GasLog Partners (GLOP, Financial), which is currently trading at unit price of $20.1, offers robust cash distribution of $1.91 per share, translating into distribution yield of 9.5%. This article discusses the reasons for considering this partnership unit an attractive medium for long-term investment.
Starting my discussion with a brief business overview, GasLog Partners is in the LNG shipping part of the LNG value chain and I wanted to mention this at the onset, because LNG shipping is not directly impacted by volatility in energy prices. Even when energy prices remain depressed, energy companies have to maintain a certain level of operation for servicing debt along with business operations continuity. This creates sustained demand for the LNG shipping industry.
With this overview, the first reason to be bullish on GasLog Partners is the fact that the unit has LNG vessels that are on long-term charter with various clients. This ensures stable flow of revenue and cash. Further, this ensures that the current distribution of $1.91 sustains.
However, the bullish story for GasLog Partners just starts here, as forward looking analysis will provide the key unit price upside triggers. GasLog Partners has the option for dropdown of LNG vessels from GasLog (GLOG, Financial) and as of the second quarter of 2016, there are 13 LNG vessels that potentially qualify for dropdown to GasLog Partners.
While it does not imply 13 vessels will be added to the fleet for GasLog Partners in the coming quarters, selective dropdown will ensure that strong revenue and cash flow growth momentum sustain for the partnership unit.
It is important to note here that for second quarter 2016, GasLog Partners announced cash distribution of 48 cents per share, which is 10% higher than second quarter 2015. With 13 potential dropdowns, I expect that the unit’s cash distribution will continue to surge and this will trigger re-rating of the unit. In other words, investors can expect meaningful unit price upside besides the point that cash distribution will trend higher.
With discussion on potential dropdown, it is also important to discuss the financial flexibility for these dropdowns. The following points ensure that new LNG vessel entry into the fleet will be smooth in the coming quarters .
First, GasLog Partners currently has debt to capitalization of 55% and this gives sufficient room for leveraging. While the company’s net debt to EBITDA (first half 2016 annualized) is 4.7, I do not see leverage levels as a concern considering the fact that long-term charters provide robust cash flow for smooth debt servicing.
Second, the 13 potential dropdowns are already contracted for the long-term. This makes financing easier, as increase in leverage will be immediately associated with an increase in EBITDA. Therefore, credit metrics are likely to remain sound even on further leveraging.
Third, in second quarter 2016, GasLog Partners reduced debt by $9 million using cash balance and excess cash flows. This is indicative of the strong financial position and the company’s intent to reduce debt whenever the financials permit. GasLog Partners still has $85 million in liquidity as of the second quarter and that provides buffer for financing.
Considering these financial factors, GasLog Partners is well positioned for growth and I believe that the company will continue to meet its target of 10% to 15% annualized distribution growth in the coming years.
I must mention here that negative sentiments for the broad energy industry have relatively depressed the stock. However, as I explained at the onset, the business is relatively immune to energy price fluctuations. This makes current valuations attractive and worth considering for the medium to long-term.
Disclosure: No positions in the stocks discussed.
Start a free 7-day trial of Premium Membership to GuruFocus.
