How to play the surge in natural gas prices

Christian DeHaemer

Written By Christian DeHaemer

Posted June 4, 2024

Natural gas prices have been going up over the past three months.  Bloomberg put out this chart regarding long futures contracts.

And Reuters is reporting that the U.S. is expecting LNG exports to increase after Freeport LNG fixed some mechanical issues to three of its processing units which were offline for the past three months.

LNG Futures Chart

The U.S. is the largest exporter of LNG and a key supplier to the EU after Russia invaded Ukraine.  That said, exports have been declining all year.  This is about to change.  Exports will pick up to both the EU and Asia.

Asia is Hot

Spot prices in Asia have been climbing due to hot weather.  Now the U.S. is sending Asia 41% of total exports up from 32.6% in April.  Furthermore, most shipping is going the long route around Africa’s Cape of Good Hope to reach their final destination as the Hoothies keep launching drones against shipping in the Red Sea.

One company I like in the LNG transport sector is Cool Company Ltd (CLCO) out of London, UK.  Cool Complay buys, owns, operates and charters liquefied natural gas carriers (LNGCs).  They own 11 LNGCs and manage 17 others for third parties.

The company has been in business since 1970 but went public about a year ago.  You can now buy them below their IPO price.

Cool Chart

The company is undervalued with a forward price-to-earnings of 4.32, a price-to-book of 0.89, and pays a whopping 14% dividend.  Cool has a market cap of $666.04 million.

For comparison, Golar LNG (GLNG) a similar LNG shipping company has a forward price-to-earnings ratio of 12.69, a price-to-book of 1.32, and pays a 3.83% dividend.  Golar has a market cap of $2.73 billion.

In other words, Golar is valued at roughly three times Cool.  That’s absurd.

Not only is Cool undervalued and its products in demand but it just got 7% cheaper for a dumb reason and I’ll tell you why.

The company recently signed a 14-year charter with GAIL, India’s leading natural gas company.  GAIL has a market cap of $16.5 billion.  India’s population is hitting peak working years, the economy has been on fire, and natural gas demand is jumping.  It is used for cooking, fertilizer, and electric power creation.   

India is the fourth-largest LNG market globally with significant growth potential.  The deal with GAIL adds clarity and stability so that Cool can go out and order new ships. 

The reason Cool sold off was that Indian stocks had their worst day in four years.  This was because Prime Minister, Narendra Modi didn’t win his election in a landslide.  The PM has driven economic growth for the past few years. 

The market priced in 400 seats for the Bharatiya Janata Party but they only got 300 seats in the Indian parliament.  This means that the growth agenda won’t be so easily installed.  That said, Modi still has a majority and I don’t see how this will affect the importation of LNG.  

Cool Company Ltd (CLCO:NYSE) is a buy at $11.49.  New tankers are in limited supply until 2026 at the earliest so the share price should continue to climb.  And while you are waiting you can cash that 14% dividend as a hedge against inflation.

All the best,

Christian DeHaemer

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