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Liang Chen
Steven Chen
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Gaztransport et Technigaz: A Pick-and-Shovel Play on Natural Gas

A well-moated, asset-light, promising and cyclical company

February 16, 2020 | About:

If you are a long-term bull on natural gas, Gaztransport et Technigaz (XPAR:GTT) may be right for you. The French company is an engineering expert in the field of liquefied gas and, in particular, liquefied natural gas (referred to as “LNG”). Combining operational efficiency and safety, it provides containment systems with cryogenic membranes and relevant technologies used to transport and store natural gas.

With roughly 350 employees, this 3.5 billion euro ($3.79 billion) market cap business took advantage of its mission-critical, highly-reputed patented technology and built license-based operations to charge royalties (approximately 95% of fiscal 2018 revenue) and service fees (5%, including consulting, training and maintenance). The core applications of technologies provided by Gaztransport et Technigaz are transportation and storage of LNG. At the same time, the company has also been expanding into the adjacency of LNG as a fuel, which is considered a “greener” and more cost-efficient energy solution that is expected to take a sizable revenue share at the company in the end.

In addition to LNG as a fuel, the ongoing increasing share of gas in the energy mix may also generate secular growth opportunities for the company. Per BP Energy's outlook for 2019, gas is expected to exceed coal by 2025 and could become the top source of energy in the early 2040s, driven by environmental, pricing and availability factors. Meanwhile, in the gas export domain, LNG is expected to surpass pipeline by 2035 thanks to the greater flexibility. When it comes to the growth strategy at large, management emphasizes market penetration, regional expansion and new applications.

To compete favorably in the LNG transportation and storage niche with a zero error tolerance, reputation plays a critical role. Gaztransport et Technigaz provides technologies that are approved by international classification societies as well as recognized and recommended by major gas production companies worldwide. The company has also been continually optimizing these technologies to meet the requirements of regulators, ship owners and shipyards, which demands deeply insightful know-how and strategic focus on the niche that may not be economically viable for a larger group to invest in heavily.

This is what we like about the company the most – a capital-light model with both downside protection and upside potential. Gaztransport et Technigaz has delivered consistently high returns on capital since its initial public offering (see below). Its main rival, Moss Maritime, is a subsidiary of Italy-based Saipem (MIL:SPM), which specializes in engineering and construction services for the oil and gas industries.

Every business has a risk profile. Our main concerns with the long-term future of Gaztransport et Technigaz at the moment include the concentration risk (in terms of geographies, products and services), the cyclicality of the natural gas market, the lack of recurring transactions and the acquisition risk (where the management may get distracted from initiatives for organic growth). Check out the historical movement of the global price of natural gas and the company’s revenue in the chart below.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any securities mentioned in the article.

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About the author:

Steven Chen
Steven CHEN is a quality-focused investor (with bottom-up opportunistic approaches), an ex-hedge fund analyst on Wall Street, a serial entrepreneur, computer scientist, and free-market capitalist.

Steven is the Managing Partner of Urbem Partnership, a value/quality-focused investment partnership fund (www.urbem.capital), and Urbem Capital, the research boutique that focuses on the highest-quality 0.1% of all public companies worldwide.

Steven can be reached at [email protected] or through LinkedIn.

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