Cool Company Ltd Compelling Despite Dividend Cut
Oil and gas prices were trading for around $70.00 per barrel, at least they were until early January, which is when the outgoing Biden Administration levied big sanctions on Russian oil and gas.
Since then, West Texas Intermediate has been trading at its highest levels in four years, near $80.00 per barrel. Brent Crude has followed a similar trajectory, trading at around $82.00 per barrel.
Higher oil and gas prices have also juiced oil-freight prices, with derivatives trading at their highest level in a decade. Earnings on the Middle-East-to-China route, an industry benchmark, surged more than $22,000 in the two sessions since the sanctions were announced, reaching almost $50,000 per day. (Source: “Oil Freight Traders Pile In as Russia Sanctions Push Rates Up,” BNN Bloomberg, January 14, 2025.)
Before the sanctions were announced, lower oil prices and shipping rates were what was holding the shares of Cool Company Ltd (NYSE:CLCO) down…well that and the issues that led to the shipping company cutting its dividend.
But the sanctions, which are expected to be supported by President Donald Trump, are now doing the opposite: they’re helping juice CLCO stock. While the stock is down 22% over the last three months, it’s up 10% since the start of 2025.
And those gains could be just the beginning, with Wall Street analysts providing a 12 month share price forecast target of $13.50 on CLCO stock. This points to potential gains of 54%. That would also put CLCO stock above its May 2024 record intraday high of $12.55.
Chart courtesy of StockCharts.com
About Cool Company Ltd
Cool Company is a pure-play liquified natural gas (LNG) shipping company.
Global demand for LNG is expected to rise by more than 50% by 2040, as industrial companies in China and South Asia and Southeast Asian countries switch from coal to gas to support their economic growth. In 2023, global trade for LNG hit 404 million tonnes, up from 397 million tonnes in 2022. (Source: “Shell LNG Outlook 2024,” Shell plc, last accessed September 3, 2024.)
The U.S. is the world’s largest exporter of LNG, which means key markets in Asia have to pay more to have that production shipped further distances on a growing number of vessels.
It takes an LNG vessel 15 days to travel from the U.S. to Europe, 47 days to travel to China via South America, and 41 days traveling via the Cape of Good Hope in Africa.
Cool Company’s fleet consists of 15 LNG vessels and floating storage regasification units (FSRUs) that operate under short- and long-term charters with major energy companies and utilities. (Source: “About Us,” Cool Company Ltd, last accessed January 17, 2025.)
Higher Daily TCE Rates of $81,600
For the third quarter ended September 30, Cool Company announced that revenue had inched up to $82.4 million, up slightly from $83.4 million in the second quarter of 2024. The slight increase was due to three vessels undergoing scheduled drydocking during the quarter. (Source: “Q3 2024 Business Update,” Cool Company Ltd, November 21, 2024.)
The company’s net income was $8.1 million, versus $26.5 million in the second quarter. The big drop was mainly a result of a loss in its market-to-market interest rate swaps. Time charter equivalent (TCE) earnings rose four percent to $81,600 per day. That was boosted in part due to one vessel charging a higher charter rate.
Contracted backlog at the end of the quarter was $1.1 billion, not only providing Cool Company with predictable revenue, but also boding well for its dividend.
During the quarter, the company took delivery of one newbuild vessel, which is already on the spot market. It also completed drydocks for two vessels.
Subsequent to the end of the third quarter, Cool Company obtained bank approval for the refinancing of its $570.0-million bank facility into a reducing revolving credit facility, which will provide approximately $120.0 million in additional borrowing capacity.
Commenting on the third-quarter results, Richard Tyrrell, the company’s chief executive officer, said, “Our contracted fleet and efficient dry-docking enabled us to reach the upper end of TCE guidance for the third quarter, despite a soft market backdrop that is expected to impact us in the fourth quarter.”
“While we work to secure their long-term employment, the newly delivered Kool Tiger and the available Kool Glacier are currently subject to weaker rates in the short-term market. However, by design, our backlog from our remaining 10 vessels and one newbuild vessel, set for delivery in January, limits our exposure.”
At the time, management said that the winter market was expected to be negatively impacted by unfavorable short-term trading dynamics. We now know that isn’t the case. The industry is being positively impacted by short-term and near-term trading dynamics.
LNG remains the most popular transition fuel of choice, which helps support Cool Company’s long-term prospects.
Third-Quarter Dividend of $0.15/Share
Cool Company only went public in March 2023 after being spun off from Golar LNG Limited (NASDAQ:GLNG) in early 2022. As a result, it doesn’t have a long history of providing investors with a growing dividend. (Source: “Dividends,” Cool Company Ltd, last accessed January 17, 2025.)
CLCO stock also has a variable dividend, after allocating funds for drydocking and capital expenditures tied to improving vessel efficiency. Other considerations include the freight market outlook, market cycles, macroeconomic conditions, and the company’s balance sheet.
This simply means that CLCO stock’s payout could change from quarter to quarter. Cool Company is not the kind of investment you can just stick in your portfolio and forget about.
Because of industry dynamics, which included lower third-quarter profitability, Cool Company had to lower its dividend payout in the third quarter to $0.15 per share, or an annual distribution of $1.64 per share, for a forward dividend yield of 15.41%.
Shareholders punished CLCO stock by sending it significantly lower. But it has rebounded since the start of 2025, and the outlook remains solid for CLCO stock and its dividend.
In addition to a strong balance sheet, Cool Company’s cash flow has picked up from $2.4 million in 2023 to $77.8 million over the last 12 months. This, coupled with higher oil prices and stronger freight rates, should allow the company to raise its dividend in 2025.
Moreover, because of its strong balance sheet, Cool Company was able to announce a $40.0-million share repurchase program, which will extend over the next two years.
The Lowdown on CLCO Stock
Cool Company Ltd is a great pure-play LNG shipping company that had a fleet utilization of 98% in the third quarter. While the company reported solid third-quarter revenue and TCE rates, it also had significantly lower net income, which negatively impacted its dividend.
Nevertheless, because of its strong balance sheet, growing fleet, and industry tailwinds, Cool Company’s board could raise the distribution over the coming quarters.
While the company clearly wants to perform well for its shareholders, insiders have significant interest, too, with 58.4% of all CLCO stock being held by insiders. On top of that, 65 institutions have a 23.1% stake in CLCO stock. Some well-known institutional owners include Morgan Stanley, Bank of America Corp, and HSBC Holdings plc. (Source: “Holders,” Yahoo! Finance, last accessed January 17, 2025.)