GLNG - Golar LNG: Buy It's Resilient To Current Volatility

Summary

• LNG stocks had a good year in 2022 as the UP World LNG Shipping Index, which gauges the LNG shipping business, surged 46%.
• Entering 2023, the end of good times appears here, with prices plummeting and demand cooling.
• GLNG is hedged against volatility, and I expect it to flourish this year.

Investment Thesis

For 2022, the UP World LNG Shipping Index, which tracks the LNG shipping industry, rose by about 46% . This sums up what I would call a successful year for the industry. Supply shocks caused by the effects of the conflict in Ukraine drove up demand, which in turn boosted LNG stock performance. Due to supply shocks and increased demand, LNG prices skyrocketed, leading to substantial income and increased profit margins.

In 2023, things look very different, with demand seemingly decreasing and prices plummeting. The good times in the LNG industry may be coming to an end due to this tendency. If this trend continues, the strong growth experienced by many companies will reverse drastically this year. Some sector stocks have dropped considerably since their 2022 highs: The price of Cheniere ( LNG ) has decreased by 6% during the past month. Golar LNG ( GLNG ) and New Fortress ( NFE ) are down significantly by 8% and 13%, respectively. However, as GLNG is hedged against this volatility, I am bullish on the stock.

LNG In 2023: Off The 2022 Heat?

The good times may be over for liquefied natural gas after 2022, which has been a fantastic year for LNG equities. With prices falling and supply expected to outstrip new demand in 2023, liquefied natural gas no longer looks like the hottest commodity for the year. Despite annual demand growing by only 10M tons, LNG manufacturers are expected to add 20M metric tons of LNG capacity to the market this year.

As a result of strict COVID lockdowns, Chinese demand for LNG dropped by around 20% in 2022. Although demand has begun to creep back since late last year as China has begun to reopen, analysts do not expect it to return to previous levels until late 2023. Lower-cost energy sources are being prioritized, which may limit demand for spot LNG. Demand may decline in India as the power and industrial sectors switch to cheaper fuels.

However, despite this bad news, most analysts expect LNG stocks to bounce back as the longer-term demand opportunity comes into view. Although I may agree with them, I expect that the growth in renewable energy sources will eventually claim a considerable share of the market, perhaps by 2030, with many nations having a renewable energy vision dating 2030.

GLNG Hedged Against Volatility?

In what I would call astute management, LNG entered into hedge agreements in anticipation of volatility in its market and has decided to unleash them now during this difficult time. The hedges will protect the corporation until at least 2024. Last month, Golar LNG Limited revealed that it had unwound the majority of the swap arrangements for the FLNG Hilli's Dutch Title Transfer Facility ("TTF") connected output. The benefits to the firm are as listed below:

• March to December 2023, securing about $76 million of Distributable adj. EBITDA:

100% of TTF-linked production was unwound at $21.80/MMBtu, which resulted in a net gain of $28.2/MMBtu. This equals a Distributable Adjusted EBITDA of $76 million, which will be paid out in ten equal monthly payments from March to December 2023.

• For 2024, they expect to secure around $49 million in Distributable adjusted EBITDA. After unwinding 50% of TTF linked output at $20.55/MMBtu, the net gain was $30.65/MMBtu, equal to Distributable Adjusted EBITDA of $49 million, payable in twelve equal monthly installments through 2024.

Golar's only remaining TTF hedges are for January and February 2023, estimated to have a Distributable Adjusted EBITDA of approximately $25 million. This estimate considers Golar's share of TTF invoices for the same period, which are estimated to have generated roughly $12.5 million each from the hedged price and physical production. The total secured value from the TTF hedges entered into during the third quarter of 2022 is about $140 million, equivalent to approximately $1.3m in cash flow per share.

Golar continues to have exposure to the TTF-related tariff for the FLNG Hilli. The earnings sensitivity for 2023 is $2.7 million for every $1/MMBtu change in TTF, $3.2 million for every $1/MMBtu change in TTF for 2024-2025, and $1.7 million, respectively, for every $1 difference in MMBtu in TTF between January 2026 and July 2026. According to the current forward curve, this equates to a distributable adjusted EBITDA of $47 million in 2023 and $56 million in 2024. It is estimated that its portion of Hilli Distributable Adjusted EBITDA will amount to approximately:

• 2023: $282m

This consists of $101 million in locked-in TTF curves, $47 million in earnings linked to TTF at a forward price of $20.8/MMBtu in 2023, and $67 million in earnings linked to Brent at a forward price of $84/bbl in 2023 and a base tariff of $67 million.

• 2024: $225m

Earnings of $53 million are currently linked to Brent at a future price of $79/bbl and a base tariff of $67 million, while locked-in TTF curves are worth $49 million.

Roughly $50 million (approximately $29 million in debt amortization and about $21 million in interest) is projected to be paid each year to service Hilli's contractual debt, of which Golar will be responsible for a portion.

Valuation

With a PE ratio of 3X and a PB ratio of 1.02X, GLNG is trading below the industry medians of 8.31X and 1.85X, respectively. Further, a DCF model by Finbox shows that the company is trading below its fair value of $34.66 with an upside potential of 50%.

Considering the company's use of its hedge strategies to act as a buffer to the current volatility in the market, I believe that the company has the potential to grow its share prices even beyond its fair value in the long run, especially when competitors succumb to the current volatility.

Final Thoughts

Although LNG stocks have done exceptionally well this year, 2023 appears to be different due to falling pricing and decreasing demand. This trend heralds the end of the good times and gives GLNG a chance to continue its ascent despite a temporary setback at the beginning of the year. The company's ability to deploy its hedge strategy to protect itself from market uncertainty is a powerful catalyst for its long-term success. This justifies my "buy" recommendation for the stock.

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