believe that the stock has more upside potential over the next 2-3 years.
As a brief overview on the company, Golar LNG is an owner and operator of LNG carriers with the company engaging in transportation, regasification, liquefaction, and trading of LNG. The company, together with the fleet held by Golar LNG Partner LP, owns and operates 25 vessels comprising 6 FSRUs and 19 LNG carriers.
If investors and readers go through the company’s news releases over the last 6-9 months, most of the news and developments have been related to floating LNG vessels or FLNG vessels. FLNG is a floating facility that has the capability to produce, liquefy, store and transfer LNG at sea. The FLNG technology is just gaining prominence in the market for the ease of operations and due to relatively lower cost that is involved.
Golar LNG has embarked on a mission to convert few of its LNG vessels to FLNG vessels. The bullish factor to mention here is that these FLNG vessels have witnessed strong demand already.
In June 2015, Golar LNG and Perenco Cameroon signed an agreement for FLNG vessel that will commence operation in 2Q 2017. According to Golar LNG, this FLNG vessel will generate an EBITDA in the range of $170 million to $300 million in the first full operational year.
Similarly, Golar LNG also signed an agreement with Ophir Energy in May 2015 for another FLNG vessel. This vessel will commence production operation in 2019 and will generate $350 million in annual EBITDA for Golar LNG. It is clear from these two recent contracts that the FLNG potential is huge.
Golar Energy has another LNG vessel that is being converted to FLNG vessel and I am of the view that the vessel can also attract contracts in the coming quarters. Since all the vessels are being converted from LNG to FLNG vessels and since the clients will commence operation on or beyond 2017, the big growth for Golar LNG is still few years down the line. However, this is a good time to accumulate the stock with a long-term horizon.
Besides the FLNG project that is a long-term growth driver for Golar LNG, the company’s revenue and cash flow will continue from long-term contract for Golar LNG Partners with clients such as BG Group, Petrobras and ENI among others.
For Golar LNG, a large number of vessels are in the spot market and that is a potential risk. However, if the FLNG demand increases in the coming 12-24 months, I believe that there will be many more LNG vessel conversion to FLNG vessels. For Golar LNG, FLNG might be the future.
From a balance sheet perspective, Golar LNG concluded the sale of Golar Eskimo to Golar LNG Partners LP for $390 million in the first quarter of 2015. The company also sold 7.17 million Golar Partners common units generating net proceeds of $207 million. This has provided a near-term liquidity boost to the company. I also believe that Golar LNG’s debt will increase in the coming quarters as the company invests in the building of FLNG vessels, but debt increase is not a concern because the FLNG vessels have long-term contracts in place.
One of the key risk factors for Golar LNG is a decline in natural gas prices. I do believe that natural gas prices have bottomed out and are likely to trend higher in the coming years. However, the level of oil and gas exports from Iran can change that view once sanctions are lifted. Therefore, even with a bullish view on Golar LNG, I would advise gradual exposure to the stock. Since the big EBITDA generating projects are still few years away, the stock can be accumulated over a period of time.
