GasLog (GLOG, Financial) is an international owner, operator and manager of liquefied natural gas (LNG) carriers that provides support to international energy companies. As of Sept. 30, 2016, the company had consolidated fleet of 28 vessels of which nine vessels are contracted to its subsidiary GasLog Partners (GLOP, Financial).
Industry dynamics and the company’s long-term charter provide attractive upside for GasLog.
Positive industry outlook
Natural gas and LNG markets are growing and expected to overtake coal as a percentage of global energy mix in the next 10 years. This is primarily because natural gas is abundantly available with low cost and has lower carbon emission as compared to coal and oil. Moreover, growing energy and power demand would further accelerate growth and would increase natural gas market share of primary energy consumption.
On the other hand LNG is expected to surpass pipeline gas as a percentage of the overall global trade by 2030 primarily because of location mismatch of gas reserves and energy demand (as is the case with U.S. and Japan).
Global LNG demand is also expected to rise significantly as shown in the chart below. This is because gas is much more appealingly priced than many energy sources along with requirements of many countries like the U.K. to replace the declining indigenous production. According to the company’s November 2016 presentation, LNG import to China and India has increased by 27% and 34% year over year. This implies that developing nations are also more interested in gas as the source of energy than other energy sources like coal because of its hazardous impact on nature. Thus, considering shift of demand toward natural gas and LNG, GasLog is well positioned to benefit in the long run.
FSRU should be the next big thing
Floating storage and regasification unit (FSRU) is a component that is required for transiting and transferring LNG through oceanic channels. On Dec. 5, 2016, GasLog announced its entry in the FSRU industry by ordering for FSRU long lead items for its LNG carrier conversion. Long lead items include pumps, vaporizers, heat exchangers and low-duty compressors that are required for the conversion process. It reduces the time required to convert LNG carrier from 18 to 24 months to six to eight months.
This project would position the company to offer fast solutions to FSRU projects in the future. There has been increasing demand for the use of FSRU and considering it would provide a new route and a vital source of gas diversification to a number of European countries that are currently highly dependent on pipeline gas in Southeast and Central Europe.
GasLog would have a competitive advantage over its peers. It would also enhance the security of the supply in the region along with promoting competition and pricing flexibility. Moreover, the company’s agreement with Gastrade demonstrates the development of the company’s ongoing FSRU strategy; it would further open up new markets for GasLog and the company would benefit from this in the years to come.
Modern fleet and demand for long-term charter
GasLog has one of the most modern fleets on the water with average age of the water vessels being 5.3 years. Technological advancement since 2000 has resulted in modern steam, TFDE, MEGI, etc., which have further resulted in a more modern and widely acceptable fleet.
In addition to an existing fleet, the company also has new build deliveries until 2019, which would approximately add $21 million to $23 million EBITDA per vessel, resulting in approximately $200 million annualized EBITDA addition.
Considering a mix of younger and modern fleet, GasLog has a strong demand for long-term charters. On July 11, 2016, the company signed a seven-year charter with Total (TOT, Financial) and the charter commences mid-2018. Similarly, on Oct. 20, 2016, the company also signed a charter with Centrica (CNA, Financial) that would commence in the second half of 2019. Also, the charter rates are in line with the company’s average long-term charter, which determines strong demand of the company’s fleet even in a gloomy economic condition. Moreover, contracts with companies like Total and Centrica assure stable cash flow and decrease the risk of contract cancellation, which gives a stable revenue visibility for GasLog.
Liquidity profile
As of Sept. 30, 2016, the company had a total debt of $2.57 billion of which $143.5 million is payable within one year and $5.9 million of finance lease liability is also payable within one year. With available cash and cash equivalent of $244.7 million, debt repayment is not a concern for GasLog. Long-term charters also ensure that debt servicing will be smooth in the years to come. Also with a positive current ratio of 1.1 (current assets of $269 million and current liabilities of $246.7 million), the company has enough buffer to meet its short-term obligations.
Conclusion
Industry dynamics support gas and LNG market expansion in the next few years. The company’s step to introduce FSRU and combination of modern and young fleet would attract customers to deliver products faster and more efficiently. This, in turn, would have a positive impact on the company’s contract and provide sufficient revenue upside. Thus, based on the company’s outlook and industry prospects, GasLog looks attractive for long-term investors.
Disclosure: No positions in the stocks discussed.
Start a free seven-day trial of Premium Membership to GuruFocus.
