We came across a bullish thesis on Golar LNG Limited (GLNG) on Substack by Value Science. In this article, we will summarize the bulls’ thesis on GLNG. Golar LNG Limited (GLNG)’s share was trading at $40.35 as of Feb 11th. GLNG’s trailing and forward P/E were 310.38 and 25.06 respectively according to Yahoo Finance.
Close-up of a liquefied natural gas terminal expelling plumes of smoke.
Golar LNG (GLNG) has experienced a strong total return of 79% since the initial post last March, but despite this performance, its prospects remain just as bullish today. The market has priced GLNG conservatively due to significant uncertainties surrounding key elements of its future business, including terms of the new Hilli contract with PAE, the potential for newbuild MkII vessels, and the likelihood of future contracts for these vessels. These uncertainties, while substantial, are balanced by potential developments that could substantially impact the company’s valuation.
One of the main factors affecting GLNG’s valuation is the commodity-linked tariff on its contracts, particularly with PAE. Although the definitive contract with PAE is not yet FID, analysts are focusing on a low-end commodity-linked contribution of 20% to the base tariff, which seems overly conservative given historical data from the company. In Golar’s Q4 2023 results presentation, the company illustrated a mid-range scenario where commodity-linked tariffs contributed 100% of the base tariff, reflecting higher expectations. The tariff terms could potentially be negotiated downward, though there is a reasonable case to be made for Golar achieving a stronger outcome. This uncertainty has led analysts to adopt a cautious stance, but Golar’s previous contract terms and the possible upside from commodity-linked contributions suggest the market is undervaluing its future prospects.
Golar’s valuation is highly sensitive to future LNG prices, with analysts projecting a range of $8-10/MMBtu. Current LNG prices exceed this range, sitting around $14/MMBtu, but there are expectations that prices will fall with the arrival of new supply. The most likely scenario seems to be a mid-range price of $8-10/MMBtu, with risks evenly balanced between upside and downside. However, with LNG prices currently higher than projected, Golar stands to benefit from this short-term advantage while it waits for the longer-term supply balance to shift.
A key focus for Golar is securing a contract for its MkII newbuilds, which could provide a substantial boost to its business. Golar had previously expected a deal with Nigeria, but this may have been delayed or fallen through. However, the company has signaled that it expects to have a unit contracted within 2025, with the main contender now being YPF, a partner in the joint venture with PAE leasing the Hilli unit. The situation with YPF is evolving, as they reconsider their plans and potentially expand their fleet with Golar MkII units. The prospect of securing a contract with YPF is becoming more promising, as YPF recognizes Golar’s ability to provide floating liquefaction units (FLNGs) sooner and at a lower cost than competitors. The possibility of a contract with YPF within the year, along with the option to secure a second MkII vessel, could significantly enhance Golar’s growth prospects.
Recent reports also suggest that YPF could commit to up to four FLNG units, with Golar potentially supplying the second unit. If this comes to fruition, Golar could see a massive increase in the number of contracts, leading to a significant upward revaluation. Additionally, even if the YPF deal does not materialize, Golar’s fundamentals remain solid, and the potential for securing multiple future contracts makes the company’s stock attractive.
In summary, while Golar LNG faces uncertainties regarding its contracts, LNG prices, and newbuild vessels, its strong position in the FLNG market, the potential for commodity-linked tariffs, and its ability to secure key contracts suggest that the current market price is undervalued. The company’s ability to navigate these uncertainties and secure favorable contracts, particularly with YPF, could lead to significant upside, making Golar LNG an attractive long-term investment despite the risks involved.
Golar LNG Limited (GLNG) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 39 hedge fund portfolios held GLNG at the end of the third quarter which was 36 in the previous quarter. While we acknowledge the risk and potential of GLNG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GLNG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.