LNG carrier operator CoolCo has revealed more details regarding its recent 14-year charter deal with India’s largest gas utility GAIL.
CEO Richard Tyrrell said during the company’s first quarter results earnings call on May 22 that this charter deal with GAIL is the largest single contract CoolCo has ever entered into.
He said GAIL is a “significant importer of LNG into one of the highest potential markets”.
“It is great to establish our relationship and we’re aiming to work together on future projects,” Tyrrell said.
GAIL is an end user for LNG and sells regasified LNG to customers in the fertilizer, city grid, power, refinery, and petrochem sectors, amongst others in India.
The state-owned firm owns and operates a network of over 16,000 km of natural gas pipelines in India.
It holds a stake in India’s largest LNG importer, Petronet LNG, and the company buys volumes under long-term LNG deals, including from the US and Qatar.
GAIL charters LNG carriers to ship these volumes and currently has 4 vessels in its fleet. It also operates the 5 mtpa Dabhol LNG terminal in India.
Tyrrell said growth in India is underpinned by a booming economy and high growth niches like the compressed natural gas and LNG markets for transportation.
“You can see how LNG imports have bounced back now that the prices have stabilized after the Ukraine shock and are now back on their upward trajectory,” he said.
“The high-teen return on equity that we achieved on the newbuild sets a supportive precedent for the second vessel, around which active discussions continue,” Tyrrell said.
Kool Tiger and Kool Panther
Under the long-term deal announced on May 16, CoolCo will charter one of the company’s two newbuild 174,000-cbm LNG carriers currently under construction at South Korea’s Hyundai Samho.
CoolCo will deliver the newbuild to GAIL in the Gulf of Mexico, with the time charter starting in early 2025.
Also, GAIL has the option to extend the charter by two additional years beyond the firm 14-year period.
CoolCo purchased this and the other LNG carrier from its largest shareholder Eastern Pacific Shipping, and they feature GTT’s Mark III Flex membrane cargo tank system, reliquification, air-lubrication, and shaft generators.
The shipping firm exercised its option with affiliates of EPS Ventures in June 2023 to acquire newbuild contracts for the two 2-stroke LNG carriers scheduled to deliver in the fourth quarter of 2024.
CoolCo will pay about $235 million for each of the LNG carriers which will be named Kool Tiger and Kool Panther.
This is much lower than the current prices in South Korea of about $260-270 million for a newbuild 174,000-cbm LNG carrier.
In October last year, CoolCo entered into sale and leaseback financing arrangements with China’s Huaxia Financial Leasing, the leasing arm of Hua Xia Bank, for the newbuild vessels.
Charter rate
The time charter deal with GAIL increases CoolCo’s firm revenue backlog to more than $1.2 billion and total revenue backlog including extensions to almost $1.9 billion as of March 31, 2024.
An analyst said during the CoolCo earnings call that the expected charter rate for the GAIL deal could be in the “low $90,000” range per day, based on the backlog increase.
He asked Tyrrell and CoolCo’s CFO John Boots to discuss the expected returns on this contract and to compare the rate to the cash breakeven and a normal 10 percent return on equity.
“So in November 2022, we put a chart.. that showed the economics and there you see that in order for us to make a 10 percent equity return with the assumption that I mentioned there, we need at least $82,000 per day,” Boots said.
“And the breakeven is $69,000 in that chart. So if you then use your number that you calculated and you extrapolate, then you effectively come to the conclusion that equity returns within the high-teens,” he said.
“And then looking at it from the other angle, this vessel cost us $236 million compared to the prevailing cost of these vessels, which is $260 million. So we’ve managed to harvest the benefit of that lower cost fundamentally,” Tyrrell said.
Asked about the second newbuild, Tyrrell said that CoolCo could opt for a shorter contract compared to the first newbuild.
“However, the rate advantage you get on a shorter charter in this market isn’t going to be as great as what it would have been, call it, 12 months, 18 months ago,” he said.
“So you’ve got to ask yourself whether that makes sense or not. Because obviously, with a 10-year plus charter, you can get the extra leverage, you can release some equity, and that has significant value, which I think probably outweighs any rate advantage you can get from doing a shorter term charter today. Now that can change of course quite quickly. The market is volatile but that’s at least how we see it today,” Tyrrell said.