This discussion is not going to be long or complicated as we believe the arguments are very clear and easy to follow, as a good investment should be.
GasLog (GLOG) went public at the end of March 2012 and issued shares to the public at $14. GasLog owns two LNG carriers built in 2010 and has a 25% interest in an additional LNG carrier. In addition, GasLog has ordered 8 additional LNG carriers to be delivered between 2013-2015. GLOG has signed contracts with BG Group and Shell for six of the vessels and has two uncommitted vessels. The company has financing in place for its newly built program and it will finance the equity chunk with the proceeds of the IPO.
Since its IPO, shares of GLOG have dropped 31% (see graph) and they are now trading at 4% discount to book value. If we were to look at the assets of the company, they would include the 2 owned vessels, the 25% interest in an additional vessel (lets assume worth zero for our exercise) and cash to pay for the equity part of the ordered vessels. The current vessels are recorded as of March 2012 at $436 million, which is their depreciated cost and also what they are approximately worth.
GLOG's strategy is to secure long term charters for its vessels and this provides us with a good visibility for the future income. In terms of strategy and market, we believe Golar LNG Partners (GMLP) is a comparable company as both are pure long-term LNG players exposed to similar risks and rewards. For readers that are not familiar with GMLP, GMLP is a partnership that went public in 2011 and is managed by Golar LNG (GLNG), one of the largest players in the LNG space (and biggest risk takers). GMLP is structured similarly to an MLP.
As most of the GLOG vessels are not operational yet, the current cash flow of the company does not represent the future earning power. I believe it makes sense to analyze one vessel's economics and apply it to the rest of the fleet.
Based on GLOG's disclosure and our assumptions (discount rate of 20% for the terminal value and for G&A expenses), we have prepared the following calculation to reflect the yield an investor would receive if he would purchase one of the vessels at the current implied market value (4% discount to book equity):
Click to enlarge.
We have calculated the NAV of the project (the vessel) and discounted the available cash flow after tax. The outcome of this exercise implies 20% rate of return on the vessel at the current share price (this would also imply a sales price for a carrier of $170 million which is fair for a 4 year old carrier). This calculation is similar for the other seven ordered vessels-adjusted for timing issues. Repeating the same calculation with the IPO price ($14) would suggest a return of 10%.
When repeating the same exercise for GMLP (we will look at the whole company as GMLP's vessels are not generic) we can see that the market is pricing GMLP at a negative discount rate which means GMLP is not really a good investment at the current price (we have used the Q1 2012 figures and annualized them. Going forward we added an increase in revenues of 2.5% p.a. to reflect inflation).
As investors probably would not accept a negative return, they probably assume a different terminal discount rate. In order to justify a 5.9% distribution rate, the terminal value would have to be 11% (we do this through "goal seek"). provides evidence how ridicules the comparable valuation of both companies is as GMLP's vessels will be 20 years older than GLOG's vessels and yet the market provides them with a huge premium (as indicated in the difference in discount rate and terminal discount rate).
Where are the differences between the companies?
GMLP is buying vessels from its parent, so there might have a conflict of interests as GLNG will try to sell to its subsidiary vessels at the highest possible price. GLNG is acting as a sourcer of vessels and sells them at a mark-up to its subsidiary GMLP. Future acquisitions, or "drop-downs", will probably be at prices higher than their acquisition costs to GLNG. We don't accept the argument of growth throw drop-downs as we believe they are at premium prices over the market values and don't provide long term value.
GLOG is buying vessels for itself, at market price, allowing any upside to remain with its shareholders.
2. Participation in distribution:
GLNG is the general partner of GMLP and as such is entitled to "success fee" if the distribution to shareholders is above a certain amount. GLOG has no similar arrangement. The controlling shareholders will receive dividends pro-rata to their shareholding.
3. Vessel type:
GMLP owns two LNG carriers and three converted FSRU's. Finding a new employment for FSRU's is more difficult than for a generic carrier, implying a higher risk for GMLP. In addition, recent FSRU projects have been awarded to newly built FSRU's over conversions, increasing the terminal risk of investors when the charter ends. GLOG has generic carriers which are easy to redeploy.
4. Age of fleet:
GLOG has a brand new fleet. GMLP discloses an average age of 18, while there has been work done during the conversion process to renew the FSRU vessels.
GMLP's distributions are not taxable (further discussion whether these distributions are dividends or capital repayments can be found in Pandora's piece - link to follow). The tax will be paid when the unit is sold. GLOG's dividends will be taxed as any other dividend.
We believe the case for GLOG is very clear:
1. Traded at discount to book value (which represents vessels and cash to be used for payment for vessels)
2. No premium to reflect the profitable charters signed. Current share price reflects a return on investment of at least 20% p.a.
3. No premium to the fact that financing for the vessels is also in place and most of the risk is basically gone.
4. No conflict of interest with management. No related party transactions.
As we like to pair our trades to avoid market and sector risk, we hedged our position with a short position in GMLP. Other then serving as a hedge for the industry, we believe GMLP is overvalued. A detailed analysis done by Pandora's Box Research (which we believe provide a few good points) can be found here. In addition, from our little short exercise it is very clear GMLP is overvalued.
To finalize, we believe GLOG is worth at least $14 a share, a value at which the company would be generating a 10% return on investment, providing more than 40% upside to current share price. We believe GMLP is worth about $17 based on the same discount rates used for GLOG.
We don't have anything against Fredriksen. We just feel some of the companies he controls are overvalued and make a good short investment. At some price, they might also be an attractive investment.