A valuation of Höegh LNG: The impact of using real options valuation

Thor A.M. Bang-Ellingsen & Sverre Kjelstrup Nymo

Student thesis: Master thesis


The main objective of this dissertation is to estimate the value of Höegh LNG through an expanded discounted cash-flow analysis (eDCF). We point to the fact that none of the eight valuation reports we have looked at from major Norwegian corporate finance companies incorporate the potential value of Höeghs real options on newbuildings. Thus, in addition to a throughout valuation based on the DCFmodel we attempt to enhance the analysis by building a real option valuation model based on the foundations of the B&S-formula. Secondary we discuss if and how positive real option values may affect the negotiation power between ship owners and ship builders during price negotiations. Based on an in-depth investigation of the LNG market we concluded that Höeghs strategy is well fitted in order to extract future profits from the LNG FSRU-segment. In accordance to our DCF valuation the market price of one share in the company was estimated at NOK 66,- May 31 2013. This implies a potential gain of about 43 % compared to the equivilant market share price. The real option valuation induced a potential added value of NOK 0,86 pr. share. Equal to about NOK 67 million, or an additional 1,3 % of our NOK 66,- pr. share estimate (totaling about NOK 67,- pr. share). The real option valuation model accounts for risk by adding a risk-adjusted growth rate to the underlying asset of the real option model. Such a risk adjustment was found necessary due to practical difficulties related to replicating a portfolio where the underlying asset is characterized as a commercial asset. The model’s output was deemed very sensitive with regard to a few important input factors. However, we believe that the model with well founded inputs may be of practical importance for ship builders and ship owners in contracting situations of new vessels with real options attached. Seen from the investor’s perspective we conclude that an option value is to be compared with that of a financial asset. Similar to gain on for example financial derivatives we point to theoretical valution framework presented and concedes that such gains are not to be defined as operational income in the event of Höegh. Nevertheless, we show that Höegh’s real options hold a substantial value and that the real option valuation model may be of interest to other operators in the general shipping market.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2013
Number of pages149