The New King of LNG

The moment that Russia invaded Ukraine, the global energy markets were changed for decades to come. 

We’ve seen how the story has unfolded since that invasion. Europe implemented sanctions on purchasing Russian oil and natural gas. 

Russia retaliated by cutting off all gas supplies through the Nord Stream 1 pipeline to Europe. That is a huge deal because Russia was the primary supplier of gas for all of Europe. 

And Russian President Vladimir Putin declared, “We will not supply gas, oil, coal, heating oil – we will not supply anything!” 

As a result, Europe’s energy crisis became an outright catastrophe. 

What Can Europe Do Now?

Energy security is a major priority and can’t ever be taken for granted. 

Our eyes are now wide open to the fact that relying on unfriendly nations to supply essential energy is a policy blunder of the highest order. 

Europe, which was dependent on Russia for almost half of its natural gas, faced a desperate situation as Putin choked off supply. The price of the commodity was up by about 600% at its peak, but as you can see in the chart, prices have fallen back to normal levels. 

The sabotaging of the Nord Stream 2 pipeline only added an even greater element of urgency to the situation. 

Europe was completely dependent on Russian fuel. And it was totally unprepared to provide its own energy. In short, Europe was on the verge of a major prolonged energy crisis. 

But fortunately… there was a replacement for Russian natural gas: American natural gas! 

While Europe has very little natural gas, we are blessed with a treasure trove of shale gas here in the United States. 

That’s why the price of natural gas in the United States remains incredibly cheap while it’s sky-high in Europe. Natural gas in the United States sells for about $2 per million British thermal unit (MMBtu). In Europe, over the summer of 2022, it spiked to between $60 MMBtu and $80 MMBtu. 

The United States is the world leader in producing cheap natural gas. We have nearly unlimited supplies. And we have the technology to pull it out of the ground in massive amounts. 

We just needed to be able to get the gas from here to there. And the company in this report was instrumental in that process, and it remains critical in keeping European gas prices under control.

Flexing Its Muscles

In order to transport natural gas from America to Europe, it must be transformed from regular natural gas to liquefied natural gas, or LNG. 

And then that LNG is transported across the ocean on a ship. 

The problem is that not many shipping companies have the type of ship needed to transport LNG. 

But Flex LNG (NYSE: FLNG) does. It was perfectly prepared to capitalize on this opportunity… and likely played a part in bringing European natural gas prices down. Based in Hamilton, Bermuda, Flex specializes in the seaborne transportation of LNG worldwide. Its fleet contains of some of the newest and most advanced ships for transporting LNG. 

Its armada consists of 13 fuel-efficient, fifth-generation LNG carriers built between 2018 and 2021. 

These new vessels use 50% less fuel and have 30% more storage capacity, offering the lowest transportation costs in the industry. 

With all the LNG needed in the coming years, demand for Flex’s ships is clearly going to be strong. 

In fact, it already is.

Locked-In Profits

European governments are still locking in long-term contracts at fixed prices for years to come! 

Flex has been and still is glad to oblige them. 

Of the company’s 13 ships, 12 of them are now in fixed contracts… with LNG prices locked in for between three and 10 years. 

In total, the company has 51 combined years of LNG delivery locked in for the 13 ships it operates. 

And Flex was able to extend its charters on three of its LNG carriers – the Flex Endeavour, the Flex Ranger and the Flex Vigilant – with Cheniere Energy for a total of 19 additional years. 

That’s what I call predictable revenue! 

This is easily some of the most predictable future sales growth you can imagine. 

And this sales growth is not a guess or a projection. These are enforceable contracts with significant penalties for any party that breaks them. 

But the contracts are not going to be broken for two critical reasons… 

The first is that Europe is never going back to being reliant on Russian gas. European countries have abruptly realized that being dependent on Russia for their energy needs is a very bad policy. 

Europe, as much as possible, will reduce its dependence on Russian natural gas and switch its allegiance to the U.S. 

The second reason is the massive current and future need for LNG as an energy-supplying fuel. The use of oil – the No. 1 source of energy in Europe – is (intentionally) on a steep decline. Natural gas is the No. 2 source, and it’s purposely on a gradual increase. 

However, “Putin’s folly” rapidly accelerated Europe’s need for natural gas. Russia’s loss will be America’s gain…

LNG: The Long-Term Solution

Natural gas is the cleanest-burning and most environmentally sustainable fossil fuel. 

It is widely expected to overtake both oil and coal as the most widely used fossil fuel within eight years. 

That will be a boon to the LNG industry. 

When cooled to minus 260 degrees Fahrenheit, the volume of natural gas decreases 600-fold, making it easy to transport by ship. When the ships reach an import terminal, the LNG is regassified and transported through pipelines to provide heat and electricity. 

The LNG market has doubled over the past 10 years – and demand is growing rapidly. 

Early in 2022, President Joe Biden announced an agreement that committed an additional 15 billion cubic meters of U.S. LNG to be sent to Europe. The agreement also anticipates annual shipments from the U.S. to increase to 50 billion cubic meters by 2030. 

That’s a lot of future shipments. But not many companies are currently in a position to benefit… 

Flex is. 

The Best Pure Play on Increased LNG Use

The numbers here are already excellent. 

Third quarter 2023 revenue topped $94.6 million, up 7.9% quarter over quarter. Net income totaled $45.1 million, up 6.1% over the same figure in the previous quarter. Total cash and equivalents were $429 million.  

Yet the stock sells for just 10.98 times earnings as I write. That’s much less expensive than the average S&P 500 stock’s price-to-earnings ratio. 

Flex’s regular dividend is $3 per share each year, and at current prices (as of this writing), the yield is 10.44%.  

And right now, because of Putin’s folly, Flex’s ships are picking up loads of LNG and shipping them to Europe. 

In the second quarter of 2022, the average ship charter rate was $75,941 per day. That was a 21.26% jump from the $62,627 per day rate the company was receiving in the first quarter of 2022. That all happened because of the war in Ukraine.  

Are you grasping the significance? 

A whole new source of business opened up for Flex at a time when natural gas demand and price were sky-high. 

Natural gas suppliers were scrambling to get as much natural gas to Europe as fast as they could. Flex is now going to make a lot of trips to Europe.  

Moving forward… now that Russian gas is off the table… we are looking at a company with 13 ships capable of producing more than $70,000 per day on every journey from America to Europe or anywhere else. 

Right now, Flex has 100% contract coverage until mid-2024… It signed two ships to seven-year deals… And another ship is contracted all the way until 2033! 

As I mentioned earlier, out of 13 ships, 12 of them are locked in at fixed prices. 

So even now that energy prices have come down, Flex is protected. 

And the company is rewarding shareholders like never before. The company’s dividend yield has increased dramatically, and I expect it to go up a similar amount in the next couple of years. 

I was on a conference call with the CEO and CFO in 2022, and investors were asking about the future growth and dividends. 

The CEO told us the business is “immensely profitable” and said it will “focus on paying very healthy dividends for our shareholders.” 

Flex has a huge first-mover advantage in the LNG shipping industry… The company’s 13 ships are all state of the art. The average age of its fleet is just over 3 1/2 years. 

Any new competitors who want to get in the LNG business are going to have a tough time catching up. 

The cost of building these new cost-efficient LNG ships – like everything else due to inflation – has skyrocketed. 

The cost of building a new ship has gone up by tens of millions of dollars since early 2021. 

In addition, because of labor and raw material shortages, a new ship ordered today won’t be ready until nearly the end of the decade! So Flex won’t have new competition coming in for years! 

Of course, Flex has competitors… but not nearly enough to fill the massive demand for natural gas. 

Putin’s Folly

It is now glaringly obvious that Putin’s invasion is a crime against Ukraine and a humanitarian tragedy. 

The implementation of economic sanctions on Russia has caused Putin to retaliate. The result is a colossal energy crisis facing Europe. 

Here’s the takeaway… 

No matter how the war in Ukraine ends, Europeans will never go back to depending on Russia for their energy needs. Putin is the most hated man in Europe. Putin’s actions have alienated an entire continent. 

Europe will look elsewhere for its energy needs. Permanently! 

That means LNG shipments from the U.S. will see a massive increase… and Flex will be a prime beneficiary. 

Insiders (corporate executives, board members, etc.) at Flex have loaded up on shares, owning 45% of all outstanding shares. Clearly, the insiders understand the enormity of this opportunity. 

However, because Flex is such an unknown company, very few retail investors own it. 

And even with the company’s tremendous – locked in – earnings prospects… shares are selling for only 10.98 times earnings. 

In short, Flex is extremely undervalued at current levels and is an ideal way to profit from Putin’s folly. 

Action to Take: Buy Flex LNG (NYSE: FLNG) at market. And use a 25% trailing stop to protect your principal and your profits.