While the LNG industry is not having the best of times, the long-term prospects for the industry remain very bright. Teekay LNG (TGP, Financial) is one company in the industry that has the potential to be a value creator for long-term investors. The company’s stock has declined by only 10.2% in 2014 amid relatively difficult market conditions, and this is an indication of the intrinsic strength of the company. This article discusses Teekay LNG and the key investment positives related to this potential value creator.
The first reason to be bullish on Teekay LNG is the company’s strong position in the industry. As the chart below shows, Teekay LNG is one of the largest LNG carriers in the world with a strong pipeline of new orders.
A strong position within the industry means that when robust growth comes, Teekay LNG will be well placed with its current fleet and with the potential fleet addition that will come over the next few years.
The second big reason to be bullish on Teekay LNG is the company’s current revenue backlog. As of September 2014, Teekay LNG had forward fee-based revenue of $11 billion with a contract term for LNG carriers being 14 years. This means that the company’s cash flow position is very sure over the next few years, and the company’s current distribution yield of 7.3% will only get healthier in the times to come.
The third big growth driver for Teekay LNG is the export potential from the U.S. It is projected that over 100 LNG carriers will be needed from 2016 onwards for the U.S. to export LNG. This means that there is a big scope for expansion in LNG carriers, and this also means that the company’s existing fleet on order will have no problems in being absorbed into long-term contracts once they are in the markets.
With Asia expected to account for nearly 70% of the LNG demand in the foreseeable future, the long distance LNG carriers will be in focus and will command strong rates. According to Teekay LNG’s latest presentation, nearly 150 new LNG carriers will be required by 2020 to meet the incremental demand that will come from LNG exports. This means that the market potential is big and the long-term prospects for the industry is robust even if there is some intermediate term weakness.
In terms of delivery of new LNG and LPG carriers, Teekay LNG expects the delivery of two carriers in 2015, five in 2016, seven in 2017 and five in 2018. While the deliveries extend to 2020, the key point is that the addition of new carriers every year will ensure that the company’s revenue and cash flows are on a trajectory of growth.
From a fundamentals perspective, the company’s balance sheet has a debt of $1.7 billion, but the company has been generating strong operating cash flows to service the debt. For the first nine months of 2014, Teekay LNG generated $135 million in OCF, and I believe that operating cash flows will be even better in the future on delivery of new LPG and LNG vessels. As industry demand increases, the rates for long-distance transportation will also increase, supporting cash flows.
The company’s distributable cash flow is also sustainable considering the long duration of existing contracts, and I expect the distributable cash flow to increase over the next few years as new delivery of vessels helps in improving the cash flows. Therefore, the current distribution payout of $2.77 looks very healthy and sustainable. This is one of the key positives for exposure to Teekay LNG.
Further, I believe that the company will also go for inorganic expansion considering the big potential that the industry holds over the next 5-6 years. If inorganic expansion does come, the company’s revenue and cash flow will see strong upside growth and the distribution yield can also be revised upwards.
While competition in the industry is intense and can be considered as one risk factor, the incremental demand that will come from U.S. exports will more than offset the supply side pressure. This will keep the rates for LNG carriers high. I must also add here that the export demand is not only come from U.S., there is also potential exports that will come from the Middle East and the LNG markets are bound to get more competitive from the LNG exporters' perspective. All this will however be positive for LNG carriers and the next few years should be strong in terms of growth and fleet expansion.
In conclusion, Teekay LNG is an excellent stock to consider with a 3-5 year investment horizon. The stock will give strong distribution yield coupled with stock appreciation on robust market outlook. Teekay LNG can be a value creator in the long-term portfolio.
