GasLog: Good Results Despite The Writedown And Positioned Well For The Future

Summary

• GasLog's headline numbers were rather disappointing.
• This was driven by a writedown of its steam-powered ships and not by any real problems with its operations.
• The demand for steam-powered ships on long-term contracts has weakened significantly over the past year.
• The production of LNG will likely grow over the next five years and this will drive demand for new tankers.
• GasLog is well-positioned to take advantage of this.
• Looking for a portfolio of ideas like this one? Members of Energy Profits in Dividends get exclusive access to our model portfolio. Get started today »

On Thursday, February 6, 2020, liquefied natural gas tanker giant GasLog Ltd. (NYSE:GLOG) announced its fourth quarter 2019 earnings results. At first glance, these results appeared to be somewhat disappointing as the company managed to beat the expectations of its analysts in terms of top-line revenues, but it missed their expectations in terms of bottom-line earnings. In addition to this, the company posted a loss on a GAAP basis. However, a closer look at the actual results shows that things were not really as bad as they appear at first. The company managed to make some progress at reducing its debt and even ended up paying a special dividend to its investors. The market has certainly not been friendly to the company in the aftermath of these results though, which is partly due to fears that the COVID-19 (coronavirus) will shut down the Chinese economy. While this is certainly a very real concern, the future of the company continues to look bright. Investors may actually have an attractive opportunity here.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from GasLog's fourth quarter 2019 earnings results:

• GasLog brought in total revenues of $182.253 million in the fourth quarter of 2019. This represents a 3.39% decline over the $188.644 million that the company brought in during the prior-year quarter.
• The company reported an operating loss of $82.133 million in the most recent quarter. This compares very unfavorably to the $104.997 million operating profit that the company reported in the year-ago quarter.
• GasLog recorded an impairment charge of $162.1 million on six steam turbine-driven vessels constructed in 2006 and 2007.
• The company successfully issued NOK 900.0 million of senior unsecured bonds due 2024, which it used to pay off its outstanding bonds that matured in 2021.
• GasLog Limited reported a net loss of $119.889 million in the fourth quarter of 2019. This compares very unfavorably to the $30.384 million net profit that the company had in the fourth quarter of 2018.

The first thing that anyone reviewing these highlights is likely to notice is that most measures of profitability were significantly worse than what we saw in the prior-year quarter. The biggest reason for this is the aforementioned writedown that the company took on six steam-powered vessels, five of which are actually owned by sister company GasLog Partners (GLOP). The company noted that the demand from the firms that hire liquefied tanker ships declined significantly over the past year. They do not particularly want to hire these vessels on long-term contracts, although Golar LNG Partners (GMLP) recently got awarded a two-year contract for one of its steam-powered ships. This is also reflected in the spot rates for these ships, which have also declined significantly. As such, these ships will probably end up generating much less revenue than they did before their contracts with Royal Dutch Shell (RDS.A) (RDS.B) ended. The company does not expect that this situation will change anytime soon. As the value of a vessel is a direct function of how much revenue and cash flow they will generate going forward, these ships are no longer worth as much as they once were. Unfortunately though, the company's balance sheet still listed them at the former values. Accounting rules require that a company in this situation adjust the balance sheet so that it accurately reflects the true value of the ships and take a corresponding charge against its income. That is what we see here. It is important to note though that GasLog did not actually see $162.1 million leave its bank account as a result of this charge. As a result, we can safely ignore it when evaluating the company's operational performance during the quarter.

This is in fact what the company aims to do with the figure that it calls adjusted profit. This is a non-GAAP measure that the company uses to adjust for the impact of non-cash writeoffs, foreign exchange fluctuations and any mark-to-market gains or losses on derivatives. This figure was $38.5 million in the most recent quarter, which was a 38.4% decline over the $62.5 million that it had a year ago. While this still represents a year-over-year decline, we can clearly see that it was not as large of a decline that the headline numbers would imply so the company's overall operating performance was not really that much worse than a year ago.

One way we can analyze demand for ships is to look at the number of term charters being offered by those looking to hire them. A term charter (as opposed to a voyage charter) is a long-term commitment to use a ship for a period of between one to seven years. As we can see here, only six steam-powered vessels worldwide received term contracts in 2019 compared to twelve in 2018:

Source: Poten, GasLog Partners

Admittedly, this is not the way that GasLog thought that the market would develop, which was one of the reasons that GasLog was operating these vessels as opposed to the tri-fuel diesel electric propulsion vessels that comprise the remainder of its fleet. The company freely admits that this was a mistake. With that said though, the steam-powered carriers that GasLog owns were constructed in 2006 and 2007 so they are still considered modern vessels. There are a number of steam-powered vessels constructed prior to 2000 that are still in operation and it is quite possible that we will begin to see these ships scrapped in response to the market weakness. This will not affect GasLog, however.

Another thing that we notice in GasLog's results is that the company saw its revenues decline slightly. The primary reason for this is that GasLog had fewer ships operating in the spot and short-term pool than it did in the prior-year quarter. During the quarter, the company performed emergency repairs on three of its ships - the GasLog Savannah, the GasLog Singapore, and the GasLog Chelsea. It is quite possible that this will improve in the first quarter of 2020, but it is important to note that spot rates historically peak in the fourth quarter because importers are attempting to stockpile natural gas for the winter heating season so it is likely that these ships will not generate as much revenue as they would have had these unscheduled drydockings not happened.

As I have discussed in many previous articles such as this one, the demand for liquefied natural gas tankers is likely to increase over the coming years. One of the reasons for this is that both the demand for and the supply of the compound is expected to increase between now and 2025. We can see this here:

Source: Wood Mackenzie, GasLog

This will require the use of liquefied natural gas tankers because that is the only way to move the compound across the ocean from those regions that produce it to those that consume it. In fact, this is the only reason to convert natural gas into a liquid as there are more economically efficient ways to transport natural gas across smaller bodies of water. Thus, we can see how growth in liquefied natural gas volumes needed to be transported will cause an increase in the demand for tankers. There is some concern by the market that tanker companies will end up overbuilding their fleets, causing a collapse in spot rates. This is somewhat similar to what happened in the offshore drilling industry. Fortunately, that does not appear to be the case in the near-term as this chart shows:

Source: Wood Mackenze, Poten, GasLog

Fortunately, there are reasons to believe that this chart is accurate. As of February 4, 2020, there were 118 ships in the orderbook (vessels scheduled to be constructed), which is more than the world's shipyards can construct over the period in the chart. Thus, we have a reasonable idea of the number of ships that will be on the water at any given time. We also have a reasonable idea of what the production capacity of liquefied natural gas will be because every facility that will be producing it is either already under development or in operation. As we can see above, in all but the worst case scenarios, the supply and demand for these tankers should be balanced. There is one exception to this scenario though. As I discussed earlier, there may be some reasons to believe that numerous older steam-powered vessels will be scrapped due to the current market conditions. In this scenario, we could very easily see a near-term shortage of tankers, which would be beneficial for spot rates and by extension revenues.

GasLog is well-positioned to take advantage of this impending growth in the market. We can see this by looking at the company's current fleet. Here it is:

Source: GasLog

As we can see here, GasLog currently has seven vessels under construction that are scheduled to be complete and leave the shipyard over the next two years. The nice thing about this is that all seven of these ships have already obtained long-term contracts for their use. Thus, they should begin generating revenues for the company as soon as they are complete. This should prove stimulative to GasLog's revenues between now and 2022.

One other promising thing that we see here is that on December 12, 2019, GasLog entered into a loan agreement in the amount of $1.052 billion from a consortium of thirteen international banks that the company will use to finance the delivery of the seven ships that are currently under construction. This financing is 60% backed by the Export Import Bank of Korea and the Korea Trade Insurance Corporation, which does provide some safety for the banks, but it is still nice to see that the financing market still continues to be available to liquefied natural gas tanker companies. This could prove to be a good sign for when GasLog Parters seeks to refinance its near-term debt.

In conclusion, these were reasonably solid results for the giant tanker company despite the disappointment inherent in the headline numbers. The recent outbreak of COVID-19 has sent investors running for cover with regards to the name. The market continues to look strong over the long term, though, and GasLog is well-positioned to take advantage of this strength going forward and generate growth.

Analyst’s Disclosure: I am/we are long GLOP, 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.

Comments

[spend my cash]

added one $GLOG.A
today. Hoping for the
best

[jluns0616]

Prepare for a blood bath in the entire sector today.

[imeldo marcos]

oil just crashed.

[AlieGee]

And going lower...

[stonergreg13]

PH,

Thanks for the article and agree with most. Actually purchased another small block of GLOP last week in the mid $3s. Already down 18% on that purchase. For now, sitting on my hands, not buying any additional securities. Oil being pummeled and the virus fears growing. Accumulating cash and waiting.

Greg

[Power Hedge]

That is what I’m doing too. Stockpiling cash in my brokerage accounts so that I can take advantage of opportunities once the structural problems clear.

[bluewings]

Market recovery usually starts when there is still doubt. If you want to make sure everything is clear, the market will have already rallied quite a bit.

[Power Hedge]

That is correct. Best strategy is to cautiously buy in on dips.

[MotorD1212]

Thank you for the write up. I'm sure that I'm not the only person in this same "boat" they are to embarrassed to say anything. I have had my ass handed to me in these two stocks lately, and, HMLP, yet I have been buy on the way down. I am a believer that as the new ships come on line I will be rewarded in spades by buying on the cheap an waiting. No one has explained in anything that I have read in a true manner with real hard data why steam ships are disliked so much. As a retired engineer from an engine company which builds large engines some of which went into ships which I have been on many times, I don't understand the dislike for steamers. Regardless of what they burn and with the addition of scrubbers or other emission devices the day rate can be adjusted to compensate for that until it's time to scrape them. Many of them are not near they life term, the bleed off rates are about the same. Maybe I'm wrong, but I would think you could go in with a rate low enough to be compedative an still be profitable. I am not a bean counter, may be on the tax side it is better to take the write down or write them off.

[ChrisSBurns123]

I’m heavy with 60K shares of GLOP so it has hurt but taking the long view on this and not selling.

[taosjet]

could a steamer be converted to burn LNG?

[Power Hedge]

I’m half tempted to start slowly buying in with prices at this level.

GMLP actually had a lot of success with its steamers in Q4. There were times though when Golar Maria or Golar Mazo were literally the only ships available.

GLOG/GLOP’s steamers are modern ships too. These aren’t the 20 year-old ones that other companies have.

[Mktneutralhedger]

I'm afraid that, regardless of fundamentals regarding the specific companies, shipping names were held by Energy funds that lately are experiencing terrible times due to the sector knocked down and very large outflows.

[Power Hedge]

I think that’s part of the problem here.

[George eFF]

Likewise SA Authors didn’t foresee the domesday scenario approaching.

[Power Hedge]

At these prices, it’s like people are predicting that demand for natural gas from emerging markets is going to zero and that’s just not credible.

Europe is trying to get away from Russia exclusively as a natty gas supplier. Southeast Asia is still coming online. The need for LNG shippers is still there. GLOG doesn’t have a whole lot of exposure to the spot market and nearly all its contracts are with giant corporations. Unless you seriously think Royal Dutch Shell is going out of business within two years, this is the mother of all overcorrections.

[DavidJL615]

It will take a long time before I recover from this stock. I have 10K shares so my loss was definitely in six figures. I have stated before this is a CON Company. I have researched their past earning calls and there was little mention of the doom and gloom that happened. I will most likely ride this stock out and hope for better days. Going from 20 to 3 is not panic selling. It is a lack of faith in management.

[Pitivier]

wait the end of coronovirus dont sell now is crasy situation
GLOG is better than GLOP GLOG is free at 5$ more the new construction soon

[Dennis 1]

Don't feel like the lone ranger, liked it at $20 and added at the drop in the teens. Recently added at $3.90 --again at $2.99, in for a penny, in for a pound. Breaks my own 'rules' adding, but under $3 is ridiculous. I have to believe the company made the hard choices to better position in the future. Sad story...November was in the green in brokerage account, finger on the sell button and decided to hold for one more ex-div. Closing it out in that account and was to add small amount in Roth...it dropped, added in Roth ....now have boatload of shit! ...hang in there David. I ain't selling at no 75% discount.

[Power Hedge]

At below $5, GLOG could literally liquidate itself and profit. The tankers alone are worth more than that!

[jack20]

My $$ is on TGP. 3.85 DCF coverage of distribution, paying down debt, buying back stock, no new ships on order, and current fleet under LT contract. Buy, hold, DRIP, and retire rich!! P.S. the distribution goes to $.25 on next payout so figure your return on that basis.

[Pitivier]

TGP THE same situation wait for me 4$ to buy

[creese]

GLOG made out ok but the unit holders of GLOP got screwed. Five of the six steam ships were on the books of GLOP. Management only gave rosy guidance when they knew that problems were developing with the steam ships. They kept the problem hidden.

They knew problems were developing so they ran out and cancelled the IDRs and issued GLOG a boat load of shares to lessen the impact when GLOP whacked their dividend. Helped keep the cash flow to GLOG going.

Well investors have seen through this and the shares of both GLOG and GLOP have been decimated.

[Panzerman]

GLOG.....I have it and it has hurt me as the stock price collapsed. However, as with many things these days, the shares have been sold off in panic. That said the company is in a decade plus growth area and is one of the better run LNG companies available in the market. So with some time and patience, this will work out. Lots of paranoia in the market at this time.
Long GLOG and HMLP in shipping