Path Dependency and Thoughts on Offshore Acronyms

September Offshore Report: the FSRU Edition

Path dependency matters. Equity investors know that. Everyone has a story of a prematurely reached stop loss, followed by price recovery and a subsequent take-profit hit. However, we are out of the game, and instead of realizing profits, we record realized losses.

In short, path dependency illustrates the relationship between outcome and path taken.

It can be described with the following example: we travel to San Francisco, as our starting point is New York. We are not constrained by time, yet we have enough fuel to cover only the distance from New York to San Francisco.

If we deviate to Houston, we will consume more fuel and not have enough to get to San Francisco. Eventually, we will be stuck between Houston and San Francisco. It's like hitting a stop loss on a stock position, which means we are irreversibly out of the game. In this case, our trip is bound only by fuel, not time.

Let's now look at how long options work using the same example. We have unlimited fuel but 72 hours to get to San Francisco. It doesn't matter if we divert to Houston or another city, as long as we arrive in San Francisco within the 72-hour time frame. In this case, our journey is defined only by time, but not by fuel. This is called time dependence.

There are no solutions, only trade-offs, as Thomas Sowell says. By using long calls, we are immune to path dependency, but we become time dependent. Conversely, by investing in equity, we are not time-dependent; however, we are exposed to path-dependency.

The offshore industry has a lot to offer for derivatives and equity investors. For instance, a household name like Transocean (NYSE: RIG) has liquid options with multiple strike prices and tenors. On the other end of the scale are one-asset names, such as Deep Value Driller (OSL: DVD), that are illiquid and do not offer options.

That said, let’s see how the offshore names have performed over the last few weeks.

Since the beginning of the year, offshore stocks have struggled to deliver, with a few exceptions. However, over the last three months, all names recorded respectable gains. The leader is Shelf Drilling (OSL: SHELF) with 100% gains. The ADES takeover offer caused the price spike. You can find more details on the offshore consolidation trend in the August offshore commentary.

Last week, Transocean delivered good news for drillship bros. The company is retiring four of its low-spec units (Discoverer Clear Leader, Discoverer Americas, Deepwater Champion, and Discoverer India) and one older semi-submersible rig (Henry Goodrich).

This means the supply side is reduced by four ships, while Transocean cuts its expenses for cold-stacked vessels maintenance.

With the approach of 2026, when more offshore projects will get FID, not just drillers are catching up, but also all the floating equipment. Let’s look at the FPSO names' performance:

During the summer, FPSO owners remained in a positive territory. The exception is Bumi Armada (MYX: ARMADA). Bumi’s fleet consists of older converted units (Suezmax or VLCC tankers converted into FPSO), which are suitable for smaller-scale projects. For Tier 1 offshore fields, purpose-built FPSOs are required, with specs designed for the particular field.

Another cryptic name is FSRU (Floating Storage Regasification Unit). FSRUs are one of the most interesting offshore niches.

Remember the $750 billion LNG deal between the EU and the US. The deal has a time cap on December 31, 2028, implying significant material constraints. Until recently, the EU relied on pipeline gas from Russia, which required relatively simple infrastructure.

Seaborne LNG needs elaborate terminals for offloading. The EU has such infrastructure, but insufficient capacity to accept nearly triple the amount of LNG than before. Lead times for onshore LNG terminals typically range from three to five years. I am skeptical that the EU can triple the capacity of its LNG infrastructure on such short notice.

A viable solution would be to hire FSRUs. In plain language, floating LNG terminals. They are cheaper and have a shorter production time (approximately 36 months). The problem is that this market is supply-driven, i.e., a lack of FSRUs availability combined with robust demand.

That said, UE countries like Greece, Croatia, and Poland have employed FSRUs as an alternative to onshore LNG terminals. In summary, if the EU likes to progress with the deal, it needs to do two things: charter as many FSRUs as possible, while expanding its offshore terminals.

To recap, FSRUs are an attractive investment theme; however, the alternatives are limited. Names like New Fortress Energy (NYSE: NFE), Exmar NV (GETTEX: 1EX), and Teekay LNG (now Seapeak LLC) have divested their FSRUs completely, or the FSRU segment delivers a tiny share of their revenues. FSRU-only publicly traded names are Exelerate Energy (NYSE: EE) and Hoegh LNG Partners LP (OTC: HMLPF).

Exelerate has been struggling to deliver since the beginning of 2025, realizing a 20% YTD loss. The company brings to the table equity, options, and bonds. Frankly, its options are not worth it because they have low volumes and limited tenors. On the other hand, Exelerate’s 8.0% Senior Unsecured Notes due May 2030 (ISIN: USU3001FAA40) are worthy of investors’ attention. Currently, they are trading at a hefty premium to their face value. Therefore, it requires some patience to enter at a favorable price.

Hoegh LNG is quite an interesting proposition. The company delisted its common shares a few years ago. Preferred units are the only way to invest in Hoegh. However, they are illiquid and not available on every brokerage platform.

Beyond FSRU and FPSO, FLNGs are another type of offshore infrastructure that is less well-known. Globally, there are approximately 200 FPSO units and 50 FSRUs, while eight FLNGs are in operation. IOCs and NOCs own the majority of the FLNG units. Golar Energy (NYSE: GLNG) is the only company that provides liquefaction services. In other words, GLNG is an FLNG-only bet. The best thing is that GLNG offers not only equity but also attractive options.

The table below shows GLNG calls with expiration in January 2027.

As you can see, GLNG calls offer three out of three: adequate liquidity, attractive implicit volatility, and multiple strikes.

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PS: For more actionable and asymmetric ideas on offshore and beyond, consider TheOldEconomy premium plans: Researcher and Strategist.

Thank you for being part of TheOldEconomy. Here’s to your continued growth and success, one wise decision at a time.

Invest wisely,
Mihail Stoyanov
Founder, TheOldEconomy

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