GasLog Partners: Rapidly Growing MLP In LNG Shipping Sector

Sep. 4.14 | About: GasLog Partners (GLOP)

Summary

GLOP is a fast growing, relatively stable, and low-risk LNG shipping MLP.

It is one of the fastest growing MLPs, with a long pipeline of drop-down candidates.

GLOP offers an attractive distribution leveraged to favorable long-term fundamentals in the growing global LNG market.

Formed by its parent GasLog Limited (NYSE:GLOG), GasLog Partners (NYSE:GLOP) is a fast growing, relatively stable, and low-risk LNG shipping master limited partnership [MLP]. It has a long pipeline of drop-down candidates. Growth prospects are supported by approx. $4.0 billion dropdown candidates, including $1.8-$2.0 billion from already committed 10 vessels with long-term contracts and additional $2.0 billion in potential dropdowns if GLOG can secure long-term contracts for 10 other vessels in its fleet.

GLOP is a pure-play LNG transportation MLP. The partnership offers an attractive distribution leveraged to favorable long-term fundamentals in the growing global LNG market. GasLog Partners' current fleet includes three modern LNG carriers and the partnership is in the process of acquiring additional two vessels from GLOG. All of these five carriers have secured long-term, fixed-rate contracts with BG Group (OTCPK:BRGXF), a major international energy company with investment grade rating. The reputation of the counterparty and long-term, fixed-rate nature of the contracts provide visibility of cash flows and protect the partnership from near-term weakness in the LNG shipping market.

Robust Growth Strategy

GasLog Partners was spun off by its parent, GLOG, to unlock value and provide a growth vehicle for its LNG shipping business. GLOP not only offers investors an opportunity to get exposure to positive long-term fundamentals of the LNG shipping market but also provides an opportunity to get in the early stages of a growth partnership. In addition to the recent acquisition of two vessels, GLOG has created a stacked pipeline of 10 modern vessels to drop down into GLOP. It is important to mention here that all potential dropdowns come with long-term contracts and the company can use these dropdowns to grow its already attractive distribution. GLOG has additional 10 carriers that it will be required to offer GLOP for purchase, if these vessels enter a charter of 5 years or more.

These asset dropdown opportunities are an important growth driver for GasLog Partners. I believe GLOG is incentivized to sell these vessels to GLOP and maximize shareholder value as GLOG receives distributions as the owner of the general partners and holds a 50% limited partner interest. The purchase of two additional vessels only three months after IPO also came in earlier than market expectations and shows that the partnership is very well positioned to execute a robust growth strategy fueled by drop downs from its parent. GasLog Partners is targeting 10-15% distribution growth annually, and based on GLOG's fleet of 20 ships, I believe GLOP could exceed the top end of this range over the next two years.

The partnership has already announced its plans to raise its quarterly distribution upon the completion of the Methane Rita Andrea and Methane Jane Elizabeth drop down acquisitions. GLOP intends to increase its quarterly distribution to $0.43125-$0.43750 per quarter, implying 15.8% growth at the midpoint from the minimum quarterly distribution of $0.375.

Low-Risk Profile

GLOP also offers investors low-risk profile given its stable, fixed-rate cash flow streams backed by long-term contracts. GasLog Partners provides LNG transportation services, in exchanged for a fixed daily charter rate and for a pre-determined period of time. GLOP's charter agreements have an average remaining contract life of 4.5 years and are all 100% fixed-fee. This structure protects GLOP from near-term commodity price risk or near-term fluctuations in the Global LNG market. The partnership also has a history of high utilization, with the vessels currently in the MLP expected to operate at 99.5% utilization.

While the contract length and fixed-fee are important and provide stable cash flows, counterparties are also important. As I mentioned above, the current fleet of three vessels are all contracted to BG Group, a global name in the energy sector. Out of the 12 dropdown candidates (including the two recently acquired), all 6 steam vessels are contracted with BG till 2020. Two of the TFDE are contracted with Shell ((NYSE:RDS.A),(NYSE:RDS.B)) through 2020, and the remaining four TFDE vessels, which will be delivered in 2016, are also contracted with BG Group past 2022.

In addition, GLOG has another 10 vessels that are currently in operation with contracts but they will be up for renewal within in the next 5 years. If GLOG can manage to get long-term contracts for these vessels, these ships would also be eligible for drop-down.

Industry Outlook

LNG shipping market is expected to face challenges in the near term, as the industry goes through a rebalancing phase. However, the long-term fundamentals remain strong. In fact according a recent report by the shipping consultancy, Drewry, in the long term the sector could face a vessels shortage as demand rises.

A combination of vessels delivered before the liquefaction projects came online, many liquefaction facilities experiencing unplanned shutdowns, and falling trade caused short-term freight rates for unconventional LNG carriers to decline through 2013 and the first half of 2014. The outlook for unchartered vessels is expected to remain unfavorable for the next 18 months at least. However, GLOP is not expected to be affected by these near-term challenges, as the partnership has already secured long-term contracts for its current fleet. In fact, the dropdown candidates have also secured long-term charters with blue-chip counterparties.

Despite of these near-term challenges, the long-term fundamentals remain strong. Drewry expects new projects in Australia and North America to boost demand later in the decade. Similarly in a recent report (published August 28, 2014), Barclays estimated Global LNG production to increase by 37% by 2020. The surge in production will be driven by liquefaction facility projects already under construction. The report further adds that a significant slate of 'planned' and 'proposed' projects could support an additional 76% LNG supply growth.

In comparison, the expansion in LNG carrier capacity is lagging and shipyard capacity is limited, indicating a market that will be short LNG vessels. Drewry cautioned in its report that the anticipated rise in cargo traffic may take ship-owners by surprise. Shantanu Bhushan, Lead Gas Shipping Analyst at Drewry said, "We expect that the LNG shipping industry will need many more vessels in the latter half of the decade than are currently on order."

Conclusion

GasLog Partners is a low-risk, high quality LNG shipping MLP with visible growth prospects. It provides an attractive opportunity to gain exposure to long-term favorable fundamentals of the growing LNG shipping market. While the unchartered vessels are expected to face challenges in the near term, all of GLOP's vessels have secured long-term contracts. Moreover, the long-term fundamentals for LNG shipping remain among the best in all of shipping end markets due to the liquefaction development pipeline and measured pace of expected fleet growth.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.