The ongoing weakness in oil prices continues to reverberate around the world’s energy markets, including the liquefied natural gas (LNG) market.
In fact, some pundits claim that low oil prices will deliver a knockout punch to the LNG market. That view shows a lack of understanding about how LNG is sold in a key part of the market – Asia.
But that short-sightedness does give investors an opportunity to profit from a specific segment of the LNG market.
First of all, Asia has a high demand for LNG cargoes. Of the approximately 4,000 LNG shipping voyages made in the course of 2013, about 2,500 went to various Asian countries.
The point that pundits are missing is the fact that most LNG sold in Asia is sold on the basis of contracts linked to the price of oil, not on the price of natural gas.
By early next year, the slide in the price of crude oil will be reflected in those Asian LNG contracts. This means that LNG will soon be cheaper for nations with this kind of contract. That price decline is likely to increase demand for LNG across the continent.
That lower price may not be great for the producers of LNG around the world. But, the increased demand for cheaper LNG is music to the ears of one particular segment of the LNG industry, the LNG shipping industry.
The industry had been facing headwinds in the form of too many ships and weak demand over the past few years – LNG shipments in 2013 actually fell 1%.
But now the winds are a-changin’…
Not as many LNG-carrying ships are being built, even though there more LNG liquefaction projects are coming online in places like Australia and the United States.
The average journey length is another factor that’s been in the industry’s favor for three years and will only get better as demand from Asia rises. The longer a journey is, the more time each ship will be in use, meaning fewer ships available to deliver LNG cargoes.
LNG Shipping Companies
All of these factors bode well in the months ahead for LNG shippers, and there are a number of companies that will benefit, but two stand out to me.
The first is a company controlled by Norwegian shipping billionaire, John Fredriksen. Golar LNG (GLNG) is one of the world’s largest independent LNG carrier companies, and it’s been in business for more 30 years. It’s updated its existing fleet with the delivery of 11 newly built vessels, the last of which will be delivered in early 2015.
Adding to that is the fact that Golar is converting the older part of its fleet into floating liquefied natural gas vessels, which has potential to be a big winner.
A second LNG shipping company to consider is GasLog Ltd. (GLOG).
The company’s fleet consists of 15 LNG-carrying vessels that are very new, with the first ship delivered in only 2010. GasLog also manages and operates five LNG ships that are owned or leased by BG Group (BRGYY).
GasLog also has another eight LNG vessels on order, meaning it’ll maintain its position as having the youngest LNG tanker fleet in the industry.
The company also has signed customer contracts, which means most of the fleet will be operating near 100% capacity.
With global LNG demand forecast to grow at least 50% by 2030, these LNG shippers should prosper.
And “the chase” continues,
P.S. Follow me on twitter @TimMaverickWSD!