Cool Company Ltd (CoolCo) (CLCO) Stock Analysis

CoolCo is one of the few publicly traded companies focused exclusively on LNG shipping. Here's why that matters.

Cyclical Value Investing

Mar 29, 2023

∙ Paid

Quick Stock Overview

Ticker: CLCO

Key Data

Industry: Energy / Shipping
Market Capitalization ($M): 687
Price to sales: 4.26
Price to Free Cash Flow: 5.97
Dividend yield: 3.05% (12.5% annualized)
Sales ($M): 161
Free cash flow/share: $4.18
P/E: 16.4

1. Executive Summary

The Ukraine war has put a spotlight on the danger of Europe's dependence on Russian energy supplies. This is especially true for natural gas, which the EU consumes in massive amounts to power it's electric grid, run its industries, and stay warm in winter.

The pipeline gas that Europe received from Russia was inexpensive, but a pipeline can only move gas from one source, and Russia's political instability makes dependence on Russian gas unacceptable. LNG terminals make an ideal alternative. An LNG terminal can receive gas from anywhere, avoiding the problem of being tied to a single supplier.

This led to a flurry of construction aimed at building infrastructure to receive and process LNG. This leaves one unsolved chokepoint that is little discussed: LNG shipping.

LNG can only be shipped on specialized vessels, and the current fleet is not dimensioned for the sudden surge in European demand. At the same time, shipbuilding capacity is not able to add new supply quickly, as it is already running at 100% capacity after many shipyards went bankrupt in the 2010s.

Worse, new pollution regulations are forcing the retirement of a large portion of the existing fleet.

This gives a unique opportunity for CoolCo, a pure play in LNG shipping. Its modern fleet is unaffected by pollution regulations. Its ships will be able to capture most of the upside when buyers outbid each other to obtain precious supplies ahead of the coming winters.

2. Extended Summary: Why CoolCo?

The Not-Over Energy Crisis

The Ukraine war has dramatically increased Europe's need for LNG. This has dramatically increased global demand, as Russia's pipeline gas cannot be redirected elsewhere for years. 75% of Russia's gas pipeline net runs to Europe, and the existing pipelines to Asia can carry only a small fraction of Russia's output.

This created a logistical nightmare for the EU.

The Coming Supply Chokepoint

Gas and LNG producers are expanding capacity as fast as they can. The EU has also rushed new facilities to process and collect this supply. But shipping is a chokepoint that cannot be solved as easily. Limited shipping capacity is leading to increasing day rates, multiplying the margins of LNG shipping companies.

CoolCo

CoolCo is one of the only publicly traded pure-play LNG carriers. It operates a modern fleet that will benefit from its competitors being forced to retire vessels due to new stringent pollution regulations. Increasing shipping day rates could bring its Free Cash Flow to Equity up to a 30-50% yield.

Financials

CoolCo has growing revenues, profit, and cash flows. It has some debt, but most repayment is scheduled for 2025 and 2027. Its policy is very shareholder friendly, with most free cash flow distributed in dividends and expected double-digit dividend yields.

A New Listing

CoolCo filed for a direct listing on the NYSE on February 14, 2023. The Company completed the regulatory process on March 10 and asked the SEC to declare its registration effective on March 14.

The registration has been approved, and CoolCo shares commenced trading on the NYSE on March 17, 2023, under the symbol CLCO. Trading on the Oslo exchange will continue.

Up until this time CoolCo has traded on the Oslo Euronext Growth exchange in Norway, restricting access for US investors and limiting the stock's visibility and profile.

Stock Spotlight