Teekay LNG Partners (TGP, Financial), which provides marine transportation services for liquefied natural gas, liquefied petroleum gas and crude oil, is an excellent stock to consider for the long term. This article discusses the key investment positives related to the stock and industry that will take the stock significantly higher from current levels with a 3-5 year investment horizon.
A distribution yield of 7.1% is the first reason to consider Teekay LNG. The stock currently has a distribution payout of $2.77 per share and I believe that the payout is sustainable. Further, I believe that we can also see an increase is distribution payout over the next 2-3 years. The reason for this view is discussed below.
As of 3Q14, Teekay LNG had a forward fee based revenue visibility of $10.8 billion. The revenue visibility comes from long-term contracts with oil & gas companies for its LNG and LPG vessels. The company’s LNG carriers, in particular, have average contract duration of 14 years and this implies that the cash flow will remain strong in the years to come.
In addition to the existing fleet of the company, Teekay LNG also has 15 LNG and LPG carriers on order with deliveries scheduled over the next few years. As new LNG and LPG vessels come into operation, the distributable cash flow will increase. This is positive for unit holders and even if the distribution yield remains at 7% to 8%, it will healthy and very sustainable.
The biggest positive from an industry point of view is the potential LNG exports that are scheduled to come from U.S. and Canada over the next few years into Asia. It is expected that a bulk of the exports from these two countries will be directed towards Asia and this means that the demand for long-distance LNG carriers will be robust over the next decade.
I therefore believe that the utilization of existing fleet and the utilization of new fleet will remain high and considering the prospects for LNG exports, Teekay LNG can further expand its new fleet order.
As per the company’s investor day presentation, it is estimated that the export projects in the U.S. will create demand for over 100 LNG carriers from 2016. This demand needs to be met with new LNG carriers with most of the existing carriers on long-term contracts. Teekay LNG and other players in the industry such as GasLog (GLOG, Financial) therefore have immense expansion and growth potential. I have earlier discussed GasLog in one of my articles here and I remain bullish on the company’s long-term prospects.
Coming back to Teekay LNG, the company’s stable revenue trend is a key factor to remain invested. For the quarter ended June and September 2014, Teekay LNG had net voyage revenue of $100 million and a distributable cash flow of $61 million. A coverage ratio of 1.05 is comfortable and sustainable. In an uncertain market environment, it a good to have a stock like Teekay LNG Partners in the portfolio.
Teekay LNG is currently trading at a trailing twelve month EV/EBITDA of 19.57 and I believe that this is not expensive considering the fact that the company’s revenue visibility extends over 10 years through long-term contracts.
The revenue visibility also ensures that Teekay LNG is able to easily service the current balance sheet debt of $1.8 billion. With the stable cash flow, investors should not consider the current debt as a matter of concern.
In conclusion, there are not many companies that provide a 7% and above distribution yield and have such a long-term revenue visibility. Further, the industry growth prospects are robust and Teekay LNG is well positioned in the industry as among the top five players. All these factors make the stock an excellent buy at current levels.
