There are several ways for investors to play the growth in the LNG industry. One of these ways is to invest in those companies that will be transporting the fuel from those countries that produce it to those countries that consume it. One such company is GasLog (NYSE:GLOG).
GasLog is an international owner of LNG tankers. The company currently has a fleet of fifteen operating vessels, including three that it is in the process of acquiring from BG Group. GasLog also has an additional nine ships under construction.
New ships are drivers of growth
These ships that are under construction will be the driving force of the company's forward growth, and the sheer number of ships under construction compared to the operating portion of its fleet should result in quite powerful growth. This is because these ships are not currently operating. Instead, all of the company's revenues are coming from the operating ships in its fleet. However, once the company's new ships are complete and start operating then they will also be generating revenue, thus producing growth.
Short-term weakness in LNG shipping industry
Many of you are likely familiar with the struggles that the overall shipping industry has been having over the past several years. However, these struggles have not affected the LNG shipping industry as much, which was in the midst of an unprecedented boom until fairly recently when short-term charter rates began to soften. However, GasLog itself has been largely unaffected by this weakness due primarily to its very large number of long-term contracts. The LNG shipping industry itself is expected to recover within the next year or so, and that should drive charter rates back up, which will likely prove beneficial for the company in the coming years. This is because the growing demand for LNG from countries around the world is likely to cause a shortage of ships by the end of this decade.
Long-term charters provide stable cash flow
One of the nicest things about LNG shipping companies is their long-term charters and GasLog is no exception to this. What this means is that the company that needs to ship LNG will commit to use the LNG tanker for a long period of time, usually several years. This works out quite well for the tanker company as it provides very strong visibility into future cash flows and effectively provides guaranteed revenues to the tanker owner. We see this in GasLog. GasLog currently has contracts for 98% of its total available time this year and 82% of its time next year. In fact, GasLog has contracts that provide the company with guaranteed revenues until 2026.
High debt poses some risks
GasLog has been rapidly growing its fleet over the past few years and this, naturally, cost the company a great deal of money to accomplish. This is due to the high cost of building an LNG tanker relative to other types of ships. An LNG tanker costs, on average, just north of $200 million to build. Due to this high price, GasLog has been forced to take on an enormous amount of debt to construct its fleet rapidly.
The company has also used other methods besides debt to build out its fleet such as transferring some ships to a master limited partnership, which has helped it avoid taking on too much leverage. But, even so, GasLog currently has $1.1 billion in debt compared to approximately $837 million in equity. This gives the company a debt-to-equity ratio of 1.31.
This debt-to-equity ratio is higher than some of GasLog's peers and thus may present some risks. For example, Golar LNG (NASDAQ:GLNG) has a debt-to-equity ratio of just 0.44. However, as long as the LNG shipping industry remains strong then GasLog should be able to generate the sustainable cash flows that are needed to pay down this debt. GasLog's long-term contracts will help a lot here by providing a stable, steady source of income.
Other ways to play LNG
There are other companies that can benefit from the boom in shipping liquefied natural gas, many of which are GasLog's direct competitors. Golar LNG is one such company (discussed in more depth here). Another company that stands to benefit is Teekay LNG Partners (NYSE:TGP), which also offers a very nice 6.19% yield to investors. Teekay LNG Partners is not a pure-play on shipping LNG however, as the company also operates crude oil and LPG tankers.
In conclusion, LNG shipping companies such as GasLog offer an excellent opportunity for investors to profit off of the LNG boom. This is because these companies are right at the heart of the boom due to their function of shipping this LNG from those countries that produce LNG to those that consume it. As long as this boom continues, and there is a good chance that it will, then these companies can be a very good place to be.
Daniel Gibbs has no position in any stocks mentioned. His research firm, Powerhedge LLC, has a business relationship with a registered investment advisor whose clients may have positions in any of the stocks mentioned. Powerhedge LLC has no positions in any stocks mentioned and is not a registered investment advisor. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.