Q116LNG Shipping Earnings Preview:Recovery Has Been Slow,Q1Should See More of the Same

Chinese demand growth may be returning: Chinese LNG importshave recovered in recent months, with imports up 17% year-over-yearduring Q1. This is after being down 1.2% in 2015. It remains to be seenif this growth rate will continue in the near-term. While the long-termLNG prospects for LNG demand in China should be solid, near-termdemand LNG import demand seems to have been affected by low pricesfor alternative energy sources and the availability of pipeline gas.

    Imminent Angola restart could provide relief to depressed spotmarket; outlook for Yemen remains uncertain: Angola LNG is nowexpected to come back online in Q2/16. The facility was shut down formaintenance in 2014. Seven vessels are dedicated to the facility, whichshould help remove vessels from the oversupplied spot market.

    The battle for European imports the major variable in ton-miledemand: With Asian demand growth slowing, that Qatar, Russia andU.S. supply competes for demand in Europe. There is destinationflexibility in U.S. contracts, so Asian customers could potentially takecargoes and try to sell them into Europe. U.S. exports being shipped toEurope instead of Asia would generally be a negative from a ton-miledemand perspective. However, if the LNG cargoes displace pipelineimports it could be a positive.

    Lowering 2016 rate assumptions as recovery is taking its time: Weare lowering our rate assumptions for 2016, bringing down rates to$35,000 (from $40,000), and lowering utilization to 59% (from 69%).

    See Table 1 below for details. Generally, our assumption changes are asa result of a spot market that currently remains weak, especially on theback of sluggish Asian demand. Farther out, we are maintaining ourexpectations that rates will gradually improve.

    TGP remains top pick: Given our view on the sector, we prefer highcharter coverage, and Teekay LNG (TGP) outperforms its peers here.

    This, combined with its position in promoting new technologies and itsdiversity of charterer relationships, results in TGP being our top pickwithin the LNG segment.