The recent earnings call for Cool Company Ltd. (NYSE:CLCO), an LNG shipping giant, was brimming with optimism. The company secured a landmark 14-year charter with GAIL of India, expanding its backlog to a staggering $1.9 billion, roughly five years per vessel. CEO Richard Tyrrell confidently declared the company is "in a great position to seize opportunities and realize very significant value for shareholders." But beneath this veneer of success lurks a potential time bomb – a looming dividend cliff that could send shockwaves through the company's stock price.

While Cool Company's robust backlog provides short-term stability, the company faces significant headwinds in the form of expiring charters and a softening spot market. Two vessels, the Blizzard and the Glacier, are slated to come off charter later this year, exposing Cool Company to the increasingly volatile and unpredictable short-term market. While the company expects a rebound in rates by the time these vessels are up for rechartering, the current environment offers a sobering reality check.

The TFDE spot market, a key indicator for Cool Company's vessels, has been particularly weak. While the company highlighted a recent bottoming out of spot rates, last year's performance provides little comfort. Despite a strong seasonal uptick, TFDE spot rates averaged significantly lower in 2023 compared to the robust levels seen during the Ukraine-driven spike. The company's own guidance for the second quarter of 2024 forecasts a TCE of $75,000 to $80,000 per day – a considerable drop from the first quarter's $88.1 million in operating revenues.

This softening market reality has significant implications for Cool Company's dividend policy. The company has consistently maintained a dividend of $0.41 per share, even as its free cash flow has fluctuated. While this has attracted income-hungry investors, the sustainability of this payout is now in question. The company explicitly stated that its dividend policy hinges on "the rates for the vessels that are coming open."

Here's where the numbers start to paint a worrisome picture. Let's assume a conservative scenario where the Blizzard and Glacier secure one-year charters at $75,000 per day when they come off their current contracts. This would result in a combined $13.7 million reduction in annual revenue compared to their current TCE. Factoring in operating expenses and a conservative estimate for interest expense, this could translate to a roughly $8 million hit to free cash flow. This figure represents almost 20% of the company's total dividend payout for 2023.

Now, Cool Company does have several levers to pull. They can increase leverage on their newbuilds, generating additional cash. They can also potentially secure longer-term charters for their expiring vessels, providing more predictable cash flow. However, these options are not without risk. Higher leverage exposes the company to interest rate volatility, and securing long-term charters at attractive rates in a softening market is a challenging proposition.

The company's management may be confident in their ability to navigate these challenges and maintain the current dividend. However, the market seems to be pricing in a different scenario. The recent sell-off in Cool Company's stock price suggests that investors are increasingly concerned about the company's ability to sustain its generous payout.

While Cool Company's long-term prospects remain tied to the burgeoning LNG market, the company's near-term performance hinges on its ability to secure attractive charters for its expiring vessels. Failure to do so could trigger a dividend cut, sending shockwaves through the stock price and undermining investor confidence.

Cool Company's TCE Performance

The following chart shows Cool Company's Time Charter Equivalent (TCE) performance for the past few quarters. Note the dip in Q2 2024 forecasts, highlighting the potential impact of expiring charters and a softening spot market. Data based on

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Key Financial Data

Source: SeekingAlpha

"Fun Fact: Cool Company's largest vessel, the "Kool Tiger," is longer than the Eiffel Tower is tall. It can carry enough LNG to power a city the size of Boston for a day."