Why Is Teekay LNG Partners Lagging Its Peers?

Worldwide liquefied natural gas, or LNG, imports are projected to climb significantly through 2030. The only way to move LNG overseas is by ships called LNG carriers. Intuitively, investing in LNG carrier companies makes sense given the long-term LNG demand and the need for carriers. Today, however, there simply isn't enough LNG to fill demand. This could put short-term pressure on an otherwise attractive investment.

Indeed, LNG carriers have generally done well, with the exception of Teekay LNG Partners (NYSE: TGP  ) . The stock barely climbed over the past year. This, despite paying a distribution that yields 6.3%. Other LNG carriers such as Golar LNG (NASDAQ: GLNG  ) and GasLog (NYSE: GLOG  ) have fared better, their stocks rising 66% and 99%, respectively. Most of these gains have come since February. So, why hasn't Teekay kept up with its competitors?

A look at fundamentals
Teekay's underwhelming performance is not a result of the income it offers. Teekay LNG Partners currently yields 6.3% -- far more than Golar's 3.2% or GasLog's 1.6%. The distribution for Teekay has slowly grown, as it has for Golar and GasLog, but not spectacularly so. Teekay's distribution enjoys a coverage ratio of 1.02, just above the ratio of 1.0 considered sustainable. Gaslog's modest dividend is well covered by earnings, but Golar's isn't, at least not at the moment.

Earnings don't explain the divergent stock performance, either. Golar has posted losses as often as profits over the past year, and while GasLog posted profits over the past year, Teekay put even better numbers on the board. Investors seem to think Golar has potential for future returns, and most analysts forecast growing earnings. Still, why would a profitable company lag a marginally profitable one?

One consideration is fleet composition. Teekay operates oil tankers at a time when there's a glut of such ships on the market. GasLog and Golar don't. GasLog operates LNG carriers and nothing else. Golar operates LNG carriers and other LNG-related ships called Floating Storage and Regasification Units and Floating Liquefaction Units. The former are used to receive LNG and transfer it to shore. The latter cools and liquefies natural gas for transfer onto an LNG carrier. Put another way, Golar operates ships that can liquefy natural gas, transport it to some destination, and then regasify the LNG for transfer to shore for use.

That said, Teekay only operates eight oil tankers, and its earnings don't seem to be suffering terribly. Additionally, Teekay operates ships that transport liquefied petroleum gas, such as propane. Teekay owns interests in 19 such ships, with several more on the way. The revenue from these ships is better than from LNG carriers.

That four letter word
One big cloud on Teekay's horizon is its debt. One metric to measure the indebtedness of a master limited partnership is its debt to earnings before income tax, depreciation, and amortization, or debt/EBITDA. Typically, a ratio of 4.0 or less is considered safe. Based on earnings announcements on the company's website, Teekay's debt/EBITDA comes in at 8.25. In fairness, Teekay has been acquiring interests in new LNG carriers and other ships. These cost money. So, while Teekay is clearly investing in the future, its current debt load may cause trouble if there's a further downturn in the LNG or liquefied petroleum gas markets. GasLog and Golar, in contrast, operate with a much lower debt load.

Final Foolish thoughts
By all accounts, there is significant and growing demand for LNG across the world. Projections are for LNG demand to double by 2035. Asia, including India, will be a major market, with Latin America following. Europe is increasing its LNG imports, with France constructing one terminal at Dunkirk that could supply 20% of its needs. However, Europe faces competition for LNG since Asian markets pay better. LNG production will increase as the U.S., Australia and others compete with Qatar for LNG markets. If Canada can sort out its internal LNG export issues, it could be a major supplier of LNG to Asia.

All of which spells profits for LNG carrier companies. Teekay is clearly the income play of the three companies reviewed here. However, its debt picture warrants caution. While the long-term picture is bright for LNG carriers, the short-term picture is more challenging, leaving Teekay investors vulnerable if the company's cash flow is interrupted. GasLog offers the most consistent earnings of the three, while Golar operates a more diversified fleet. I'm partial toward Golar since its diverse LNG fleet should help it ride out the current difficult LNG market and perform well in the future.

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10/22/2014 3:59 PM
GLNG $52.52 Down -2.33 +0.00%
Golar LNG Limited… CAPS Rating: ****
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Teekay LNG Partner… CAPS Rating: *****

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