Teekay LNG Partners (TGP, Financial) might have declined by 10% year to date, but the company’s long-term outlook remains positive and there are reasons to be bullish with a time horizon of two to three years. The stock has declined by 68% in the last year and can be considered as a deep value investment idea. However, investors should consider gradual exposure to the stock instead of a big plunge.
The first reason to be bullish on Teekay LNG after the deep correction is the unit’s revenue visibility for the coming years. While the stock has slumped by 68% in the last year, the company has a current order backlog of $5.2 billion, and there is a potential to increase the backlog by another $6.9 billion (considering projects in the pipeline). This will ensure that the cash flow remains steady in the coming years and that the current distribution payout of 56 cents per share sustains.
The second reason to be bullish on Teekay LNG is the company’s recent 20-year contract to develop an LNG regasification project in Bahrain. A joint venture consisting of Teekay LNG, Samsung C&T (Samsung) and Gulf Investment Corporation (GIC) finalized a 20-year contract for start-up in mid-2018. Teekay LNG will provide the project with the FSU, modifying one of its previously unchartered MEGI LNG carrier newbuildings, under a 20-year charter contract to the JV. While the project will not provide cash flows immediately, it does ensure that long-term revenue visibility improves. According to Teekay LNG, the project is likely to provide estimated annual CFVO (cash flow from vessel operations) of $45 million.
Teekay LNG Partners expects moderate growth in CFVO through 2018 with the CFVO likely to be around $580 million by 2018 from current levels of approximately $460 million. However, for the period 2018 to 2020, the CFVO is likely to increase by $250 million with the Bahrain project adding to the growth coupled with the Yamal LNG (estimated annual CFVO from the project is $114 million). In the near-term, the LNG contract with Shell (5 MEGI new vessels under construction) is likely to add $88 million to the estimated CFVO. Therefore, for the next three to five years, Teekay LNG Partners will continue to see steady cash flow growth with some promising projects in the pipeline.
From a balance sheet perspective, Teekay LNG Partners has total debt of $2 billion, but that is not a concern with firm cash flow visibility for the coming years. Further, the new vessel deliveries that will be backed by debt have long-term contracts and the company’s EBITDA and cash flow will increase with increase in debt. In other words, the debt servicing metrics will remain strong even if total balance sheet debt increases in the next two to three years.
In conclusion, Teekay LNG Partners currently offers an attractive distribution yield of 4.6% and I believe that unit distribution will sustain at current levels. Further, as CFVO increases in the next three to five years, distribution can also increase meaningfully. With the stock correcting by 68% in the last year on negative sentiments for the broad energy industry, there is a good buying opportunity for long-term investors. In the coming years, I expect more long-term regasification projects to deliver cash flow growth for the company along with earnings and distribution stability.
Disclosure: No positions in the stock.
