GasLog (GLOG, Financial) has been one of the star performers in the LNG shipping segment in the last 15-18 months. However, after reaching a peak of $31.89 on June 30, 2014, GasLog has declined by nearly 38%. While a part of the decline can be attributed to transfer of assets to GasLog Partners (GLOP, Financial), there has been some correction in the stock due to depressed market sentiments.
Investors, however, need to consider GasLog with a long-term perspective, and the company looks very attractive if investors are willing to hold on to the stock for the next 3-5 years. This article discusses the reasons why the long-term horizon on GasLog can yield strong returns.
As of October 2014, GasLog had 10 vessels on water and 10 on order with a total order backlog of $2.8 billion. The strong order backlog, which extends for long term, is the first reason to consider GasLog. Further, the company’s order backlog is with strong clients and this ensures that the cash inflow will be robust for GasLog.
GasLog currently has 16 vessels (12 on water and 4 on order) that are contracted with the BG Group. Further, GasLog has two vessels currently on charter with Shell. Therefore, both the clients are big and the charters are long-term in nature.
In terms of days contracted, GasLog has 99% of the day contracted for 2014, 82% for 2015, 77% for 2016 and 70% for 2017. As the new vessels for delivery are contracted, the contract coverage for GasLog will get even stronger in the days to come. Even the current contract status means that GasLog is likely to show strong revenue and EBITDA growth over the next 2-3 years.
An indication of the company’s growth trajectory comes from the company 1H14 results. The company’s revenue for the period increased by 138% to $130 million in 1H14 as compared to $54.8 million in 1H13.
For the same period, the company’s EBITDA increased by 155% to $80.7 million as compared to $31.6 million in 1H13. I don’t expect the revenue growth in 2015 to be as strong as 2014, but the growth trajectory will remain robust and this means that the company’s correction is an attractive buying opportunity.
In terms of the company’s upcoming capital expenditure, GasLog had $1.9 billion in investments scheduled from the second half of 2014 to 2017. A bulk of the investments is expected to come in 2016 and 2017 and I believe that GasLog has the financial flexibility to incur the capital expenditure.
While GasLog has approximately $1.9 billion in debt, the company’s strong order backlog of $2.8 billion ensures that funding the new vessels will not be an issue. In addition, GasLog also had a strong cash position of $241 million as of 1H14 and I believe that the company’s cash position and financial flexibility will increase further as there is more drop-down of vessels to GasLog Partners over the next 2-3 years.
In August 2014, GasLog announced the sale of two vessels to GasLog Partners for a consideration of $328 million; this increases the company’s cash position to $670 million and the net debt for the company is reduced to approximately $1.2 billion. Therefore, financial flexibility is not an issue or will come in the way of growth.
From an industry perspective, the long-term outlook for the LNG industry is very positive, and it should ensure the company’s fleet utilization remains robust as it has been in the last few years. The global increase in LNG production is the key reason to be bullish on the LNG vessels industry.
By 2020, it is expected that the total number of LNG vessels required for global LNG transportation would be 322. However, the current vessel count is only 135 and this means that there is a significant supply gap that needs to be covered. The direct implication is that vessel utilization will remain robust and it would be easy for new vessels to win long-term contracts. In particular, the LNG exports from the U.S. and Canada can be a big game changer for the industry.
In addition to the strong growth that is lined up for the next few years and is likely to result in stock upside, GasLog is also currently offering a good dividend payout. The company’s dividend yield currently stands at 2.4%, and I believe that the current dividend payout of $0.48 per share is likely to increase with the delivery of new vessels.
From that perspective, even GasLog Partners looks interesting with the partnership having a current distribution yield of 5.9% and the drop-down from GasLog will ensure that the company’s distribution yield will remain high. Further, all the drop-downs are contracted for long-term and the revenue and cash flow visibility is also strong.
In conclusion, GasLog has strong growth prospects and the company is getting bigger in an industry that has strong growth prospects. Investors can consider GasLog at current levels as the stock looks good to provide strong returns over the next 2-3 years.
