Golar – NASDAQ:GLNG

18/04/20

Company Background: 

Golar is one of the world’s largest independent owners and operators of marine-based LNG midstream infrastructure – active in the liquefaction, transportation and regasification of natural gas. 

A close up of a map

Description automatically generated
Company data(17/04/20)
Market Capitalization600 mill $
Revenue FY19449 mill $
EBITDA FY19255 mill $
Debt2,119 mill $

What is the business of the company:

Golar has three divisions: shipping, FNGL and downstream. The shipping division accounted for 52% of its revenues in 2019. Meanwhile, FNLG accounted for the rest. 

The downstream division started its operations last 26th March 2020. It has a contract of 25 years with the Brazil government to sell the electricity produced at a fixed price. Consequently, its revenues are set at 120 Mill$ per year(inflation-adjusted and in Brazilian currency) and they have to be added to the obtained in the other two divisions.

The shipping division has ten ships, six of them are tied to long-term contracts. Consequently, its revenues are fixed, the rest work on spot prices. The vast majority of the natural gas supply comes from the US, and the majority of the demand comes from Asian countries, mainly China, Japan and South Korea.

The FLNG division has one cargo which is tied to a long term contract (this new modality is the one which provides the highest margins. In addition to that, because the Floating Natural Gas Liquefaction does not need infrastructure associated, it is becoming prevalent in developing countries). Golar is building a new FLNG cargo tied to a 20 years contract with BP. This cargo will start operations in 2023.

Why do we think that it is attractive?

The companies have changed their strategy in the last couple of years where the shipping business operated mainly on the spot instead of working tied to long-term contracts, which brings stability. Golar has moved from a cyclical business into a one which guarantees fixed cash-flow. Currently, it is looking for a buyer to sell its shipping division and focus on FLNG and downstream.

After a considerable stock price fall due to the COVID-19, the delay of one year suffered from the new FLNG carrier from BP. Golar share price is at 5$ while Golar’s book value prices its shares at 16$. However, this is not the only main point. Still, Golar’s downstream division also makes money if the natural gas is at low prices as it uses natural gas to transform it into electricity. Because of the amount of fracking in the US, the production of natural gas is at its maximum level, bringing down its prices.

Catalysts: 

The company is modifying its complex structure, which is putting some investors away from Golar and simplifying it.

Golar is looking for an investor to sell its shipping division (There is no market for selling natural gas vessels individually, so it has decided to sell all division). Golar focuses on becoming a stable cash flow company, moving to downstream (Golar Power) and turning out its vessels from spots contract to long-term ones.

From 26th March, its downstream division (Golar Power) has started to produce revenues. In addition to that, China is reactivating its economy. Consequently, the demand for American natural gas will progressively increase to previous levels (increasing the revenue from shipping)

Valuation: 

I have valued the company following a DCF model, assuming these hypotheses for the next five years:

  • Spot price of 45000$/day
  • 100% utilisation of FLNG carrier
  • 60% long-term contracts on its shipping division at its current prices
  • Change Real (Brazil) – Dollar constant at 5
  • Capex and D&A will be in line with last years
  • NWC constant
  • Natural gas prices from 1.5 to 2.5 in the next 10 years 
  • FGNL vessel for BP will be operative in January 2023

Risks:

  • The volatility of the natural gas price
  • The volatility of the spot prices (shipping division)
  • Debt – There is a concern about the amount of leverage that the company has. Its assets have a lot of value, but there will be problems if there are problems with the cash flow
  • Currency rate (Brazil) – It is going down considerably the last 12 months

Results:

From our point of view, Golar is one of the most undervalued companies in the market. It is true that in the last years, due to its bet for spot contracts, its earnings have been highly volatile. There was not the downstream division, and the cost of any of its acquisition has been huge due to the characteristics of its business.

The situation is different now, Golar has become a stable cash flow infrastructure company, and they are in a sector which is growing very fast. However, it is important to keep an eye over the cash flows in case of future problems

Taking into account the current price (5.64$/share), we aim for a 219% increment, up to 18$/share. The risk of this investment is high, due to the characteristic commented previously.

Annex:

Disclaimer: This cannot be taken as an investment recommendation. The picture is property of Golar LNG Limited.