Looking Under the ‘Hood’ of Gaslog Partners MLP
By: Tim McPartland,
Yesterday we took time to take a look at Dynagas LNG Partners (ticker:DLNG) in conjunction with their offering of a new preferred stock (which started trading today). Dynagas is just 1 of 2 pure play LNG ocean shipping MLP’s–the other is Gaslog Partners LP (ticker:GLOP) which we will look at now.
Not unlike DLNG, Gaslog Partners is a fairly small company in terms of the number of ships – just 8 LNG ships (we note that these ships are very expensive–around $160 million each). Gaslog has just purchased 3 ships in the last 2 weeks in a transaction with sponsor Gaslog LTD (MLP’s have sponsors–essentially the sponsor is the parent corporation). All 8 of these ships are now contracted out with the first contract expirations not occurring until 2018. Unlike the dry bulk carriers, which have been under tremendous financial stress since 2009, LNG carriers are in demand–in total there are just over 400 LNG ships globally. Day rates are reasonably good and the ability to lock in long term contracts is a comforting fact for investors.
In spite of solid contracts these carriers have in place the marketplace has not treated their common units well. Markets have chosen to equate LNG equity values to LNG prices which have been soft over the last couple of years as you can see by the chart below of Gaslog Partners common units.
Gaslog Partners is currently paying a quarterly distribution of .4345 cents/share which equates to a current yield of around 8.2%. The company fully covers the distribution–with ease (net income was over $12 million last quarter and the dividend requirements are only around $5 million). Revenue was up 57% last quarter, which is a function of having more ships (they started with 3 at IPO and added 2 more), prior to the most recent acquisition of 3 ships after quarter end.
We need to note that while the LNG carriers have super margins they also have very high debt levels. In the case of GLOP they have total debt of $470 million (as of 3/31/2015) which seems a bit scary for a company that has $130 million in annualized revenue–BUT this is the norm in the industry, in particular when you are buying ships that cost $160 million each. Unfortunately in a rising rate environment debt can kill a company and the lions share of GLOP’s debt comes due 11 months from now. Remember that GLOP’s future revenue stream is fixed under current contracts and if rates rise 1% in the next 11 months the incremental interest payments will come out of what is currently income. While this may or may not come to pass it is a consideration for potential investors.
Master Limited Partnerships (MLP’s), not unlike REITs in some respects, are continually in a capital or debt raising mode and GLOP has just had a common unit offering to help pay for the 3 new ships, but with the high margins the contracts on these ships provide it should not impact distributions to unit holders. We would expect that they will do a couple more offerings in the next year as Gaslog Partners has an option with their sponsor, Gaslog LTD, for 9 additional ‘dropdown’ vessels meaning more capital will be needed. In addition to the common unit offering which GLOP completed recently a preferred stock offering was completed in late March with proceeds used for the recent acquisition of 3 ships. The new preferred offering was at 8.75%, which speaks to the future perceived risk in the shipping business. These shares are now trading at $25.95 meaning a current yield of 8.43%.
In summary Gaslog Partners (GLOP), a MLP, provides one of the best ways to gain exposure to the global shipping business. Margins are good, but debt is high and in the future when we see rising interest rates risk will increase as refinancing costs will begin to eat into income.