Executive Summary / Key Takeaways

• Merger Ceiling vs. Intrinsic Value: A $9.65 per share cash offer from EPS Ventures (58% owner) creates a hard valuation ceiling at $9.80, yet management's aggressive share buybacks at $5.59 and public statements about a "disconnect" between market price and inherent value suggest they believed the company was worth far more before accepting the deal.
• Cyclical Trough with 2027 Recovery: Spot LNG charter rates have hit "the lowest rates we have ever seen" according to management, but a wave of new LNG supply (+23% by end-2026, +39% by end-2028) and the retirement of 150+ steam turbine vessels should rebalance the market by 2027, positioning CLCO's modern TFDE fleet for a sharp earnings inflection.
• Capital Allocation Whiplash: The company pivoted from a $0.15 dividend to a $40 million buyback program in 2024, then terminated the buyback upon announcing the merger—signaling management's opportunistic approach to capital deployment but also raising questions about long-term strategic conviction.
• Fleet Modernization as Hidden Catalyst: Four of five planned LNG-E upgrades are complete, delivering $5,000 per day in shared upside and 30% fuel savings, which enhances vessel competitiveness and positions CLCO to capture premium rates when the cycle turns.
• Critical Risk Asymmetry: The merger agreement limits upside to $9.65, but if the deal collapses due to financing or regulatory issues, shareholders face downside from spot rate pressure and two vessels rolling off lucrative charters in Q4 2025 onto "well over $100,000 per day" lower rates.

Setting the Scene: The LNG Shipping Cycle's Painful Trough

Cool Company Ltd., founded in 1970 and headquartered in London, operates at the sharp end of the most cyclical segment in energy infrastructure. The company owns and charters a fleet of twelve modern LNG carriers, making money by locking vessels into long-term contracts that provide stable cash flows while exposing a portion of its fleet to spot market rates that can swing from $200,000 per day to below breakeven. This business model worked beautifully during the 2021-2022 LNG supercycle but has been brutalized since late 2024 by a perfect storm: a "glut of ships" from aggressive newbuild ordering, "sustained high LNG prices in Europe" that distorted trading patterns, and the "delivery of new vessels" that flooded the charter market.

The company's position in the industry structure reveals both strength and vulnerability. CLCO competes with larger pure-play operators like Flex LNG (FLNG) (13 vessels) and diversified players like Golar LNG (GLNG) (FLNG plus carriers), while smaller niche operators like Dynagas LNG Partners (DLNG) (3-4 ice-class vessels) capture specialized Arctic trades. CLCO's fleet of tri-fuel diesel electric (TFDE) vessels, acquired during a 2014-2015 expansion spree, is modern enough to compete on efficiency but now faces a concentrated drydocking cycle that has pressured utilization. The key differentiator is CLCO's "portfolio strategy"—balancing long-term backlog coverage (50% of days through 2027) with selective spot exposure to capture upside when rates recover.

What makes this moment particularly interesting is the extreme cyclical dislocation. Management has described Q4 2024 spot rates as "well below breakeven" and "the lowest rates we have ever seen," yet they simultaneously point to a "much more balanced market" by 2027. This creates a classic cyclical investment setup: a company with a strong balance sheet and modern assets trading through a painful trough, but with visible catalysts for recovery. The twist is the September 2025 merger agreement that caps near-term upside at $9.65 per share, creating a merger arbitrage situation where the investment case hinges on deal completion rather than fundamental recovery.

Technology and Strategic Differentiation: The LNG-E Upgrade Edge

CLCO's fleet modernization program represents a critical source of competitive advantage that will only become apparent when the market rebalances. The company has invested approximately $10 million per vessel to upgrade five TFDE carriers to "LNG-E specs" by installing subcoolers that deliver 30% annual fuel savings and emissions reductions. Four of the five upgrades are complete, with the final one scheduled for Q4 2025. This matters because fuel costs represent one of the largest variable expenses in LNG shipping, and charterers increasingly face environmental regulations that penalize inefficient vessels.

The economic impact is already visible in the numbers. These upgrades generate over $10,000 per day in total upside, with CLCO capturing approximately $5,000 per day through profit-sharing mechanisms with charterers. While this partially offsets the current spot market pain, the real value emerges when rates recover—LNG-E vessels will command premium pricing and be the first to secure employment in a tightening market. Management notes these vessels are "significantly more attractive to charterers," which explains why they've been successful in securing new contracts even in a weak environment.

Beyond the upgrades, CLCO's operational efficiency improvements have been substantial. Vessel operating expenses declined from $17,700 per day in Q3 2024 to $15,900 per day in Q2 2025—a 10% reduction driven by economies of scale, completed drydocks, and better fleet management. This cost discipline provides a crucial cushion during the rate trough, ensuring the company remains cash flow positive even when spot vessels earn "unsatisfactory rates." When the cycle turns, these lower breakeven costs will translate directly to margin expansion, amplifying the earnings recovery.

Financial Performance: Evidence of a Defensive Strategy

CLCO's financial results through 2025 tell a story of managed decline rather than fundamental deterioration—exactly what you'd expect from a cyclical company successfully navigating a trough. Total operating revenue has held remarkably steady around $85 million for Q1 and Q2 2025, up slightly from $84.6 million in Q4 2024. This stability masks a significant internal shift: the average time charter equivalent (TCE) rate has fallen from $81,600 per day in Q3 2024 to $69,900 per day in Q2 2025, a 14% decline that reflects vessels rolling off higher-rate contracts onto spot market exposure.

The margin structure reveals management's operational skill. Despite the TCE pressure, operating margins have remained strong at 41-43% in early 2025, down from 46-47% in late 2024 but still healthy.

Adjusted EBITDA actually increased year-on-year in Q2 2025 to $56.5 million, benefiting from the full contribution of the GAIL Sagar newbuild and reduced drydock days. This demonstrates that the company's "healthy foundation" of contracted backlog is doing exactly what it's supposed to do—providing a cushion against spot market volatility.

Cash flow generation remains solid, with annual operating cash flow of $146.11 million and quarterly OCF of $67.47 million in the most recent period. The negative free cash flow figure (-$41.38 million TTM, -$104.22 million quarterly) reflects the heavy capital investment in LNG-E upgrades and newbuild deliveries, not operational weakness.

With $109 million in cash and $117 million in undrawn revolver capacity as of June 2025, CLCO has $226 million in total liquidity—more than sufficient to complete its upgrade program and weather the cyclical storm.

The balance sheet metrics show moderate leverage with a debt-to-equity ratio of 1.74 and an enterprise value of $1.77 billion trading at 5.48x revenue and 8.15x EBITDA. These multiples are reasonable for a cyclical shipping company at trough earnings, particularly when compared to Flex LNG's higher EV/Revenue (7.89x) and EV/EBITDA (11.46x) multiples that reflect its younger fleet and longer contract backlog.

Outlook and Guidance: The 2027 Recovery Thesis

Management's commentary provides a clear roadmap for the recovery, though the timeline remains uncertain. The company anticipates Q3 2025 revenue "at a similar level as Q2," with two vessels redelivered from long-term contracts but already secured on spot voyages. This guidance matters because it signals that the worst of the earnings decline may be behind us—vessels are finding employment even if at lower rates.

The critical inflection point comes in Q4 2025, when two vessels (Blizzard and ICE) will roll off elevated long-term charters onto spot rates, creating a "well over $100,000 per day" headwind. This is the final major earnings cliff before the recovery begins. By 2027, management expects a "much more balanced market" driven by two powerful catalysts: a 23% increase in LNG supply by end-2026 and the retirement of older steam turbine vessels. With 215 steam turbines currently operating (50 already idle, 150 rolling off charter), the industry faces a structural shortage of modern tonnage that CLCO's upgraded TFDE fleet is perfectly positioned to fill.

The supply-demand math is compelling. Newbuild orders have "fallen behind the supply curve" in 2025, with only 29 open orders remaining versus up to 60 vessels needed for replacement demand by end-2026. This creates a natural balancing mechanism that historically drives rates sharply higher when demand returns. Management's view that "the arrival of new volumes is the primary way in which the LNG shipping market balances" suggests they expect a rate spike as new LNG projects come online and compete for the limited pool of modern vessels.

Risks and Asymmetries: What Could Break the Thesis

The most immediate risk is merger completion. The $9.65 per share cash offer, while representing a 72% premium to pre-announcement trading levels, may undervalue the company if the cyclical recovery materializes as management projects. EPS Ventures' 58% ownership stake ensures the vote will pass, but the transaction faces typical closing risks including financing, regulatory approval, and potential litigation. If the deal collapses, shareholders would own a company facing Q4 2025 earnings pressure from two major charter rollovers, with spot rates still at historic lows.

Spot market exposure remains a critical vulnerability. While the 50% contract coverage through 2027 provides downside protection, the remaining open days expose CLCO to a charter market where rates are "well below breakeven." Management's admission that they "had to work hard to fix vessels that have rolled off charter, often fixing them multiple times in the spot market at unsatisfactory rates" reveals the operational strain. If the anticipated 2027 recovery is delayed by slower LNG project ramp-ups or persistent vessel oversupply, CLCO's earnings could remain depressed for longer than expected.

Competitive positioning presents another risk. Flex LNG's younger fleet and longer average charter duration (5+ years vs. CLCO's 4.5 years) gives it better revenue visibility and higher margins. Golar LNG's FLNG diversification provides alternative growth streams that CLCO lacks. While CLCO's smaller scale offers agility, it also means higher per-vessel operating costs and less bargaining power with charterers. The company's ability to "consolidate the market" through acquisitions, as management has suggested, is now moot given the merger agreement.

On the positive side, an asymmetry exists if the merger fails and rates recover faster than expected. The company's strong liquidity position and modernized fleet would enable it to capture significant upside in a tightening market. However, the merger consideration structure effectively caps this upside for current shareholders, making the investment a binary bet on deal completion rather than a cyclical recovery play.

Valuation Context: Merger Arbitrage Pricing

At $9.80 per share, CLCO trades just 1.6% above the $9.65 merger consideration, creating a classic merger arbitrage situation with minimal spread. This pricing reflects high market confidence in deal completion but leaves virtually no room for fundamental upside. The enterprise value of $1.77 billion represents 5.48x TTM revenue and 8.15x EBITDA—multiples that appear reasonable for a cyclical trough but are rendered irrelevant by the pending cash-out.

Comparing CLCO's multiples to peers illustrates the valuation disconnect that management cited when initiating their buyback. Flex LNG trades at 7.89x revenue and 11.46x EBITDA with a 49% operating margin versus CLCO's 39% margin, justifying a premium for its younger fleet and longer backlog. Dynagas, with its specialized ice-class vessels, achieves a superior 48% operating margin and trades at just 2.46x revenue, reflecting its smaller scale but higher profitability. Golar's diversified model commands a lofty 39.15x EBITDA multiple due to FLNG growth optionality.

CLCO's price-to-book ratio of 0.66x and price-to-sales of 1.60x suggest a potential value play, but these metrics are overshadowed by the merger agreement. The company's 6.18% dividend yield is misleading—the dividend was cut to $0.15 per share in 2024, and the buyback program that was meant to return capital has been terminated. The real valuation story is the merger arbitrage: investors are effectively lending money to EPS Ventures at a 1.6% premium while bearing the risk of deal failure.

Conclusion: A Cyclical Recovery Capped by Corporate Action

Cool Company finds itself in an unusual position: its fundamental business is navigating a painful but ultimately temporary cyclical trough, yet its investment outlook is dominated by a merger agreement that caps upside at $9.65 per share. The company's modern TFDE fleet, LNG-E upgrades, and substantial contract backlog provide a "healthy foundation" that should enable it to thrive when the LNG shipping market rebalances by 2027. Management's operational discipline is evident in declining vessel costs and maintained margins despite severe rate pressure.

However, the September 2025 merger agreement transforms the investment from a cyclical recovery story into a merger arbitrage play. While the 72% premium to pre-deal trading levels appears fair for a company facing near-term earnings headwinds, it may undervalue the long-term earnings power of the fleet if management's 2027 recovery thesis proves correct. The termination of the share buyback program, which was accumulating shares at prices well below both book value and the eventual merger consideration, suggests that controlling shareholders prioritized liquidity over maximizing minority shareholder value.

For investors, the critical variables are deal completion probability and timing. The 58% insider ownership virtually guarantees shareholder approval, but financing and regulatory approvals remain potential hurdles. If the deal closes as expected in Q4 2025 or Q1 2026, shareholders receive $9.65 cash and the story ends. If it fails, they own a cyclical shipping company facing Q4 2025 earnings pressure but positioned for a powerful 2027 recovery—a scenario that management's own actions suggest could be worth substantially more than the merger price.