Teekay LNG Partners: Steady Income, Huge Coverage, No K-1

About: Teekay LNG Partners L.P. (TGP), Includes: FLNG, GLNG, GLOG, GLOP, TK
by: J Mintzmyer

Teekay LNG Partners (TGP) is the world's largest publicly-traded LNG shipping company.

TGP has a superior $10B contract backlog with very little near-term market risk with 96% of their days fixed through 2021.

Less than 3 months left to complete their 4-year growth initiative. Improving leverage and active $100M repurchase program.

The stock is cheap because investors aren't yet rewarding their huge coverage (more than 4x fwd coverage).

Savvy investors can acquire this high-quality name at a deep discount. Fair value estimate: $25/unit, 66% upside. 5.1% yield bonus.

Image Credit: Teekay LNG Partners, Q2-19 Presentation

Teekay LNG Overview

Teekay LNG Partners (TGP) controls the world's largest and most modern publicly-traded LNG shipping fleet with a $10B backlog of highly lucrative contracts. Despite Teekay trading weak along with other shipping names, unlike spot-focused firms, there is very little uncertainty in forward revenues since their entire LNG fleet is fixed on strong employment contracts with 96% average coverage through the end of 2021. Furthermore, a large portion of their fleet is employed for a decade or longer.

TGP is the limited partner for Teekay Corporation (TK). TK owns 25.2M units (about 32% of TGP) and controls the GP/IDR. Unlike most GP/LP relationships, Teekay LNG has been fully self-funding, and there is no dropdown overhang from their GP. Teekay Corp is aligned with the common goal of maximizing long-term returns through distributions and stock price appreciation.

Teekay's closest peer is GasLog Partners (GLOP), but other major LNG shipping companies include GasLog Ltd (GLOG), Golar LNG (GLNG), and Flex LNG (FLNG). TGP has the strongest backlog by far and is best suited for more conservative-minded investors.

TGP has approximately 78M common units outstanding for a market capitalization of about $1.17B. They offer a current yield of 5.1%. This payout might seem a bit low at first glance, but forward coverage is over 4x, which makes TGP one of the cheapest stocks on the market in terms of DCF yield.

Newbuild Program & Stellar Backlog

Teekay is set to complete their four-year newbuild program within three months. This endeavor involved around $3B of newbuild financing and legacy debt refinancing, all with zero core equity dilution. Leverage is a bit high, but TGP is rapidly paying down debt, and their $10B backlog ensures forward stability regardless of market conditions.

Following the delivery of the "Vladimir Veronin" in mid-August, TGP only has three assets left to deliver through November 2019:

Source: Teekay LNG Partners, Q2-19 Earnings Presentation, Slide 11

TGP's backlog is world-class, with $10B of high margin forward revenues, translating into $7.3B of forward expected EBITDA. Teekay has some of the strongest industrial counter-parties in the world and the promising global LNG trade ensures strong long-term underlying business stability.

Source: Teekay LNG Partners, Q2-19 Earnings Presentation, Slide 12

Key Market Disconnect

Investors have the opportunity to buy TGP for a deep discount because of a confluence of market and investor misconceptions. Some of these include:

Trade War Fears

  • Reality: TGP has almost zero LNG rate exposure until 2022
  • Large portion of fleet is fixed past 2030 on industrial charters
  • LNG is secular growth story with little dependence upon US-China relations

"Small" Dividend

  • Their 5.3% yield is nearly 4x covered
  • DCF is set to surge q/q through mid-2020
  • Active $100M repurchase program, drives tremendous long-term value

High Leverage Concerns

  • TGP is within months of wrapping up a 4-year growth program
  • Leverage (net debt to EBITDA) will rapidly come down starting in 2020

TK Management Overhang

  • GP has been friendly, zero dropdowns remaining
  • TGP is fully self-funding unlike other peers which overpay their parent

Enormous Discount to Closest Peer

TGP is a world-class company and trades at a significant discount to its closest comp, GasLog Partners, despite owning a vastly superior fleet and touting a revenue backlog that is over 700% larger. Despite GLOP sliding nearly 15% in the past month, TGP still has between 81% and 109% upside (DCF comp or EV/EBITDA comp) over the next year just to trade in the same range.

I believe TGP deserves to trade at higher multiple than GLOP because of their superior structure (no dropdown overhang) and fleet mixture (i.e. 81-109% upside is still too low to a proper market balance). For more savvy investors looking to hedge market risk, a long TGP + short GLOP pair-trade is enticing.

Comp Assumptions (TGP- $15.05 vs. GLOP- $19.70):

TGP EBITDA ('19/'20) - $675/$730M, Net Debt - $4.8/$4.4B, DCF - $240/$290M

GLOP: EBITDA - $230/$240M, Net Debt - $1.13/$1.1B, DCF - $119/$121M

Why Does GLOP Trade Higher? Yield Trap

We covered the main four misconceptions about TGP earlier in this report. Although GLOP is clearly also trading down a bit on trade war concerns, their 'high dividend' is keeping them in premium valuation territory.

When investors first look at GLOP and TGP, they see an 11.7% dividend versus a 5.3% dividend. It's easy to make the knee-jerk decision that GLOP is attractive and TGP is an avoid. However, the opposite is the reality. Why? TGP has over 4x forward coverage to their payout, and they have a $10B backlog of mostly modern assets.

Meanwhile, GLOP barely covers their payout over the coming years, their backlog is less than 15% the size of TGP's, and their fleet is both significantly smaller and also technologically inferior. GLOP's fleet is two-thirds 2nd-tier assets (TFDE propulsion) and one-third 3rd-tier assets (steam propulsion ships). Meanwhile, TGP's fleet is more than 50% ultramodern top-tier MEGI propulsion ships and Arc7 icebreakers.

Active Repurchase Program & Forward Payout Raises

Teekay LNG has an active $100M repurchase program which I expect them to fully utilize (market conditions permitting) by the end of 2020. World-class investor David Einhorn has taken notice: TGP was one of his top additions during Q2-19 after he first bought during Q1-19.

TGP is focused on bringing down their leverage over the next few years, but they are still likely to increase their distributions. These increases should be modest at first, but once they hit their target leverage (within 2 years), we could see substantial increases. At the same time, there is substantial uncertainty about GLOP's distribution sustainability.

Near-Term Catalysts: Investor Day & Slam Dunk Q3-19

Teekay is hosting a major Investor Day in New York City on October 2nd. I expect they will provide additional cash flow clarity and drum up interest for this world-class shipping play. Einhorn has been adding a lot of shares, and I expect he's likely adding even more this quarter. He's the first major US name to arrive, following Cobas (the 'Warren Buffett of Europe') who has also added more since last year. I suspect we could see more major investors join soon.

Source: Teekay LNG Partners, Q2-19 Earnings Presentation, Slide 7

Q3-19 Blowout Earnings Inbound

TGP is likely to report their earnings on either the first or second Thursday of November. We don't have to guess on this one due to their significant contract fixtures and helpful guidance (ref. slide 15 here). We already know it will be a blowout, a $15M q/q earnings uplift, driving what will be the strongest result in company history. TGP traded in the mid-$40s last time they did this well.

Source: Google Finance, TGP price chart

Conclusion: Significant Opportunity with Lower Risk

TGP offers investors a significant value opportunity with far lower risks than most other names in either the shipping or energy sectors. They have $10B of backlog with top-tier counterparties, and management is prudently bringing down their leverage. 5.3% is a fine payout, but the best part is the more than 4x forward coverage.

I believe TGP is worth about $25/unit today, driving 66% potential upside.

Disclosure: I am/we are long TGP, TK, GLNG. 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.