Golar LNG Ltd. (GLNG) shares have bounced more than 20% since mid-August lows that followed disappointing second-quarter earnings and trade war fears circling around U.S. liquefied natural gas (LNG) exports into China. We called the bottom on the stock on our Aug 23 note when we saw an inflection point in the industry on the back of new marine regulations and we think the stock will continue its upward trend on supply/demand fundamentals.
According to a Reuters report, the price of shipping LNG from the Atlantic Basin to Asia has jumped to a range of $90,000 to $95,000 a day from $75,000 a day at the end of August. That's a 20% increase month over month, and rates are expected to remain high through 2019 as rising production from new liquefaction plants coming online may fuel demand of LNG vessels, outpacing the existing vessel supply. Rates have risen from a range of $30,000 to $40,000 a day during the 2015-2017 period due to longer distances carrying LNG from new terminals in the U.S. and Arctic Russia, rising demand in China, and a limited number of ships.
According to Golar, new production will come from the start-up of new facilities and new trains at existing facilities, among them Yamal, Ichthys, Prelude, Corpus Christi, Sabine Pass, Cameron and Freeport. Those who need transportation have Golar's office number on speed dial.
Transportation of LNG from Novatek's (NOVKY) Yamal facilities in northern Russia have created incremental ship demand because Arctic-class vessels lifting cargoes, such as those managed by Teekay LNG Partners (TGP) , transfer the commodity to conventional carriers in Europe for further journeys. In turn, deliveries from U.S. terminals to Asia must pass through the Panama Canal, taking longer than cargoes from Australia, the second-largest world producer after Qatar.
Wood Mackenzie estimates it takes 1.9 ships to carry 1 million tons per annum (MTPA) of LNG from the U.S. Gulf to Japan compared to 0.7 ships from Australia. These drivers have prompted many vessel owners to book ships on multimonth or multiyear charters, locking in rates before they rise but cutting the availability of vessels for others.
The sentiment in the market is the fear that there may not be enough ships in coming years to match rising output, including from U.S. terminals, which according to the International Energy Agency (IEA) are expected to add 84 million tons per annum by 2023, turning the U.S. into the world's second-largest exporter. Thus, we shall expect better third-quarter earnings for Golar on the back of this news. For traders who are volatility-oriented, we recommend buying the GLNG Jan. $32.50 calls that are a bit more than 10% out of the money and also are the most liquid.
In addition, according to a Reuters report, strong LNG demand has helped drive the tanker rates up as Asian utilities in Japan and South Korea have been building their winter inventories, driving prices to a seasonal four-year high. Demand from Asian buyers was stronger than usual after a summer heatwave drew down inventories to power extra air conditioning.
Golar forecasted that projects with capacity of 72 million tons per annum, equivalent to about 23% of current LNG production, are expected to commence operations over the next 24 months and would require 100 extra vessels in a market where only 66 were scheduled to be delivered on time. Golar said it is no longer possible to go out today and order a vessel for delivery before 2021, given the structural changes in the sector that will be driving vessel demand.
For now, our trade is long GLNG shares until we can see a change in fundamentals on the horizon.