Legacy LNG Assets Will Suffer Under Decarbonization Pressure

Key Takeaways

• Ongoing decarbonization and stricter regulations threaten Cool's revenue growth, margins, and future asset values due to reliance on the shrinking LNG market.
  
• Increased ESG activism and shrinking capital access further hinder Cool's ability to adapt or diversify into new technologies for long-term earnings stability.
  
• Strong charter coverage, fleet efficiency upgrades, and disciplined financial strategy position Cool to capitalize on rising LNG shipping demand and industry supply constraints.

Catalysts

Acquires, owns, operates, and charters liquefied natural gas carriers (LNGCs).

• Global decarbonization efforts and net-zero mandates are accelerating worldwide, leading to a structural decline in long-term demand for fossil fuels such as LNG; this will directly pressure Cool's future revenue growth as its core market shrinks over time.
  
• Widespread advances and adoption of renewable energy technologies are expected to undermine the competitive position of LNG over the coming decades, steadily eroding Cool's addressable market and negatively impacting long-term earnings and top-line growth.
  
• Escalating regulatory pressure-including stricter emissions standards and the potential for more aggressive carbon pricing-will increase operating and compliance costs for Cool, ultimately compressing net margins well into the future.
  
• Cool's high reliance on legacy LNG shipping assets exposes it to the risk of asset write-downs and stranded vessels as decarbonization advances, which could lead to significant impairments and deteriorating balance sheet quality.
  
• Growing investor activism and intensifying ESG scrutiny are likely to further restrict access to capital markets for fossil fuel-focused firms like Cool, resulting in a higher cost of capital and limiting their ability to invest in new technologies or diversify revenue streams for sustained earnings stability.

Cool Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Cool compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Cool's revenue will decrease by 4.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 17.5% today to 13.1% in 3 years time.
• The bearish analysts expect earnings to reach $37.2 million (and earnings per share of $0.72) by about September 2028, down from $56.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 15.4x on those 2028 earnings, up from 7.2x today. This future PE is greater than the current PE for the NO Oil and Gas industry at 8.5x.
• Analysts expect the number of shares outstanding to decline by 1.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.99%, as per the Simply Wall St company report.

Cool Future Earnings Per Share Growth

Risks

• Accelerating LNG supply growth from new global projects, particularly in the U.S., is set to increase shipping demand and ton miles, which could drive higher vessel utilization and improve revenue for Cool.
  
• A substantial chartering backlog covering 50% of fleet days until 2027 provides earnings stability and cushions the impact of market weakness, supporting the company's earnings consistency and financial resilience.
  
• Investments in vessel upgrades and eco-friendly features that yield around $5,000 in daily charter premiums and 30% in annual fuel and emissions savings are improving fleet efficiency and operating margins, potentially strengthening net margins over time.
  
• Industry-wide trends such as idling and scrapping of older, less efficient LNG vessels are tightening supply, which can accelerate market rebalancing and support an upturn in freight rates, benefitting Cool's top-line growth and pricing power.
  
• Management's disciplined capital allocation, strong liquidity position with $226 million in available funds, extensive interest rate hedging, and active share buybacks below net asset value can enhance shareholder value and support both earnings and balance sheet strength over the long term.

Valuation

• The assumed bearish price target for Cool is NOK79.66, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Cool's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK114.5, and the most bearish reporting a price target of just NOK79.66.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $283.3 million, earnings will come to $37.2 million, and it would be trading on a PE ratio of 15.4x, assuming you use a discount rate of 13.0%.
  
• Given the current share price of NOK77.1, the bearish analyst price target of NOK79.66 is 3.2% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that the bearish analysts believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.