Here's How Teekay LNG Partners Is Avoiding the Market Downturn

The spot rates for LNG tankers are collapsing and some operators are at risk of getting into trouble, here's how Teekay is avoiding trouble.

Jul 17, 2014 at 5:08PM

Just as the oil tanker and dry bulk markets have suffered from an oversupply of capacity during the past five years, the LNG tanker market is rapidly moving into a position of oversupply.

Indeed, during the first quarter of this year, the average day rate of LNG vessels halved, to around $70,000 per day, leaving only a thin profit margin for many operators. Deliveries of new tankers have sent the market into a state of oversupply, and with the fleet set to expand by a further 30% between now and 2017, this weakness looks set to continue.

Growing fleet
There are 63 new LNG vessels set to join the fleet over the next two years, adding to the 32 vessels delivered over the twelve months to march. What's more, compounding the problem is the fact that vessels are not leaving the fleet and LNG supply is not rising.

Hopefully, these two factors will work themselves through over the next few years. There are currently 42 vessels in the global fleet that are over 30 years of age set for retirement, and a number of LNG projects are set to come onstream next year. These include Chevron's delayed Gorgon project.

Concerning situation
Golar LNG's (NASDAQ:GLNG) management has gone so far as to say that it "remains concerned" by the state of the LNG carrier market. Nevertheless, the company expects to report second quarter operating results in line to "slightly better" than those reported for the three months to March.

However, alongside this cautiously optimistic statement, Golar's management issue a warning. According to management:

As this weak market looks set to prevail at least for the remaining part of 2014, the Board believes that the current spot fleet will continue to operate with a negative cash contribution...

So, it would seem as if the portion of Golar's fleet trading on spot rates is losing cash for the company. Still, the portion of the company's fleet operating on fixed contracts is helping to keep Golar profitable. Unless the market improves, however, these vessels will roll off contract into a weak market.

Not worried
Teekay LNG Partners (NYSE:TGP) is not worried about falling tanker spot rates. The partnership reported a strong first quarter this year, with operating vessel expenses and depreciation costs of around $33 million, compared to vessel revenues of $74 million.

What's more, Teekay has been trying to navigate around the supply glut by buying partnership interests in long-term contracts. The partnership has announced, within the past few days, that it acquired from BG Group ownership interests in four LNG carrier newbuildings.

Scheduled to deliver between September 2017 and January 2019, the vessels will each operate under 20-year time-charter contracts, for a wholly owned subsidiary of BG. This deal should be extremely beneficial for Teekay as the company has been able to acquire assets with a long-term contract in place.

Teekay will own a 30% in the first two newbuilds and 20% in the second two, with the balance of ownership held by an affiliate of China National Offshore Oil Corporation and China LNG Shipping Limited. The transaction with BG follows a 50/50 joint venture signed this year with a China-based liquefied natural gas shipping company to provide six internationally flagged icebreaker LNG carriers.

The bottom line
The bottom line is that the LNG spot tanker market is in trouble. Falling day rates caused by oversupply are pressuring operators, and Golar is now claiming that its ships on spot contracts are losing cash.

Teekay is getting around the issue of falling day rates by investing in partnership interests, coupled with long-term contracts; these investments should pay off for the partnership. If structured correctly, these deals should allow Teekay to avoid much of the LNG tanker market downturn, ensuring that partner distributions are kept intact.

Do you know this energy tax "loophole"?
You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

 
 

Rupert Hargreaves has no position in any stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers