As it looks like oil and natural gas prices may have bottomed out, some companies are looking to take advantage and set a strong pace for growth going forward. Golar LNG Ltd. (NASDAQ: GLNG) has some ambitious plans for the future, and Merrill Lynch breaks down where it thinks the company is going. On top of the big gains already seen, the firm has outlined why Golar could have about another 30% upside.
What caused the jump in share prices was a surprise move Tuesday morning. Golar signed an agreement with Ophir Energy for Golar’s GoFLNG vessel Gimi, its second floating natural gas production facility (FLNG). A midstream process liquefies natural gas, using a floating offshore vessel, enabling the global movement of liquid natural gas (LNG). Golar has also commenced discussions with Keppel (yard converting vessels) and Black & Veatch (equipment) to exercise an option for a third FLNG conversion.
The heads of terms agreement was approved by Ophir’s Equatorial Guinea, Block-R upstream partner GEPetrol, and will be formally ratified next week. This agreement is structured as a 20-year tolling contract, commencing commercial operations in the first half of 2019. It is worth noting that in the agreement the tolling tariff is directly comparable to the USA Gulf of Mexico brownfield LNG projects currently under construction. At full production, the vessel will have contracted capacity of 2.2 metric tons per annum of LNG to be marketed by Ophir and GEPetrol. The project is expected to deliver an EBITDA for Golar of approximately $350 million per year. Final investment decision is expected in first half of 2016, following completion of an upstream FEED study.
For some background on Golar: it is one of the world’s largest independent owners and operators of LNG carriers and floating storage and regas units (FSRUs), with 40 years of LNG shipping experience. It has 11 LNG vessels onwater and one new-build FSRU on order. It also has three 1970s-era vessels, two of which are contracted for FLNG conversion and a third option potential.
Merrill Lynch reiterated a Buy rating for Golar and raised its price objective to $60 from $40, implying an upside of 59.4% from Monday’s close ($37.64) or 30% from current prices. The brokerage firm described its valuation as:
Our $60 objective is based on a sum-of-the-parts valuation. We incorporate market rates for its on-water LNG carrier business, to arrive at an $22 per share value (equates to 0.75x current NAV), a $8 per share value for its Golar LNG Partners stake (GMLP), and we value its two contracted floating LNG vessels and its third option based on a discounted cash flow (DCF) analysis ($10 per share), where we apply some discount given recent energy market weakness.
Risks to Merrill Lynch’s valuation include:
- Volatility in the trading market for LNG transportation due to the supply and demand balance
- A change in the global supply or demand for natural gas, and hence LNG
- A change in the pricing of LNG substitutes, such as oil and coal
- Delay or default by the shipyards would adversely impact the company’s operations
- The risks of building out and executing on a FLNG, which has not been done to date
24/7 Wall St. gathered a couple of key points regarding Merrill Lynch’s outlook on Golar:
- Return on equity is seen rising from -0.3% in 2015 to 4.7% in 2016 and 6.4% in 2017.
- Sales are seen rising from $110 million in 2014 to $148 million in 2015, to $303 million in 2016 and to $334 million in 2017.
Merrill Lynch described its investment thesis as:
Golar LNG is a leader in the LNG transport and infrastructure sector, its diversity of offerings (LNG carriers, FSRUs, FLNG) and its new-order book provide it with an advantage over many of its peers and competitors. We expect LNG spot rates to slowly improve as terminals come on-line in Angola, Australia, and the U.S. Also, it has contracted to build out its Floating LNG production vessels (FLNG) business, which is expected to have attractive economics.
Shares of Golar were up 27.9% to $48.15 Tuesday, in a 52-week trading range of $27.72 to $74.44. The stock has a consensus analyst price target of $52.56.