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FSRUs: The Leading Edge of the LNG Market

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"Floating Storage and Regasification Units cost less than half the cost of an onshore facility. The benefits to Japan now, which is in a proverbial 'space race' to meet its electricity needs, are that they can be ordered, made and delivered in 2–3 years, versus 5–7 years for an onshore import terminal."

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In Part 1 (The Race To Supply LNG), I explained how the Japanese will most likely solve its power shortage, now that there are no nuclear plants running.

One of the biggest answers is LNG—liquid natural gas—and an emerging LNG technology that is growing around the world. . .and could be a fast answer to Japan's dire need to quickly replace their nuclear power.

It's called FSRU—which stands for Floating Storage and Regasification Unit. It's a floating LNG import terminal—at less than half the cost of an onshore facility. The benefits to Japan now—which is in a proverbial "space race" to meet its electricity needs, are that they can be ordered, made and delivered in 2–3 years, versus 5–7 years for an onshore import terminal.

FSRUs and onshore LNG import terminals take LNG and regasify it—taking it from the liquid form, where it is reduced 600:1 in volume and expanding it back into a gaseous form where it's usable to make electricity in your home, and for other uses.

Both facilities need a berth for the LNG ship, storage tanks and pipelines. But the traditional land-based terminals can cost upwards of $700 million (M)for a facility with a peak capacity of about 7.75 million tons (Mt) per year (around 1 billion cubic feet per day [bcf/d]). Terminals operate at roughly half of their peak capacity.

These onshore facilities can take 5–7 years to be planned, constructed and brought online, which means they are not ideal for Japan's current situation.

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As I said, FSRUs are custom-built vessels—similar to the LNG carriers but with the ability to turn LNG into its gaseous form.

FSRUs not only get to market faster, but cheaper: A newly built FSRU costs close to $260 million, according to Unit Economics (and they do the best research in this sector, by a nautical mile).

One company has even started converting old LNG carriers into FSRUs, for which Unit Economics says the cost is more like $160M—and can be ready in just 14-16 months.

Another advantage is that they can be moved to wherever demand is highest for the regasification of LNG.

However, FSRUs have one big drawback—less capacity. Most have a peak capacity of around 4 Mt annually (about 500 Mcf per day), though some of the new ones are getting closer to 1 bcf/d.

A potential drawback for the Japanese could be that this technology is so new, there are only 10 working in the world right now, with another seven being tendered.

So while they are proven, they cannot yet be called mainstream. But there are already several large shipyards able to build them, and competition for bids is intense; i.e., there is a healthy supplier's market.

Still, it should be noted that even if Japan goes with FSRUs, it will still to take some time for them to start importing LNG. This time gap is another reason Drolet believes nuclear reactors will have to come back online to meet the country's energy needs.

Publisher's Note: LNG is one of the only bull markets right now in energy. The FSRU market is at the leading edge of this. They are new and exciting, and the growth rate right now is huge—likely 100% in the next two years. And the profits are rolling in fast for one of the leading companies in the space. This company has already built and sold four of them. The thing to keep in mind here—FSRUs are different than LNG carriers in that they are much longer contracts (10- to 20-year contracts), with great long-term cash flow—exactly the thing you can plan a dividend around.

And that's what this company has done—having increased its dividend in each of the last four quarters. The total dividend increase during this time is 40%. How many companies are doing that in this market?

Analysts are calling for quarterly EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) to double in the next quarter—a 100% increase in just one quarter. Its utilization is 100%, and operating profit margins are an eye-popping 80%. That's why they are one of the most profitable companies in the worldwide energy sector.

I bought the stock this week myself. And I encourage you to learn all you can about this play. . .

LNG, as I mentioned, is rapidly becoming a global industry; and we are still early stage.

And the Street is just figuring out the advantages of FSRUs in the context of the LNG sector—and how they will be the next leg up in the industry. I see demand increasing for years. . .with Japan being the linchpin for LNG use.

As the Street picks up on this, I'm betting that one company will prosper more from today's global LNG market—and tomorrow's—than any other one.

It already has one of the highest gross margins I can find anywhere in the global energy patch (and highest net margins too—50%!).

Management knows success. It also owns half the company. . .and is committed to increasing dividends.

That's why I bought the stock. It is one of the most closely followed plays in the OGIB portfolio—my personal portfolio. And now I have even more reason to like this play. . .

You see, nuclear is in the process of being phased out—all over the world. Countries are increasingly moving into a natural gas phase.

LNG is going to play a huge part in this global shift. And this company is already the world leader in this new sector.

What's more: This stock wins because it is 1) independent of the oil price, and 2) it is maximizing the leverage it holds in one of the world's biggest trends right now—liquid natural gas.

That's why other analysts covering the company are forecasting a triple—or higher—in earnings per share this year. . .and another 50% jump in EPS next year, in 2013.

It's simple: As LNG shipping day rates go up, this company's profits—and dividend—go up. And right now I'm looking for the next catalyst—which I expect will result in the dividend being raised again. This catalyst could happen inside the next few weeks.

Remember, there is always a bull market somewhere. And LNG is one of the only bull markets right now in energy.

That's why I want you to have the opportunity to gain from it—and to position your portfolio properly.

First, though: In case you're not yet familiar with my service, here's a look at the kinds of trades I make in the OGIB portfolio.

Contact Exploration (CEX:TSX.V) is a great example.

Contact was drilling two horizontal oil wells in New Brunswick, a province in the Canadian Maritimes—not a well-known oil hotspot. That's why I was able to buy this undiscovered gem at $0.08. Their wells hit, and I exited the stock at $0.27 and $0.44, giving notice in advance to subscribers so they could sell first.

Xcite Energy (XEL:TSX.V) is another big portfolio win.

Xcite is an exploration play in the North Sea. They had an asset that everybody knew had lots of oil—just like my favorite pick here and now in western Canada. They just had to drill it horizontally and see if it would flow economically—again, just like my favorite pick here and now in western Canada.

I bought the stock at $0.62 in 2010, and sold my first stock at a double. . .and kept selling all the way up to over $4 as investors anticipated good news.

These are examples of high-reward junior exploration stocks; the "discoveries."

But the truth is there's more to making money in the oil markets than trading high-risk, high-reward exploration plays. They don't always hit on the first well, after all.

In fact some of my best trades last year in the OGIB portfolio have come from the energy services sector.

The energy services sector (the "support" companies that do everything but call the oil their own) is still in very high demand, despite the recent drop in the oil price. And the sector should provide investors with ample profit opportunities.

Keith Schaefer
Oil and Gas Investments Bulletin

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