Cool Stock: Overlooked 6.1%-Yielder Has 53% Upside
December 4, 2023
Why Recently-Listed CLCO Stock Is Up 23% Since April
This hasn’t been the best year for initial public offerings (IPOs). So far this year, there’ve been 146 of them on U.S. stock exchanges. That’s about 16% fewer than in the same period last year.
On top of that, there’ve been many lackluster debuts on the stock market.
Not all IPOs in 2023 have been underwhelming, though; Cool Company Ltd (NYSE:CLCO) has been bucking that trend.
The company is a pure-play liquid natural gas (LNG) marine shipping business that was spun off from Golar LNG Limited (NASDAQ:GLNG) in early 2022.
Cool Company’s fleet consists of 30 LNG carriers and floating storage regasification units (FSRUs). (Source: “About Us,” Cool Company Ltd, last accessed November 27, 2023.)
LNG carriers are ships designed to transport LNG. FSRUs are unique vessels that are essentially floating docks that Cool Company’s LNG customers can access when they need to.
FSRUs aren’t susceptible to the same kind of economic volatility that other vessels might be. FSRUs tend to be in demand regardless of how the broader market is doing (including during pandemics).
Cool Company Ltd has a balance of short-term and long-term charter contracts with major energy companies and utilities.
During the second quarter, the company exercised and financed an option to acquire two newbuild LNG carriers at a discount to their market value. Management expects to secure long-term time charter contracts for the ships well in advance of their 2024 delivery.
This isn’t a total surprise. The demand for LNG carriers is robust. Cool Company Ltd has a firm revenue backlog through 2026 of $1.54 billion.
Since Cool stock started trading on the Nasdaq in March, it’s been outperforming the stock market, up by 23% over the last six months. That’s a big gain, and bigger gains could be ahead.
Thanks to strong industry tailwinds, Wall Street analysts have provided a 12-month share-price low estimate for CLCO stock of $15.50, a median estimate of $18.00 per share, and a high estimate of $20.55. This points to potential gains of 15.5%, 34.1%, or 53.1%, respectively.
Chart courtesy of StockCharts.com
Cool Company Ltd Delivered Another Successful Quarter
For the second quarter ended June 30, Cool Company announced that its total operating revenues slipped slightly on a quarterly basis to $90.3 million. The revenue reduction was mostly related to the company’s sale of the vessel Golar Seal in late March. (Source: “Cool Company Ltd. Q2 2023 Business Update,” Cool Company Ltd, August 31, 2023.)
The company’s second-quarter net income fell to $44.6 million on a sequential basis, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $59.9 million.
Cool Company’s time charter equivalent (TCE) rates in the second quarter averaged $81,100 per day, compared to $83,700 in the first quarter. During the second quarter, LNG prices experienced typical seasonal weakness and relatively lower prices, reaching price parity with oil for the first time since the period before Russia invaded Ukraine.
Commenting on the second-quarter results, Richard Tyrrell, Cool Company Ltd’s CEO, said, “During the second quarter, we achieved full utilization across the CoolCo fleet and secured well-timed growth through the exercise of our option on two state-of-the-art newbuild MEGA LNG carriers with deliveries in late 2024, newbuild pricing materially below current levels and committed financing in place subject to documentation.” (Source: Ibid.)
He also said, “In conjunction with our three existing vessels that come into the charter market in 2023 and 2024, of which two are currently at rates well below prevailing levels, we have a clear path towards the realization of significant incremental value, cashflow, and continued dividend-paying capacity.”
Tyrrell is bullish on the near-term demand for LNG vessels.
“With the approach of winter in the Northern Hemisphere, which is typically accompanied by a surge in LNG carrier demand related to both increased gas consumption and additional utilization for floating storage, trading arbitrage involving lengthy voyages to the Far East, and weather-related delays that soak up shipping capacity, the market seems tightly coiled,” said Tyrell. (Source: Ibid.)
Moreover, the recent extreme volatility in natural gas prices has continued to put an emphasis on energy security, leading importers to put a premium on natural gas.
Regarding the future, Tyrrell said, “It remains to be seen how the coming winter will ultimately play out, but similar tightness of both cargoes and shipping capacity has historically presaged dramatic inflections in the spot charter market and provided firm support for both rates and charter durations in the more stable time charter market.” (Source: Ibid.)
Cool Stock’s Quarterly Dividend Maintained at $0.41/Share
Cool Company Ltd only went public in March, so it doesn’t have a long history of paying dividends.
The company has only paid three dividends so far. Management has raised CLCO stock’s dividend once, from $0.40 to $0.41 per share in June. (Source: “Dividends,” Cool Company Ltd, last accessed November 27, 2023.)
Cool Company maintained Cool stock’s distribution at that level in September, which works out to a yield of 6.1% (as of this writing).
The Lowdown on Cool Company Ltd
Cool Company is a pure-play LNG shipping business with a growing fleet that currently has 100% utilization.
Despite the LNG shipping industry’s seasonal weakness in the second quarter, the company reported solid results for that period and a firm backlog through 2026 in excess of $1.5 billion.
Thanks to industry and seasonal growth drivers, the following quarters and years look bright for Cool Company Ltd (and for holders of CLCO stock).
