I have been closely tracking GasLog (GLOG, Financial) for a few years, and the company has not disappointed on the business development front. Stock returns have come in line with progress in fundamentals, and this has been a stellar year so far in terms of stock returns.
GasLog is higher by 77% year to date, and the rally is far from over when considering a medium to long-term investment horizon.
The company’s business model is largely based on fixed time-charter revenue, and this provides clear revenue and cash flow visibility for the years to come. As of June 30, GasLog had $3.6 billion in fixed-rate long-term contracted revenue and an additional $4.0 billion of fixed-rate option revenue.
With this visibility, the company’s revenue and cash flow trend is likely to remain steady in the coming years. This is one of the key positives related to GasLog and ensures that the current dividend payout of 56 cents per share will sustain and potentially increase in the coming years.
Another reason for mentioning the company’s revenue visibility at the onset is the fact that GasLog has net debt of $2.4 billion as of June 30. While the company has been working on timely debt refinancing to extend the maturity profile, the key factor is smooth debt servicing. With EBITDA and cash flow likely to remain stable on long-term contracts, debt servicing is not a concern.
Further, I expect the company’s debt to increase in the coming quarters as new LNG vessels are delivered. However, most of the vessels are already contracted for long-term and an increase in debt will be associated with an increase in order backlog and EBITDA. Another point to note here is that GasLog Partners (GLOP, Financial) has the option of vessel dropdown and if that happens, GasLog will receive cash for debt reduction or further investments. I don’t see any concerns from a vessel financing perspective as well as from increase in debt in the coming quarters.
From an industry perspective, the sentiments remain equally bullish with long distance LNG transportation likely to keep demand for LNG vessels strong. In addition, the new vessel order is at a multiyear low and the LNG vessel construction time is three years. The supply is unlikely to be strong, and that will keep the demand factor robust for existing vessels. For GasLog, the exposure is primarily on time charter rather than spot markets (that tend to be volatile). This eliminates the risk of any revenue and cash flow fluctuation.
Coming back to the company’s core business drivers, I expect FSRU (floating storage regasification unit) to be another major long-term growth driver for GasLog. The markets are currently favoring FSRU over land-based solutions, and I expect the company’s FSRU fleet to increase over time. The reason for mentioning this as a key stock upside trigger in the long term is the point that FSRU generates higher returns than conventional gas carriers. This would imply higher EBITDA margin over time (as FSRU units increase).
With GasLog also considering FSRU units to be potential dropdown candidates in the long term, GasLog Partners is also an interesting investment for investors seeking higher distribution yield. GasLog Partners also has all LNG units under long-term time charter; the cash distribution is likely to remain stable and potentially increase on new dropdowns.
GasLog is in a good business, and the company has proved its execution capabilities over time. I expect the positive stock momentum to sustain on stable revenue along with incremental growth coming from new LNG carriers. Even after big upside in YTD16, the stock remain attractive for the long term.
Disclosure: No positions in the stocks discussed.
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