Growth and income in natural gas
Golar's speciality fleet is set to benefit from an expected boom in LNG shipping.
By Harry Domash, Dividend Detective
Thanks to new techniques for getting natural gas out of shale rock formations, the U.S. is suddenly producing more natural gas than we need.
That's a good thing because many foreign countries are eager to import our surplus natural gas. Meanwhile, falling natural gas prices have opened up an opportunity for investors in Golar LNG (GLNG).
Until recently, natural gas could be transported only via pipelines, making it impossible to export overseas. But that has changed.
New techniques have been developed that involve freezing natural gas, which turns it into a liquid, and then transporting the gas by ship to its destination port, where it is essentially defrosted, which converts it back to a gas.
Golar owns and operates a fleet of ships built specifically to transport liquefied natural gas (LNG). But there is more to the story.
Few, if any, ports have the equipment needed to liquefy natural gas for shipping. Same story on the other end.
The facilities required to convert LNG back to its gaseous state doesn't exist at most likely receiving points.
Golar has filled those gaps by outfitting ships with liquefaction facilities that it stations near natural gas shipping ports, and different ships that can convert LNG to natural gas.
In April 2011, Golar created Golar LNG Partners (GMLP), an MLP, which operates LNG ships and liquefaction and regasification assets intended for long-term charters.
You could participate in the oncoming natural gas shipping boon via GMLP, which just hiked its quarterly distribution, increasing its yield to 5.2%. But there's a better way.
Golar LNG is GMLP's master partner. As such, each quarter, Golar LNG is entitled to a percentage of GMLP's distributable cash before GMLP's limited partners (unitholders) get their payout.
That percentage, dubbed "incentive rights," runs from nothing at the beginning up to 50% when GMLP's distributable cash reaches a predetermined level. In addition, Golar LNG holds around 68% of GMLP's limited partner units.
Putting that all together, although Golar LNG's current dividend yield is only 2.9%, its cash flow, and hence its dividends, will grow much faster than GMLP's distributions.
Golar, founded and controlled by shipping magnate John Fredriksen, is incorporated in Bermuda, but headquartered in London.
Also on the plus side, since Golar LNG is a corporation, at tax time, shareholders won't have to deal with the more complicated returns required for master limited partnerships, such as GMLP.
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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