The weirdest thing on Wall Street

Last week I was using Fidelity’s preferred stock screener to search for interesting opportunities. Preferred stock is different than common stock. Preferred shares are a hybrid of bonds and common stock. Preferreds pay a dividend, similar to a bond, but if there is a failure to pay the preferred shareholders the dividend, it does not mean the company is in default. Preferreds trade like a common stock but are rated by the major credit rating agencies like bonds. They don’t have voting rights as stocks do but have a higher claim on distributions than commons. In liquidation, bond holders get paid first, then preferred shareholders, then common stocks. Sometimes these preferred shares can become convertible to common stock.

The tricky thing about preferreds is that companies usually only issue them if they are having trouble accessing capital. It is generally cheaper for a company to issue a bond because interest payments on bonds are contractually guaranteed, and debt is senior to preferred stocks in a bankruptcy. The level of protection offered to bond holders reduces the premium that would occur without those legal protections. Companies resort to issuing preferred stock if the company needs the flexibility to suspend the dividend payment without declaring bankruptcy, finds it difficult to find buyers for their debt, or would suffer a credit downgrade if additional debt obligations would degrade the company’s balance sheet. This can make preferreds hot garbage.

The preferred that caught my eye was Golar LNG Partners LP (GMLPF). This preferred stock trades at $11.25 today (6/20/24) with a quarterly dividend of $0.5469 which creates a dividend yield of 19.4%. Par for this preferred is $25/share with a dividend of 8.75%. At first glance, this seemed quite outrageous. LNG is in hot demand and Golar LNG seems to be a quality company with healthy earnings, so why the discount? What I found was a deep hole that I am still searching for complete answers to.

It looks like these preferreds were first issued in October of 2017 by Golar LNG Partners LP (GMLP). This was a rough time in the LNG shipping sector and makes sense why a company in that sector, at that time, would issue such shares. Fast-forward to 2021. In 2021, New Fortress Energy was making acquisitions in the LNG space. They were purchasing Hygo Energy Transition which was 50% owned by Golar LNG (GLNG). They also purchased Golar LNG Partners LP (GMLP) which was 30.8% held by Golar LNG.

“In addition, NFE has today also announced that it will acquire 100% of the common units and general partner units of Golar LNG Partners LP (Nasdaq: GMLP) (“GMLP”) at a price of $3.55 per unit. GLNG holds 30.8% of the issued and outstanding common units in GMLP.  In connection with the acquisition, GMLP’s incentive distribution rights will be cancelled. GMLP’s 8.75% Series A Cumulative Redeemable Preferred Units will remain outstanding.”

Bold is mine. The common shares were sold to New Fortress Energy (NFE) but the preferreds were allowed to remain outstanding. This seems like a sneaky way to cut the preferred shareholders out of the deal as NFE could just suspend the dividend without declaring bankruptcy. However a funny thing happened. NFE has continued to pay the GMLPF dividend. The latest was announced April 24th.

“NEW YORK--(BUSINESS WIRE)--Apr. 24, 2024-- Golar LNG Partners LP, an indirect subsidiary of New Fortress Energy Inc. (NASDAQ: NFE), has declared a cash distribution of $0.546875 per unit of 8.75% Series A Cumulative Redeemable Preferred Units for the period from February 15, 2024, through May 14, 2024. This will be payable on May 15, 2024, to all Series A preferred unitholders of record as of May 8, 2024.”

NFE also continues to post updated financial statements for GMLP.

Their P&L looks terrible. They are lacking time charter revenues and are moving backwards quickly. They lost $35M in 2023. Their balance sheet is also getting ripped to shreds.

However, it looks like the preferred unitholders are sitting on $140M in equity. At 5.52 million preferred shares outstanding, this puts the book value at $25.36 per share. Could NFE continue to pay out dividends to GMLPF until that equity reaches 0? If they stayed at the current quarterly pace, it would take nearly 46 quarters to payout $140M in equity.

$25.36 Equity per share - Current share price ($11.25) = $14.11 net return

The stock would go to zero, so you’ll have to account for that in your return. Therefore:

$14.11 - $11.25 = $2.86 net profit

$2.86 / $11.25 = 25% total return

25% return over 11.5 years is a paltry 2.2% annual return.

Something doesn’t add up here.

I emailed both Golar LNG and New Fortress Energy in an attempt to gain a better understanding of how these preferreds are handled and what the future might hold for them. So far, there has been no response. I’ll keep you posted if new developments happen, but I’m doubtful I’ll hear anything from Investor Relations. I think everyone involved wants these to simply go away.