- 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:
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:
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:
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.
At Energy Profits in Dividends, we seek to generate a 7%+ income yield by investing in a portfolio of energy stocks while minimizing our risk of principal loss. By subscribing, you will get access to our best ideas earlier than they are released to the general public (and many of them are not released at all) as well as far more in-depth research than we make available to everybody. We are currently offering a two-week free trial for the service, so check us out!
This article was written by
Power Hedge has been covering both traditional and renewable energy since 2010. He targets primarily international companies of all sizes that hold a competitive advantage and pay dividends with strong yields.He is the leader of the investing group Energy Profits in Dividends where he focuses on generating income through energy stocks and CEFs while managing risk through options. He also provides micro and macro-analysis of both domestic and international energy companie. Learn more.
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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.