GasLog Partners LP (GLOP) – IPO: High Growth LNG Shipping Play with Solid Distribution Upside
GasLog Partners LP (GLOP) is a growth-oriented limited partnership that was formed by Monaco-based parent company GasLog Limited (GLOG) to initially acquire (from GasLog Ltd.) and operate three liquefied natural gas (LNG) transportation carriers under long-term charters of five years or more. GasLog Ltd. was founded and is effectively controlled by Peter G. Livanos whose family has been in the shipping business for over 100 years. GasLog Ltd. is far and away one of the most-respected leaders in LNG shipping with tremendous customer goodwill built up over years of excellent service and reliability.
GasLog Partners LP (“GasLog”) went public on Wednesday, May 7, 2014, at $21 per share (the upper end of its $19 – $21 pricing range and well above net tangible book value of $13.16). Shares immediately shot up and closed the day up 24% at $26.11, with continued increases to close the week at $26.46.
With GasLog expected to earn $1.28 per common unit for the 12 months ending March 31, 2015, shares trade at a forward P/E of 20.7x and a Price/Book of 2x which is a little rich relative to estimated earnings growth, but not if you factor in the tremendous growth upside and the expected spurt in demand for experienced LNG carriers in the 2017/2020 timeframe and beyond.
The company sold 8.4 million common units and gave underwriters the standard 15% overallotment to buy an additional 1.26 million common units. Given the strong IPO reception, we expect the offering was fully oversubscribed and delivered gross proceeds of $202 million to the company.
GasLog plans to use the proceeds to repay $82.63 million in debt related to one vessel (GasLog Sydney), retain $35 million for general corporate purposes and remit the balance to sponsor company GasLog Ltd. as partial consideration for the dropdown assets received.
$0.375 Minimum Quarterly Distribution Delivers 5.7% Yield
As an MLP, GasLog plans to make at least $0.375 per common unit in minimum quarterly cash distributions for an implied yield of 5.7% at $26.46 (closing price on 09 May 2014). At $0.375, units have a 1.125x coverage ratio relative to cash available for distribution.
Distributions will first be paid to common units and to the general partner, then to subordinated units ($0.375 quarterly minimum), and then to all unitholders pro rata until each unit has received an aggregate distribution of $0.43125. Beyond $0.43125 per unit, the company will pay up to 48% of all excess available cash to GasLog Ltd. for its IDRs.
Based on current contracts, management estimates that it will generate enough cash for minimum quarterly distributions to common and subordinated units through March 31, 2015.
Management estimates that about 70% of all distributions through December 2017 will be taxable as dividends while 30% will be deemed return of capital. We fully expect distributions to rise strongly as the company exercises its options on additional vessels.
GasLog now owns and operates three modern, newly built (2013) LNG carriers under long-term charter contracts with subsidiaries of global British oil and gas firm BG Group.
In addition to this base fleet, GasLog has options and rights on acquiring additional carriers from GasLog Ltd. – and this provides significant built-in growth and fleet diversification opportunities. In addition, GasLog may acquire vessels from third parties.
GasLog plans to operate its LNG vessels under long-term charters with predictable cash flows, grow its market share in the LNG shipping sector and increase distributions per unit through reliable customer service and by leveraging its parent company’s expertise.
Investment Highlights – Secure Cash Flow, Built-in Growth Upside
GasLog has a secure cash flow profile with long-term contracts with high credit quality counterparties, a visible growth pipeline with the option to acquire 12 vessels and the upside of six additional vessels from its parent company. GasLog will also benefit significantly
from the best-in-class technical management expertise and broad sector relationships of parent company GasLog Ltd.
GasLog’s core LNG ocean transportation business has compelling industry dynamics with attractive growth opportunities. U.S. natural gas is typically produced at favorable price points for international export, and the recent turmoil in Ukraine has highlighted the attractiveness of sourcing LNG from the U.S. In addition, global LNG demand is on the rise (with demand for 186 additional LNG ships) and macro-trends favor GasLog’s prospects for stable cash generation, contract renewals at favorable day-rates and growth to meet expanding demand.
With significant reserves, competitive pricing and cleaner air emissions, natural gas now meets 24% of the world’s energy needs, up from 16% in 1965, and is gaining market share from traditional coal and oil based energy. This growth in natural gas market share is driven by rising natural gas production globally, increasing tonne miles (for transport) and attractive price arbitrage between production and demand.
Growth Option with 12 Additional Ships… plus Six More
In addition to the initial three ships, GasLog has the option to purchase 12 LNG carriers, at fair market value, from its parent within 36 months of each vessel’s acceptance by its charterer. GasLog will have to finance the purchase, which it can do through a combination of equity or debt. All of these are new vessels with delivery between Q2 2014 through Q4 2016, with two to be chartered by Shell and ten by BG Group, with charter terms expiring between 2020 and 2026.
And GasLog has the first right of refusal on six additional carriers (4 old, 2 new) if parent company, GasLog Ltd., secures committed charters of 5 years or more on these vessels.
This offers significant distribution upside for unitholders over the next few years.
Stable Sponsor Relationship with GasLog Ltd.
GasLog’s sponsor, GasLog Ltd., is a premier ship management company with deep customer relationships and in-depth industry expertise, a strong track record of operational safety and excellence, a history of successfully growing its asset base and access to bank and capital markets’ financing. GasLog Ltd.’s ongoing growth will result in additional upside for GasLog beyond the 18 additional vessels that could be acquired, making GasLog a solid long-term growth and distribution story.
Strong Corporate Governance and Shareholder Alignment
Most of the company’s Board Directors are independent of GasLog Ltd., with four of five Board seats held by outsiders. Unlike many MLPs, GasLog has a dedicated CEO that is not part of existing management at the sponsor company.
GasLog has been structured so GasLog Ltd. retains 58% of the partnership and with $60 million in IPO participation from existing investors, which reflects their comfort on unitholder alignment with the sponsor.
GasLog Plays a Strategic Role in the LNG Value Chain
GasLog’s LNG shipping business sits at the center of the LNG value chain.
With strong natural gas exploration and drilling activity, multi-billion dollar investments in additional liquefaction capacity (including headline projects along the U.S. Gulf Coast), increases in tonne miles on higher global LNG demand and favorable price arbitrage between production and wholesale prices, there is strong growth in demand for LNG shipping.
Liquefaction capacity, for example, is expected to jump 13.5% annually from 286 million tonnes per annum in 2014 to 611 mtpa by 2020. And global LNG exports are expected to rise sharply to over 500 million tonnes by 2018.
Greater inter-country LNG trade and longer distances for LNG delivery from source to wholesale distribution points have increased tonne miles.
As the map below shows, price arbitrage is also driving global trade volumes, especially between Henry Hub production at $4/MMBtu and developing regions such as Brazil ($14/MMBtu), China and India ($15/MMBtu).
Industry analysts estimate that increased liquefaction and global demand fulfillment will require 299 LNG transport ships, well short of the 113 ships that were in the order book as of April 2014. Existing LNG vessels can only carry 31% of existing orders, with fleet growth expected to accelerate in 2014 and 2015.
However, the high cost of building new LNG carriers and preference for a history of safe operations
prevent new entrants from gaining a foothold in this industry. Limited carrier construction capacity at high-quality shipyards and long build-times also restrict the supply of new carriers in the near term.
This demand-supply imbalance will ensure strong long-term charters with high credit quality companies, at favorable daily rates, and allow GasLog to easily absorb additional vessel acquisitions from its sponsor while growing its revenue and cash flow base to support higher distributions.
GasLog Partners MLP Holding Structure – Subordinated Units and IDRs
In exchange for assets and capital contributed, GasLog Ltd. will hold a 56.1% stake in GasLog, 100% of all incentive distribution rights (IDRs) and 100% of the General Partner (which owns 2% of GasLog). GasLog itself will fully-own its shipping fleet.
Public shareholders will own 41.9% of all outstanding units. GasLog Ltd. will own 9,822,358 subordinated units. Subordination will end around March 2017, at which time subordinated units will convert to common on a 1-1 basis.
Strong Management Team with Extraordinary LNG Shipping Experience
GasLog Partners will be managed by its general partner, with little input or control by public unitholders. To focus on growing the company’s asset base and maintaining operational safe and quality standards, the company hired Andrew J. Orekar as CEO from Goldman Sachs where he headed their Chemicals and Agriculture investment banking business and advised major corporations on strategy, corporate finance and M&A. Simon Crowe will concurrently serve as CFO of GasLog and GasLog Ltd. Crowe has significant CFO-level experience at Subsea 7 and Transocean Ltd. In addition, Orekar will be advised by Paul Wogan, CEO of GasLog Ltd. and the Board which includes Curtis Anastasio and Peter Livanos who have extensive industry experience.
Financial Overview – Secure Cash Flow, Flexible Capital Structure
GasLog has an average of 4.1 years remaining on existing charters on its three vessels, and contracts that have staggered maturities with operating expense escalation provisions and distribution coverage of 1.125x.
The company also has a flexible capital structure with pro forma Net Debt / EBITDA of 4.2x, financial flexibility to execute on its growth strategy and a capital structure with attractive terms and amortization profile.
Revenues are expected to grow 14% annually from $64.1 million in 2013 to $83.7 million for the 12 months ending March 31, 2015. Adjusted EBITDA, after adding back for financial costs and depreciation, is expected to grow 10% annually from $49.6 million to $59.9 million for FY 2015.
$59.9 million in adjusted EBITDA will provide $33.8 million in available cash for distributions and provide 1.125x coverage for $1.50 in minimum annual distributions per unit.
Post-IPO, GasLog will have $297.3 million in total debt and $273.8 million in equity.
GasLog Partners offers excellent income growth potential with virtually guaranteed minimum annual distributions of $1.50 through March 2015 on existing charters, significant growth potential as it expands its fleet seven-fold from three ships to 21 ships, and relatively low risk because of its sponsor relationship with GasLog Ltd. Moreover, favorable industry trends (increasing natural gas output, expanding liquefaction facilities, greater global demand for LNG and attractive price arbitrage), high barriers to entry (capital, lead-time and operational) and GasLog’s longstanding reputation for operational excellence should drive distribution growth.
While subordinated units and incentive distribution rights will divert a significant amount of available cash to the general partner, public unitholders will still receive significant upside over the next decade.
GasLog is more of a long-term play because LNG exports are slowly being approved by the U.S. government and liquefaction and export terminals take time to come online. LNG charter rates have dropped significantly, by almost 50% to $70,000 per day, and will likely languish at that level for now, but will rise in the 2017/2018 timeframe as LNG ship demand far outstrips ship supply.
Longer term, GasLog offers tremendous upside as Cheniere Energy (NYSE: LNG) inaugurates its Sabine Pass terminal in Q4 2015 and other U.S. producers commence shipping around early 2017 to sate demand in China (as it transitions away from coal) and Japan (as public pressure grows to transition away from nuclear to natural gas). So LNG carriers could see a significant boost around the 2017 – 2020 timeframe, when GasLog’s options on 18 additional ships could make shares rise significantly. So, view near-term weakness as a strong buying opportunity, do not lose hope if units languish and focus on holding units for the next decade, while using lucrative options strategies for cost-basis reduction and upside.