Looking for high-yield income vehicles in a strong industry? Then take a look at the LNG - liquefied natural gas shipping industry - demand and supply keep rising, leading to ~10% increased LNG trade in 2018, which, in turn, led to more projects, with liquefaction FIDs - financial investment decisions - nearly quadrupling in 2018.
Meanwhile, LNG vessel spot rates nearly doubled, form $45K to $80K/day in 2018. LNG vessels ordered jumped from 17 in 2017 to 60 in 2018. However, it takes ~2.5 years for these vessels to be delivered, so spot and charter rates should continue to be strong in 2019.
All of these factors should give strong support to ship owners in this sub-industry over the next few years, as global LNG supply and demand is projected to keep increasing:
Hoegh LNG Partners LP (HMLP) is a carrier which occupies a niche within this industry - it's the only pure play FSRU - floating storage and regasification unit - vessel owner on the market. FSRU's solve a problem for countries - these vessels replace the need for costly LNG terminals - giving them more flexibility in their energy programs.
Increasing LNG supplies have led to attractively priced LNG, which can successfully compete with coal and oil. This has led to a surge in FSRU projects under development:
"Oh no - not LPs again, we don't need no stinkin' K-1s!!"
Chill out income investors - these may be LPs, but they all issue 1099s, not K-1s, at tax time.
These three companies all have high yield common units, and also have five different high yield preferred units between them.
Common Distributions and Valuations:
Here's a look at their respective yields and valuations for their common units. HMLP yields 9.45%, and has the strongest trailing coverage, at 1.19X. It's getting a premium P/book of 1.68, most likely due to its stronger coverage.
GLOP yields 9.90%, with trailing 1.09X coverage, and is selling below book value, at a P/book of .86.
The market is demanding a high 12.63% yield from GMLP due to a distribution cut from $.5775 to $.4042 in Q3 '18. Management cut the payout, in order to improve coverage, which sank below 1X in 2018, to .71X:
Recent Common Coverage - We can see that HMLP leads the group in trailing coverage, at 1.19X, but it also makes sense to look at the most recent quarters to see if things may be turning a corner for a company which struggled with poor coverage, such as GMLP.
Increasing DCF and the Q3 '18 payout cut pushed GMLP's coverage back over 1X again in Q3 '18, and it improved further in Q4 '18, to 1.20, which is much better than the trailing .71 figure.
GLOP also had increasing common coverage in Q3 and Q4 '18, going from 1.06 to 1.17X.
Like most LPs these three common distributions are in a Feb/May/Aug/Nov.cycle.
As it turns out, these companies all also have five high-yield preferred units available. They're all cumulative, so the company must pay you for any skipped distributions before they pay the common unitholders. They're also senior to the common units in a liquidation scenario.
They're all selling below their $25.00 call values, except the Hoegh A units (HMLP.PA), which are at $25.23. The yields are all in a tight range of 8.6% to 8.9%.
Gaslog's preferreds have an additional feature - these are hybrid preferreds, which have a floating rate that kicks in after their call dates, which run from 2023 to 2027. The floating rates, which range from 5.32% to 6.31%, will be added to whatever the current three-month LIBOR rate is at the call date.
The conundrum with the floating rate preferreds is that, although they can give you protection against rising rates in the future, their yields could also be lower than their current yields, should three-month LIBOR rates be lower after their call dates. 3M LIBOR rates have eased a bit in the past few months are ~2.61% now, but no one knows where they'll be in 2023 - 2027.
If 3M LIBOR rates are much higher then, say, at 5%, for example, the Golar preferreds will yield in a range of 10.32% to 11.31%, vs. their current 8.6% to 8.91% yield range.
As usual, the preferreds have much better coverage than the common.
GMLP's preferred units have the strongest coverage, at 8.92X vs. net income, and 11.06 vs. DCF. However, all of these preferred series have good coverage, ranging from a minimum of 5.14X to 8.92X on a net income basis and 5.84X to 11.06X on a DCF basis.
HMLP is the winner in the financials race, with lower debt leverage and higher operating metrics. Other than current ratio, all three companies' metrics are mostly better than peer averages, except for GMLP's total debt/equity and operating margin. They all have good EBITDA/interest coverage, which is the other key to their debt leverage profiles.
Drydockings and Recontracting - Vessel owners must contend with five-year ship surveys, which bring ships into drydock, and reduce earnings. For smaller fleets, this can really impact earnings in a negative fashion.
GMLP had multiple special surveys/drydockings and re-contracting issues that pressured its cash flow in 2018. However, they turned a corner late in the year, and management reports that there will be no further drydockings until the end of 2019.
GLOP has two scheduled dry dockings in 2019 - one in Q2 '19, and one in Q4 '19, both of which are anticipated to take 30 days to complete. However, management also is expecting a 2019 new asset dropdown which will help to soften the effect of these two drydockings.
HMLP will have two fully-owned vessels drydocking in 2019, for a cost of ~$6.5M to $7M, and a JV vessel drydocking, which will cost ~$1.5M. This ~total potential cost of $8.5M is ~12% of 2018 DCF total of $71.34M, so HMLP's common coverage won't be as robust during these drydockings, but it should remain above 1X.
Even with added drydocking expenses, all of the preferred units will continue to have robust coverage.
If you're looking for additional ways to profit from the LNG industry, here are some relatively short term option-selling trades for GLOP and GMLP - HMLP doesn't have options.
We added this July trade to our free Covered Calls Table, where you can see more details for this trade and over 35 others, all of which are updated throughout each trading day.
GLOP should go ex-dividend again in May, for a $.55 payout. If you want to be aggressive, you could sell the July $22.50 call for $.85, which would give you an 18% annualized yield for this ~4-month trade.
The $.85 call premium gives you some added downside protection, but the flipside is if GLOP rises to or above $22.50 before the May ex-dividend date, your GLOP units could get called away/assigned, so you'd net $.85 for the call option and $.27 in price gains, but no distribution money.
GLOP's July $20.00 put strike pays $.80, which gives you an 11.50% annualized yield, and a $19.20 breakeven:
We've added these two put trades to our Cash Secured Puts Table, which has more details for this trade and over 35 others, all of which also are updated throughout each trading day.
We're bullish on the LNG shipping industry's future prospects, and we feel that the income vehicles detailed in this article represent attractive ways to profit from continuing LNG growth.
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Disclosure: I am/we are long GLOP.PA, GLOP.PB. 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.
Additional disclosure: Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article. All tables furnished by DoubleDividendStocks, unless otherwise noted.