Top Idea For 2016: Golar LNG Partners

Summary

• I am submitting Golar LNG Partners (GMLP) as my ‘Top-Idea for 2016’ for participation in Seeking Alpha’s latest contest.
• GMLP has plunged by more than 75% YTD, while the underlying contracts have not changed, mostly as a result of the sector collapse and fears of distribution cuts.
• The following report consists of three parts: an overview of the MLP space, background and current examination of GMLP itself, and scenario discussion with overview of significant risk factors.
• Based on a strong conservative cash flow analysis, the blended worst-case scenario results in discounted present value of $5.80/unit, and the baseline scenario results in present value of $10.12/unit.
• My personal price target is $17.50, which I believe is attainable (including distributions) by the end of 2016 based on market stabilization.

Overview

I am submitting Golar LNG Partners (NASDAQ:NASDAQ:GMLP) as my 'Top-Idea for 2016' for participation in Seeking Alpha's latest contest. Seeking Alpha is looking for compelling opportunities to exploit market mispricing and will reward both the thesis itself and also the full-year performance (both peak and total). Although there are a few other ideas that might offer higher total returns, when adjusting for downside risks, GMLP is far and away my favorite idea for 2016.

The following report will consist of three parts, each of which can be read separately, but will come together to make the case for an investment in GMLP. First, this report contains an overview of the MLP space, from boom to the current bust, and how the shipping sector has played into these events via massive LP issuances. Second, the report will cover the background and current make-up of GMLP itself including vessel valuation estimates and an examination of current cash flow. Third, we will examine the potential for various outcomes and discuss significant risk factors, both company-specific and industry-wide.

About Golar LNG Partners

Golar LNG Partners LP is a limited partnership managed by publicly-traded general partner Golar LNG Ltd (NASDAQ:GLNG). GMLP is involved in two primary businesses- LNG transportation (4 vessels, 2000-2006 built, 100% on contract through the end of 2017), and floating storage and regasification ("FSRU" 6 units, all with significant contracts, 2018-2025). GMLP was originally structured to serve as an additional funding vehicle for parent GLNG via dropdown vessels with long-term contracts.

GLNG owns 30.4% of the total outstanding units, and also owns incentive distribution rights (IDRs) which currently entitle them to 50% of all distribution boosts beyond the current rate. These incentives are designed to align GLNG with GMLP unitholders in a pursuit of increasing distributions per share. Golar Partners currently has 62.87M units outstanding for a current market capitalization of approximately $503M. GMLP has $1.39B in net debt, for a total enterprise valuation of $1.89B. The current yield is 28.9% based on the present ~$8.00 pricing.

Part 1: Review of the MLP Cycle & the Role of Shipping LPs

Root Cause of the Surge: Response to ZIRP

High-yielding ("junk") securities have always existed on the stock market in some form, typically in niche sectors such as oil tankers, specialty REITs, and more recently: pipelines. These firms have always offered a higher yield, with the understanding that growth prospects would be fairly limited and underlying risk could be substantial if the economy, or a specific market niche, fell apart.

Following the "Great Recession" of 2008, the Federal Reserve instilled an effective 'Zero Interest Rate Policy' ("ZIRP") in efforts to increase general investment and capital spending. ZIRP was meant to stimulate the flow of money by making borrowing extremely cheap. Rates were further lowered through three iterations of 'Quantitative Easing' ("QE"). While it's impossible to know the Fed's initial plans, I firmly believe that nobody intended for ZIRP to last for a total of 7 years. While ZIRP effectively lowered interest rates to the floor and spurred changes in capital structures, including repurchases, which led to a roaring bull effect in the stock markets, the 'average person' didn't see their paycheck change by much and traditional conservative income options like savings accounts, CDs, Treasury bonds, and even investment-grade corporate bonds withered away. Income investors had no traditionally 'legitimate' avenues from which to receive anything beyond miniscule returns.

The Investment Boom: Higher Yields Promised with (Perceived) Minimal Risk

The stock market has always offered an avenue for investors to chase higher gains, but many of the more conservative investors were averse to throwing their money at more speculative equity vehicles like technology, retail, or biotech. These 'investors' wanted to find a source of reasonable yield from tangible products. These investors wanted income from something they felt comfortable with.

Enter the boom of oil and gas production MLPs, pipeline MLPs, and shipping LPs. From 2010 through 2014, over 100 of these firms went public or issued massive follow-on offerings, raising aggregate proceeds of more than $300B. The below report from Yorkville Capital tracks the MLP sector. Note that most shipping companies are LPs and are not technically listed in this category.

Note: The primary difference is taxation, generally speaking MLPs are pass-through entities that pay no federal income tax and report with a K-1. LPs often pay income tax and report with a standard 1099. Since most shipping firms own international assets, are located overseas, and pay very little total taxes, the majority of firms are structured as an LP and issue a 1099.

The Crash: Oil Markets Bring Reality to the Business Model

Starting in late 2014, the underlying market, in this case mostly oil production and transportation, began falling apart. MLPs promised some level of income even in bad markets because most claimed fixed contracts or utilized heavy hedging. The problem was nobody was planning for oil below $70, let alone below $50. Many of these fixed contracts involved a %-toll versus a flat price. Additional 'fixed' contracts contained many loopholes, or lacked insurance in case of counterparty defaults. Producers hedged their supplies, but these hedges began to expire en masse after just 6-12 months of poor markets.

Suddenly covered income plummeted and a few banks came back and demanded additional capital. Kinder Morgan (NYSE:KMI) has been the largest poster child for pipelines gone wrong. KMI is down 48% to-date (including dividends) or 50% in the past two months. Ironically, Kinder Morgan is actually one of the most conservatively structured players in this market. Mid-Con Energy Partners (NASDAQ:MCEP) is an even better example of complete business model failure. Witness the complete collapse below as MCEP went from paying $2.06/year in distributions to trading towards $1 in just over 1 year.

MCEP had a good business model… when oil was $100/barrel. There are dozens of others, but I wanted to paint a spectrum, with MCEP on one side and KMI towards the other. This is a spectrum of high-risk vehicles with direct exposure to the US oil markets.

The Role of Shipping LPs

Shipping LPs have always been a bit of a copycat or "pretender" in the MLP space. As referenced above, nearly all of these firms aren't actually MLPs, but are standard corporations with partnership governance (typically ran by a general partner ("GP") and unitholders have minimal rights) and hyper-yield designs (shipping LPs tend to pay out nearly 100% of 'cash available for distribution,' which is a murky metric itself). Shipping LPs offered parent corporations the chance to divest long-term assets for quick capital and to establish a feeder vehicle to promote enterprise-wide growth. Shipping LPs offered investors a chance to receive enormous yields, with virtually zero taxation. The investment promise was high yield with strong growth potential. Investors could participate in rate upside via new dropdown assets and contract extensions, while they were sheltered from downside via the nature of their long-term contracts. Sounds too good to be true right?

Shipping LP Cycle

These LPs were established with sponsorship from a GP, often from a related firm. For example, GMLP was sponsored by GLNG. The GP would 'align' themselves with unitholders through a substantial stake in the common units and they would receive additional bonuses for successfully growing distributions. Here is a typical Incentive Distribution Right structure ("IDR"), taken directly from GMLP filings.

The minimum quarterly distribution was the level at which distributions must be maintained or the GP's units (typically classified as 'subordinated units') would receive $0 in distribution. The majority of firms included a 2-5 year conversion period, in which the subordinated units would transition into common units, so the 'floor' was only firm for initial investors.

Perverse Incentive: Exacerbating the Oversupply

Although technically the IDR and subordinated/common unit structure aligned the GP and the common investors in terms of growing per-unit cash flow, the structure led to a perverse incentive to pursue growth, even at the sake of the long-term stability of the company. For example, if GMLP paid out 44 cents per quarter for a decade, GLNG only received the baseline of 2%. Whereas if GMLP paid out $1 per quarter for 4 years, GLNG would receive a total weighted bonus of nearly 25% of the total.

With multiple asset opportunities offering 10% annual yields, shipping companies were able to juice the return by slapping on 50% debt at a ZIRP-inspired rates of 5-8%, leading to equity returns of 14% with a 6% cost of debt (14% @ 50% + 6% @ 50% = 10% total returns). As long as the MLPs traded in the market at a reasonable yield of say 5-9%, per-unit growth only required extremely simple financial engineering… AND cooperating shipping markets.

This additional investor capital, spurred on by worldwide flows of cheap credit, and state-backed shipyards willing to operate at losses, allowed the global ship market to explode. This explosion was mostly absorbed by the massive growth exhibited by China and India, but this growth notably halted in 2015. As specific sectors started to crash (such as dry bulk in 2010-2011), emphasis was shifted to 'healthier' sectors such as containers, LNG, and offshore. Offshore and LNG were the biggest boom sectors, and of course they were heavily impacted when oil began to crash.

Rapid Collapse

In early-mid 2015, we had multiple high-yield industries, primarily offshore 'shipping' and onshore energy MLPs facing complete business model decimation. Reading through Seeking Alpha, you can find dozens of cases of strong denial. The stock prices of many of these firms held up through mid-2015 as oil staged a mild recovery, but finally in November, the market cracked.

Oil plummeted past $50, then below $40, as OPEC again refused to cut. Despite fears in the Middle East, global supply has remained intact. In the past 1-2 months, dozens of high-yield stocks have lost 50-90% of their trading value (GMLP is down 75% YTD). However, not all firms are created equal. History is fascinating, but all that really matters to deep value investors such as ourselves is "how can we profit now?"

Part 2: Overview of GMLP Structure and History

Market History

Golar LNG Partners achieved an initial public offering in April 2011, selling 13.8M units at a price of $22.50. In July 2012, GMLP sold 6.3M units at $30.95. In November 2012, GMLP sold another 5.8M units at $30.50, both in a public offering (4.3M units) and also privately to GLNG (1.5M units). 4.3M units sold for $29.74 in February 2013, and 5.1M units sold for $29.10 In December 2013 (GLNG sold 3.4M of its units in a secondary). In January 2015, GLNG made a very well-timed secondary sale of 7.2M units of GMLP for $29.90.

Note: GMLP raised $215M, or nearly 50% of its current market cap, in cash, under a year ago.

Since IPO, GMLP has paid out a total of $8.42 in distributions in 4 years. The current payout (57.75c/qtr) represents an annual yield of 29%, and this payout is fully covered through at least the end of 2017. It looks like there are minimal pipelines for internal cash flow expansion, especially since the equity is not trading attractively, but management has recently alluded that one additional dropdown, the Golar Tundra, can be achieved with zero equity dilution.

Management Strength- Related Party Concerns?

As with most shipping firms, related party transactions and the capacity for abuse are a significant risk factor. GMLP's structure is thoroughly discussed in the annual filings (Annual report: 20-F pg. 99-106). I believe the management and technical fees are in line with industry standards for management.

GLNG was built with heavy support and financing from John Fredriksen and Tor Troim, two of the most successful shipping tycoons in the world. Fredriksen recently split from GLNG last fall (ironically to focus on Seadrill (NYSE:SDRL), which has fared far worse), but Troim is in full control and is an exceptional manager.

Fleet Analysis

GMLP owns 3.6 LNG transportation vessels (60% of Golar Mazo) and 6 FSRU vessels.

The most recent VesselsValue.com report is only valid for the 4 LNG vessels, as they do not provide valuations on FSRU (or oil rigs/ships/platforms). FSRU is a very niche market, as of April 2015, there were only 16 currently active FSRUs. Brazil, Jordan, Kuwait, and Egypt are some of the biggest candidates for new projects - with Brazil offering the most recent tender offer. I discuss the FSRU prospects in further depth below, but it's difficult to get an accurate read on the fair-market value of these vessels. My best guess is approximated under the assumptions of- $300M brand new worth, 25-year life, $10M ending 'hull value.' For the conversions - $250M post conversion, 25-year life, $10M ending 'hull value.'

Based on the adjusted age of the FSRU vessels- I have a total value estimate of $1.37B based on my valuation "best guess." ($274-Igloo, $274-Eskimo, $208-Nusantara, $190-Freeze, $172-Winter, $163- Spirit). Adding back the $384M net from the four LNG vessels results in a full fleet valuation of approximately $1.67B. The VesselsValue.com report is shown below, but only shows the 4 LNG transport vessels (and doesn't adjust for the 60% Mazo stake).

Note: These valuations are for charter-free assets. GMLP has extensive charter backlog which adds additional value in terms of discounted cash flow. These values are more important for balance sheet analysis and for examining the solvency risk in case of a counter-party default.

Balance Sheet

As of the Q3-15 results, GMLP carried net debt of $1.39B. Based on the previously covered vessel valuations ($1.67B), this translates to a charter-free debt-to-assets ratio (D/A) of 83%. This debt level seems very high, but the FSRU cash flows are long-term in nature, and I believe I took a very conservative tack on my vessel valuation estimates. The debt levels do not concern me, but I see extremely limited expansion capacity without unit issuance, which would be disastrous in the current market conditions. Again: Note that management claims the Tundra can be dropped down without additional equity. Likely through a related-party financing agreement with GLNG.

The biggest concern on the debt front is the significant balances due in 2017 and 2018, right as several LNG vessels go off-charter. GMLP currently has $230M of cash on the balance sheet (note: a significant portion - $168M is restricted), so the 2015 and 2016 maturities should be less of a factor, especially in light of recent refinancing. GMLP issued $150M in bonds in May 2015 (6.275% net cost), and refinanced a $180M credit facility in June.

Contracted Cash Flow

GMLP has fairly impressive charter coverage, with 100% coverage through October 2017, with several vessels pushing into the 2020s. The biggest current exposure risk is via Petrobras, currently involved in a multitude of scandals. Transocean (NYSE:RIG) has recently come under fire, and so has Seadrill, could GMLP be next? Although Petrobras is a risky counter-party right now, the GMLP contracts were secured over seven years ago, and are profitable operations, so I believe they are secure.

Note: SDRL and RIG contracts with Petrobras are extremely unprofitable in this oil environment, so motivations to prove fraud and nullify contracts are naturally much higher.

The slide below from the Q3-15 investor presentation highlights the full contract coverage.

GMLP's top two dropdown contracts are the Golar Tundra in early 2016 and potentially the Hilli in 2017. The slide below shows the current drop down candidates.

Although it would seem GMLP is unable to fund further dropdowns, especially considering the plummet in equity pricing, management was extremely bullish on the Q3-15 call, just 2 weeks ago.

Industry-leading news source TradeWinds has recently reported on a firm fixture for the Golar Tundra, with a five-year import contract in Ghana. With the contract set and management claiming the equity balance is acceptable, GMLP is likely to take delivery by mid-2016.

Payout Scenarios and IDRs

GLNG, as the "general partner" (manager), is paid based on its ability to grow the per-unit distribution. This structure is designed to attempt to align interests between partner unitholders and the managers, but it can lead to higher payouts than are best for long-term stability. As discussed, one of the first things I look at is the positioning on the IDR payout, and GMLP's is shown below (taken from the 2014 20-F, page 109).

In this situation, GLNG has done a great job of managing the firm thus far in terms of distribution growth, and it has notably limited the dilution, with the majority of pricing around $30/unit.

Based on the current chart, GLNG is eligible for 50% of the marginal additional cash flow (2% GP + 48% IDR). The per-unit metrics keep shareholder interests mostly aligned, but if GLNG is looking for liquidity, they might try to pull some short-term levers at GMLP for a temporary boost is distributions. Golar is one of the best actors in the business- with a public track record dating back to the early 2000s, so I doubt any reckless short-sighted decisions will be made.

I expect payouts to continue as covered, but I don't see much room for expansion as any upside from the Tundra will be balanced out by additional debt servicing requirements and LNG expirations at the end of 2017. In balance, I believe payout coverage is firm through 2017, and likely until at least the end of 2018. Note: There is a difference between payout coverage and actual distributions. Many firms have decided to cut their distributions to shore up the balance sheet.

Market Dynamics

There are two major markets to discuss with GMLP - the overall LNG transportation market and the niche FSRU segment.

LNG Transportation Market

The summary market slide from GMLP's Q2-15 presentation is shown below (highlights and ink added). The first bullet is dubious as LNG economics are rapidly dwindling, note the flip-flop on the recent Alaska LNG project. Second bullet is true - it generally takes over 2-3 years to build these vessels. Third bullet is naively bullish and is only true if the market plays out perfectly.

The basic holes in the bullish LNG transportation thesis:

1. These figures are based on a fixed August 2015 order book. With vessel construction typically taking around 2.5-3 years, there are still at least 2 more years until the 2019-2020 fleet potential is realized.
2. The demand assumes 100% utilization, similar market dynamics, and zero considerable construction delays. The demand figures assume 100% of rated output from all global LNG facilities, zero cancellations of major projects, and 100% on-time construction results. As evident from Chevron's (NYSE:CVX) Gorgon debacle alone, LNG export facilities are extremely complicated and expensive. Note that GLOP shows Gorgon as pushing LNG in 2015, further highlighting their bullish demand forecast.
3. The international LNG market for 2020 might be considerably different (weaker) than today's balance, especially if huge natural gas discoveries occur in Asia or if Russia continues to expand its pipeline partnership with China.

In a related note of poor oil economics, Shell has cancelled offshore exploration in Alaska, just a recent casualty of the horrendous pricing environment- more of a negative factor for drilling firms than LNG firms, but worth noting that supply/demand forecasts are poor across the board. Recent reports discuss that the upcoming glut in LNG is poised to be even worse than the current glut in oil. Although this seems like a bullish note for transports, similar to how crude tanker rates have surged, note that the majority of projected demand is still in development stage and could easily be downsized or cancelled if market prospects continue to dwindle.

FSRU Market - Niche, but with Strong Economics

The FSRU market is quite different than LNG transportation in the sense that cheaper LNG prices have the opposite effect on development of demand. In LNG transportation, cheaper prices act as a bearish drag on LNG facility development and utilization, which drags down output and could rapidly lead to a glut in vessels and basement rates. With FSRU, cheaper LNG from market oversupply leads to more countries enthusiastic about the prospects of importing LNG for energy usage. The cheaper LNG trades, the better the economics for FSRUs.

The relevant slide from the GMLP Q3-15 presentation is shown below. The economics seem to add up, and as discussed below, I believe there are potential tailwinds from the eventual legislative results of the recent "Paris talks." The danger of course is a corresponding supply glut from newbuild FSRUs and a rush to convert unprofitable LNG carriers. Hoegh LNG as the 'major offender' here, with two 2018 FSRUs on the table, leading to 3-4 in supply added from Hoegh alone (3 firm delivering Q2-16, Q1-17, Q1-18 respectively, 1 additional 2018 option).

The biggest risk factor for conversion-supply is that some of the "rust-bucket" LNG vessels present good hull candidates for FSRU conversions. GLNG themselves are currently converting two vessels, with an option on a 3rd, all build in the mid-1970s. TradeWinds reports that GLNG is reportedly looking into a 4^th conversion slot with a Q1-19 delivery, most likely for the Golar Mazo (40% owned by GMLP). These two firms alone account for a supply boost of up to 9 vessels by the end of 2018 to Q1-19, so I'm skeptical of the "supply bottleneck" thesis. Then again, with some 30 candidate locations for FSRU, 8-9 new vessels by the end of 2018 might be no issue. These vessels take a minimum of 2.5 years to build or convert and are extremely niche, which helps prevent rapid ship dumping.

The biggest long-term risk factors are that LNG prices will skyrocket and FSRU will not be economically attractive. This is offset by the fact that a rise in LNG prices will ensure export facilities are developed, in which case the LNG transportation business will be heavily profitable.

If the FSRU market fizzles, when contracts expire, the majority of FSRU vessels will essentially be worthless (beyond scrap steel), similar to what's happening with ultra-deepwater vessels and platforms today. Another concern is that major natural gas discoveries inside or near several of these import candidates could yield additional FSRU deployment unnecessary.

Tailwinds from Climate Initiatives?

With the World Climate Summit in Paris recently concluded, I'm expecting to see some major public policy endorsement for nuclear power and LNG as 'bridge fuels' to aid the transitioned towards a lower carbon output. Environmentalists obviously want to see a heavy shift to "renewables" like solar, wind, and geothermal, but the basic economics behind a near-term immediate shift are horrendous.

The only way to meaningfully and realistically drop net CO2 emissions in the near-term is to invest heavily in nuclear energy and natural gas.

Part 3: Review of Potential Outcomes, Risk Factors, and Price Targets

GMLP units currently trade at $8 and offer a current distribution of $0.5775/qtr. During Q3-15, the distribution coverage was 1.34x, which technically means that GMLP could have distributed around $0.75 per share. With the Golar Tundra dropdown set for 1H-16, near-term distribution coverage will actually increase through the end of 2017. Although a distribution increase is unlikely considering the current market conditions, it is entirely feasible based on the near-medium financial results. Note: since inception in 2H-11, GMLP has never gone more than 3 quarters without a distribution increase.

Bear Case Scenario

The bear case scenario assumes the Tundra will not be dropped down, and distributions will be cut in half, including for Q4-15. At the end of 2017, distributions will drop to $0 and the balance sheet will continued to be addressed. Note: GMLP loses 2.6 LNG vessels at the start of 2018 and one FSRU in mid-2018.

The bear case assumes a terminal valuation based on core asset values, of approximately $260M for the 2.6 LNG carriers, and $1.3B for the 7 pro forma FSRU vessels. These values are attained from the aforementioned vessel valuation scheme discussed earlier in this report. Depreciation is set at $6M/yr for LNG carriers, nearly 50% higher than the current curve. Additionally, I cut vessel values by another 25% to adjust for a worsening market. The fixed contract charters will be valued at $0 (despite 5 vessels with approximately $1B in remaining, highly profitable, backlog). The contracts will be heavily penalized to compensate for the fact that GMLP's best approach would be to sell the existing fleet and focus on the ships with contracts, which would further hurt profitability (higher burden of overhead).

I expect operating cash flow of close to $55M for Q4-15 through Q4-17, then dropping to $30M on a blended average through 2018. $18M will go towards distributions for the first nine quarters, followed by $0 for the next four quarters, leading to a net debt decrease of $453M. This results in a pro forma net debt position of $937M versus $1.17B in asset valuations (LNG @ 75% + FSRU @ 75% + $0 contracts). With 62.87 units outstanding, this provides a terminal bear case valuation of $3.71 ($233/62.87).

Based on a discount rate of 10%, blended for distributions (paid after end of quarter), the returns are as follows:

Downside in Bear Case: 28% at $8.00 per unit.

Baseline Case Scenario

The baseline case scenario assumes the Tundra will be dropped down, and distributions will be held steady through the end of 2017, then halved during 2018, and at the end of 2018, distributions will drop to $0 and the balance sheet will be directly addressed. Note: GMLP loses 2.6 LNG vessels at the start of 2018 and one FSRU in mid-2018.

The base case assumes a terminal valuation based on core asset values of approximately $260M for the 2.6 LNG carriers, and $1.3B for the 7 pro forma FSRU vessels. These values are attained from the aforementioned vessel valuation scheme discussed earlier in this report. Depreciation is set at $6M/yr for LNG carriers, which is an accelerated rate compared to aging curves. The fixed contract charters will be valued at only $300M (despite 6 vessels with over $1B in remaining, highly profitable, backlog). Based on the recent Golar Eskimo contract, and assuming a net purchase price of $380M for the Golar Tundra, net debt will start at $1.77B, and 100% of non-distributed cash flow will go towards deleveraging.

I expect operating cash flow of close to $55M in Q4-15 and Q1-16, expanding to $63M on average through Q4-17, then dropping to $40M on a blended average through 2018. $36M will go towards distributions, and eventually $18M, leading to a net debt decrease of $315M. This results in a pro forma net debt position of $1.45B versus $1.86B in asset valuations (LNG + FSRU + contracts). With 62.87 units outstanding, this provides a terminal valuation of $6.52 ($410/62.87).

Based on a discount rate of 10%, blended for distributions (1 quarter behind), the returns are as follows:

Upside in Baseline Case: 27% at $8.00 per unit.

Bullish Case Scenario

The bullish case scenario assumes the Tundra will be dropped down, and distributions will be increased to $0.60 through the end of 2018, followed by a terminal valuation.

The bull case assumes a terminal valuation based on core asset values with a premium of 1.2x from previously calculated values of approximately $260M for the 2.6 LNG carriers and $1.3B for the 7 pro forma FSRU vessels.

The fixed contract charters will be valued at $500M (despite 6 vessels with over $1B in remaining, highly profitable, backlog), based on increased confidence in the business and a healthier LNG transportation market backdrop. Based on the recent Golar Eskimo contract, and assuming a net purchase price of $380M for the Golar Tundra, net debt will start at $1.77B, and 100% of non-distributed cash flow will go towards deleveraging.

I expect operating cash flow of close to $55M in Q4-15 and Q1-16, expanding to $63M on average through Q4-17, then dropping slightly to $55M on a blended average through 2018 and beyond. $38M/qtr will go towards distributions, leading to a net debt decrease of $277M. This results in a pro forma net debt position of $1.5B versus $2.37B in asset valuations (LNG @ 120% + FSRU @ 120% + $500M contracts). With 62.87 units outstanding, this provides a terminal valuation of $13.87 ($872/62.87).

Based on a discount rate of 10%, blended for distributions (1 quarter behind), the returns are as follows:

Upside in Bullish Case: 107% at $8.00 per unit.

Additional Risk Factors

I believe a majority of the risk factors are addressed in the previous report, but in summation, the biggest risks are:

1. Contract dissolution as a result of a Petrobras investigation or default

Based on the currently strong market for FSRUs and the long-dated nature of the contracts (both signed prior to 2010), I find a dissolution unlikely on either legal nor bankruptcy claims. If either occur, I believe GMLP could find eventual replacements for these rigs, but there would be a significant break in contract coverage. Impact: Moderate Likelihood, Minimal Net Impact (Cash Flow Disruption)

2. Further collapse in LNG vessel or FSRU valuations

The bear case assumes aggressive depreciation followed by an additional 25% plunge, which I believe covers the realistic downside; however, the base case valuations could obviously be too optimistic if asset slides continue. Impact: Moderate Likelihood, Moderate Net Impact (Terminal Value)

3. GMLP diluting at horrendous rates in a bid to 'save' the balance sheet

Based on the analysis of its net debt, especially if the Tundra dropdown is completed without equity, I believe GMLP will avoid dilution at all reasonable costs. Barring significant counterparty defaults (all unlikely, with the exception of the profitable Petrobras arrangement), there is no cause for concern in terms of debt issues. The upcoming maturities are shown below (and also earlier in the report):

The biggest hit is in 2017-2018, but GMLP has $230M in current cash and even in the bearish case is likely to generate over $450M in excess cash. This is enough cash generation to surpass the upcoming maturities with minimal additional refinancing required. Impact: Unlikely, Harsh Net Impact (Dilution)

4. Immediate distribution cuts, leading to a loss in present value recovery

Let's be clear: GMLP does not need to cut the distribution until Q1-18 at the earliest. However, it is currently yielding nearly 30% and virtually all of its peers have already decided to cut distributions. Pressure might be on the company to follow suit. However, GLNG also needs cash flow to weather its own issues, so I believe distributions are more likely than not to continue at the current pace. Regardless, a reduction or a halt in payouts would have a strong positive effect on terminal values, at the expense of a lower return in present value payments. Impact: Moderate Likelihood, Minimal Net Impact (Present Value Shift)

5. Deteriorating FSRU market that results in worthless assets at the end of fixed contracts

The biggest long-term legitimate risk to GMLP is that the FSRU market becomes overly flooded with LNG conversions and the desire for LNG impacts simultaneously dries up. It's my opinion that this particular scenario would only occur with high global LNG rates, which would naturally lead to more export development, and a subsequent LNG transportation recovery and boom season. It seems very unlikely that both ends of the market would be decimated at the same time; however, this is indeed a real risk to consider. Impact: Moderate Likelihood (Minimal at Both Ends), Significant Net Impact (Terminal Value)

6. The investment market for high-yield LP structures completely dries up and nobody desires to buy GMLP or peers and valuations continue to plummet until eventually the LP is rolled back into the GP.

This appears to be the biggest risk in the present market conditions. I believe we are in a significant panic as a result of an overcorrecting pendulum shift back from the insane bullishness of just 1 year ago. The majority of the most recent drops have been the result of distribution cuts from peers such as Teekay LNG Partners (NYSE:TGP). TGP dropped 50% in one day as a result of an 80% distribution cut, even though the core business is completely unchanged. Impact: Moderate Likelihood, Moderate Net Impact (Present Value Shift + Elimination of Near-Term Bullish Outcomes)

Summary

GMLP has been hit by a massive panic exodus from anything MLP or LP-related. Nothing contractually has shifted since January 2015, and yet the price/unit valuation has plunged by over 75%. Arguably GMLP was overpriced in January as a result for the burgeoning demand for "junk yield," but we are now well into the over-correction territory, especially considering that GMLP is not heavily leveraged to cash flow potential. The following chart illustrates the equal-weighting of each case outcome, the average of which offers over 35% of upside to the current price of $8/unit, despite the explicit conservatism displayed in each scenario.

The "true bullish" scenario would be a revision towards historical values coupled with expanding distributions, which could equal present value outcomes in excess of $30/unit. However, one could also envision multiple doomsday scenarios, and I've found that as both an investor and as a trader, it is always best to temper expectations to the maximum extent possible.

I am heavily long with an adjusted basis slightly above $10, recently adding a large stake at $7.95 prior to publication. My personal price target is $17.50, which I believe is attainable (including distributions) by the end of 2016 based on market stabilization. Based on this report, the blended expectation is $10.83/unit.

Additional Strategies

It is possible to play GMLP while lowering your entry cost through selling near-dated covered calls such as January or February $12.50 strikes. The current market toward the $10 strike is very thin, but it should develop further if GMLP remains depressed for more than a few days.

Purchasing outright calls is another approach, but I do not currently find this strategy effective based on the strong premiums and lack of distribution eligibility.

Disclosure

This research report was compiled by J Mintzmyer via Mintzmyer Investments LLC. Investors should consider this full report as "opinion only" and only make investment decisions based on their own prerogative. This report does not constitute any form of "investment advice." J Mintzmyer is long GMLP, with a recent purchase stake of $7.95 and a blended average cost basis of approximately $10. J Mintzmyer has discussed this ideas with several peers and with research subscribers via Value Investor's Edge prior to full public release. J Mintzmyer's current price target for GMLP as of 17 December 2015 is $17.50, but this is subject to change with market conditions.

Disclosure: I am/we are long GMLP. 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.