Cool Company Ltd: 13.6%-Yielder Has 20% Upside
September 11, 2024
Outlook for Cool Company Ltd Bullish on Industry Tailwinds
Long-term industry tailwinds can help provide shareholders with some security during periods of short-term volatility. That’s why I’m taking a look at Cool Company Ltd (NYSE:CLCO), a pure-play liquified natural gas (LNG) shipping company.
Global demand for LNG is expected to rise by more than 50% by 2040, as industrial companies in China and South Asia as well as Southeast Asian countries switch from coal to gas to support economic growth. (Source: “Shell LNG Outlook 2024,” Shell PLC, last accessed September 3, 2024.)
The U.S. is the world’s largest exporter of LNG, which means key growth markets in Asia and the Far East will see customers paying more to have that production shipped further distances on a growing number of vessels. And prices go up even more with canal closures and geopolitical tensions.
It currently takes a LNG vessel 15 days to travel to Europe from the U.S. Gulf Coast, 47 days to reach China via South America, and 41 days to get around the Cape of Good Hope in Africa.
Additional factors impacting the cost to charter a vessel include load, demand, arbitrage, seasonality, and even spot rates. All of this bodes well for Cool Company Ltd.
The London-England-based company’s fleet consists of 29 LNG carriers and floating storage regasification units (FSRUs) that operate under a short- and long-term charters with major energy companies and utilities. (Source: “About Us,” Cool Company Ltd, last accessed September 3, 2024.)
The average charter term is approximately five years, but in the second quarter, Cool Company secured a 14-year charter to service the fast-growing Indian LNG market for one of its two new LNG carriers that should be delivered in the fourth quarter. The company has a firm revenue backlog through 2026 of $1.8 billion. (Source: “2Q24 Results Presentation,” Cool Company Ltd, August 29, 2024.)
Cool Company’s customers include Shell PLC, BP plc, Vitol, and TotalEnergies SE.
TCE Rates Improve to $78,400
For the second quarter ended June 30, Cool Company reported revenue of $83.4 million, down from $88.1 million in the first quarter of 2024. The decrease was primarily a result of drydock upgrades. (Source: “Q2 2024 Business Update,” Cool Company Ltd, August 29, 2024.)
Net income was $26.5 million, compared to $36.8 million in the first quarter of 2024. Time Charter Equivalent Earnings (TCE) increased to $78,400 per day compared to $77,200 per day in the first quarter. The increase was supported by contributions from two vessels that recently started to charge higher rate charters.
Commenting on the results, Richard Tyrrell, chief executive officer, said, “During Q2 and the early part of Q3, CoolCo has taken advantage of the seasonally quieter months to complete drydocks and secure additional forward charter cover for both the relative short term and the long term.”
“Following our recent chartering activity, our fleet is now largely fixed through the medium term. Due to full charter coverage and improved drydock performance, we expect a moderate increase in TCE rate and time and charter voyage revenues for the third quarter compared to the second quarter,” Tyrrell added.
Maintains Quarterly Distribution of $0.41 Per Share
Cool Company only went public in March 2023 after being spun off from Golar LNG Limited (NASDAQ:GLNG) in early 2022. As a result, it doesn’t have a long history of providing investors with a growing dividend. It’s only declared seven dividends so far. That said, the company has raised its dividend once, in the first quarter of 2023, from $0.40 to $0.41 per share. (Source: “Dividends,” Cool Company Ltd, last accessed September 3, 2024.)
Cool Company has maintained that distribution since then. This works out to an annual distribution of $1.64 per share, for a current yield of 13.6%. The variable dividend payout is safe, with a payout ratio of roughly 70%; well below the 90% threshold we’re willing to stomach. This provides the company with enough cash to continue to pay its dividend and, if the TCE rate continues to increase, raise its quarterly dividend, too.
Chart courtesy of StockCharts.com
The Lowdown on Cool Company Ltd
Cool Company Ltd is a pure-play LNG shipping company that had a fleet utilization of 99% in the second quarter, compared with 95% in the first quarter of 2024.
It reported solid second-quarter results, with TCE improving to $78,400, inked a 14-year charter. It also has a firm backlog of $1.8 billion.
Thanks to a shift in bias toward U.S. LNG production, the outlook for Cool Company remains robust.
On top of all this, CLCO stock offers an attractive dividend.
