LNG shipping stocks have proved resilient, despite global GDP growth uncertainties, high inflation and the ongoing geopolitical crisis, caused by the Russia/Ukraine conflict.
Drewry’s LNG shipping equity index increased by 12.7% year-to-date as of 28th June, 2022, outperforming S&P 500, which declined by 19.8% during the same period.
Golar LNG stock price firmed the most (up 87.9%), while Flex LNG increased by 24.8% and Nakilat by 18.2.%. Stocks mainly benefited from the rising European LNG demand, as the region tries to switch away from Russian natural gas.
Companies with FSRUs have particularly benefited, as European countries opted for these units over their land-based counterparts. FSRU terminals can be installed in one to two years, compared to three years for LNG import terminals on average.
For example, Golar LNG’s share price profited from its exposure to FSRUs, the company’s stake in New Fortress Energy (NFE) - a leading FSRU player and high crude oil prices. NFE, which has a fleet of seven FSRUs and in which Golar LNG has a 6% stake, gained 68.5% YTD.
Europe is looking for at least 16 units to replace most of the Russian gas imports, Drewry said, adding that it believed countries, such as Germany, France and Italy, were willing to pay a high premium to acquire these assets. However, with only 50 FSRUs (as of March, 2022) operating globally, demand strengthened.
The forthcoming IMO EEXI and CII regulations and charterers’ desire to secure LNGCs amid the geopolitical tensions, were other factors driving LNG shipping demand.
For example, Flex LNG’s latest charters announced last month (see page 10) were for between seven and 10 years, longer than most of the company’s existing charters. This suggested an increased preference by charterers to opt for longer term business to cover volatility in a tight supply market.
More FIDs
In the coming years, more FIDs for LNG liquefaction projects should be seen, leading to higher demand for LNGCs. As a result, Drewry said that it expected spot and long-term LNG shipping rates to firm.
In addition, tight LNG supply forecasts and European geopolitical tensions accelerated sale and purchase agreements (SPAs) for LNG and in turn, FIDs for new LNG projects.
While new ordering momentum was high thus far this year, LNG shipping rates were still predicted to firm, as most of these new orders have firm charters attached.
On the back of the EEXI and CII regulations coming into effect from 1st January, 2023, an increase in conversions of older stream turbine vessels into FSUs for import projects was expected.
While these vessels would need to reduce their speed to comply with the regulations, the very old LNGCs will become uneconomic thus exiting the fleet, affecting capacity and consequently, supporting higher freight rates.
LNG shipping companies reported healthier balance sheets at the end of 1Q22, compared to 4Q20. Furthermore, an increase in LNGC prices since mid-2020 indicated higher borrowings potential, which could be used to acquire new vessels.
Given the strong prospects, it was comparatively easier today to win long-term charters, compared to the previous two years, Drewry said.
