LNG shipping stocks show resilience despite uncertainties over global GDP growth, high inflation and the ongoing geopolitical crisis caused by the conflict between Russia and Ukraine.
The Drewry LNG Shipping Stock Index is up 12.7% YTD as of June 28, 2022, outperforming the S&P 500, which is down 19.8% over the same period. Golar LNG’s share price rose the most (87.9%), while Flex LNG rose +24.8% and Nakilat +18.2%. LNG stocks have mainly benefited from growing European demand for LNG as the region moves away from Russian natural gas. We explore the reasons for the resilience of LNG shipping stocks amid the sell-off in the broader stock market and whether investors should consider adding LNG stocks to their portfolios.
FSRU Stock: Key Benefits
Companies with exposure to FSRUs have particularly benefited as European countries are opting for FSRUs over their land-based counterparts. FSRU terminals can be installed in one to two years compared to three years for LNG import terminals. Golar LNG’s share price has benefited from its exposure to FSRUs, the company’s stake in New Fortress Energy (NFE, a leading FSRU player), and high crude oil prices. Amid a buoyant FSRU market, Golar LNG has signed a contract with Snam to sell its 19-year-old Golar Arctic LNG carrier for $287.9 million (€269 million) as FSRU after conversion. The company also signed an agreement with Snam to sell Golar Tundra FSRU for USD 350mn. NFE, which has a fleet of seven FSRUs and in which Golar LNG has a 6% stake, has earned 68.5% YTD.
FSRUs are in high demand and Europe is seeking at least 16 FSRUs to replace the majority of Russian gas imports. We believe that countries such as Germany, France and Italy are willing to pay a high premium to acquire the assets, but with only 50 FSRUs (as of March 2022) in operation globally, the demand for FSRU providers has strengthened.
Buoyant market drives new improvements in charter contracts
Upcoming EEXI and CII regulations and charters’ desire to insure LNG ships amid geopolitical tensions are other factors driving demand for LNG shipping. Flex LNG has won fixed charter contracts for 12 vessels since March 2021, suggesting strong demand for its young fleet, with three of these charter awards in June 2022. The latest charter awards announced in June 2022 were span between seven and ten years, longer than most of the company’s existing charters, and suggest a growing preference by charterers to opt for a longer-term charter. Nakilat announced during its 4Q21 results that it has won the term lease for the four newbuild vessels delivered between 2Q20 and 1Q22.
Outlook for LNG transport
The war between Russia and Ukraine has brought the energy sector center stage with an increased focus on the LNG industry as Europe tries to move away from Russian LNG imports and is increasing its LNG import facilities by investing in FSRUs. As there should be more FIDs for LNG liquefaction projects in the coming years, leading to higher demand for LNG carriers, we expect long-term and spot LNG shipping rates to firm up. LNG shipping lines will benefit from this high charter rate environment. Expectations of tight LNG supply and European geopolitical tensions are accelerating LNG buy-sell deals and, in turn, FIDs for new LNG projects. Charterers prefer long term charter to hedge volatility in a limited supply market. While new order momentum is high in 2022 YTD with close to 100 LNG ship orders, we expect LNG shipping rates to continue to rise as most new orders are firm chartered.
Upcoming EEXI and CII regulations to support LNG freight rates
As the EEXI and CII regulations come into effect from January 1, 2023, we expect an increase in activity converting older flow turbine vessels to FSU for import projects, as we believe these vessels will be will be more affected by the new regulations. While these vessels will need to slow down to comply with regulations, very old vessels will become unviable and leave the fleet, affecting capacity and consequently incurring higher freight rates.
More debt capacity with a healthier balance
LNG carriers have a healthier balance sheet at the end of 1Q22 compared to 4Q20. Additionally, an increase in LNG ship prices since mid-2020 indicates increased borrowing potential that can be used to acquire new ships. Given the strong outlook, it is now comparatively easier to get a long-term charter compared to the previous two years.
We expect LNG carrier earnings to benefit from positive LNG shipping prospects in the coming quarters. Given the narrow outlook for LNG shipping and the resilience of LNG stocks thus far, we think investors may want to consider adding LNG shipping stocks to their portfolio. We prefer companies with strong revenues, a young fleet and a healthy balance sheet.