I have covered GasLog (GLOG, Financial), the owner, operator and manager of LNG carriers, several times in the past, and the stock has not disappointed from a returns perspective. Year to date, GasLog has surged from oversold levels by 82%, but the medium to long-term rally for the stock is far from over.
Starting with the third-quarter results, GasLog reported robust revenue of $121 million compared to revenue of $106 million for third-quarter 2015. For the same period, the EBITDA increased to $81 million from $66 million. While growth was strong for the quarter, I will not focus much on the result analysis.
The first point worth mentioning is the company’s capital expenditure program and its impact on EBITDA. For fiscal 2016, GasLog has four vessel deliveries, and these deliveries are on time and budget. The key point to note is that all four vessels are already on long-term charter with Shell (RDS.A, Financial)(RDS.B, Financial). Therefore, GasLog expects an EBITDA impact of $90 million from these four vessels in fiscal 2017 (full year of operations). This implies that the company’s revenue and EBITDA growth trajectory will sustain through fiscal 2017, and this is likely to take the stock higher.
Further, there are no new vessel deliveries in fiscal 2017, but GasLog has two vessels to be delivered in fiscal 2018 and three more lined up for delivery in fiscal 2019. Again, the vessels to be delivered in fiscal 2018 and fiscal 2019 are already contracted with Shell and Total (TOT, Financial). The company’s revenue and EBITDA upside visibility is clear for the next few years, and this should take the stock higher.
The next important point to note is that industry dynamics are robust, and it’s clearly evident from the fact that carriers for delivery in 2018 and 2019 are already contracted for the long term. With significant LNG demand coming from China and India, I see the bullish industry momentum sustaining. Further, the demand from these two Asian giants has been robust even with economic activity remaining sluggish. When these two economies accelerate, the LNG demand will surge further. Therefore, the market for LNG carriers is likely to remain strong in the coming years, and I see new LNG carrier deliveries also sustaining beyond 2019.
Coming back to company specific factors, the drop-down agreement with GasLog Partners (GLOP, Financial) is also a key positive. In particular, from GasLog’s balance sheet perspective. To elaborate on this point, GasLog announced a recent drop-down to GasLog Partners for a consideration of $189 million. This represents an EBITDA multiple of 9.4x. Importantly, the drop-down provides GasLog will liquidity infusion that can be used to reduce debt or for financing of new LNG carriers. For GasLog Partners, sustained cash distribution growth is a key advantage from a unit holder’s perspective.
I must mention here that as of the third quarter, GasLog had gross debt of $2.7 billion and net debt of $2.5 billion. However, I don’t see debt as a concern considering the point that the LNG carriers are contracted for long-term and provide steady EBITDA. Even if debt increases with delivery of new LNG carriers, there is an increase in EBITDA and cash flow. The drop-down agreement also helps to keep the leverage in check. I therefore expect debt servicing to remain smooth in the coming quarters, and the focus is likely to be on growth than on the company’s balance sheet.
GasLog is a quality stock in the LNG carrier industry and the industry fundamentals will ensure that good times sustain for the company. While the stock has surged by 82% year to date, the rally was from oversold levels and I expect further rally in the medium to long term.
Disclosure: No positions in the stocks discussed.
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