IPO Preview: GasLog

Mar.29.12 | About: GasLog (GLOG)

Based in Bermuda with executive offices in Monanco, GasLog Ltd. (NYSE:GLOG) has scheduled a $400 million IPO with a market capitalization of $1.071 billion at a price range mid-point of $17 for Friday, March 30, 2012. Managers: Goldman, Sachs (NYSE:GS); Citigroup (NYSE:C); J.P. Morgan (NYSE:JPM); UBS (NYSE:UBS).

GLOG is one of nine new IPOs scheduled for the week of March 26.

This GLOG article is based on the company's F-1 filing which can be found here,in addition to separate, independent analysis of the LNG shipping industry by IPOdesktop.com.

GLOG is growth-oriented international owner, operator and manager of liquefied natural gas ("LNG") carriers providing support to international energy companies as part of their LNG logistics chain.

GLOG's owned fleet consists of 10 wholly owned LNG carriers, including two ships delivered to in 2010 and eight LNG carriers to be constructed by the world's leading LNG shipbuilder, Samsung Heavy Industries.

Based on increasing staffing preparing for ship arrivals in 2012, GLOG expects that 2012 profit will be significantly lower than the $13.72 million recorded in 2011,

No payout until 4th quarter 2012 and then the annualized payout rate will be only 2.6%.

GLOG will be a high quality liquefied natural gas ((NYSEMKT:LNG)) carrier, albeit with very heavy customer concentration. However, with income projected to decline in 2012 and with dividend payouts not beginning until the December 2012 quarter, there appears to be no need to rush in and buy GLOG stock on the IPO.

Competition includes the major owners of LNG carriers include MISC Group, Qatar Gas, NYK, MOL, Teekay Tankers (NYSE:TNK) and Golar LNG Partners LP (NASDAQ:GMLP). Golar LNG Partners was formed by Golar LNG (NASDAQ:GLNG) Limited (Golar) to own and operate floating storage and regasification units and liquefied natural gas carriers under long-term charters.

GLOG is growth-oriented international owner, operator and manager of liquefied natural gas ("LNG") carriers providing support to international energy companies as part of their LNG logistics chain.

GLOG's owned fleet consists of 10 wholly owned LNG carriers, including two ships delivered to in 2010 and eight LNG carriers to be constructed by the world's leading LNG shipbuilder, Samsung Heavy Industries.

GLOG currently manages and operate 14 LNG carriers, which includes 2 owned ships, as well as 11 ships owned or leased by BG Group, a leading participant in the Global energy and natural gas markets, and one additional LNG carrier in which GLOG has a 25% interest.

All of GLOG's ten owned ships are, or when delivered will be, newly-built LNG carriers equipped with the latest tri-fuel diesel electric propulsion technology, which lowers the fuel cost to charterers and environmental emissions compared to traditional steam-powered LNG carriers.

GLOG has secured multi-year time charter contracts for the two ships delivered to in 2010 and six of the newbuilding ships on order that from December 31, 2011 provide total contracted revenue in excess of $1.2 billion during their initial terms, which expire between 2015 and 2021.

GLOG expects to expand staffing levels significantly in 2012 as it prepares for the delivery of additional vessels in 2013 and incur increased general and administrative expenses associated with being a public company.

At the same time, since none of GLOG's newbuildings will be delivered before 2013, GLOG expects revenue for 2012 to increase only modestly in 2012 over 2011.

Accordingly, GLOG expects that for 2012 profit will be significantly lower than the $13.72 million recorded in 2011, while on a percentage basis the decline in Adjusted EBITDA is expected to be substantially less.

GLOG estimates the useful lives of its new ships to be 35 years from the date of delivery from the shipyard. Furthermore, GLOG estimates the residual values of the ships to be 10% of the initial ship cost, which represents an estimate of the market value of the ship at the end of its useful life.

With the Global demand for natural gas increasing and LNG's share of the international natural gas trade expanding within the sector, GLOG believes the following attributes of the LNG industry create opportunities for GLOG to successfully execute its business plan and expand its business:

Natural gas and LNG are strong and growing components of Global energy sources. Natural gas accounted for 24% of the world's energy consumption in 2010, and over the last two decades has been one of the world's fastest growing energy sources, growing at twice the rate of oil consumption over the same period.

GLOG believes LNG, which accounted for 31% of overall cross-border trade of natural gas in 2010, will continue to increase its share in the mid-term future. Because of the cost and environmental advantages of natural gas relative to other energy sources, together with the increased availability of natural gas, GLOG believes that demand for natural gas and LNG in particular will continue to grow in the future.

The demand for LNG shipping is experiencing significant growth. Disparities in the location of natural gas reserves and the nations that consume natural gas have resulted in a rise in the percentage of natural gas traded between countries as well as an increase in the portion that is being transported in the form of LNG. This is being driven by the growing distances between natural gas sources and its users, the greater flexibility and generally lower capital costs of shipping natural gas in the form of LNG, as well as the reduced environmental impact, as compared to transportation by pipeline. Additionally, price disparity between markets is becoming a feature of the LNG trade market, with a significant difference in terms of the prices that Far Eastern and American buyers are willing to pay for LNG, creating arbitrage opportunities for LNG producers and traders.

Planned capacity increases in liquefaction and regasification terminals are anticipated to increase export capacity significantly, requiring additional LNG carriers to support trade activity.

Based on the current project pipeline of liquefaction projects that are planned or under construction, liquefaction capacity is expected to increase by 38% by 2016, requiring an additional 100 LNG carriers, compared to a Global order book of 58 ships.

A limited newbuilding order book and high barriers to entry should restrict the supply of new LNG carriers. The order book of LNG carriers represents only 17% of current LNG carrier fleet capacity as of December 31, 2011, with only modest increases expected in 2012, 2013 and 2014, respectively.

GLOG also believes that significant barriers to entry exist in the LNG shipping sector, given the large capital requirements, the limited availability of financing, the limited availability of qualified ship personnel and the need for a high degree of technical management capabilities.

The industry is also known to have a demanding customer base that requires the highest quality operating standards. Finally, we believe the limited construction capacity at high-quality shipyards and the long lead-time required for the construction of LNG carriers should also restrict the supply of new LNG carriers in the near-term.

Stringent customer certification standards favor experienced, high-quality operators. Energy companies have established increasingly high operational, safety and financial standards that independent owners of LNG carriers generally must meet in order to qualify for employment in their programs.

Because GLOG has managed LNG carriers for BG Group for over 10 years and GLOG's technical management operations have also been vetted by four other major energy companies, GLOG believes that these rigorous and comprehensive certification standards will enhance GLOG's ability to compete for new customers and charters relative to less qualified and less experienced ship operators.

Increasing ownership of the Global LNG carrier fleet by independent owners.
Independent owners have increased their share of the Global LNG carrier fleet from approximately 25.8% in 2001, to 31.2% as of January 2012. Orders by independent owners represent 72.4% of the current Global order book.

GLOG believes private and state-owned energy companies will continue to seek high-quality independent owners for their growing LNG shipping requirements in the future, driven in part by large capital requirements and a recognition that LNG ship-owning and operation are outside of their core areas of expertise.

Strong preference for modern ships equipped with the latest tri-fuel diesel electric technology.
Today 71% of the Global LNG carrier fleet is equipped with steam turbine propulsion, while approximately 90% of the LNG carriers currently on order will have diesel electric propulsion.

GLOG believes that most charterers prefer the newer diesel electric propulsion technology because it offers significantly lower fuel consumption and emissions as compared with steam-powered ships.

Based on average prices for heavy fuel oil in Singapore during 2011, tri-fuel diesel electric propulsion offers estimated savings of over 30%, or approximately $33,040 to $41,300 per day, for a ship operating on fuel oil at a speed of 19.5 knots in laden condition, compared to conventional steam turbine propulsion.

Because all of the LNG carriers in its owned fleet are modern ships with tri-fuel diesel electric propulsion, GLOG believes it is well positioned to benefit from this trend.

GLOG has secured multi-year time charter contracts with BG Group and Shell for eight of the ten ships in its owned fleet, including six newbuilding ships on order. By contracting with companies that GLOG believes are financially strong such as BG Group (OTCQX:BRGYY) and Shell (NYSE:RDS.A), the company believes it has minimized counterparty risk.

The total contract price for GLOG's eight newbuilding ships on order is approximately $1.55 billion, of which $124.4 million has been paid to date. GLOG has entered into four loan agreements aggregating $1.13 billion to finance a portion of the contract prices of its eight newbuildings.

Borrowings under these facilities will bear interest at floating rates, will be repayable over periods ranging from six to 12 years, will require GLOG to comply with certain financial and operating covenants and will be secured by mortgages on the ships.

GLOG expects to fund the balance of the total contract price with the proceeds of this offering. In the event that the company decides to exercise its options to order two additional ships from Samsung, GLOG expects to finance the costs with cash from operations and a combination of debt and equity financing.

Upon delivery of the last of GLOG's eight contracted newbuildings in 2015, GLOG's owned fleet will have an average age of 1.9 years, making it one of the youngest in the industry.

GLOG currently focuses on multi-year time charters. Current time charters have initial terms of up to seven years and include options that permit the charterers to extend the terms for successive multi-year periods under hire rate provisions that are comparable to those prevailing at the end of the expiring term.

Following this offering, GLOG intends to pay a quarterly dividend of $0.11 per share commencing in the fourth quarter of 2012. As GLOG's fleet expands, GLOG will evaluate future increases to the quarterly dividend consistent with its cash flow and liquidity position.

The annualized payout rate as of the 4th quarter is 2.6% annual rate at the price range mid-point of $17

Concurrent with the public offering of common shares, GLOG is also selling approximately $3.7 million of its common shares through a private placement to certain directors and officers, at the public offering price.

GLOG expects that proceeds from this offering and the concurrent private placement will be $374 million.

GLOG intends to allocate the IPO proceeds together with its $1.13 billion of committed debt financing, to fund the remaining scheduled installment payments totaling $1.42 billion under eight new LNG carrier construction contracts.

The balance, if any, is allocated to other general corporate purposes.

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

Additional disclosure: GasLog (GLOG) expects to price Thursday for Friday trading.