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Earning an Upgrade

By Roger S. Conrad on Sep. 29, 2013

GasLog (NYSE: GLOG)

Although GasLog completed its initial public offering in early 2012, the conservatively run shipowner has managed BG Group’s (LSE: BG/, OTC: BRGYY) fleet of LNG carriers for more than a decade. The company also owns four operating LNG carriers that are booked under medium-term charters that expire in 2015, 2016 and 2018, providing exposure to an anticipated tightening in the market.

More important, GasLog awaits the delivery of nine newly built vessels, seven of which have secured fixtures with either BG Group or Royal Dutch Shell (LSE: RDSA, LSE: RDSB; NYSE: RDS A, RDS B). This visible pipeline of cash flow should enable the company to grow its dividend as newly built vessels start their contracts. GasLog’s close relationship with BG Group and Royal Dutch Shell makes us less concerned about these two vessels finding charter work.

Management has indicated that the company is exploring eventually spinning off some assets in a master limited partnership (MLP)–a move that could unlock substantial value and attract more investors. 

The company has options to order three additional LNG carriers from Samsung Heavy Industries (Seoul: 010140, OTC: SMSHF) and sees opportunities to acquire vessels from distressed operators with exposure to near-term weakness in the spot market.

GasLog in early February announced the order of two LNG carriers from Samsung Heavy Industries. Upon their delivery in 2016, these vessels will commence 10-year fixtures with BG Group.

The shipowner also modified to the contract for one of its vessels slated for delivery in the third quarter of 2013. The first three years of this extended eight-year agreement will feature the same terms as the previous agreement; however, in subsequent years, the vessel will operate under a seven-month charter to BG Group, leaving GasLog to secure short-term work for the remaining five months. This amended agreement provides exposure to anticipated tightness in the spot market.

More recently, the company acquired the STX Frontier, a 2010-built LNG carrier that currently operates in the spot market. We’ve long argued that the lull in new liquefaction projects over the next two years and an influx of new vessels could enable established players to pick up unchartered ships at favorable prices. GasLog’s acquisition of the STX Frontier for $160 million is a prime example of this phenomenon.

With a relatively young fleet, close relationships with two of the industry’s heavyweights and a highly visible plan to increase its cash flow, GasLog rates a buy up to $16.00 per share for investors seeking dividend growth.

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