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  • Roger S. Conrad

How Our Riskier Fare Fared

By Roger S. Conrad on Feb. 19, 2016

Gaslog Partners LP posted solid fourth-quarter results, headlined by distributable cash flow that covered the payout by 1.43 times. Given the highly visible stream of cash flow generated by the contracts under which its eight vessels operate, this resilience in the face of lower commodity prices doesn’t come as a surprise.

Although Gaslog Partners grew its distribution by 10 percent last year (the low end of management’s guidance), the decision to keep the fourth-quarter distribution flat and use the retained cash flow to pay down about $30 million worth of debt reflects the turmoil in the equity market.

With the Gaslog Partners’ common units yielding 14.6 percent, issuing equity to pursue drop-down transactions from Gaslog (NYSE: GLOG) doesn’t make sense for either party.

The sponsor created the MLP to recycle capital and take advantage of investors’ willingness to pay a premium for distributed (as opposed to retained) cash flow and the tax advantages associated with the structure.

Under this strategy, Gaslog would sell the vessels in its portfolio that operate under long-term contracts to Gaslog Partners, fueling distribution growth at the MLP level and raising additional capital for the sponsor to fund additional investment in its fleet.

Pursuing these transactions in the current environment would require a blend of alternative financing and/or lower asset valuations to ensure that these deals are accretive to distributable cash flow per unit.

Thanks to its strong distribution coverage, Gaslog Partners can afford to use its excess cash flow to reduce debt and repurchase shares while it waits for the equity market to recover.

However, with the charters on three of its eight vessels slated to expire in 2018, the pressure to prevent a cash flow shortfall hinges on either completing drop-down transactions or the supply-demand balance in the LNG tanker market improving.

Prevailing day-rates for vessels available on an ad hoc basis remain significantly lower than those in Gaslog Partners contracts; however, the supply-demand balance in this shipping market could tighten in coming years, depending on the utilization rate at export facilities and the growth in LNG consumption.

Gaslog’s close relationships with BG Group (LSE: BG/, OTC: BRGYY) and Royal Dutch Shell (LSE: RDSA, RDSB; NYSE: RDS A, RDS B) have helped it to secure charters in difficult markets.

At the very least, Gaslog Partners’ high cost of equity capital will force the partnership to tap the breaks on its drop-down driven growth story.

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