Investment overview
Teekay LNG Partners LP (TGP, Financial) provides marine transportation services for liquefied natural gas, liquefied petroleum gas and crude oil globally.
Year to date, the stock has gained 20% and currently trades at $17.75. In addition, the company currently provides a dividend of 56 cents per share, which translates into a dividend yield of 3.2%.
Teekay is an attractive investment for the next three to four years. In this period, I expect the stock price to trend higher and the dividend to swell.
Strong cash flow visibility
The first reason to be bullish on Teekay is the MLP's strong cash flow visibility for the next several years. With revenue visibility from strong counterparts, the cash flow is solid and ensures the dividend will remain healthy.
For the MLP, forward revenue from existing operations currently stands at $4.6 billion. In addition, forward revenue from growth projects currently stands at $6.8 billion.
With total revenue visibility of $11.4 billion, Teekay is well positioned for sustained growth in its dividend.Â
Growth and financing
While the existing fleet of carriers provide clear revenue visibility, the MLP's growth project makes the stock interesting for the long term.
As of the second quarter, Teekay had 18 new LNG carriers under construction for delivery between September 2017 and February 2020. This is beneficial for several reasons:
First, all 18 carriers are already contracted with an average duration of 18 years. The contracts are with solid companies, including Royal Dutch Shell (RDS.A, Financial) (RDS.B, Financial), Yamal LNG and BP PLC (BP, Financial). As these LNG carriers are delivered, they will start contributing to incremental cash flows. In other words, Teekay has clear growth visibility for the next three to four years.
Second, financing growth projects with the remaining capital expenditure, which as of June 30 was $2.6 billion, is critical. The big positive here is the company has already completed $1.1 billion in debt financing needed for $1.4 billion. I do not see that as a concern since all new LNG carriers are contracted and Teekay aims to complete financing by the end of fiscal 2017.
Third, the company’s owned carrier order book is currently the largest in the industry and is expected to contribute approximately $250 million to incremental cash flow from vessel operations (CVFO) by 2020. This provides an insight to the potential dividend growth by 2020.
Investors might point out the MLP's debt will significantly increase significantly after delivering the carriers, but I do not see that as a concern because an increase in debt will be associated with an increase in cash flows. Debt servicing is, therefore, likely to remain smooth over the next several years.
Positive industry dynamics
While MLP-specific factors point to sustained upside in share price along with an increase in dividends, it is also important to discuss the industry factors that will support growth in the coming years.
The very fact the company has all LNG carriers contracted underscores the robust trend for the industry in the coming years. Teekay President and CEO Mark Kremin said in the second-quarter earnings call:
"Finally, we are seeing positive signs that the market is gradually tightening and we expect this to continue as more liquefaction capacity comes online."
With strong demand for LNG coming from emerging Asia, the industry dynamics are likely to remain positive in the next five to 10 years. Just to put things into perspective, the chart below from a Gaslog (GLOG, Financial) presentation indicates visible demand for 50 LNG carriers is yet to be secured.
Considering this scenario, I expect solid long-term charters as well as relatively easy charter extensions in the coming years. This should keep momentum positive for the company.
Conclusion
Teekay LNG Partners has moved 20% higher year to date, but the MLP's growth visibility for the next several years is likely to ensure strong upside sustains in the next 24 to 36 months.
In addition to stock price upside, I expect steady growth in the dividend as new LNG carriers are delivered. With clear plans for financing and long-term contracts, I see minimal risks.
Overall, the industry trend is positive and supports the current expansion for Teekay LNG Partners.
Disclosure: No positions in the stocks discussed.
