Cool Company: Powering Ahead with Modern LNG Fleet and Strategic Resilience (NYSE:CLCO) - CLCO Stock Research Report

## Executive Summary / Key Takeaways * Cool Company Ltd. (CLCO) is a pure-play LNG carrier strategically positioned to capitalize on the long-term growth in global LNG demand, driven by new supply projects and the ongoing retirement of older, less efficient vessels. * Despite a challenging near-term spot market characterized by low rates and oversupply, CLCO's robust backlog, covering 50% of vessel days until 2027, provides a strong financial foundation and mitigates volatility. * The company's investment in advanced LNG-E upgrades for its tri-fuel diesel electric (TFDE) vessels offers significant fuel efficiency benefits (up to 30% annual savings) and commands a premium of approximately $5,000 per day, enhancing vessel attractiveness and profitability. * CLCO has proactively strengthened its financial flexibility through strategic debt refinancing, significant interest rate hedging (75% of notional debt fixed/hedged), and a share repurchase program, enabling opportunistic growth and shareholder value creation. * The outlook points to a rebalancing market by 2027, with substantial LNG supply growth (23% by end of 2026, 39% by end of 2028 compared to 2024) and the accelerated scrapping of older steam turbine vessels creating significant demand for CLCO's modern, efficient fleet. ## A Strategic Foundation in Global LNG Shipping Cool Company Ltd. (CLCO) operates as a pure-play liquefied natural gas (LNG) carrier, owning and operating a fleet of 13 modern LNG carriers (LNGCs). The company's journey began in earnest in 2022, following its 2018 incorporation, when it strategically acquired a significant fleet, including seven modern tri-fuel diesel electric (TFDE) vessels and four additional vessels (two 2-stroke and two TFDE) from affiliates of its largest shareholder, Eastern Pacific Shipping Pte. Ltd. This foundational move established CLCO's presence in the critical LNG transportation sector, a market underpinned by global energy security needs and decarbonization efforts. CLCO's overarching strategy is multifaceted: it aims for organic growth through its newbuild program, actively assesses opportunities for vessel acquisitions, and seeks potential consolidation within the fragmented LNG market. The company leverages an in-house LNG transportation and infrastructure management platform, not only for its own fleet but also to provide management services to third-party owners. This integrated approach, coupled with the backing of Eastern Pacific Shipping, strengthens CLCO's position with shipyards and financial institutions, providing access to deal flow and enhancing its strategic capabilities. The global LNG market is currently experiencing a period of "indigestion," as described by management, marked by an influx of new vessel deliveries ahead of corresponding LNG supply projects. This has led to a challenging spot market with rates falling to levels not seen since 2018. However, this near-term softness is set against a backdrop of robust long-term demand for LNG, with significant supply growth projected from new liquefaction projects, particularly in the U.S. This dynamic creates a compelling narrative for CLCO, which is strategically positioning its modern, efficient fleet to capitalize on the anticipated market rebalancing. ## Technological Edge: Fueling Efficiency and Returns A cornerstone of CLCO's competitive strategy is its commitment to technological differentiation and operational efficiency. The company has invested in advanced LNG upgrades for its TFDE vessels, transforming them into "LNG-E vessels." These upgrades, which include the installation of subcoolers, are designed to significantly improve fuel consumption and reduce emissions. The tangible benefits of these technological enhancements are substantial and quantifiable. Depending on the operating profile, CLCO's LNG-E vessels can achieve up to a 30% saving in annual fuel consumption and emissions. This translates directly into financial advantages, as these upgraded vessels command a premium in the charter market. Management has indicated that these upgrades yield an upside of approximately $5,000 per day for CLCO, with the total actual upside for the charterer being around $10,000 per day. The investment for these subcooler upgrades is approximately $10 million per vessel. The company has completed four out of five planned upgrades, with the final one scheduled for Q4. This demonstrates a clear return on investment, making the vessels more attractive to charterers and supporting higher utilization and profitability. Beyond its core fleet upgrades, CLCO also holds a $1.60 million investment in Armada Technologies Limited, a UK-based technology company developing a passive air lubrication system aimed at further improving vessel fuel consumption. While specific target metrics for this initiative are not yet publicly detailed, the strategic intent is clear: to continuously enhance the environmental and economic performance of its fleet, thereby strengthening its competitive moat and long-term growth prospects. These technological differentiators are critical in a market increasingly focused on environmental regulations and operational costs, allowing CLCO to offer superior value to charterers and secure more favorable contract terms. ## Competitive Landscape and Strategic Positioning The LNG shipping industry is competitive and rapidly evolving, with CLCO vying for market share against established players such as Flex LNG (TICKER:FLNG), Dynagas LNG Partners (TICKER:DLNG), and Golar LNG (TICKER:GLNG). Each competitor brings distinct strengths and strategies to the market. Flex LNG, for instance, emphasizes a modern fleet with advanced technology for fuel efficiency and a focus on long-term charters. Dynagas LNG Partners also prioritizes long-term contracts and a diversified vessel portfolio. Golar LNG, on the other hand, specializes in LNG carriers and floating LNG infrastructure, with a strategic focus on expanding into floating production and regasification. CLCO's competitive positioning is built on its modern fleet, operational flexibility, and integrated service offerings. Its TFDE vessels, particularly those with LNG-E upgrades, offer superior efficiency and environmental performance, making them ideal replacements for older tonnage. This technological edge provides CLCO with a distinct advantage in securing employment, even in a soft market. While Flex LNG also boasts a modern, efficient fleet, CLCO's integrated management platform and its affiliation with Eastern Pacific Shipping provide a unique strategic advantage in terms of deal flow and relationships with shipyards and financial institutions. In contrast to Dynagas's focus on standardized shipping, CLCO's approach, including third-party management services, offers a more comprehensive value proposition, potentially fostering stronger customer loyalty. Against Golar LNG's broader infrastructure focus, CLCO's specialized fleet and operational agility allow it to be highly responsive to specific transportation needs. The market is currently impacted by a "glut of ships" and prevalent "sublets," where vessels are chartered out without much consideration of rate, creating downward pressure. However, CLCO's modern, larger vessels with lower unit freight costs and environmental compliance (CII regulations) are well-positioned to displace older, less efficient steam turbine vessels. This dynamic is akin to a "shipping version of musical chairs," where new, efficient ships like CLCO's enter, and older ones exit. This strategic positioning, combined with its technological advantages, allows CLCO to navigate competitive pressures and target the growing demand for modern LNG transportation. ## Financial Performance and Operational Resilience Cool Company's financial performance in the first half of 2025 reflects both the benefits of its strategic growth and the challenges of a soft market. For the six months ended June 30, 2025, time and voyage charter revenues increased by $7.20 million to $162.30 million, primarily driven by the contributions from the newbuild vessels, GAIL Sagar and Kool Tiger. This growth was partially offset by scheduled off-hire days for drydocking. However, vessel and other management fee revenues decreased significantly by $6.02 million to $1.38 million, due to the termination of several third-party management contracts in late 2024. The average daily Time Charter Equivalent (TCE) rate for the first half of 2025 stood at $70,200, a 10% decrease from $77,800 in the same period of 2024. This decline was attributed to lower charter rates secured upon contract renewals, increased scheduled off-hire days, and the net TCE impact from the newbuilds. In Q2 2025, the average TCE was $69,900 per day, with total operating revenue holding steady at $85.5 million, and Adjusted EBITDA rising to $56.5 million from $53.4 million in Q1 2025. This modest year-on-year EBITDA increase was largely due to the newbuild contributions in a challenging market.

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Operational efficiency remains a key focus. Average vessel operating expenses in Q2 2025 were $15,900 per day across the fleet, a decrease from both Q1 2025 ($16,300 per day) and the 2024 average of $17,300 per day. This positive trend is expected to continue as the company completes its drydock program, with only two more drydocks planned over the next couple of quarters, which will further reduce off-hire days and associated costs.

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Liquidity and capital resources remain robust. As of June 30, 2025, CLCO reported $109 million in cash and cash equivalents, complemented by $117 million in undrawn capacity under its revolving credit facility, totaling $226 million in available liquidity. The company has also proactively managed its interest rate exposure, entering into significant interest rate swap agreements. As a result, approximately 75% of its total notional debt is now hedged or fixed, with an average interest cost of around 5.6%, providing greater predictability in cash flows.

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## Strategic Initiatives and Future Outlook CLCO's strategic initiatives are firmly aligned with its long-term vision, even as it navigates short-term market headwinds. The company's backlog is a significant strength, with 50% of its vessel days covered until 2027, providing a healthy foundation against market volatility. Management anticipates a more balanced market by 2027, with sentiment improving in advance. A key driver for this rebalancing is the projected increase in global LNG supply. LNG supply is expected to grow by over 20% from 2024 levels by the end of 2026, with an additional 6% in 2027 and 10% in 2028. This wave of new supply, particularly from U.S. projects like Calcasieu Pass 2, Louisiana LNG, and Plaquemines, is crucial for increasing ton-mile demand, as U.S. LNG often travels longer distances to Asia. The ton-mile development is projected to be 4% in 2025, accelerating to 17% in 2026 as new production comes fully online. Another critical factor is the accelerated retirement of older steam turbine vessels. Approximately 50 of the 215 steam turbine vessels currently on the water are idle, and this trend is expected to continue, with 92 of 233 steam turbine vessels already over 20 years old. These older vessels face significant cost disadvantages, including higher operating expenses, speed restrictions under CII environmental regulations, and expensive drydocks, making them uneconomical at current rates. This creates "well over 100 opportunities" for modern, efficient vessels like CLCO's to take over business in the coming years. In response to market conditions, CLCO has adjusted its capital allocation strategy. In Q4 2024, the company opted not to declare a dividend, prioritizing financial flexibility and capacity for opportunistic growth. This was followed by the initiation of a share repurchase program in April 2025, targeting up to 7.00 million shares for $40 million by December 31, 2026. By August 22, 2025, CLCO had repurchased approximately 859,000 shares at an average price of $5.77 per share, significantly below its net asset value per share. This program underscores management's belief in the intrinsic value of the company and its commitment to shareholder returns.

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For Q3 2025, CLCO anticipates total operating revenues to be similar to Q2 2025, though the redelivery of two vessels from existing contracts towards the end of the quarter will impact the average TCE rate. Management expects a significant reduction in rates for these two vessels, potentially "down well over $100,000 per day across these 2 vessels come Q4," depending on spot market developments. Despite this, the company remains confident in securing long-term employment for its Kool Tiger newbuild at strong rates, especially as the market for 2027-2028 deliveries remains robust. ## Risks and Challenges Investing in CLCO carries inherent risks, primarily stemming from the volatile nature of the LNG shipping market. The company is indirectly exposed to price risk in the spot and short-term charter markets, where rates are uncertain and depend on natural gas prices, vessel supply and demand, and broader energy market dynamics. The current market softness, characterized by low spot rates and an oversupply of vessels, highlights this vulnerability. Operational risks are also significant, including marine disasters, mechanical failures, and the unpredictable costs of drydock repairs. While CLCO actively manages its drydock schedule, these events can lead to off-hire days and revenue losses. The company's long-term debt obligations are subject to interest rate fluctuations, although extensive hedging actions have substantially mitigated this exposure. Geopolitical tensions, regulatory hurdles, and trade policy shifts can also impact demand patterns and shipping routes, adding uncertainty for charterers and potentially affecting CLCO's ability to secure favorable contracts. The ambiguity surrounding U.S. port fees related to Chinese leases, particularly for vessels financed through sale and leaseback arrangements, presents a potential, albeit currently deferred, risk that management is closely monitoring. ## Conclusion Cool Company Ltd. stands at a pivotal juncture, demonstrating strategic resilience and a clear vision in a dynamic LNG shipping market. While the immediate environment presents challenges with depressed spot rates and an oversupply of tonnage, CLCO's foundational strengths—a modern, technologically advanced fleet, a robust charter backlog, and proactive financial management—position it favorably for the long term. The company's investment in LNG-E upgrades, delivering quantifiable fuel efficiency and a daily rate premium, underscores its commitment to operational excellence and competitive differentiation. Coupled with a disciplined approach to capital allocation, including strategic refinancing and a share repurchase program, CLCO is actively enhancing shareholder value. As the global LNG market rebalances, driven by significant new supply coming online and the inevitable retirement of older, less efficient vessels, Cool Company is poised to capitalize on increased ton-mile demand and a tightening vessel supply. Investors looking for exposure to the long-term growth trajectory of LNG transportation, backed by a well-managed and technologically forward-looking fleet, may find CLCO a compelling opportunity.