A Timely Growth Play in Nat Gas

 | Jun 13, 2012 | 9:00 AM EDT  | Comments
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Natural gas is in investors' doghouse right now, and that makes this a perfect time to look at emerging growth plays in the sector that are beaten up yet offer solid long-term potential.

One of the more interesting newcomers is Golar LNG Partners (GMLP), a limited partnership designed to own and operate floating storage regasification units, or FSRUs, and liquefied natural gas vessels.

Geek alert! Here comes a long explanation of the arcane but clever role these vessels play.

The typical process for exporting natural gas once it's discovered and produced in places such as North Dakota, Brazil, Qatar or the Gulf of Mexico is to liquefy it and ship it overseas on liquefied natural gas carriers, which Golar LNG Partners owns. Once reaching its destination in a high-demand country such as Japan, the LNG is converted back to its gaseous state and injected into pipelines for transport across land.

Golar is involved in two of the three processes, operating LNG carriers to ship the gas, and then operating FSRUs to regasify and inject the gas into land pipelines.

The company's LNG transportation unit consists of two carrier vessels, the Methane Princess, built in 2003, and the Golar Mazo, built in 2000. The 100%-owned Princess currently has a time charter through 2024 with BG Group, while the firm holds a 60% interest in the Mazo vessel, whose charter with Pertamina, the state-owned oil and gas company of Indonesia, runs through 2017.

The outfit's floating storage and regasification unit operates a fleet of three FSRU vessels, the Golar Spirit, Winter and Freeze. Golar owns a 100% interest in all three, and they were all converted from existing LNG carriers into floating terminals that can be maintained offshore or at receiving terminals purposely built for FSRU ships.

The FSRUs receive the liquefied natural gas from a LNG carrier, regasify it onboard, and then send it out via pipeline to the shore for delivery. The Spirit and Winter ships are under time charters with Petrobras of Brazil through 2018 and 2019 respectively. The newly added Golar Freeze is chartered to Dubai Supply Authority through 2020 for delivery to end customers in Dubai.

These floating vessels have a number of advantages over land-based terminals, including shorter installation times and full scalability to suit the given contract demand. And most of all, they are mobile, able to be deployed anywhere around the world where demand exists. In fact, GMLP is the only firm in the world to have converted a LNG carrier to a floating regasification ship.

A key benefit that Golar LNG Partners has over some of its peers is the relationship it has with Golar LNG (GLNG), which is owned by the Fredriksen Group. Golar is one of the world's largest independent owners and operators of LNG carriers and actually developed the idea of using FSRUs converted from LNG carriers.

The parent company operates a fleet of over a dozen vessels and has seen a tremendous amount of success in recent years. As a result, the company decided to spin off GMLP, initially with four ships and an option to add additional vessels as it grows. The company has an immediate competitive advantage, being able to leverage Golar's existing relationships with customers to sign new contracts.

Many analysts believe that parent company Golar will continue to focus on operating LNG carriers, while GMLP will focus its future expansion efforts on the FSRU segment, giving investors a more narrowly focused way to exploit the natural gas market. For example, Golar's fleet will reach 21 vessels in total over the next few years, and GMLP has the option to acquire any of these should they obtain any charters that exceed five years in contract length.

The company went public April 2011 at an offering price of $22.50, and it now trades just over $29, giving shares a 16% return in the past year. Despite tremendous price appreciation opportunities, any good master limited partnership is judged by its distribution potential, and GMLP currently has a dividend yield just shy of 6%. Investment researchers at Morgan Stanley expect that yield to increase to $2.46 per unit, or 7.7%, by 2014.

Spinoffs are always an interesting proposition, and there are a lot of ways to play the natural gas market moving forward. Golar LNG provides a unique way with a young, growth-oriented company that sports a solid dividend and the backing of one of the largest carriers in the business.

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