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Ship Shape: Floating Pipelines

By Elliott H. Gue on Jun. 4, 2015

Although overzealous ordering in recent years has pushed the LNG shipping market into an oversupply, the start-up of new liquefaction projects in the US and Australia should help to absorb some of this excess capacity.

But the intermediate-term outlook suggests that this supply-demand balance will tighten, as lower LNG prices help to stimulate demand, especially in China, where energy consumption continues to grow with urbanization and air pollution has lessened coal’s appeal.

GasLog founded GasLog Partners as a means of recycling capital. This virtuous cycle involves GasLog selling LNG carriers in its fleet to GasLog Partners at prices that are accretive to the MLP’s distributable cash flow. The parent then deploys some of the proceeds into ordering or acquiring new vessels that can be dropped down to the MLP once these ships obtain longer-term contracts.

Equally important, GasLog and GasLog Partners enjoy strong relationships with BG Group (LSE: BG/, OTC: BRGYY) and Royal Dutch Shell (LSE: RDSA, RDSB; NYSE: RDS A, RDS B), two of the LNG market’s leading players.

Prior to its initial public offering, GasLog managed BG Group’s fleet of LNG tankers. The shipowner also has acquired vessels from both of these major oil and gas companies.

GasLog earlier this year took advantage of this relationship to purchase two LNG carriers from BG Group that will operate under nine- and 11-year contracts. Management estimates that these ships will generate $46 million in annual earnings before interest, taxes, depreciation and amortization.

And GasLog and GasLog Partners also announced a transaction where BG Group will charter three newly built LNG carriers for 9.5 years at above-market rates, with the option to secure another six vessels under 10-year fixtures.

Given the difficulty that some shipowners have experienced chartering their newly built vessels, this agreement with BG Group underscores the value of this close relationship and demonstrates the British company’s confidence in LNG demand growth.

These transactions bring GasLog and GasLog Partners closer to achieving their “40:17” vision, which involves expanding their fleet to 40 vessels by 2017.

As for Royal Dutch Shell’s pending acquisition of BG Group, GasLog and GasLog Partners can only benefit from their close relationship with what will be one of the top dogs in the LNG market.

GasLog Partners generated enough cash flow to cover its first-quarter distribution by a 1.32-to-1 margin. Over the long haul, management has targeted a coverage ratio of 1.125-to-1 to cushion against maintenance-related downtime.

The stock has pulled back since the MLP filed a shelf registration statement to issue up to $600 million worth of equity. Although the market has reacted negatively to this potential dilution, the move signals that GasLog Partners is gearing up for another drop-down transaction.

GasLog Partners’ stock has returned about 24 percent since its initial public offering in May 2014, but has given up about 30 percent of its value from the high reached on July 1, 2014.

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