Description

It’s not often that a special situation has this many near-term catalysts. 

Cool Co is a Norway listed LNG shipper with 12 contracted vessels and the following items afoot:

                Feb 28th –  Q4 Earnings (tmro)

                Dividend – Initiating, likely tmro, their first declared dividend… expectation of 12% yield

                March 15^th – US Stock Listing… with associated sell side coverage coming

                End of March – Sale of their oldest unit at $184m, a premium price, already announced

                End of June – Options decision on 2x newbuilds (equity portion largely paid for by the sale)

                Spring offensive – Asymmetric outcomes from geopolitical events in Russia/Ukraine

                September – First available unit to market...  1y Time Charters currently at double the 5yr avg

                Oct-Nov – China’s likely return to the LNG market in size, after a hiatus allowing flows to the EU, has potential to be highly bullish for LNG vessels.

                Valuation – 4.9x P/E and 5.3x EV/2023 estimated EBITDA of $306m

Time Charter Rates
Note how 2023 1Y rates are floating way above the 5 year average.  Unfortunately this is due to the sabotage of the Nord Stream pipeline and the EU’s dire needs for winter supply which pushed seasonal rates last Autumn to even greater heights seen in light blue:

Fleet
Cool Co is selling the 2013 built Golar Seal, leaving them with 11 vessels.  The average age of the fleet is seven years, before renewal from the 2x optioned newbuilds which would deliver in 2024:

They will be looking to the Golar Bear to lock in a high time charter rate for first availability in September. Options in this environment are highly likely to be exercised. Spot rates also are running well above last year, but should be used with caution because the dispersion behind spot quotations can be vast. Comps Awilco and Flex are similarly sold out for the next few years, and larger players like CMA-CGM have plans to increase the LNG portion of their fleet to 44 vessels by 2024.

Vessel Sale
For a vessel marked at $150m they are getting a premium price of $184m, which is 23% ups… In addition, the buyer, Höegh LNG, is picking up the cost of required drydock, so the total value of the sale could be as high as ~$190m.  Hoegh is paying the premium because they have a long-term time charter for it.  The sale will release $94m that can be used for equity in their newbuilds.

NewBuilds
COOL has options for two newbuilds from Hyundai Heavy at $234m per vessel, exercisable before end of Q2 2023. Assume $250m per with working capital for initial crewing and mobilization, which at current 1 and 3 year time charter rates implies an EV/EBITDA of 3.9x and 4.3x, and there’s talk of 7 years at $120k/day for newbuilds delivering in 2024 which implies 6x.

Cash Flows and Multiples

Note the sizeable valuation discounts on NAV, P/E and EV/EBITDA combined with the high returns on equity and the double-digit dividend yields.  Current market cap is $682m with an EV of $1,361m.  It’s not hard to get a higher equity value when you consider there are 11 ships doing over $300m of EBITDA.  6x on $300m is $1,800 of EV, or a reasonable $163m per vessel.  Subtract $679m of net debt, and you’re at $1,121m for the equity which is 216 NOK per share on 53.7m shares outstanding.  That is 64% above current price.  Plus there’s renewals & upside optionality… see China and Orderbook discussed below. 

US Listing & Sell Side
The Norwegian sell side loves the management and the company with stock price targets well above market at 170-210 NOK… Current market is 131 NOK.  All of the sell side has recently published buys except ABG Sundal (at hold) who primarily does bonds and hasn’t published since Oct, while the rest have published in Feb… except Clarksons, who can’t right now because they are lead in the upcoming US Listing, expected on the Ides of March.

China
Despite the political turmoil of late, China made a major humanitarian gesture to Europe by significantly scaling back their LNG imports in 2022 when the war broke out. This allowed the EU to import vastly more of sorely needed supplies at much better prices… IMHO, the Germans, Italians, and others owe China a big thank you for allowing them not to freeze in winter.  China had been importing 7800t/month immediately before the war and dropped it into the 4000ts/month for much of last year. They are now at 6600, still below their winter imports of the previous few years, and a huge question for the LNG market is when will they return to the market and in how much size? 
Before giving them any humanitarian awards, consider that with Russian gas supplies not flowing to Europe, those molecules are likely finding their way to China at below market prices, so their LNG imports might not roar back the way some expect.  The LNG import reductions also coincided with much of China’s covid shutdowns, which trimmed industrial use considerably.  Now that they’re on a reopening tact, it will be very interesting to see how fast volumes return.  A full buying program that returns them to the pre-war volume growth trajectory would be extremely bullish for the LNG vessel sector.

Here’s the chart of China Monthly LNG Imports, where you can easily see last year’s wartime accommodation… Europe picked up all that slack and more:

Plus, something crowding out the normal vessel supply is governments entering the space due to energy security fears and taking long term charters…  The Federal Republic of Germany has, for example, chartered two vessels from Hoegh until 2032/2033…

Risks include a Putin/Zelensky peace accord with a quicker than expected reopening of the Nord Stream Pipelines, or some unforeseen calamity with an LNG vessel running into trouble Exxon Valdez or BP Deepwater Horizon style.  While I’d put low odds on this while the near-term catalysts play out, anything can happen in geopolitics… including upside surprises, which feel more likely in 2023-24.

Orderbook
Though it’s good times in the LNG space, attractive returns in shipping always attract too many newbuilds.  And there’s modest deliveries coming in 2023 (43 units of various sizes), but many coming in 2024 (80 units), 2025 (82 units), and 2026 (72 units).  Current orders would be for 2027 delivery.  But new technology requirements might just cause a scrapping of the older end of the fleet, and keep the newer vessels employed at nice rates for some time because the newer designs are much more fuel efficient and in compliance with ever more stringent regulatory requirements for safety and fuel standards.

Here's a view of the worldwide fleet (currently 604 vessels with 295 on order).

Most of the steam turbine vessels that have long dominated LNG shipping will need to be scrapped for newer Tri-Fuel vessels, and the newest ships have Electronic Gas Injection which saves fuel and uses less pressure in the engine.  So, pretty much all 2012 and older vessels need to go, which ameliorates some (much?) of the treat from the coming of newbuilds.  It’s going to be an interesting year ahead.

Catalyst

- Earnings
- Dividend initiation
- US Stock Listing
- Closing of sale from oldest unit at premium price
- 2x Newbuild options
- First available vessel in Sept
- Return of China to historic LNG volume levels
- Scrapping of the steam turbine units, the older portion of the ww fleet
- Geopolitical events