MONACO: Not all energy companies are suffering from the worst oil crash since the 1980s. Take, for example, LNG tanker MLP GasLog Partners, which just announced record results. Let’s take a look at why this MLP’s business model remains on track to make it one of the best high-yield income growth investments of the next few years, as well as one of its biggest growth risks.
Any way you slice it, GasLog Partners delivered astonishing results this quarter. The impressive growth is a result of the MLP’s fleet expansion. This past quarter, its sponsor and general partner, GasLog Ltd (NYSE:GLOG), dropped down three LNG carriers to GasLog Partners at a cost of $483 million.
This move increased GasLog Partners’ fleet to eight LNG carriers, each of which is under long-term charters. In fact, none of GasLog Partners’ charters expires before May 2018, and its fixed-fee contracts have no exposure to energy prices.
Exceptionally appealing distribution profile
The most important thing to MLP investors is the distribution profile, which is composed of three parts: yield, payout security, and realistic, long-term distribution growth potential.
GasLog’s massive distribution increase now raises its forward yield to an extremely generous 10.4%.
More importantly, unlike many investments with such a sky-high-yield, GasLog Partners’ payout is highly secure, as seen in its exceptionally strong coverage ratio this quarter. That security is only increased by the fact that all the MLP’s DCF is generated by long-term contracts with BG Group, which is being acquired by Royal Dutch Shell. That means there is almost zero risk that GasLog Partners’ contracts will be defaulted on.
According to CEO Andrew Orekar, management’s decision to raise the payout “only” 28% represents a decision to be more conservative — specifically, by maintaining a higher DCR, it means GasLog Partners is generating substantial excess DCF, which can be used to strengthen its balance sheet.
That’s important, because GasLog Ltd. has eight new LNG tankers under construction, seven of which have already secured long-term charters. In total, GasLog Ltd. has 12 vessels it eventually plans to drop down to GasLog Partners. This should fuel incredible long-term DCF and distribution growth.
Growth potential at risk because of falling unit price
While GasLog Ltd. recently secured a $1.3 billion credit facility to pay for the construction of those eight new LNG tankers, GasLog Partners will still need to buy them from its sponsor. That could be a problem, because this past quarter’s drop-down deal was financed 36% with new equity sales, and 64% with debt.
GasLog Partners was able to sell 7.5 million units at a price of $23.9 for that deal. However, since then, the unit price has fallen 23% because the oil crash has made investors nervous about all things energy.
So even though GasLog Partners’ cash flows have no exposure to oil prices, the market’s fear could cause its unit price to continue to slide. That means each additional tanker it buys from its sponsor might need to be financed more with debt. The problem is there is a limit to how much creditors are willing to lend it despite its super-stable business model.
That’s especially true since GasLog Partners’ current outstanding debt under its existing credit facilities stands at $779 million. As part of those facilities, creditors have imposed certain debt covenants that the MLP must comply with. That includes a debt-to-capital ratio of no more than 60%. As of this quarter, that ratio stands at 58%.
That is why management is focusing on increasing its coverage ratio and applying the excess DCF to paying down its existing debt. Until GasLog Partners can pay down some of its debt, the only way it can afford to grow its fleet is through increasingly expensive equity offerings or with its excess DCF.
That means investors shouldn’t expect more payout growth surprises. That’s because management’s current long-term distribution guidance is 10% to 15% CAGR. As long as the oil crash keeps its unit price low, I would expect payout growth on the lower end of that projection.
Bottom line: One of the most secure double-digit yields you can find today, but expect future payout growth to slow
GasLog Partners’ blowout results this quarter showcases the strength of its business model. With long-term fixed-fee charters that have incredibly strong counterparties, investors can remain confident in the security of the existing payout even if oil prices remain low for years.
That said, GasLog Partners isn’t entirely immune from the oil crash. Wall Street’s irrational punishment of its unit price could slow the pace at which the MLP can grow both its fleet and thus its payout going forward.
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