Teekay LNG Partners: Distribution Boost Caps Record Year
Summary
- TGP has increased the quarterly distribution by 15%.
- Cashflow and debt reduction targets are being met.
- Charter extensions provide even further visibility of future growth.
- We maintain our Bullish opinion, with near-term PT of $17.6/shr, and long-term intrinsic value of at least $22/shr.
Q4 Results
Amid instability and M&A activity in the LNG shipping sector, NYSE:TGP together with its Joint Venture fleet has delivered record results for EBITDA and Net Income as the boost from its large portfolio of fixed term vessels continues to run its course.
Debt amortization remains a top priority with TGP eliminating $100M and $558M from its books (J.V. proportionally consolidated) in Q4 and FY 2020, respectively. The debt reduction in 2020 amounted to 11% of total debt, bring debt to capital down to 64%.
Distribution History
TGP’s quarterly distribution was initiated around $0.70/shr at IPO in 2013, but subsequently cut to $0.14 in late 2015 at the onset of the oil price collapse, coinciding with its large newbuild program. The distribution has since steadily recovered to the present level of $0.25/shr.
With last week’s Q4 2020 earnings call, and as widely anticipated, TGP confirmed plans to increase the quarterly distribution to $0.288/shr, an increase of 15%, bringing the current yield to 8.4%. The new distribution level will become effective with the May 2021 payment.
For U.S. tax purposes, TGP’s common unit distribution typically has a component of return of capital with the remainder treated as ordinary income.
Fleet Status Update
TGP’s fleet maintained nearly 100% utilization during 2020 and with its long-term charter agreements avoided disruption emanating from COVID-induced cargo cancellations. It has made significant strides in diversifying its customer base, which traditionally had been tied to Shell Oil, by adding names, such as Cheniere, Petronas, Yamal LNG, and BP. The JV vessel Marib Spirit received a new charter from Trafigura through early 2023, increasing backlog to $8.8 billion, or $16 per share on a net cashflow basis.
The wholly-owned fleet has an average charter duration of 4 years, while the J.V. fleet is further locked in for an average of 14 years.
The average vessel age is 10 years, slightly higher than the overall industry average of 9.5 years. The older average age is acceptable, in our view, given the immense charter backlog.
For the vessels coming off charter in 2H 2021, Creole Spirit and Oak Spirit, TGP intends to trade in what is projected to be another lucrative winter spot market for owners, following the massive spike in spot prices witnessed this past winter season.
Figure 1. TGP’s Majority-Owned Fleet (excl JV): Source – TGP Q4 2020 Presentation, pg. 5
Annual Results
TGP has seen improvements along every line of its P&L over the past several years. Revenue, EBITDA, and Net Income set record highs.
Figure 2. TGP Summary P&L (Source: Company financials with Ashland adjustments)
Additionally, the Bahrain LNG Terminal, a JV in which TGP owns a 30% stake and supplies the FSU vessel, saw its first full year of operation, adding substantially to EBITDA, and diversifying TGP into a new market of terminal ownership—an area which is expected to grow over the next decade as global demand for natural gas soars.
Figure 3. TGP EBITDA Growth (Source: Company Q4 2020 Presentation, pg. 9)
Preferred Stock
TGP has two series of Preferreds, A and B, both of which trade slightly above par value. The A series has a 9.0% coupon and is callable from October 2021—an outcome that appears likely as TGP looks to shed its balance sheet of higher yielding claims. The B series has a coupon of 8.5% and becomes callable as well as floating dividend in Oct 2027 at a margin of 624 bps to 3-mo LIBOR.
We view the reset feature of the B’s to be attractive, given the ample margin which is a full 250 bps higher than the 375 bps margin for bonds of firms rated B+ by S&P. Income investors must weigh this margin of safety against the risks and return characteristics inherent in TGP’s mostly long-term chartered fleet, as well as of course the call risk.
Figure 4. TGP Preferred Stock Table (Source: Company Prospectus with Ashland Calculations)
Financing Updates
In December 2020, the Partnership's 50% owned LPG JV with Exmar refinanced its $254 million revolving credit facility and term loan by entering into a new revolving credit facility in the amount of $310 million maturing in December 2023.
Also, on February 8, 2021, the Partnership's 70% owned Tangguh JV refinanced its $191.5 million term loan which was scheduled to mature in 2021, by entering into a new $191.5 million term loan maturing in February 2026.
This leaves TGP with only $174M of debt maturing during the remainder of 2021, which is easily covered by free cash flow and cash reserves. TGP has manageable maturities of $212M in 2022 and very little through most of 2023.
The Exmar JV refinancing was especially critical, as those vessels are largely exposed to the spot market at a time when LPG carrier spot rates are weakening. TGP getting ahead of the curve will aid in de-risking the Exmar JV entity.
TGP’s leverage, as measured by Net Debt to EBITDA, has fallen to 5.8x and is further expected to reduce to 5.0x by 2023—a level we believe is sustainable for the business model.
Figure 5. TGP Leverage Metrics (Source: Company Q4 2020 Earnings Presentation, pg. 9)
Look-Ahead
As the reality of the distribution hike sets in, we expect the market price of shares to stabilize in the near term. With the large majority of TGP’s fleet locked into long-term charters, we look to the ancillary business units for any potential risks. Certainly, the lower rate for LPG vessels could weigh on the Exmar JV in the near-term. Longer term, we think the key LPG trade route of U.S. to China continues to open up, as well as India becoming a major importer, increasing ton-miles of demand. Nevertheless, TGP has mitigated exposure to this volatile segment through a Joint Venture risk-sharing arrangement and addressing debt extensions well in advance of maturity. We expect TGP’s newer debt facilities to come with more attractive terms and/or lower margins to LIBOR.
The Bahrain Regas JV is a very exciting development—an entirely new market for TGP. There could be future business arrangements of similar makeup which expand TGP’s portfolio beyond the traditional ownership of LNG carriers. It also shows the flexibility afforded older vessels, that they can be repurposed for storage/regas duty with only minimal capital investment.
Analyst Ratings & Potential Catalysts
TGP has garnered 4 Strong Buys, and 2 Holds, with no Sells, with an average price target of $14.5. Seeking Alpha’s Quant Rating has TGP graded with A’s for Value, Growth, and Profitability, with Momentum being a detractor. Analysts are expecting 2021 EPS of $2.45/shr. Similarly, our projections show $2.51/shr.
As we noted in our previous report on TGP, we see fair value of shares being in the range of $22-25/shr. Based on 2021 expected earnings of $2.51/shr, our 12-month price target is $17.6/shr, based on a PE ratio of 7x.
Figure 6. TGP Value Summary (Source: Company financials with Ashland projections)
Going forward, our price target will be influenced by TGP’s rechartering of vessels at rates above cash breakeven, securing debt at attractive rates, and allocating capital efficiently between shareholders and debtholders.
We believe the negative sentiment surrounding TGP’s 2015 distribution cut along with a general malaise in oil & gas related sectors ever since has led to the continued drag in the share price. However, with a modern newbuild program now complete and a clear deleveraging strategy making headway, we see the company’s increased distribution in 2021 and further in 2022, backed by sturdy cashflows, as potential catalysts for the share price to reset upwards.
Closing Thoughts
TGP continues to deliver on all targets—vessel re-chartering, improving cashflow, debt reduction, and steady distribution hikes. We continue to view the common shares as being undervalued—this is evidenced by PE and EBITDA multiples well below historical values. As for the Preferred shares, we view the A-series as being a poor risk/reward given the near-term call risk involved. The B-series are fairly priced given a current yield margin of circa 300bps relative to high yield bonds. Longer-term holders may appreciate the inflation-protected feature of the B-series.
The distribution increase is a welcome sign of financial health. Looking back, TGP had taken a very prudent and proactive action in 2015 to slash the distribution at a time where others were maintaining unsustainable payouts. In the end, TGP emerged with a stronger foundation and ability to renew distribution raises in a sustainable manner.
Look for TGP to continue to find ways to monetize its existing assets through joint ventures into new markets, as well as recontracting expiring charters at attractive rates, while taking sensible action to reduce debt and reward shareholders.
This article was written by
Analyst’s Disclosure: I am/we are long TGP. 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.
This publication is provided for informational purposes only. The opinions expressed herein are those of the individual author, and do not represent the opinions of any other employers or affiliates. The information provided herein is not intended to and does not constitute legal, financial, investment, accounting, tax, or any other type of professional advice, and should not be relied on as such by any recipient. None of the information contained herein should be used as a substitute for consultation with competent advisors. All information contained herein is provided “as is” without any express or implied warranty of any kind. While reasonable efforts have been taken to present accurate factual data from a variety of sources, no representation or assurances as to the accuracy of information or data published or provided by third parties and contained herein is made. The author, and its affiliates, and their respective officers, directors, members and employees shall have no liability in contract, tort or otherwise to any third party. The information set forth in this publication is for the internal use of the subscriber. The information contained herein is proprietary, and any duplication or distribution of such material to any third party is expressly prohibited absent the prior written consent of the author. The copyright for any material created by the authors and all other rights are reserved.
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.
Recommended For You
Comments (42)
Hope you took advantage of the 2020 trading alerts for the Teekay group, not only 2019... (-:
