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A Liquid Way to Play LNG
07/17/2007 12:00 am EST
Bryan Perry, editor of the 25% Cash Machine, finds a cargo carrier that specializes in liquefied natural gas, which he views as the fuel of the future.
At this time I recommend upping our [exposure] during this initial growth phase for the dry and wet cargo carriers by adding Golar LNG (NASDAQ: GLNG) to our Buy List. We're moving into shipping the most cutting-edge, commercial-use fuel of the future: liquefied natural gas, also known as LNG.
Demand for LNG is growing because it is viewed as safe, flexible, reliable, economical, and—one of its biggest pluses in this current "go green or go away" climate—environmentally acceptable. It's the ideal fuel for home heating [and] cooking and for generating electricity.
World demand for LNG is expected to double by 2010—up to more than 280 million tons consumed. And, in particular, Australia has emerged as a key supplier for nations looking to secure supplies produced in geopolitically stable regions. The Pacific Rim region accounts for about 70% of the world's LNG trade, with demand in Asian markets expected to grow 80% by the year 2015.
With growing demand, and declining alternative sources of energy, the United States is very likely to be a major growth market for LNG imports, with an eightfold increase forecast by 2015. This will be particularly noticeable in California, where 83% of LNG is currently imported, and a considerable shortfall is predicted unless new production and importing facilities are built. Right now, that looks unlikely.
With the extreme concentration of liquefied gas (LNG is a tiny fraction of the volume of natural gas), it is much more cost-efficient to transport over long distances where pipelines don't exist. LNG offers an energy density comparable to gas and diesel fuels, with the added benefit of producing less pollution.
In May, Golar's board of directors declared a 50-cent dividend on earnings of 81 cents per share. Nice! The dividend was paid on June 19, 2007. What matters most to us is that we'll have a $2-per-year dividend payout. As usual, it's all about cash flow when supporting the case for the high-dividend yields and GLNG is producing the necessary cash flow per share to accomplish good yields.
I like our chances very much with this pure energy play in concentrated natural gas—particularly because the top and bottom line momentum are strong. While forward numbers will be somewhat erratic for a few more quarters, I expect earnings at Golar LNG to grow at least 20% per year for the next five years—and that just might be a very conservative forecast!
(Owning Golar means accepting a higher level of volatility. GLNG is almost certainly going to exhibit some wild price swings, but the future for LNG is so bright we can deal with the short-term volatility.)
I have great expectations for the LNG industry, so buy the stock up to a price of $19 and a 12-month target price of $25. (The stock closed above $20 on Monday—Editor.)
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