Floating Your Way to Easy Profits in Europe

Commodities Investing, Energy Investing, Shipping

On May 4, the European Union proposed a phased-in ban on imports of all Russian oil. The ban will cover all Russian oil, seaborne and pipeline, crude and refined. The goal is to phase out Russian oil supplies in an “orderly fashion” within six months and refined products by the end of the year.

The EU is also proposing to bar European ships from transporting Russian oil and petroleum to any part of the world.

However, the story is vastly different for Russian gas, on which Europe is highly dependent. Last year, 45% of the EU’s gas supplies—155 billion cubic meters came from Russia.

As I told you in early April, the war and diminishing natural gas exports from Russia have turned Europe into a rather desperate buyer of LNG.

Gas tanker LNG – carrier ship designed for transporting natural gas

Europe and LNG

However, Europe has a major weakness: a lack of LNG infrastructure. And therein lies the money-making opportunity for investors.

The continent does have the infrastructure to “regasify” 170 billion cubic meters of LNG. However, most spare capacity is located on the Iberian Peninsula (Spain and Portugal).

And guess what? There are not enough pipelines from the Iberian Peninsula to move LNG supplies further north into the heart of Europe. It would take several years to build the pipeline infrastructure. And land-based LNG import terminals take at least five years to build and are very costly.

So, what is the solution for Europe?

Leaders say the EU needs to secure specialized ships that will offer it the quickest way (a year or so) to expand imports of LNG.

A number of European countries already have plans to secure floating storage and regasification units (FSRUs). These are docked liquefied natural gas tankers with heat exchangers that use seawater to turn the supercooled fuel back into gas.

However, Europe faces a harsh reality: spare vessels are few and far between. Out of a global fleet of about 50 FSRUs, estimates are that only a handful of ships are available globally. Supplies of these ships are limited because there had been a lack of demand for them—at least until the until the war broke out.

And even if Europe manages to charter ships, it will cost a pretty penny. Charter rates for FSRUs have increased by at least 50% since the outbreak of the war. The consultancy Rystad Energy estimates it now costs from $40 million to $60 million per year to charter an FSRU.

That translates to a goldmine for any company that owns some of the FSRUs in service now—like Excelerate Energy (EE), which not only owns and operates one of the largest FSRU fleets in the world, but also recently IPO’d.

Excelerate Energy: Perfectly Positioned

The situation today in the global gas market puts Excelerate Energy (founded in 2003) in the proverbial catbird seat.

On its website, the company highlights its strengths:

  • It has more than 60 years of combined customer regasification experience.
  • It owns 10 FSRU vessels, one of the largest fleets in the industry.
  • It has made over 2,000 ship-to-ship transfers and has transferred more than 236 million cubic meters of LNG—more than any other company.

Excelerate Energy is a pioneer and market leader in floating LNG regasification solutions. The company provides integrated services with the objective of delivering rapid-to-market and reliable LNG solutions to customers. Excelerate offers a full range of floating regasification services, from FSRU to infrastructure development to LNG supply.

This is exactly what Europe needs.

The company pioneered the floating regasification industry, with the delivery of the FSRU, the Excelsior, in 2005. That same year, Excelerate also commissioned the first offshore LNG receiving terminal, Gulf Gateway Deepwater Port in the Gulf of Mexico.

Today, Excelerate is a profitable energy company with a geographically diversified business model. Its business spans the globe, with regional offices in eight countries and operations in the United States, Brazil, Argentina, Israel, United Arab Emirates, Pakistan, and Bangladesh.

It is the largest provider of regasified LNG in Argentina and Bangladesh and one of the largest providers of regasified LNG in Brazil and Pakistan, plus it operates the largest FSRU in Brazil. In each of these countries, Excelerate provides a cleaner energy source than coal, from which power can be generated consistently.

As you can see, the company’s focus has primarialy been on the emerging economies. However, in light of the current situation, it would not surprise me to see it extend its operations into Europe now.

Even if it doesn’t, industry forecasts estimate that there will be a need for substantial investments in LNG infrastructure to access new markets. I expect future investments to be mainly based on new FSRU terminals, since FSRUs avoid the massive up-front investment that land-based terminals require.

That makes Excelerate Energy an absolute buy on any temporary weakness in energy prices. Any purchase in the mid-20s dollar range will be a smart long-term purchase.