This article was originally posted on October 26, 2022, when we first saw the ad running. The ad continues to run and this is one of the most-requested stories at Stock Gumshoe, so we’re re-posting this solution to answer reader questions. Neither the ad nor the article below have been updated or revised since late October, and the stock in question is trading at a price very close to where it was at the time this ad started running.

The latest presentation from Alexander Green is an ad for The Oxford Club’s entry-level membership and subscription to their Communique newsletter, and the bait he’s dangling is a stock that pays a 10% yield and could go from $30 to $280 as you get rich “thanks to a HUGE mistake by Russia’s President.”

Sounds nice, eh? Good returns, plus a finger in Vladimir Putin’s eye? So what’s Green pitching this time around.

The short answer is that he’s pitching a company that owns a bunch of the LNG tankers that will be used to replace some of the natural gas that Europe used to get from Russia, before supplies were cut off and the big Nord Stream 2 pipeline damaged by sabotage following Russia’s invasion of Ukraine.

The long answer? And which LNG company? Well, let’s get to it.

What’s that “HUGE Mistake” made by Putin? Green says it was the belief that Europe’s reliance on Russian natural gas would make Germany and others back off in the face of Russia’s invasion of Ukraine… or, really, the acceleration of Putin’s decade-long attempt to re-annex Ukraine and bring it back under Russian control. From the ad:

“… what Putin failed to recognize… is that there is a replacement for Russian gas.

“It’s a way for Europe to get all the energy they need.

“And it’s a way for investors to make a ton of money in a very short period of time.

“The answer, in short, is…

“America.”

By which he means American natural gas, production of which has grown dramatically over the past 15 years, as fracking opened up the massive resources in Louisiana and Pennsylvania and elsewhere. The US has not historically been a particularly large gas exporter, but that is starting to change… and, if we build up more infrastructure, could change more in the future (not sure I’d hold my breath on the change being rapid, LNG export capacity takes a long time to build, but one never knows).

And Green says that the huge disparity between low natural gas prices in the US and very high natural gas prices in Europe, thanks to the closure of the Russian pipelines, presents us with “one of the great arbitrage opportunities in the history of the modern global economy.”

Which is true, at least temporarily, but it’s also not a surprise to anyone, or something that we really have the infrastructure to profit from in a dramatic way in the near term. There are clearly opportunities for companies in this space, particularly if we are confident that those Russian pipelines and the Russian relationship with Europe won’t be quickly restored (seems likely, but one never knows), but we should probably be careful not to overestimate the short-term opportunity.

Let’s sample a little more of the ad, to give you a sense of the pitch:

“A pipeline is the fastest and easiest way to transport gas from country to country.

“But there is no pipeline connecting America to Europe.

“Instead, for natural gas to be transported from America to Europe, it must be transformed from regular natural gas into liquefied natural gas, or LNG.

“And then that LNG is shipped across the ocean on a ship.

“Until the past few years, this was a major challenge.

“LNG has to be stored at about minus 260 degrees in order to be held in a liquid form.

“That made it very difficult to transport.

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“Not only that, but when LNG is transported, a substantial amount of it “boils off” by the time you get to your destination.

“Much of your cargo (and money) disappears into thin air.

“That’s why… up until recently… natural gas had to be provided to Europe by a nearby country like Russia.

“It was a whole lot easier to transport it as a gas through pipelines than by sea on a ship.

“But there has been a breakthrough.

“And I believe this breakthrough is in the process of making one company (and its shareholders) an absolute fortune.”

What’s the breakthrough? I’d say it’s mostly just the gradual improvement and efficiency of LNG tankers that have been built over the past decade, but Green thinks it’s a bit more dramatic…

“… because liquefied natural gas was so difficult to ship in the past, there wasn’t much profitability in transporting LNG from America to Europe.

“The old cargo ships turned a profit of only about $15,000 per day… a tiny sum for international shipping.

“But a new set of ships designed specifically for transporting LNG has come along… and multiplied the profitability many times over.

“These new ships do something very special.

“At the port, giant compressors turn the gas into a supercooled liquid at minus 260 degrees.

“It’s then pumped into gigantic dome tanks specially designed to maintain that cold temperature.

“These domes are so efficient, they don’t even need refrigeration units to cool the LNG during the trip.”

He also says the newer ships can better preserve their gas on board, even capturing some of the “boil off” of the LNG as it warms to help run the ship’s engines, which reduces the transportation costs further.

I guess that’s true, tankers do continue to get more efficient, though part of that is also just that the industry has gotten a meaningful amount of attention over the past ten or fifteen years, after languishing in obscurity for a long time (after all, pretty much everything has gotten better and more efficient over the past couple decades).

There have been LNG tankers plying the oceans since the 1960s, the basic concept hasn’t changed that much (cool the gas to make it a liquid, ship it in specialized vessels, offload it at special facilities who can turn it back into a gas for customers), but the market has grown, and has certainly begun to change — now there are many more providers of LNG, led by huge investments in new gas fields and liquefaction facilities in Australia and Qatar, which are the biggest players, and by the catch up growth of the industry in the United States, which was also the source of the first LNG shipment in the late 1950s (Russia, in case you’re curious, has recently been the fourth-biggest LNG exporter — mostly out of Siberia to Asian customers, but there are long-established export connections from Malaysia, Nigeria, Algeria, Trinidad and others, with the cargos mostly bought by China, Japan, South Korea and Europe).

It used to be that there were just a few major LNG exporters, and a few big customers, and the supply and demand were both pretty steady and the tankers moved on predictable schedules, with the tankers effectively controlled by big companies that developed the gas fields in, for example, Trinidad or Australia, and set up the system to move that gas to end users in Boston or Tokyo, who purchased the gas on very long-term contracts to ensure a stable supply… but as the numbers of suppliers and customers have risen, and the size of the tanker fleet has grown, even before the Russian invasion of Ukraine, a “spot market” started to develop, with some LNG changing hands at market prices, and some vessels chartered for single voyages instead of under 10-20 year contracts.

That was partly made possible by newer tankers — an old LNG tanker from the 1980s wouldn’t be able to sit with a full cargo for a month or two and wait for the best buyer, they would lose too much gas in the process or have to expend too much energy re-liquefying their cargo as it warmed. But newer ones are a lot more flexible and efficient, which mans they can at least theoretically load up with LNG and cruise slowly to their destination while the cargo owner waits for the best offer from a buyer. That’s still not how most of the LNG market works, most of it is still sold on long-term contracts… but there is really a spot market for LNG now, like there is for oil, even if it’s still a pretty small part of the business. And even if, of course, pipelines are still a much cheaper way to transport natural gas.

And Green gets us pretty excited about the cash flow that can be made by these modern vessels…

“These new ships are so much more efficient, they actually bring in around $200,000 in profit every day!

“And right now, because of the energy crisis in Europe, these ships are picking up loads of liquefied natural gas and turning them into record profits in Europe.

“I want to be crystal clear on this next point because it is the most important fact I’ll share today.

“Right now, these ships pay $40 million for a full load of liquefied natural gas in America… and when they sell it in Europe, it fetches them over $240 million.”

So which tanker owner is he recommending? More from the ad:

“There are a few companies doing this. But not many. Only a few smart businesspeople saw this situation coming.

“And one company in particular prepared for this perfectly.

“They actually started building out an armada of 13 state-of-the-art LNG ships between 2018 and 2021.

“And now they are one of the only companies ready to supply the natural gas Europe is desperately buying up.

“As the CEO of this company says…

‘Europe has been gobbling up LNG spot cargos on an unprecedented level.'”

Other clues about this company?

“In the latest earnings release – even before the Nord Stream 1 shut-off – profits have ALREADY grown by an astounding 25-fold since 2020!

“The company is paying a monstrous dividend of over 10%… and they are likely to increase it even more in the days ahead….

“This company has 13 ships delivering LNG around the world.

“And 12 of them are now under fixed contracts… with LNG prices locked in for between three and 10 years.

“In total, the company has 54 combined years of LNG delivery locked in for the 13 ships they operate.

“And these contracts generate more and more increasing sales each quarter.”

Some financials?

“The company had profits of just $8.1 million in 2020.

“Over the 12 months leading up to Putin’s shut-off… profits hit $202 million.

“That’s growth of 2,400%.

“But moving forward… now that Russian gas is off the table… we are looking at a company with 13 ships capable of producing $200 million on every journey from America to Europe.

“For everyone watching at home, this is easily some of the most predictable future sales growth you can imagine… because the contracts are already in place.

“The company right now has 100% contract coverage until mid-2024 at the earliest.

“They just signed two ships to seven-year deals that run through 2029.

“And another ship is contracted all the way until 2033!”

And one more clue…

“This company trades for about $30 today… but MarketBeat is putting its price target at $280 for the next year to 18 months.”

What about risks? Here’s what Green says…

“… natural gas prices could come down… though that is unlikely, with no end in sight to this conflict.

“And no matter what happens, it will make a minimal difference for this company.

“Because out of 13 ships, 12 of them are locked in at fixed prices.

“Only one is on a variable contract.

“So even if energy prices were to go down, which I do not expect, this company’s sales growth would continue.”

And we’re told that the company has already increased its dividend dramatically, and with the executives as major shareholders (insiders own 47% of the shares, Green says), that’s expected to continue in the coming years.

And, importantly during this time of frightening interest rate changes they have hedged their debts — which means they effectively “bet” on interest rates rising as a way to fix their borrowing costs. At least for now. And they have plenty of cash — $284 million, according to the ad — which should give them some flexibility, even though one imagines that they probably carry a lot of debt (pretty much all shippers are heavily reliant on debt).

The opportunity should persist as long as gas imports are still in demand, we’re told, because the world’s shipyards can’t built LNG tankers very quickly — the boats that can be built in the near future are already sold, an order placed now would get you deliver in about five years, and therefore the resale value of these ships is also increasing (which, in turn, makes it easier to borrow money).

So what is this stock? Well, there aren’t all that many shippers who specialize in LNG tankers, and fewer still that are publicly traded, so it’s not such a tough sleuthing job for the Thinkolator: This is Flex LNG (FLNG, FLNG.OL in Norway).

Flex LNG has been around for about 15 years, funded by Norwegian shipping tycoon John Fredriksen, but really got going about seven years ago when they merged with Exmar to triple their order book for new LNG tankers and then got a listing on the Oslo Stock Exchange (where it also still trades, they did their direct US listing a couple years later, in 2019). The equity raises they did over those five years or so helped to fund that big newbuilding program for LNG tankers… and those orders turned out to be pretty well-timed, as the LNG business grew. Following Fredriksen has been a fun if sometimes terrifying ride over the years, we made lots of money on investing in his Seadrill (SDRL) offshore drilling company and Frontline (FRO) tanker company many, many years ago, and both paid out massive dividends at their peak, but those also had catastrophic collapses when the cycle turned against them.

Flex LNG does own 13 tankers now, all of which are quite new, and about half of which have only been delivered in the last 18 months or so. And yes, as teased, 12 of the 13 are on long-term time charter — half of those time charters expire in 2024 or 2025, though they have options beyond that, and some go out much further (they just extended one time charter through 2033).

Shipping is a capital intensive business, buying these tankers that should last for decades but that are also extremely expensive to build — so like most tanker companies they have a lot of debt, either directly or through sale/leaseback deals with financing partners. The good thing is that their debt maturities are pretty well matched by their contracts, they don’t have to worry much about refinancing or interset rate adjustments until at least 2025… the bad thing is that they’re probably not amortizing much of the debt, so if it happens that LNG tankers are much less in demand five or ten years from now, when their contracts end and the debt matures and has to be refinanced, they might have to pay higher rates for the debt and earn lower returns from the vessel charters. That’s what has happened to oil tankers in past crashes, and has happened to other shippers as well. Shipping is a business dominated by swashbucklers who push too hard and too fast at times, the sector has created a lot of mega-millionaires and billionaires over the last several decades… but also a lot of bankruptcies.

But for now, and for at least the next several years, FLNG looks to me like it’s in really solid shape. And they have protected themselves from some of the interest rate risk in their borrowing by hedging — they haven’t gotten all of the risk out of their balance sheet, but they do say that 63% of their debt is fixed by rate swaps until 2025, at something close to 3%. That should lead to a lot of free cash flow generation over the next few years, even if the cost of that other 37% will probably pop higher (they may also be able to refinance at higher values, since their ships could be worth more today than when they were built a couple years ago).

And they did time things well, building their fleet over the past few years when prices were substantially lower — so that will help, too, because the fact that new LNG tanker orders are going through at much higher prices now should help support higher charter prices for all modern LNG tankers in the next decade or so. And most of the orderbook for new LNG Tankers is already spoken for — there are more than 200 new LNG tankers on order for delivery over the next four or five years, and, at least according to FLNG’s analysis, almost all of them are already committed to existing producers or LNG “slots” — only 30 of the tankers on order are currently available for charter, or available to match up with any new LNG production that comes online. (The global fleet is something like 600 LNG tankers, many of them very old and likely to be less desirable in a few years, when FLNG starts to have some charters up for renewal… for context, there are probably about 2,000 large crude oil tankers in the fleet right now, not counting the refined product tankers).

And as I’ve noted in the past when talking about the LNG infrastructure companies, like Cheniere or Tellurian in the US, it takes a lot of time and money to build these big export facilities for liquefied natural gas… and they essentially never get built on time, but they are also already booked out for many years. The boom in new deals to buy LNG that came this year, at least partly in response to the Russian sanctions and the invasion of Ukraine, are very long-term deals and don’t start particularly soon because there isn’t any available export capacity — some of the deals made over the summer were for 20 years of production out of the US Gulf Coast, but those 20 years don’t start until 2027. And a new export facility planned today would take at least five years to build, at least in the US (Tellurian’s Driftwood project, for example, an oft-teased new LNG export facility in Louisiana, has been in planning for a long time and may really start construction soon, but the earliest possible date for a first shipment is probably in 2026 even if all goes well).

We should note that most shippers, including FLNG, are not direct speculators — they don’t buy the cargo and then sell it on the spot market, which is kind of what Alexander Green implies when he says they can buy $40 million worth of gas in the US and sell it for $200 million (or whatever) in Europe.

That is the dynamic, or at least it was earlier this year — there was $200-300 million of “arbitrage” in each tanker cargo as gas was bought in the Gulf of Mexico and sold in Europe or Japan, but FLNG isn’t buying the cargo, they’re leasing the ship. That means there’s a profit opportunity for them to raise their charter rates as charters expire, of course, since the big arbitrage opportunity attracts companies who want to charter their tankers… but FLNG’s fleet is already booked, and shareholders don’t directly earn that $200-300 million arbitrage.

So yes, this is a shipping company. They own modern LNG tankers, and they lease out their ships on either time charter (paying by the day, but on long-term contracts) or spot charter (paying for one voyage). All of FLNG’s vessels are now on time charter, for at least two years (and in some cases 7-10 years), and the price is fixed for 12 of the 13, so they know almost exactly what they will earn from those ships. And it’s a great return right now, they’re getting an average price of more than $70,000 per day for their tankers on those long-term contracts, and those prices will rise a bit from there over time, but there isn’t necessarily an additional “windfall” beyond that, they’re not getting “profit sharing” from the companies who charter their vessels (just like they won’t be renegotiating to offer a 50% off discount in the perhaps unlikely even that Russia’s war on Ukraine ends and Germany starts buying cheap Russian gas again). The revenue will rise into the end of the year, most likely, partly because of that one ship they have on spot charter and partly because of the several charter extensions they signed over the summer which are gradually hitting the income statement.

Right now, here’s what it looks like as of the last quarter: They have about $80 million in quarterly revenue, which is expected to bump up to close to $100 million a quarter by the end of the year. Their interest expenses will continue to rise a bit, but hopefully not dramatically, and they’re around $16 million per quarter right now. Operating expenses for the vessels have come in at about $15 million a quarter (the charterer generally pays a fixed daily fee for moving the cargo, the vessel owner supplies the crew and operates the ship). That leaves $50-60 million in potential cash return per quarter, if you ignore the depreciation (which is $15-20 million per quarter right now). The income statement quickly gets very messy with all the interest rate swaps and refinancings that they’ve done just this year, but, in general, things are looking better — they took advantage of a rush of demand this year to put their whole fleet to work at very profitable rates, for a long period of time, and it looks like they have been pretty clever and cautious in reducing the risk that their financing costs will swamp those profits. I don’t think they have any more newbuildings on order, or other imminent potential to grow the fleet, so they’re more or less fixed now and will be pretty predictable with those long-term charters and the somewhat smoothed borrowing costs.

That has led to strong dividends, as the company is committed to paying out most of their operating cash flow as dividends (so they’re not that conservative — they haven’t fixed all their debt, or repaid it when they had extra cash, they sent that money out to shareholders). The dividend is variable, they have recently fixed it at 75 cents per share but also, last quarter, paid out an extra dividend of 50 cents because they had surplus cash on hand. If you ignore the special dividend, then the “base” payout should be about $3/year, so the yield is just under 10% right now, with the shares around $33 today. If they keep paying a special dividend at that high level, and that is something John Fredriksen companies have been known to do in the past, then the annual payout could be at a $5/year pace, which would be a 15% yield. That might be sustainable, and could even grow a bit more, depending in part on how accommodating the credit markets are, or whether they invest in any new capacity or acquisitions, but it’s probably better to have fairly conservative expectations — over the past year they had about $220 million in operating cash flow and paid out $140 million in dividends, but those numbers could change as their recent charter extensions begin to be reflected in the earnings reports.

And again, there is no real potential for a dramatic windfall from new charters signed — but nor is there a big risk of having their vessels sitting idle and not earning money. Their tankers are mostly already booked out for years, and already refinanced. At $70,000 a day, which was the recent average they’re earning on their time charters per vessel (up from $62,000 a day in the previous quarter), and with a travel time of about a month from Louisiana to Northern Europe (a little less than half that for the actual delivery time, actually — but they have to wait to unload, and come back empty, so think of it as a rough estimate), that would mean FLNG, as the shop owner, really gets a little more than $2 million in revenue from one cargo being bought in the US and shipped to Europe. Even if that rises a bit as their charter rates gradually cycle higher, it’s a long way from the $200 million windfall that Alexander Green is talking about. Though it’s also a lot more reliable and predictable, at least for a few years.

Some of the companies that charter FLNG’s tankers are speculators, however (or if you prefer, “trading firms”), buying up supplies of gas from Algeria or the US or the UAE and loading it up on LNG tankers and seeing who will bid the most for their cargo. A bunch of the more aggressive companies in that space are probably now in a little bit of trouble, because the most sensitive customers in Europe don’t really need the LNG yet — they almost certainly will, once demand for natural gas picks up because the weather gets colder, but at the moment there are dozens of LNG tankers waiting to unload in Spain and Germany and elsewhere in Europe… and no storage capacity for that gas on land (according to CNBC this week, 60 tankers are in this holding pattern in Europe right now).

So that LNG arbitrage should still be a great business over the winter, but maybe not just at this very moment — and waiting a month or two is expensive, if you’re charting a vessel or even just having to keep it waiting offshore, so it’s a tough business to time perfectly even if the end user demand is obvious. Which is why spot prices for natural gas in Europe have fallen to just about zero at the moment — the companies and governments did the right thing, maxing out their storage while they had a chance, and conserving before the gas shortage crisis really hits over the coming winter, but they can’t build dozens of giant new tank farms in a month to hold that gas.

Part of the problem is a lack of interconnection in European pipelines, so it’s hard to move gas from, say, Spain to Germany… part of it’s a lack of re-gasification facilities, though that can be eased to some degree by bringing in floating units… but a lot of it is just the lack of storage capacity. Once it gets cold, storage will deplete and LNG imports will speed up… but after an unseasonably warm October in Northern Europe, and with most customers in Europe already trying to be efficient and economize (or ration gas, depending on the country), there’s a temporary glut of LNG waiting to unload.

Which is why it’s kind of nice that FLNG is not earning that full $200 million of the arbitrage between US LNG exports and the price they could sell at in Europe last quarter… because if the owners of those speculative cargos were forced to sell and offload those LNG cargos today, they might lose money. Instead, this backlog of LNG that’s sitting offshore around Europe is actually potentially a good thing for tanker owners, whether it has already been contracted or not — time charters get paid by the day, not by the cargo, so the fact that a bunch of tankers are “on hold” means that the supply of available tankers is lower, which probably means the owners will have more leverage as contracts come up for renewal or extension. That doesn’t impact FLNG immediately, since their time charters extend for at least two more years, but it adds to the demand for tankers in general.

I owned one of the companies in this space many years ago, Golar LNG (GLNG), which has since separated itself into two — they sold their LNG tankers, which are also modern but a few years older than FLNG’s tankers, to Cool Company (COOL.OL), and Golar shifted focus to their offshore gasification/liquefaction assets — which are basically older LNG tankers that have been converted to serve as floating LNG processing plants, so they could be used to turn natural gas into LNG at a remote offshore field in Australia, for example, or dock in Hamburg and turn LNG cargos back into natural gas to push into Germany’s pipeline network. So that one also might be interesting if you’re looking into the sector… and, whaddya know, it’s another company backed by John Fredriksen.

If you’re looking for other ideas, there aren’t many other companies who are really “pure play” LNG tanker companies — Dynagas LNG Partners (DLNG) has a few vessels, for example, and their current profitability is also quite attractive… though they’ve had to jump through some hoops and shift their business around a bit, since one of their major customers was the Russian giant Gazprom. And there are some much larger companies that are a little more under the radar or much more diversified — I think the Japanese firm Misui OSK is probably still the largest owner of LNG tankers in the world, they owned about 10% of the global fleet at one point, and they’re publicly traded, but they’re also part of a much larger shipping and trading business, and many of the other big LNG fleets are likewise controlled by big trading companies, including NYK in Japan and others in places like Malaysia and China… or owned by Qatar, which has worked hard to build the market for their gas over the past decade by establishing predictable supply routes. There used to be a large publicly traded LNG tanker firm, effectively a MLP run by Teekay (TK) that was called Teekay LNG, but that was bought out by the private equity firm Stonepeak Partners just before the Russian invasion and is now private, with the name changed to Seapeak (there are still preferred shares outstanding from the old Teekay LNG, now Seapeak — so you’ll see SEAL preferreds at SEAL-PB and SEAL-PA, they trade close to their $25 par and yield something like 8-10% these days, though they’re not very liquid… and I haven’t checked the other terms).

To some degree, owners of ships always seem to be playing with fire because they take on a lot of debt to build or buy the ships, and typically pay out a lot of the cash flow to shareholders to entice investors… so they can cover their debt service just fine when time charter rates are high, but they ignore the depreciation costs and often never really pay off (amortize) the principal of the debt. If you keep rolling over debt as your ship gets older and less valuable, that eats up more of your “equity” even if you’re generating a lot of positive cash flow that you can send out to shareholders (usually including the management). It’s a business for swashbucklers, and it creates fortunes, but it also leads to lots of bankruptcies. Timing the cycles can be tricky.

Still, it sure does seem like the cycle is in their favor right now. I won’t try to talk you out of this one, just note that investors in shipping companies always seem to find a way to overpay at the top and then get caught unawares and ride the shares to the bottom when the business gets overbuilt or overleveraged — I wouldn’t think they’re at the top right now, they seem well-situated for at least the next several years, particularly with their interest rate hedges and long-term time charters, but you’ll probably have to keep paying attention to this one. And maybe think about taking those dividends in cash instead of reinvesting them, if you’re not sure that the business can thrive beyond this current market. I am generally loath to pass up on dividend compounding opportunities, but shippers have not been a “buy and hold” sector in the past, and that smallish stub of equity value can really get tossed around by the debt balance if financing costs rise or other surprises hit the market.

I find the current cash flow and dividend a bit tempting, and I like their strategy and the hedging they have in place, so I can see being a bit tempted here… but don’t go into this one if you’re taking that $280 per share target price seriously, that’s not a rational forecast given that their whole fleet is essentially tied up for at least several years at fixed charter rates.

That’s what I think, at least… I don’t own any of the companies in this space at the moment, and won’t trade in any of them for at least three days since I’m writing about them now, but that doesn’t mean you have to think the same way. Tempted by the 10% and maybe growing dividend? See other growth drivers for Flex LNG in the next couple years? Scared by the boom and bust history of tanker companies? Let us know with a comment below… and thanks, as always, for reading.