by Travis Johnson, Stock Gumshoe | August 9, 2013 7:00 am
I’ll be traveling this weekend, so I’m getting your Friday File out to you a bit early this week — I want to take a look at a couple of developments in the “Gumshoe Universe” of stocks and see if I want to change my mind about any of these companies. I also have a new stock to add to the watchlist — it just went public earlier this year and I’m not ready to invest in it yet, but I want to keep an eye on them, and I have a couple comments on some of our other watchlist stocks that I’ve been monitoring.
First, one of the speculative stocks that I own but have waffled about a bit over the past year — Golar LNG (GLNG). What’s up with Golar?
Golar LNG is a stock I bought and suggested to the Irregulars almost exactly two years ago — this is what I said about them back in January:
“Golar is probably the most aggressive and creative of the Liquefied Natural Gas shippers — they own a fleet of LNG tankers, as well as floating processing units (old tankers that have been retrofitted to serve as floating regasification units, turning LNG back into “dry” gas and feeding it right into land gas pipelines), and they’re even talking up the possibility of flexible, floating liquefaction units to serve the relatively small gas projects or offshore projects that might not justify a capital-intensive liquefaction plant (or to serve those wells during the years it takes to build a plant). Golar is a John Fredriksen company, one in a long string of aggressive firms that see a long-term trend (double-hulled tankers for Frontline, Deepwater rigs for Seadrill, etc.) and invest in it even as the crowd is worried about overcapacity. Like other Fredriksen companies, too, it uses “alternative” financing, including a captive MLP (Golar Partners, GMLP) to help make sure that investors can get solid cash dividends even from capital-intensive projects. LNG is a story that everyone knows know, and it is possible that the fleet is being overbuilt with the orders that have been placed and the increased number of tankers on the spot market (like Golar’s), but I think we’re still early in this game and that the LNG shippers will be in surprisingly high demand. The near-term risk is that over the next few years the tankers are built more quickly than the big new liquefaction plants come online, so a worse supply/demand outlook for the vessels might bring day rates down for a while, but it’s still an incredibly small market compared to oil shipping so small movements up or down can have outsize impacts … and we had a solid decade or more when almost no tankers were built before the current buildup.
“While Golar is the LNG stock I currently own and the one with what I think is the most compelling potential, I should also note that although it hasn’t been in my portfolio or made the cut as an “Idea of the Month,” I actually think GasLog (GLOG) has more of a 2013-specific story — they have their fleet buildup happening right now, and the new tankers are under contract for the next couple years, so they have a very predictable spike in earnings expected this year — if you’re really thinking just one year out then GLOG may be a better pick. They have a similar current yield, though GasLog is likely to be more predictable and Golar is more likely to do something wacky to surprise investors.”
I think that actually played out pretty well so far — GasLog has indeed been a better performer so far in 2013, but I still think Golar has more upside potential over the next several years.
Golar’s stock dipped down to near $30 last month, but has recently bounced back a bit — partly because they won an appealing contract and got a big package of financing in place at very nice terms for their newbuilding program and raised the dividend. And partly, I suspect, because they keep managing to drop down assets to their captive MLP (Golar LNG Partners, GMLP) and have now effectively separated their financials from the MLP (they still sell vessels that have long-term contracts to the MLP, and still earn dividends and incentive distributions as the General Partner of the MLP, but they no longer consolidate the financial results). They now pay out 45 cents per quarter for an expected yield of about 5%. GMLP, the MLP that was formerly a subsidiary of GLNG, yields about 6.5%. GLNG still controls slightly more than 50% of GMLP and owns the general partner.
The basic argument for all of the LNG shipping stocks is that demand will rise as LNG shipping increases with the development of more liquefaction and gasification facilities (the terminals that turn gas to a transportable liquid, then back to a gas when it comes off the ship to enter local pipelines). These are the companies that own and operate the super-chilled pressurized tankers that can move liquefied natural gas from producers (mostly Middle East, Africa, Caribbean, Australia, perhaps soon US and Canada) to the consumers and end markets (a bit to Europe but mostly Asia, particularly Japan and Korea). There was a boom in the 1970s and 1980s in LNG shipping, largely focused on the US as a large potential import market before shale gas gave us a glut instead, so there is a foundation of LNG tankers built in the 1970s and 1980s that are still operating, and there are a very limited number of large LNG exporters so the tankers have tended to operate on very long-term charters, sometimes 20 years or more.
Now the expansion of LNG production in Qatar and the de-emphasizing of nuclear power in Japan and parts of Europe have combined with the discovery of major natural gas fields that are far from the major consumers, so it hasn’t been lost on anyone that there will need to be a much larger fleet of LNG tankers and a more liquid “spot market” for these tankers to create a more efficient market as the new production comes online. It takes quite a long time to order and build a LNG tanker, but it takes substantially longer to go from a discovery of a major gas reserve through to the permitting, construction, and development of that gas field, particularly if gas prices are volatile — and there are always delays when any new energy project comes online, so the big question mark in investors minds is: what’s going to happen for those couple years when we might have too many tankers? Since those “couple years” are likely to be 2014 and 2015, what will the numbers look like for GLNG and their competitors?
Well, Golar’s move in this area, and the thing that first made them appealing to me as an investor, was to try to create a “double win” by converting some of their older LNG tankers into floating storage and regasification units (FSRU’s) — essentially, new floating import terminals for LNG that are faster to build and more flexible to move and operate than traditional land-based import terminals. That creates new demand for tankers, because you now have a new facility set up to accept shipments, and it also takes some of the older tankers out of the pool.
They’re also trying to go a step beyond that and set up floating liquefaction terminals, which will still take much more time to develop but which might help to create a more flexible global trade in LNG, making it possible to turn smaller gas fields into LNG exporters without the construction of a brand new liquefaction train for each new field. Golar is one of the partners trying to develop a LNG export facility in British Columbia, the Douglas Channel project, and it’s just made long-term charters for two of their FSRU vessels in Kuwait and Jordan (five years for Kuwait, ten years with a five-year opt-out for Jordan). Those deals will also make it possible to sell those assets down to the MLP, which will generate more cash flow for GLNG and probably allow for both GLNG and GMLP to increase their dividends.
I continue to think that Golar (GLNG) is a substantially better investment than their MLP (GMLP), partly because the dividend at GMLP has just breached the incentive distribution levels and GLNG will now receive 25% of the distibutable cash flow from GMLP … and once the GMLP dividend exceends $2.31 per year that level jumps to 50%. That gives the general partner a big advantage, I think, as does the fact that GMLP is likely to keep doing public offerings to buy vessels from GLNG, and likely to also keep taking on the vessel-associated debt from GLNG when those drop downs happen. Golar is really in the captain’s chair in this relationship, and they pay out a very solid and growing dividend in their own right so you don’t give up much in the way of income. The debt levels are pretty high, and will grow with this additional $1.25 billion to finance their next several years of newbuildings, but they have good interest rate hedges in place to keep the rate reasonable (under 4%) for at least seven years, so it shouldn’t hurt them. Most of the deals they’ve been making for FSRU and other longer-term charters would enable the vessel to break even over a period of four or five years (paying off the capital cost), and all of them generate a lot of cash flow. John Fredriksen companies (like Seadrill, my favorite offshore driller) are obsessed with turning cash flow into shareholder returns, so I expect the dividends will continue to rise for GLNG.
They’re not going to be the “safe” play on LNG tankers, though — they do have 11 newbuildings coming online over the next year and a half and none of them have contracts in place as far as I can tell, so they are certainly continuing Fredriksen’s risk-seeking behaviour, trying to get out ahead of the market demand with aggressive building of assets on spec. If the number of LNG export trains doesn’t increase substantially in 2015 and 2016 as is currently expected, then there will be a glut of ships even if more of the 40 year old tankers are taken out of operation (or converted). So that’s the risk, GLNG has good financing for their newbuilding program now, they have good drop-down deals with their MLP and good income coming from the MLP, but if demand is weak for LNG tankers in 2014 and 2015 they will have very weak earnings for a little while. For this forecasting it matters where the gas is being liquefied as well as when — there will be more demand for tankers if we’re shipping LNG from the US Gulf Coast or from West Africa to Asia than there will if we’re shipping from Qatar to Asia or from Australia to Asia, shorter trips means less demand for tankers, and the widening of the Panama Canal, expected to be done by next year, should allow for LNG Tankers to shorten some trips further. Some of their deals illustrate this — Jordan and Kuwait are both ramping up to use Golar’s FSRUs to increase LNG imports for their power plants, but a lot of that gas is likely to come just a short distance via ship from Qatar. Forecasting the business brings in a lot of variables even beyond guessing when the big Australian, African or US LNG export projects will actually come online or increase capacity.
So I still like GLNG and still hold it and reinvest my dividends, but it’s likely true that the Teekay MLP, Teekay LNG Partners (TGP) will be a steadier income vehicle — they just got some more funding in place as well, and made some long term charter deals and have a yield of 6.5%, their fleet is large and new and on long-term charters so it should be reliable if you want a bit less volatility. The other one that I often look at is the fairly new GasLog (GLOG), which is right in the middle of a major fleet expansion as well and which has more than 70% of its capacity on contract for the next three years. They also have gotten additional financing and pay a dividend that’s likely to grow, though it’s smaller (about 3%). They also have two newbuildings coming on the market over the next year and a half or so without charters, but they can buttress that with about half of their fleet being on charter until 2020 or beyond. So it’s a pretty nice mix — but they don’t have the MLP dropdown, they don’t have the aggressive Fredriksen wheeling and dealing, and the don’t have the emerging FSRU business.
If you’re really optimistic about LNG transport and want to play that market for an expected bump up in late 2014 as demand for tankers starts to rise faster than the supply (maybe), then Golar is still my favorite but GasLog would be second choice. Teekay’s TGP is a more solid and predictable play on LNG long-term, but with their fleet really settled and under contract they’re not likely to get dramatic bumps up in share price unless the market re-evaluates the LNG tanker companies as a group.
I’m taking Dole Food (DOLE) off of the watchlist — I don’t know whether the takeover by their majority shareholder will work out, but it makes it very unlikely that they’ll get beaten down in price again very soon. I suspect that the company is worth more than it’s priced at now, but also that regular shareholders are not likely to get the benefit of that discount in their going-private takeover (assuming it happens). If they takeover fails, I’ll reconsider it if the shares get a big discount again, but that doesn’t appear all that likely to me.
Likewise, I’m taking Gentex (GNTX) off the watchlist — they seem to have had trouble keeping up with the boom in the global auto industry, perhaps because they don’t have enough lower-priced offerings for their auto-dimming rear view mirrors, or perhaps because they’re losing out on the rearview camera business because they missed the LCD display business for those cameras (they’ve been trying to get the display for those cameras to run through the rearview mirror, customers seem to like the separate display screen in the dash). I’m a bit concerned that they haven’t been able to take advantage of their near monopoly, but the price has still risen so I don’t see a bargain emerging there. Since it’s not growing fast enough to have real exciting breakout potential, and isn’t cheap enough to be irresistible, we’ll let it go to free up some more space. I didn’t own either DOLR or GNTX.
Among other stocks that I haven’t written about for a long time, I’m expecting an earnings release from CVD Equipment (CVV) sometime in the next week or two, which should give a pretty good indication of how their business is rebuilding in the new facility — I’ll really be looking for the orders and forward looking commentary there.
Mail.ru (MLRUY), the Russian portal, gaming and social networking business has been steady as she goes — the return has largely been in the form of two special dividends, but the company is still in a dramatic growth market, still has a good market position in email, games and social networking sites, and I expect the next catalyst will come from Mail.ru’s large minority stake in vKontackte, the Russian language social networking site that has often been rumored as a lucrative IPO or takeover for Mail.ru but that is also under scrutiny from the government for piracy and opposition political activities … so I’m continuing to hold that one for a reasonable valuation, growing company, and growing market, but I don’t know whether that vKontackte news, when it comes, will be good or bad for the stock. There are other stocks that I haven’t touched on since January that are worth re-considering, I’m sure, but we’ll get to those piecemeal as they catch my attention.
So how about another new stock for the watchlist? I’m adding another little speculative idea that has just entered the public markets: agricultural commodity streaming.
I know, I know — commodities and streaming brings to mind the collapse of Sandstorm Metals & Energy, a stock I liked for a long time (too long, you could argue) and sold pretty recently. But this is a little bit different, it’s dealing with a volatile commodity market just like the precious metals royalty companies and the metals and energy streamers do, but it’s a renewable and much more consistently in-demand commodity: food.
This could easily not work out at all, but the idea for this new company, which is called Input Capital (INP.V in Canada, INPCF for the very illiquid pink sheets ticker in the US), is to help farmers smooth the market and to get their “upside” from either increasing yields or increasing prices — and to give young farmers capital to expand and improve the yield on their farms (and expert advise from consultants) in exchange for a set amount of the crop and a share of the upside from increased yield. The company was created by some private equity folks who have worked in agriculture and farmland capital formation and investment, here’s how they describe their operation:
“Input Capital Corporation (“Input Capital” or the “Company”) is the world’s first agricultural
commodity streaming company
- Input Capital was created to bridge the gap in available funding sources for farm working
capital by providing non-constraining long-term working capital aimed at boosting production
- Crop insurance mitigates downside crop yield risk while the negotiated interest in crop
production allows Input Capital to participate in any increased crop yield
- Canola is the initial focus of Input Capital as it is the most profitable commodity for Canadian
farmers with an addressable target market of 50,000+ farmers in Western Canada alone”
Chris Mayer wrote a good (free) piece about Input Capital before it went public, back in May, and said he thought it could be a great long-term business — that’s my early impression, too, though I don’t have the knowledge of the founders that he does and I haven’t spent a lot of time looking at the business yet. I’m going to dig in a bit deeper in the months to come, and if I like what I’ll see I’ll share my thoughts with you.
They went public pretty quietly through a reverse merger just a few weeks ago, the float is tiny and there was certainly some early investor interest so the shares jumped up immediately and have bounced around between $1.70 and $1.90 per share for most of that time. They will likely be raising a substantial amount of capital to expand through the sale of additional stock in the months to come, it appears that the IPO transaction was largely aimed at giving them a public profile and setting a price for the company’s shares to enable them to raise growth capital … so that might present an opportunity to buy in if the business ends up looking appealing and the shares dip on an equity offering, but right now they have a market capitalization of just over $60 million and only a few million in cash, their cash is tied up in their portfolio of existing “streaming” deals for Canola that should, if they’re correct, provide steady cash flow for the next six years (that’s the average length of their contracts with farmers).
I don’t yet understand what their cash flow and earnings are going to look like on an ongoing basis — the business is fairly low cost and pretty scalable, so it’s possible that they can turn cash flow positive pretty quickly (each deal they’ve made has been very small so far, right around $1 million, and they start getting payback as soon as the next crop is harvested). They are currently quite concentrated in Saskatchewan so adverse weather would hurt them over the next few years, but the model definitely has some appeal and seems to be gaining some traction as an alternative financing option for farmers who see expansion opportunities in Western Canada. You can see the company’s presentation here — long on details of their deals and on the large potential, short on financial specifics about the company, it’s operating costs, and how fast they plan to expand. I’ll put them on the watchlist at $1.80 and have been considering taking a little introductory nibble as I learn more about the company, I’ll let you know if I do so and how my opinion forms as I look into this business.
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