GasLog Back At Its Lows - Buy For The Winter Season

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About: GasLog Ltd. (GLOG), Includes: GLOP
by: Seanvestments
Summary

Gaslog Ltd. is a growth-oriented, international owner, operator and manager of LNG carriers.

Gaslog Ltd. owns a fleet of 35 LNG Carriers, including 8 vessels on order and 15 owned by its NYSE-Listed subsidiary, GasLog Partners.

Charter rates for LNG vessels are seasonal and usually stronger in the second half of the year ahead of the winter in the Northern Hemisphere.

The share price of GasLog Ltd. in the last two winter seasons has followed an extremely similar seasonality pattern with the charter rates.

We believe that the very recent uptick in charter rates launched the beginning of a very healthy market that would push the share price of GasLog Ltd. much higher than today's levels and we suggest that investors enter this Long trade ahead of the winter season.

GasLog Ltd. is listed on the New York Stock Exchange under the ticker GLOG and is one of the largest owners and operators of LNG vessels. It has substantially grown its fleet since its listing, primarily recycling its capital through its subsidiary, Gaslog Partners LP (GLOP) which is an MLP vehicle.

The demand for LNG is expected to grow steadily and GLOG is very well positioned to take advantage of this growth. The company enjoys economies of scale from its fleet size, including its ability to recycle capital at attractive terms through Gaslog Partners LP. GLOG is also run by a management team that has a long experience in the shipping sector and the LNG market. These are the reasons for which we believe that the current share price represents a great opportunity to enter the stock at a very opportune timing.

GLOG provides the investors with exposure to the LNG shipping markets that are usually strong around the winter time as per the below graph of DNB Bank ASA with data from Clarksons Research.

Seasonality in LNG shipping spot rates Source: DNB Bank ASA, LNG Report dated 9 April 2019

This seasonality relates to the fact that there is increased consumption of LNG in the second part of its year. The past winter 2018-2019 was not an exception to that seasonality pattern and rates have reached about $180k per day for a TFDE vessel in November 2018 followed by a drastic decline in 2019, as per the graph below that also shows the respective increase of the rates towards the end of the year in 2016-2017, as well, albeit at lower absolute levels.

LNG Shipping Spot Rates, 2016-2019 Source: DNB Bank ASA, LNG Report dated 9 April 2019

The winter in the Asian region was milder than people anticipated and the energy needs were fulfilled by the already high inventory that was built in Q4-2019. Within this context, the low prices in the Far East (Japan-Korean Marker, JKM) have eliminated the price arbitrage of any LNG cargo sourced in the Western Hemisphere, reducing substantially the need for seaborne transportation. In terms of this arbitrage, we have to note that a major driver in the increase in the demand for LNG transportation has been the increase in production in the USA that has been directed to Asia, primarily in China. This route could have a multiplier effect in the demand due to the longer sailing distance. GLOG estimates that approximately 1.8 ships have been needed for each metric ton supplied from the US compared to a historical multiplier of 1.3x (earnings presentation for Q1-2019, May 3, 2019, page 18)

Although the shipping rates are currently at low levels, it should be highlighted that they have been still higher than the average of the last 5 years for the most part of the year so far, as per the below graph. This may be a good indication of the tight market that may follow later in the year, as the market has started on a strong footing so far in the year.

LNG Shipping Spot Rates by Month Source: Pareto Shipping Weekly, 6 May 2019

Certain analysts have already noticed the recently improving market.

For example, BTIG's Greg Lewis wrote in a report on May 10, 2019: "LNG (TFDE) rates have poked their head above $50k/d for the first time since February. Over the last 3 months depending on the trade lane, conventional LNG (TFDE) have been in the $30-40k/d range. The combination of increased fixtures and expectations of more fixtures hitting the market in May and June has helped push rates up about 20% over the last 1 week. We (and everyone else) have been waiting for the up-tick in rates and with increased inquiries once again for multi-month opportunities (not just spot voyages) the seasonal rally looks to have started."

Similarly, Pareto mentioned in its daily report on May 13, 2019: "Spot rates starting to move - right on schedule.". In the same report, Pareto included an estimate that 35 fixtures of LNG ships were concluded in April 2018 which was more than 80% up from 2018 and further noted that 8 vessels were promptly available on the day of the report whereas there were about twice this number in the same time of last year.

Also, in its recent earnings call, GasLog Partners has shown the below graph that provides an estimate of the supply/demand balance for the coming years and it illustrates that the market is expected to become under-supplied even starting from the end of 2019.

Projected Supply/Demand Balance Source: GasLog Partners LP., Q1-2019 Earnings, 25 April 2019

It is interesting to see how the share price of GLOG has reacted in the above seasonal pattern that has been witnessed in the last two years.

Below is a graph of the share price in the last three years. We would like to point out the following daily closing prices that prove the above mentioned seasonality pattern.

Date/Closing Price (% of change)

Season 2016-2017

May 23, 2016: $11.38

January 26, 2017: $17.50 (+54%)

Season 2017-2018

May 31, 2017: $12.95

December 28, 2017: $22.30 (+72%)

Season 2018-2019

March 23, 2018: $15.80

November 5, 2018: $22.59 (+43%)

GLOG - Share Price, last 3 years Source: Prices from Nasdaq.com, graph prepared by the author

An interesting observation from the above graph is also that the share price makes higher highs and higher lows its year. This reflects the continuously improving financial condition of the company which is also illustrated in the below table that has been published by Morgan Stanley.

GasLog Ltd. - Income Statement Source: Morgan Stanley, 5 May 2019

Apparently, this trade does not come without a risk. We believe that the recent macroeconomic concerns that have been fueled by the trade disputes between USA & China may pose a risk, especially if any tariffs imposed by the Chinese Government include the LNG cargo that is imported from the USA. This would be a major hick-up in the growing LNG trade, although US-China trade of LNG is not quite material. Within the same context, the steady improvement in LNG shipping rates will require a similarly increasing demand, given that there is still a large orderbook of vessels that was further elevated by the record number of LNG ships ordered in 2018.

Despite this risk, we suggest that investors buy GLOG as the current price represents an attractive entry point that is supported by the long term fundamentals of the sector and the solid financial position of GLOG.

Disclosure: I am/we are long GLOG. 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.