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In a significant development in the LNG shipping market, QatarEnergy selected Nakilat to own and operate up to 25 conventional LNG vessels Nakilat would be the owner and operator of these LNG vessels and QatarEnergy affiliates would sign time charter agreements with Nakilat. These LNG vessels are part of the second phase of QatarEnergy’s ongoing LNG fleet expansion project. Nakilat has won these tenders on a competitive basis. QatarEnergy said that the company is in the process of identifying additional successful bidders as part of the second phase of the expansion plan. These LNG new orders won by Nakilat are in line with our views published in 2021 when an invitation to tender (ITT) was announced by QatarEnergy. We had forecast that Nakilat could win a significant share of these new orders, given the long-standing relationship with QatarEnergy. In this opinion piece, we estimate the internal rate of return Nakilat is expected to earn on these orders.

QatarEnergy had announced 60 newbuild vessels under the first phase of LNG fleet expansion plans, and these orders were placed with Korean and Chinese shipyards. In the second phase, QatarEnergy ordered 40 vessels to date – eight vessels with Chinese shipyards and 22 vessels with Korean shipyards. Orders with Korean shipbuilders are reportedly at USD 230mn for each vessel compared to the prevailing market price of around USD 265mn. QatarEnergy had pre-booked 151 slots for these ships in 2020. These LNG vessels will serve the transportation needs of Qatar’s North Field LNG expansion plan, the Golden Pass LNG export project in the US and replacement tonnage requirements. With the North Field LNG expansion plan, Qatar’s LNG export capacity will increase from the current 77 mtpa to 126 mtpa by 2029.

How do potential returns look?

Back in 2021, when QatarEnergy had announced an ITT to various LNG shipowners for the chartering of these LNG carriers, the company had offered owners four options for the firm charter hire period – 10, 12, 15 or 20 years – with ‘options’ to extend the period up to 25 years. Ships are expected to be based on either ME-GI propulsion systems or X-DF engines. We have arrived at projected IRR and Equity IRR for all these scenarios, taking our long-term forecasts of charter rates and newbuild price of USD 230mn. We have assumed vessels to trade in the spot market once the firm contract period is over. Based on our calculation, we believe a time charter contract for 20 years should offer an expected project IRR of 13.2% and an equity IRR of 24.8% using 70% debt/equity.

We have calculated equity IRR and project IRR (levered IRR) using Drewry’s long-term charter rate assumptions, estimated intermediate and special survey costs, off-hire days and utilisation. Once the firm contract period is over, we have assumed that the vessel will trade in the spot market for its remaining useful economic life, which we have assumed to be 25 years for this analysis. We have not factored in any retrofit requirement on these LNG ships.

Nakilat is the best performing LNG shipping stock YTD in our coverage universe

Nakilat stock has gained 11.5% YTD 2024 and has outperformed Golar LNG (down 7.8%) and Flex LNG (down 10.7%). Nakilat stock has benefited from recent order win announcements. The relatively softer LNG shipping market and the US government’s pause in approvals for pending and future applications to export LNG from new projects have weighed on Golar LNG and Flex LNG stocks.

Short-term volatility to continue

LNG shipping market would continue to normalise in 2024 due to dismal economic outlook, limited new liquefaction capacity additions, high inventory levels and significant scheduled deliveries. However, we believe the gradual phase-out of steam turbine LNG vessels and upcoming ample LNG liquefaction capacities in future years should keep the newbuild momentum strong for LNG vessels.

Conclusion – Nakilat’s revenues backlog increase further, and the company has the potential to win more orders

We view these new orders as a positive development for Nakilat as it will help the company to strengthen its global leadership positions further. It will also increase the company’s revenue visibility and revenue backlog. Nakilat is well positioned to win further new orders from QatarEnergy’s ongoing LNG fleet expansion plan, given multiple newbuild slots are still to be matched with owners.
Source: Drewry