I have written on GasLog (GLOG, Financial) a few times in the last 12 to 15 months, and I have maintained a bullish view on the stock.
After challenging times in 2015, 2016 has been good for GasLog in terms of stock upside with the stock delivering 42% returns year to date. The rally is likely to continue for GasLog.
Before discussing the key positive factors, I want to quickly discuss the company’s first-quarter results where GasLog reported revenue and EBITDA of $104.4 million and $62.2 million respectively. While the revenue and EBITDA numbers were not different from the first quarter of 2015, the company’s business model of stable cash flows implies this revenue trend until new vessels are added to the fleet.
Coming to the first positive, GasLog reported along with first-quarter results that the company has successfully refinanced debt worth $575 million; with this refinancing the company has no further debt maturities until 2018. This is a significant credit positive since GasLog has ample cash flows to service debt easily in the coming years.
The second important point that is worth mentioning here is that GasLog has new vessels for delivery in 2016 and 2018 and the total remaining capital expenditure for vessel delivery is $1.28 billion. However, GasLog has already secured financing worth $1.15 billion through committed debt and with just $0.13 billion in remaining financing, the company is well positioned with a fully funded capital expenditure program.
While the company’s debt will increase in the next two to three years, it will be associated with an increase in the company’s operating cash flow, and debt servicing will remain smooth through this period. Just to put things into perspective, GasLog expects an annualized EBITDA of $160 million from contracted new vessels.
I mentioned an increase in the company’s debt, and it is therefore important to talk about the dropdown agreement with GasLog Partners (GLOP, Financial). In total there is a pipeline of 12 vessels that are eligible for dropdown to GasLog Partners, and these potential dropdowns will serve as a source of liquidity for GasLog. Depending on the industry scenario, GasLog has the option to reduce debt or pursue further expansion from the liquidity coming from the dropdown. Investors can also consider GasLog Partners as an interesting investment. In particular, investors seeking regular cash inflow can consider GasLog Partners for robust distribution yield.
Besides company specific positives, the industry fundamentals for LNG shipping remain robust in the foreseeable future and for the long term. The LNG export from the U.S. is likely to create incremental demand for LNG vessels, and I see spot markets also remaining attractive besides the long-term charter contracts.
In the coming years, I also see big demand for floating storage and regasification unit, and GasLog has already signed a pre-engineering study with Keppel for existing vessel conversion. It might be too early to predict potential growth from this segment, but the FRSU segment can be another game changer in the next three to five years and trigger significant stock upside for GasLog.
GasLog remains an attractive investment for the next three to five years, and this is supported by strong fundamentals, healthy credit metrics, robust order backlog and incremental EBITDA visibility from new vessels. Investors with a long-term investment horizon can consider exposure to GasLog at current levels even after 42% upside year to date.
Disclosure: No positions in the stock.
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