Last week, I wrote about a cheap opportunity in the liquefied natural gas (LNG) space which is currently experiencing explosive growth thanks to growing demand from Europe and Asia: Dynagas LNG Partners LP (DLNG, Financial), which was trading 40% below its book value.
This fuel is unlike other fossil fuels. For a start, turning natural gas into LNG requires a tremendous amount of energy and specialist equipment. Constructing facilities capable of turning natural gas into LNG in large quantities can cost tens of billions of dollars.
These facilities can take a decade to build, and as you might expect, companies cannot just throw them up anywhere they want. A lengthy planning and approvals process needs to be followed in every country around the world.
It is also difficult to store and transport this fuel because it needs to be kept at a low temperature and in vessels that meet specific safety requirements. And then, when you get to the final destination, changing the liquid back into a gas requires yet more specialist facilities.
This is the problem Europe faces right now. The region is desperate for new gas resources after Russia cut off supply, but until recently, most of the region's non-Russian local regasification facilities were located in the U.K. and Spain. The continent lacks the infrastructure to transport gas from these countries to the center of the block, especially Germany, in significant quantities, although this is changing rapidly.
That's where Golar LNG (GNLG) comes in. This company is at the center of the transition. This is one of a handful of pure-play businesses that has a significant foothold in the liquefaction and regasification of LNG. The majority of the industry is controlled by the big oil companies, such as Shell (SHEL, Financial), the largest energy trader in Europe and one of the world's largest LNG producers and traders.
Golar owns two floating LNG (FLNG) vessels. As noted above, building LNG facilities on the shore can be costly and consumes enormous amounts of capital. FLNG vessels can be built anywhere in the world and then sail to their destination. This significantly reduces the cost and capital spending requirements for companies looking to increase production. It also helps get around any planning or regulatory requirements that might come with a facility based on land.
The most important quality of these FLNG vessels is undoubtedly speed. Whereas a traditional facility might take a decade to build, they can be up and running in a matter of months. That is why Europe has turned to these facilities this year. Germany hopes to have several supplying its economy by the end of next year, a feat that would be virtually impossible using traditional facilities.
As well as its FLNG fleet, Golar also owns 31% of gas carrier Cool Co. (OSL:COOL, Financial). It transferred eight modern LNG tankers to this company at the beginning of 2022. As the demand for the liquefied fuel grows around the world, it seems almost certain that the demand for vessels to transport it will also increase. Finally, Golar also owns 6% of LNG supplier New Fortress Energy (NFE, Financial).
Compared to Dynagas LNG Partners LP (DLNG, Financial), I like Golar a bit less because it is comparatively more expensive, but it is still cheap on a standalone basis. Shares in the company are currently selling at a price-book ratio 1.3 and a forward price-earnings ratio of 13.2. With the demand for LNG only set to grow in the years ahead, the higher valuation looks justifiable in my view. With its diversified portfolio of LNG holdings, Golar should almost certainly benefit from the industry's growth.
