Any name related to the energy sector has steeply declined in the last 12 to 15 months and Golar LNG (GLNG, Financial) is no exception to that.
Golar LNG, in particular, has witnessed a free-fall in the past, and the stock is now down by 54% for YTD15. The company’s third-quarter results were the trigger for a sharp decline, and strong results from the company aren't expected in the foreseeable future. However, Golar LNG is working on a long-term plan, and the steep correction is a good opportunity to consider some exposure to the stock. This article discusses why Golar LNG can be an excellent long-term investment.
For the long term, the key game changer for Golar LNG is conversion of LNG vessels to FLNG vessels and the impact on the company’s EBITDA coming from FLNG contracts. Just to put things into perspective, the GoFLNG Hilli conversion is under way, and the Cameroon project is likely to commence in the second quarter of 2017. The potential EBITDA ranges from $170 million to $300 million for two-train operation and $240 to $430 million for three-train operation. With an eight-year project life, the above annual EBITDA implies $2 billion in EBITDA visibility at a $250 million estimate.
Over the next three to five years, the company’s LNG vessels will be increasingly converted to FLNG vessels, and the contract term for FLNG contracts is likely to range from five to 10 years (or even longer). This will provide stable EBITDA and cash flow visibility in the years to come. However, the FLNG conversion and long-term contracts will have a meaningful impact on the company’s EBITDA only two to three years down the line. Sentiments are depressed and similar valuations might be difficult to get when FLNG vessels deliver value.
As of 3Q15, Golar LNG had 16 LNG vessels, and three vessels are undergoing FLNG conversion or are conversion candidates. With most of the vessels trading in the spot markets, Golar LNG is likely to be actively looking for more FLNG contracts that provide firm revenue visibility. This will translate into stock re-rating as a large number of spot market contracts creates revenue uncertainty.
From a financial perspective, investors will point out that the company’s FLNG transformation will require significant financial flexibility. However, that is not a concern considering the fact that all FLNG conversion vessels are contracted, and the debt incurred for conversion will be serviced when EBITDA inflow commences.
Golar LNG has maintained a dividend of 45 cents per share in the last quarter. That dividend could be suspended in order to conserve cash for growth projects (particularly FLNG development). The markets also could discount dividend suspension, but that should not be a factor to avoid exposure to the stock.
Golar LNG is a good long-term investment, and the stock is trading at attractive levels considering a three- to five-year investment horizon. However, investors are urged to refrain from considering a big exposure to the stock. Gradual accumulation on declines is likely to be a good strategy. There are expectations of a rate hike this week, and it can strengthen the dollar and cause some more pain for the energy sector.
Disclosure: No positions in the stock
