Golar LNG (NASDAQ: GLNG) owns and operates a fleet of vessels that transport liquefied natural gas (LNG). Golar is unique in that it is dedicated exclusively to LNG transportation, unlike most of its competitors, which instead concentrate on crude oil transport. As of June 2008, the company had 13 vessels under its management, two of which are operating in the spot market and the rest of which are employed under medium- and long-term charters.
Golar's business depends on the demand for liquefied natural gas, a compressed form of natural gas that is easy to store and transport. Since 2000, LNG consumption in the U.S. has grown at a rate of 8% per year, and demand from countries in East Asia continue to drive world natural gas use. Simultaneously, as more shipyards are building LNG tankers, the cost of an LNG vessel has gone down as well, although LNG tankers are still relatively more expensive to produce than crude oil tankers. For instance, a 70,000 tonne-capacity LNG tanker delivered in April 2008 cost $160 million, while a typical 200,000 dwt to 300,000 dwt VLCC tanker cost $86 million in 2007. As a result of environmental concerns and the high price of oil, natural gas is becoming an attractive alternative to crude oil. Golar is betting on this trend and has plans to expand both its fleet and its offering of services along the LNG supply chain.
As of Q1 2008, Golar's fleet consisted of 13 vessels, 11 of which were on medium- to long- term charters with BG Group, Shell, Petrobras, or Pertamina. The other two vessels were competing in the spot market. For its 2007 fiscal year, Golar earned $225 million in revenues, over four-fifths of which were from BG Group, Shell, and Pertamina.
Three of its vessels are being converted to Floating Storage and Regasification Units (FSRUs) and will be completed in 2008 and 2009. This has been part of Golar's overarching strategy to attempt to vertically integrate both upstream and downstream of its traditional LNG transport; it wants to expand from its core business of transportation by being involved in the production and liquefaction processes on the upstream and the regasification and storage processes on the downstream. FSRU development falls into the downstream category; they are mobile, offshore terminals that vaporize (gassify) LNG and pipe it to the coast
For the past years, Golar has been focused on increasing the size of its fleet while maintaining its obligations to customers. Revenue has grown since 2004 as a result of the delivery of three newbuildings (newly built ships) since January 2005. Revenue did, however, decline in 2007 due to the expiration of one of Golar's long-term charter contracts; the previously chartered ship then competed in the spot market and earned lower rates and had lower utilization than before. Net income nevertheless grew over the same period after the company sold one of its newbuildings for $92.5 million, making a $41.1 million profit. The global LNG vessel fleet consisted of 266 carriers with total capacity of 34 million cubic meters, and there were 124 vessels on order books as of the end of March 2008. In contrast, FSRUs are relatively new to the commercial market, and there are only a few companies actively competing for FSRU contracts.
Contrary to many of its competitors, Golar focuses solely on liquefied natural gas vessels in its fleet. World natural gas consumption has grown at a rate of 2.5% annually between 1996 and 2006 , and from 1986 to 2006, world trade in LNG has grown from nearly nothing to half a trillion cubic feet. As world oil prices rise, natural gas is becoming a more attractive alternative to petroleum. For instance, demand for natural gas in the Asia Pacific region has increased because gas-fired power plants are more efficient than oil-fired steam power plants, natural gas use reduces dependence on imported oil, and it is environmentally cleaner. Supplying countries have correspondingly expanded the capacity of their natural gas plants. Natural gas currently makes up over 20% of the world energy supply, a share which has been on the rise since 1980 and which continues to increase due to developments in the Asia Pacific region.
As of March 31, 2008, Golar's balance sheet had total long-term debt of $745 million, most of which is exposed to a floating rate of interest. While the company uses interest rate swaps to manage risk, significant increases in interest rates still adversely effect Golar's net income through higher interest payments. Additionally, Golar's debt load makes it difficult for the company to fund future vessel acquisitions or raise working capital levels since debt payments limit its available cash.
Golar's revenues are paid to it largely in U.S. dollars, but the company has operating and administrative costs that it must pay in other currencies, such as the British pound or the euro. Since the dollar has, in general, been weakening relative to the other currencies in which Golar conducts business from 2005 to 2007, the company has had to convert more of its dollars into other currencies to cover its expenses, cutting into net income. For instance, the company has estimated that for 2008, a 10% depreciation of the dollar against pounds would increase its expenses by about $1 million and a 10% depreciation of the dollar against euros would increase crew costs by $1.3 million. While the company has entered into foreign exchange futures contracts to reduce its exposure to foreign exchange rate fluctuations, these hedges are not foolproof.
Some of Golar's major competitors include:
Golar distinguishes itself by holding a highly homogeneous fleet of tankers designed to transport liquefied natural gas. Its competitors either focus on shipping crude oil and have just a few LNG carriers in their fleet, or they divide their resources between shipping liquefied petroleum products and liquefied natural gas. Golar is also attempting to vertically integrate along the LNG supply chain, starting with the conversion of three of its vessels into FSRUs.
|Company||LNG vessels in fleet||LNG vessels in operation as of March 2008||Estimated Market Share as of March 2008|
|GLNG||13||10 on time charter, 2 in spot||5.2%|
|OSG||4||4 on time charter||1.5%|
|BW Gas ASA||13||10||5.6%|