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Investing in liquefied natural gas shipping: A key overview

Part 2
Investing in liquefied natural gas shipping: A key overview (Part 2 of 12)

A guide to liquefied natural gas carriers and key shipping costs

LNG vessel types

There were 397 LNG (liquefied natural gas) carries at the end of March 2014, according to Golar LNG Ltd. (GLNG). While there are a few different types of LNG vessels, the two dominant containment systems, Moss (nicknamed “dinosaur egg”) and Membrane systems are employed today.

Vessel TypeEnlarge Graph

Vessel type

In the Moss system, the LNG is stored in four to five enormous spherical tanks. Insulating materials used to keep LNG cool are placed within the spherical containers, which are supported by the vessel’s hull. Insulation for the Membrane system is built directly into the vessel’s hull. Because the membrane system uses the volume of the ship’s haul most efficiently, most newbuilds (89%) are built under the membrane system today.

Shaping the shipping industry

Since a newbuild LNG carrier is expensive—a standard vessel can cost around $200 million plus—these carriers are largely chartered out for several years (five years or more). This provides stability for investors, and is a key reason why several LNG carrier owners are allowed to use debt to fund more than half of the total capital cost. The useful life of a LNG carrier is estimated at ~35 years.

The stable cash flow is a key reason why several companies such as Teekay LNG Partners LP (TGP), Golar LNG Partners LP (GMLP), and Dynagas LNG Partners LP (DLNG) are structured as limited partnerships and have distributions yields greater then the Guggenheim Shipping ETF’s (SEA)—6.0% or more. GosLog Ltd. (GLOG) is also looking to form a master limited partnership with some of its vessels to reduce debt.

Today, a typical LNG carrier has carrying capacity of 165,000 cbm (cubic meter), which has gradually increased over the years. Larger vessels are more economical, because they allow fixed costs to be spread over larger volumes of cargos, which reduces overall costs and helps LNG trade grow. This means LNG carriers could be subject to lower rates once the long-term contracts roll over, as newer and larger vessel compete against old ones. We must also consider the impact changes in newbuild prices will have on shipping rates, since capital cost is a key driver of shipping rates and the difference between expected shipping rates and newbuild price affects orders.

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