The boom in natural gas production and consumption reached a record high last year, according to the Energy Information Administration [EIA] and the trend is expected to accelerate. According to the EIA, U.S. natural gas reserves are about 482 trillion cubic feet, which given the U.S. annual consumption rate of 25.5 trillion cubic feet only cover supply for less than 20 years. However, due to new drilling technology (horizontal drilling and fracking) an abundance of previously untapped natural gas deposits have been unleashed, and estimates of natural gas reserves are being revised up almost yearly.
Therefore, if production continues to increase over the next few years, the U.S. will soon become a net exporter of natural gas. As U.S. natural gas prices are much cheaper compared to the rest of the world, the opportunity to sell natural gas to foreign countries is huge. A company that is very well placed to benefit from this opportunity is Gaslog (GLOG), a small-cap shipping company that operates several liquefied natural gas [LNG] carriers.
Gaslog is a growth-oriented international owner, operator, and manager of LNG carriers, providing support to international energy companies as part of their LNG logistics chain. The company has gone public in March of 2012, has currently a market capitalization of about 860 million and, approximately, 1,100 employees.
LNG is natural gas cooled to -162ºC (-260ºF). The two main ways of transporting gas over long distances are pipeline and LNG shipping. In some instances only one or the other is viable, as LNG ships cannot operate on land, and pipelines are prohibitively expensive over long sea distances. LNG is primarily used as a means for transporting natural gas. The cooling process reduces the volume by approximately 1/600th, making it practical, from a physical and economic perspective, to transport gas over long distances in this form. A growing emergence in disparity between the location of natural gas reserves and the nations that consume natural gas, has resulted in a rise in the percentage of natural gas traded between countries to 31%, from only 16% about two decades ago.
The company's owned fleet consists of fourteen wholly-owned LNG carriers, including six ships on the water and eight ships to be delivered by the world's leading LNG shipbuilder, Samsung Heavy Industries. Its fleet is very new, given that its first ship was delivered only in 2010. Its last order was announced in August, for two new vessels to be delivered in 2016. Therefore, Gaslog has a navy of modern, efficient, and highly profitable tankers. Its eight ships on order are scheduled to be delivered on various dates between 2013 and 2016, meaning that Gaslog will maintain for many years the youngest LNG tanker fleet within its industry. Currently, its average fleet age is about 2.7 years against the 11.3 years for the industry's average.
Through its wholly owned subsidiary, GasLog LNG Services, it currently manages and operates eighteen LNG carriers, which includes its owned ships as well as eleven ships owned or leased by BG Group (OTC:BRGYY), a leading participant in the global energy and natural gas markets, and one additional LNG carrier in which Gaslog has a 25% interest.
In 2012, Gaslog achieved more than $68 million in revenues, a small increase of 3% from the previous year. However, over the next few years the company's growth should be much higher as more vessels become operational. The company has already signed forward contracts with its customers for current and future vessels, which means the company's fleet should operate at close to 100% capacity for the next few years. For the two vessels ordered last month, the company has already secured contracts upon delivery for minimum operation of 7 years with BG Group. Of the eight vessels under construction, only two aren't already assigned to customers. Beyond BG Group, Gaslog has also Royal Dutch Shell (RDS.A) has a costumer, which has two vessels operating under long-term contracts with Gaslog. According to the company, its contracted revenues should amount to $114 million in 2013, and between $207 million to $247 million from 2014 to 2016. However, as Gaslog still has two vessels available it can take advantage of higher daily shipping rates down the road to increase even further its revenues. Over the long-term, Gaslog has more than $2.1 billion of contract revenues with sound counterparts.
For the first six months of 2013, revenues increased by 64% to almost $55 million. In the second quarter of 2013, Gaslog reported revenues of almost $33 million, more than double compared with the second quarter of 2012. Its EBITDA amounted to $33.8 million, its profit was $20.4 million, or earnings-per-share [EPS] of $0.32. Its net profit margin was above 60%, which is impressive.
Going forward, Gaslog's growth and profitability should be supported by the industry fundamentals. LNG tankers are quite expensive and take more than two years to build. At the end of 2012, there was about 375 ships in operation globally, and during 2013 is expected that another 22 LNG tankers will be operational. This means new capacity is added slowly, and will probably not be enough to meet increasing demand as gas natural production goes up. This support Gaslog's growth and profitability for the coming years, given that the company has a young fleet which requires less maintenance expense and have lower fuel costs than its competitors, representing a valuable competitive advantage over its peers.
Regarding its dividend, Gaslog announced in August its last quarterly dividend of $0.11 per share. At Gaslog's current stock price, this represents an annualized dividend yield of 3.20%. Although this is not a high-dividend yield, Gaslog's dividend is also interesting for its potential growth. As more ships come into service, the company's earnings and cash flows should increase considerably, enabling Gaslog to enhance its shareholder remuneration. Moreover, taking into account the last quarter EPS of $0.32, the dividend payout ratio was only 34% so Gaslog can additionally increase its dividend through a higher payout ratio going forward.
The dividend seems also to be relatively safe over the medium to long-term due to the company's strong profitability and strong growth prospects. Furthermore, its attractive terms agreed with the Korean shipyard on its recent vessels ordered and the issue of a senior bond during the second quarter has reduced Gaslog financing needs, therefore the company does not see the need to raise new equity within the next couple of years. This means that despite the company's strong growth expected ahead, shareholders should not be diluted nor asked to inject more cash in the company because it has already secured its financing needs for the next few years.
Gaslog is a very good way to play the U.S. natural gas boom. The company should be able to achieve strong growth over the next few years, as more ships come into operation and demand for LNG tankers enables the company to maintain attractive fleet rates. For income investors, Gaslog offers an attractive dividend yield but also good prospects of dividend growth. Moreover, given its long-term revenue contracts the dividend seems safe and investors should be able to collect both a growing income and capital appreciation, due to the U.S. natural gas boom that should boost Gaslog's earnings for the next few years.