LNG Ship Owners Gaining as Obama Signals Export Support

Image: Golar LNG

(Bloomberg) — Golar LNG Ltd. and other tanker owners are reaping the benefits of President Barack Obama’s suggestions that he will back plans for liquefied natural gas exports equal to 17 percent of global trade.

Obama said May 4 the U.S. probably will be a net shipper of natural gas by 2020. He is reviewing export projects that will probably add 41 million metric tons a year to the 236.3 million- ton worldwide LNG market. Shares of Golar, which operates nine tankers hauling the fuel, rose 5 percent to $35.91 since the president’s remarks. The company, led by billionaire John Fredriksen, will gain another 20 percent in 12 months, according to the average of 13 analyst estimates compiled by Bloomberg.

The U.S. extracted the most natural gas in at least seven decades last year and domestic energy production was the highest relative to demand since 1991, Energy Department data show. The proposed deliveries would make the nation the third-biggest LNG exporter by 2020, Morgan Stanley estimates. The extra cargoes will require additional shipping capacity equal to as much as 50 percent of the existing fleet, according to RS Platou Markets AS, an Oslo-based investment bank.

“When Obama goes out and says this, it tells me that the export projects in the U.S. are very likely to get approvals,” said Erik Nikolai Stavseth, an analyst at Arctic Securities ASA in Oslo whose recommendations on the shares of shipping companies returned 16 percent in the past year. “None of the public companies are saying, ‘We count on this for our business plan to work,’ but if it does materialize, it will definitely boost shipping demand.”

Break Even

The additional cargoes will help underpin rates that have made LNG tankers profitable for the past two years, at a time when most of the merchant fleet is losing money because of a capacity glut. The carriers earned a record $128,000 a day last year, about 60 percent more than they need to break even, according to data compiled by Bloomberg.

Golar, based in Hamilton, Bermuda, will report an 11 percent gain in net income to $130.9 million this year, rising to $408.5 million in 2015, according to the mean of as many as 12 analyst estimates. Shares of the company, which has more orders for new vessels than any other publicly traded owner, will reach $43.18 in 12 months in New York trading, according to 13 predictions. The stock fell 17 percent last year.

The biggest LNG tanker owner is Doha-based Qatar Gas Transport Co., which typically only moves cargoes from the Persian Gulf nation. While MISC Bhd. in Kuala Lumpur is the second-largest operator, it has 27 LNG carriers out of a fleet of 136 vessels.

Thermal Units

The U.S. is producing the most natural gas in Energy Department data that goes back to 1936. Demand in Asia means regional prices would favor U.S. exports right now. The fuel costs $4.31 per million British thermal units on the U.S. Gulf Coast, compared with $10.33 in northwest Europe and $16.81 in Japan, according to data from Poten & Partners Inc., a New York- based shipbroker.

Cheniere Energy Inc. already won approval to build an LNG plant in Louisiana that will start shipping 9 million tons a year by 2016. That’s equal to almost 4 percent of last year’s global trade, according to the International Group of LNG Importers. There are about 20 more companies with applications pending.

Obama told business leaders at a meeting in Costa Rica on May 4 that the U.S. was likely to be a net exporter of natural gas as soon as the end of the decade, according to a transcript on the White House’s website. While a ruling on LNG shipments has yet to be made, “I can assure you that once I make that decision, then factoring in how we can use that to facilitate lower costs in the hemisphere and in Central America will be on my agenda,” Obama said.

Fund Managers

“The president’s remarks show that we’re getting closer and closer to a final action,” said James Lucier, the managing director of Capital Alpha Partners LLC, a Washington-based energy-policy adviser to fund managers, commodity traders and banks. “The issue is approaching a level where some decision is needed, and it’s clear it will be positive. I’d be surprised if we don’t see permits by early July.”

Dow Chemical Co., the biggest U.S. chemicals maker, and Alcoa Inc., the country’s largest aluminum producer, are among those who have cautioned against the projects because they may increase fuel costs. Energy represents as much as 85 percent of some manufacturers’ expenses, according to the Industrial Energy Consumers of America, a trade group for companies with a combined $1.3 trillion of annual sales.

Break Even

New export projects are often delayed, and two of the three global projects scheduled to start last year still aren’t shipping cargoes. LNG tanker rates fell 21 percent to $98,000 this year, according to Fearnley LNG, a shipbroker in Oslo. The vessels need about $80,000 to break even, according to Pareto Securities AS.

U.S. projects capable of shipping 41 million tons of LNG a year have investment and are awaiting government approval, according to Arctic’s Stavseth. They would add demand for 200 vessels, compared with a current fleet of 380 ships, said Herman Hildan, an Oslo-based analyst at Platou.

The cargoes would have a disproportionate impact on demand for tankers because the voyages would be about double the current average, Hildan said. Japan, the biggest LNG importer, is about 10,700 miles from the Gulf of Mexico. That compares with 7,500 miles from Qatar, the largest exporter.

Marine Engineering

Tanker rates reached a record last year as Japan expanded LNG imports after closing nuclear reactors following the 2011 Fukushima disaster. There are orders for 103 new ships, equal to 28 percent of the current fleet, according to data from Clarkson Plc, the world’s largest shipbroker. The biggest builders are Samsung Heavy Industries Co. and Hyundai Heavy Industries Co.

LNG is gas cooled to minus 160 degrees Celsius (minus 256 degrees Fahrenheit) so it occupies 600 times less space. Trade in the fuel, which produces about half the carbon dioxide emitted by coal, more than doubled in the past decade.

Qatar Gas Transport will report an 11 percent gain in net profit to $232.7 million this year, the median of three analyst estimates shows. Shares of the company rose 6.7 percent this year, rebounding from three annual drops. MISC will more than double earnings to $403.4 million in 2013, the median of 12 estimates shows. Its stock advanced 2.3 percent this year, after dropping 49 percent in the prior two years.

Global LNG output capacity will reach 454 million tons by 2020, with 50 million tons from the U.S., 100 million tons from Australia and 77 million tons from Qatar, according to New York- based investment bank Morgan Stanley.

“The U.S. is a huge game-changer for the back part of this decade,” said Jonathan Chappell, an analyst at Evercore Partners in New York whose recommendation on the shares of shipping companies returned 15 percent in the past year. “When you talk about the potential seaborne trade that could come from the U.S. ramp-up, it could be a huge demand driver.”

– Isaac Arnsdorf, Copyright 2013 Bloomberg.