Compelling Valuation, High Distribution Yield: Consider Golar LNG Partners

| About: Golar LNG (GMLP)

Summary

Income-seeking investors should consider GMLP's stock. The partnership has a compelling valuation, it is generating strong cash flow, and the current distribution yield is very high at 16.33%.

A significant deficit of LNG carriers is expected in the next few years due to the big LNG production in Australia and the U.S., which have started in Q4'2015.

As such, this deficit of LNG carriers is expected to manifest itself in the form of substantially improved utilization and rates from 2017.

Considering its compelling valuation, GMLP's stock, in my opinion, is extremely undervalued. The trailing P/E is very low at 4.56, and the PEG ratio is extremely low at 0.54.

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Energy stocks have fallen sharply during the last 21 months, as a result of the crash in crude oil price. However, in some cases, the slump has been a considerable overreaction, which creates excellent opportunities to buy some stocks at attractive prices. One such stock is Golar LNG Partners Limited Partnership (NASDAQ:GMLP).

Golar LNG Partners is a growth-oriented limited partnership formed by Golar LNG Limited (NASDAQ:GLNG) to own and operate floating storage and regasification units (or FSRUs) and liquefied natural gas (LNG) carriers under long-term charters, which the partnership defines as charters of five years or more.

Golar LNG Partners overview

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Source: Golar LNG Partners Morgan Stanley Capital Link MLP March 2016

In my view, income-seeking investors should consider Golar LNG Partners stock. GMLP has a compelling valuation, it is generating strong cash flow, and the current distribution yield is very high at 16.33%. What's more, the coverage ratio in the last quarter was at 1.39.

A significant deficit of LNG carriers is expected in the next few years due to the big LNG production in Australia and the U.S., which have started in the last quarter of 2015. According to GMLP, based on current trading patterns/ton miles, the order book of approximately 130 vessels will be insufficient to carry all the LNG produced. These new vessels will be delivered over the next four years, approximately 60% in 2016 and 2017 and 40% in 2018-2020. As such, this deficit of LNG carriers is expected to manifest itself in the form of substantially improved utilization and rates from 2017.

On February 29, Golar LNG Partners reported preliminary fourth quarter and full year 2015 financial results.

Fourth Quarter Highlights

  • Golar LNG Partners LP reports net income attributable to unit holders of $57.2 million and operating income of $63.1 million for the fourth quarter of 2015.
  • Generated distributable cash flow of $52.9 million for the fourth quarter with a coverage ratio of 1.39.
  • Golar Igloo 2015 regas season extended to include December; fleet records 100% utilization for quarter.
  • Successfully refinanced outstanding vendor loan from Golar LNG Limited in relation to the Golar Eskimo.

Golar LNG Partners offered an outlook for the first quarter of 2016. According to the partnership, the Golar Maria is expected to commence its 5-year drydock on or near March 12 for an approximate 28-day period. Also, the Golar Igloo will not receive hire for its annual winter downtime period during January and February 2016. Both these events will have a negative impact on first quarter operating earnings, as will the impact of the first quarter being one day shorter, but otherwise, earnings for the quarter are expected to be approximately in line with the fourth quarter of 2015.

As at December 31, 2015, Golar Partners had a total revenue backlog of $2.4 billion and an average remaining contract term of 5.0 years. The acquisition of the Golar Tundra is expected to increase the revenue backlog to $2.62 billion. According to the partnership, it benefits from the fact that its highest earning assets have the longest contracts. All the partnership's vessels, except the Golar Grand, Golar Maria and Golar Mazo, representing 70% of the current fleet have contracts extending beyond 2017. These assets account for a disproportionate 81% of net revenue, and this percentage will increase with the acquisition of Golar Tundra.

As I see it, GMLP's stock is very attractive right now due to the generous dividend payment. The forward annual distribution yield is very high at 16.33%, and the annual rate of dividend growth over the past three years was very high at 43.1%. The partnership's distributable cash flow for the last quarter was $52.9 million as compared to $51.8 million in the third quarter, but the coverage ratio was 1.39 as compared to 1.34 for the third quarter as a result of the partnership's buy-back of 534,000 units.

GMLP Dividend Chart

GMLP Dividend data by YCharts

Since the beginning of the year, GMLP's stock is up 5.8% while the S&P 500 Index has increased 1.4%, and the Nasdaq Composite Index has lost 1.9%. However, since the beginning of 2012, GMLP's stock has lost 61.3%, in this period, the S&P 500 Index has increased 64.8%, and the Nasdaq Composite Index has risen 88.6%. Nevertheless, considering its compelling valuation, the drop in its price creates an excellent opportunity to buy the stock at an attractive price.

GMLP Daily Chart

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GMLP Weekly Chart

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Charts: TradeStation Group, Inc.

Valuation

Considering its compelling valuation, GMLP's stock, in my opinion, is extremely undervalued. The trailing P/E is very low at 4.56, and the forward P/E is also very low at 5.34. The Enterprise Value/EBITDA ratio is very low at 6.58, and the PEG ratio is extremely low at 0.54. The PEG ratio - price/earnings to growth ratio - is a widely used indicator of a stock's potential value. It is favored by many investors over the P/E ratio because it also accounts for growth. A lower PEG means that the stock is more undervalued.

In addition, most GMLP's Margins and Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.

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Source: Portfolio123

Ranking

According to Portfolio123's "All-Stars: Buffett" ranking system, GMLP's stock is ranked first among all 118 stocks trading on U.S. markets with a market cap greater than $200 million and yielding more than 10%. The "All-Stars: Buffett " ranking system is based on investing principles of the well-known investor Warren Buffett.

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The ranking system is quite complex, and it takes into account many factors like book value growth, operational P/E, price-to-book value, trailing P/E, price-to-tangible book value, price-to-cash flow and EPS stability, as shown in Portfolio123's chart below.

Back-testing over sixteen years has proved that this ranking system is very useful. The reader can find the back-testing results of this ranking system in this article.

Summary

In my view, income-seeking investors should consider Golar LNG Partners stock. GMLP has a compelling valuation, it is generating strong cash flow, and the current distribution yield is very high at 16.33%. What's more, the coverage ratio in the last quarter was at 1.39. A significant deficit of LNG carriers is expected in the next few years due to the big LNG production in Australia and the U.S., which have started in the last quarter of 2015.

As such, this deficit of LNG carriers is expected to manifest itself in the form of substantially improved utilization and rates from 2017. Considering its compelling valuation, GMLP's stock, in my opinion, is extremely undervalued. The trailing P/E is very low at 4.56, and the PEG ratio is extremely low at 0.54. In my opinion, the drop in its price creates an excellent opportunity to buy GMLP's stock at an attractive price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.