We recommend a relative value trade on the growing liquefied natural gas (LNG) market via long Golar LNG (GLNG) shares and short Hoegh LNG (HMLP) on the back of Monday's announcement of a three-way joint venture between them and Stolt-Nielsen Ltd. (SOIEF) , the Norwegian shipping company. The three plan to participate in opportunistic developments of LNG projects worldwide.
Small-scale LNG developments are the most attractive business model in today's global market given their low cost, high-return, and easy scalability. This is especially true of those close to producing regions like the U.S. Gulf Coast and Mexico's Pacific Coast.
We have favored Golar LNG as our top pick in the LNG transportation market given their innovative approach to capture inefficiencies across the LNG value chain and their ability to ink the appropriate partnerships to share risk capital and capture incremental returns. Golar is involved across the full value chain, from shipping, to liquefaction, regasification and power generation.
We prefer a spread trade rather than directional bets given the inherent geopolitical volatility in the market. Hoegh LNG is very much a yield-play, with long-term chartered LNG vessels contracted past 2025, providing cash flow visibility. Golar has been very strong on short-term, spot trading.
According to Golar, liquefaction capacity is in the midst of a strong expansion, supporting demand, with production growing by 25% in 2021. The growth thesis behind GLNG is that LNG spot rates are moving higher as demand picks up and a structural deficit of LNG carriers increases. Golar anticipates an undersupply of 58 vessels by 2022.
Golar has invested $24.75 million in Avenir LNG Ltd., a company set up to pursue opportunities in the small-scale liquefied natural gas market. The investment is part of a combined commitment of up to $182 million from Stolt-Nielsen Ltd. for the pursuit of opportunities in small-scale LNG, including the delivery of LNG to areas of stranded demand, the development of LNG bunkering services and supply to the transportation sector.
Avenir LNG was originally formed by Stolt-Nielsen in 2017 to provide LNG to markets lacking access to LNG pipelines, including 4 small-scale LNG carriers currently under construction and an LNG terminal and distribution facility under development in the Italian port of Oristano, Sardinia. Avenir LNG plans to source and ship LNG to the terminal using small LNG carriers, and distribute the LNG in trucks and through regasification into the local gas grid.
Following the transaction, Golar LNG and Hoegh LNG will each hold an initial share of 25% of Avenir LNG, while Stolt-Nielsen will remain the largest shareholder with ownership of 50%. Avenir LNG contemplates a public listing on the Oslo Over-The-Counter market during 2018, very positive for equity investors looking for a pure-play stock.
What we like about Avenir LNG is that it is one of the first ventures looking to build a global presence as the leading provider of small-scale LNG, and it will be among the first movers in this market with a fleet of small-scale LNG carriers and terminals. The market for small-scale LNG is rapidly expanding, with great potential to be realized in the off-grid power, transportation and bunkering markets because of high-margin oil-to-gas switching, policy changes and environmental benefits of consuming LNG relative to alternative fossil fuels.
The forthcoming IMO 2020 regulations are one of many driving factors for increased small-scale LNG consumption. Avenir LNG plans to introduce safe and efficient ship-to-ship bunkering services at key strategic ports to meet and develop demand for LNG as a marine fuel.
Finally, Golar has also invested in floating power generation through a 50/50 joint venture with Stonepeak Infrastructure Partners. They plan to develop, own and operate integrated LNG-based transportation and downstream solutions including LNG carriers, floating storage and regasification units (FSRU) and associated terminal and power generation infrastructure which will operate under long-term contracts with utility-grade off-takers.
We believe Golar assets are well-positioned to take advantage of a global glut of low-cost LNG and bring cleaner, cheaper power to underserved markets through LNG solutions.