by Travis Johnson, Stock Gumshoe | August 13, 2012 3:29 pm
You’ve probably heard of LNG tankers — I’ve written about them a few times, and several stocks in the LNG shipping business have been teased over the last few years. Essentially, Liquefied Natural Gas (LNG) is a super-cooled form of natural gas that can be shipped via large ocean tankers, and the promise is that LNG can help turn natural gas into a globally traded commodity instead of a locally traded commodity, which would normalize prices as folks buy cheap gas in Australia or the US, ship it, and sell it in places like Western Europe or Japan or South Korea where prices are substantially higher (since they don’t have enough inexpensive natural gas production within a pipeline’s distance of their consumers).
LNG transport has particularly taken off as an investing theme in recent years for two main reasons: The Japan earthquake, and US hydrofracking. The Japanese earthquake shut down their nuclear plants and forced them to ramp up natural gas imports dramatically to meet their electricity generation needs; and hydrofracking and horizontal drilling in places like the Fayetteville and Marcellus Shales in the US has dropped US natural gas prices so low that the price differential around the globe has increased, and even US producers (and regulators) are starting to consider eventually exporting gas. There are other factors too, of course, including increased LNG exports from Qatar and new discoveries around the world, particularly in Australia and offshore Africa (both West and East), but the basic premise is that there are a lot of companies trying to make a profit by producing cheap natural gas and selling it to places far away where prices are far higher — and it’s relatively easy to do now, with transport costs substantially below the recent extreme price differentials that we’ve see around the world (ie, natural gas at $3 in the US and at $15 in South Korea).
Which means we need an efficient transportation system for natural gas — liquefaction and regasification facilities as well as a large enough fleet of LNG tankers — to enable this global trade. LNG has been around for a long time, and there was a prior boom of LNG shipping 30 or so years ago, but the market was small enough, with so few terminals and trade routes, that the only way to make it work was to have the few tankers chartered for very long periods to the few companies who were actively shipping gas, and it was far from exciting or lucrative — unlike shipping crude oil, there weren’t many competitive providers of ships or competing customers who would pay up to get quick access to a tanker.
That’s starting to change now, with many more LNG producers and customers and enough of a global flow in LNG Trade that there are even some tankers that trade on the “spot” market to meet urgent demand and get higher rates as well as the much larger number of tankers that are on long term charters… and to top that off, many of the new discoveries are far from the expected customers (we may see them shipping natural gas from Angola to Japan, for example), and longer routes also demand more tankers. So the basic backdrop, assuming that the world doesn’t return to the stone age, is pretty compelling — increased demand for LNG shipping seems almost inevitable, and there was almost no investment at all into LNG tanker construction for 20 years, so it seems likely that even the wave of new tankers being built will probably be able to be absorbed by increasing demand.
And now Elliott Gue is jumping aboard by teasing that he’s got a special report on his “#1 LNG Tanker Stock to Buy Now.” And, well, we want to know what it is. Preferably without shelling out a few hundred bucks for his newsletter … so how does he tease us?
“My Top Pick for Price-Proof Profits
“Because LNG shippers lock in long-term rates, they’re immune to fluctuations that can wreck havoc on others in the energy chain.
“So whether natural gas prices go up or down… the profits for LNG tankers will almost certainly keep rolling in.
“And what if natural gas just stays cheap? That’s great… because then more of it is bought, sold and transported, which means good business for tankers.
“This is why I’m comfortable saying that LNG tankers are the surest energy play with so much upside right now.
“No, they won’t capture headlines the way big new oil and gas discoveries will… but who cares?
“Grab the right LNG tanker now and you’ll get rich quietly. And here’s the one I’d grab right now, if I were you:
“Right now, it operates 14 LNG carriers—with 8 more on the way. And it’s already signed long-term contracts to deliver LNG for Shell and BP.
“It charters out its tankers for $147,000 per day, leading to fat operating margins of 33%.
“Even better: Charter revenues are expected to skyrocket from $56 million this year… to $210 million in 2015. That’s barely two years from now.
“And that’s not all: Goldman Sachs believes this dynamo is undervalued by at least 50%. Analyst Eduardo Baldini says this LNG tanker “is a significant player in a growing market” and “has a solid balance sheet with a fully-funded order book at attractive terms.”
“Right now, you can scoop it up for only $10 a share.
“As we saw with Golar and Cheniere Energy, this $10 price probably won’t last long. If this stock follows suit, every $10,000 you put in now could mushroom into anywhere from $70,000 to $110,000 within two to three years.”
So … who is it?
Well, we toss all that info into the maw of the Mighty, Mighty Thinkolator … and even though it’s moving a bit slower in these dog days of August, we can still get our answer out pretty quick … this is GasLog (GLOG)
This is a company that has interested me before, though it’s fairly new. Here’s what I told the Irregulars about GasLog back in April, when I was opining about all things gassy:
“If you’re a bit more patient, you might also want to keep an eye on recent IPO GasLog (GLOG) — they just went public a few weeks ago and have a very young fleet of two LNG tankers, a dozen or so tankers that they manage but don’t own, and a full order book, they’re not going to show great numbers in the next couple quarters so there may be an opportunity to buy it cheap, I’m keeping an eye on that stock to see if it dips (hopefully down to the $8-9 range) when they report the next couple of weak quarters incorporating the rising cost of being a public company, and before they begin to enjoy the benefits of their ships that haven’t been built yet. They have six newbuildings on order that should be delivered in 2013, so that’s a big catalyst to dramatically change both their balance sheet (as they pay for the deliveries) and their income statement (as those tankers start generating income). I haven’t had a chance to look very closely at GasLog’s business, including their strategy (especially their length of charters), but they priced well under the expected IPO range and have dropped further still (expected at $16-18, IPO’d at $14, now at $11+) and this smells to me like a busted IPO that will become an opportunity pretty quick if it continues to wither. I think the Street might be expecting those future newbuildings to hit during a glut of LNG newbuildings and to not get great rates, but given the expected demand for LNG shipping over the next five years I think that’s shortsighted. Worth watching.”
GLOG is now below $10 — it dipped to about $9 a couple months ago and I was tempted but didn’t end up buying the stock, but if you want something that should be fairly steady then it’s probably a decent buy in this neighborhood … as long as you don’t think we’re going to have a complete credit crunch again within the next two years, since all of these heavily indebted shippers have a tendency to get clobbered if debt gets to be inaccessible. They have enough credit lined up, and enough equity from their IPO early this year, to cover all their commitments for their newbuildings that are going to start delivering soon, with most of the debt not coming due for at least five years as long as they don’t breach covenants, and even some pretty good hedging of their interest rate risk over the next several years … but still, if you think banks will crash and companies will have trouble borrowing money over the next two years, GLOG equity will probably get cheaper if that happens.
On the flip side, they’re also going to start generating a lot of cash flow next year, when their larger fleet of owned vessels begins to hit the water — they’ll make a lot more from the fleet they own than from the fleet that they primarily manage for other owners. Because of that big change that they’ll start to go through next year, their standard valuation metrics don’t necessarily look particularly compelling right now — they’re trading for about 30X last year’s earnings, and their profits are expected to drop from 2011 to 2012 as they’ve ramped up spending for both the IPO and in preparation for the growth in their fleet size in 2013. But 2013 is when it starts to get interesting, with analysts predicting that their revenues will more than double as their fleet expands. The company’s guidance is for $133 million in time charter revenue in 2013 and $214 million in 2014 before it drops off a bit in 2015 to $210 million as they expect some maintenance downtime.
I personally own shares of Golar LNG (GLNG), which I think of as a riskier play on expanded LNG demand, but I think GasLog has the potential to be a less volatile play on LNG tankers — they have six of their newbuilds already contracted with major customers (BG and Shell) for 5-7 years, so things should be fairly predictable even though this means they’re not going to get big spikes in revenue from rising day rates (and as far as I can tell, despite Gue’s tease, they’re getting more like 7$0-80,000/day for these long term charters, I think the deals that have been made recently that approach $150,000 a day are spot charters — short term “desperate for an available tanker” deals). So they shouldn’t have to issue any more equity unless they want to order or acquire more tankers, and they are planning to pay a dividend starting in the fourth quarter of this year — the dividend will start at 11 cents/quarter, so that’s roughly a 4.5% yield at the current price. That’s competitive with Golar and not too much lower than the similarly long-term focused MLPs who own LNG tankers (like Golar MLP, GMLP at about 6%, or Teekay LNG Partners, TGP, at 6.7%).
So … there’s still certainly some risk in GLOG, particularly because most of their ships have not yet hit the water and we can’t really be sure how effective they’ll be as a large fleet owner or whether they’ll deliver the cost savings they expect (particularly through having more modern, efficient ships) — but they have been in this business for a long time as an operator of BG’s fleet so they’re not as new or inexperienced as the recent IPO might imply. I buy the basic premise behind these investments, that LNG demand will continue to grow as new customers and new producers come online, and as long as you start with that premise GLOG should do quite nicely as a steady eddie performer for the next several years.
They report earnings in about a week (pre-open on Tuesday the 21st), so it’s probably possible some negative commentary could change investor opinions at that time (if any of their vessels are delayed, for example, or they have any trouble with their banks), but I think it’s more likely that the talk will all be about what the current utilization rate is (it was 100% in the last quarter, which helped them beat estimates … though they were still substantially less profitable than a year ago) and how their costs are ramping up for next year. If the stock falls at all because of any current year weakness, like unexpected yard time for a tanker, or higher costs, it could present a better buying opportunity, since any rational look at this company tells us that what we’re really buying is not the company they are today, but the company they will become over the next two years. But at this price, I think that’s probably splitting hairs — GasLog should grow substantially in 2013 and 2014 with deals that are already done, and the fact that the stock is still newly public and the first dividend has not yet been paid probably means they are not getting quite enough attention from investors. I’m hoping that the stock gets a bit depressed over the next few months before their story really starts to play out, but it’s hard for me to envision things going very badly for investors who get in below $10.
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