Last week, GasLog (NYSE: GLOG) reported some weaker than expected earnings as the market for LNG deliveries is suffering from lower demand in places like China. Even though this doesn't look great now, there were several more promising signs in the company's recent results. Let's take a quick look at earnings for the past quarter and what we can expect from GasLog further down the road.
By the numbers
| Results (in millions, except per share data | Q3 2014 | Q3 2015 | % Change |
| Revenue | $99.4 | $105.7 | 5.9% |
| Adjusted EBITDA | $68.7 | $65.6 | (4.7%) |
| Net income | $25.4 | ($7.29) | -- |
| EPS | $0.32 | ($0.12) | -- |
Source: GasLog earnings release.
This past quarter wasn't great for GasLog. First, revenues were a little lower than expected as LNG spot market charters were contracted at lower than expected rates. Also, GasLog generated some higher operational expenses with new vessels hitting the water in this weaker environment. On top of that, the company took a $9.6 million loss related to foreign exchange swaps and financial costs were higher related to increased debt levels that are being used to pay for its newbuild program.
The business highlights
At the end of the quarter, GasLog, in conjunction with Dynagas and Golar LNG (GLNG 1.94%), announced they were forming a Carrier pool agreement for their vessels that will work on the spot market. The objective of the pool will be to consolidate marketing and charter scheduling for a pool of vessels that will operate exclusively on charters of less than 12 months. The idea behind the combined vessel pool will provide customers with more shipping efficient shipping options.
This will likely be an important component of each respective company's business because spot market vessels are the higher risk, higher reward aspect of the business. Typically, short-term charters will generate higher margins, but rarely are they utilized as much as a ship under a long-term charter. If the Carrier pool can improve utilization of vessels dedicated to the spot market, it should pay off for all the parties involved.
Another key element this past quarter was that GasLog was able to successfully drop down four vessels to its master limited partnership, GasLog Partners (NYSE: GLOP). The deal was done on July 1, which was a rather opportune time to do such a deal because the partnership was able to secure $173 million in capital from issuing new equity. Since that time, its share price has dropped 27%. Unless we see a strong rebound in prices, GasLog Partners will find it much more expensive to raise capital through another equity issuance.
What Management had to say
"GasLog continued to execute on its long-term strategy during the quarter. Our contracted vessels performed strongly and we have been pleased by the performance of the Cool Pool in its initial weeks of operation. GasLog also completed its largest financing to date, raising $1.3 billion to fund its eight vessel newbuild program. The lenders were a combination of new and existing lenders along with the Korean export credit agencies. This financing demonstrates the banks' strong appetite to lend to high quality companies with good assets and strong contracts. As the vessels deliver over the next four years, it is anticipated that the equity component of the newbuilding program will be funded by cash on GasLog's balance sheet and operational cash flow." --CEO Paul Wogan
Looking ahead
GasLog does not have any new vessels slated to come online this year, but it will have one new rig entering service per quarter in 2016 if everything stays on schedule. All four of the vessels have seven- to 10-year charter agreements in place with BG Group, which will become part of Royal Dutch Shell in early 2016. Despite weaker LNG spot prices, management still expects long-term LNG demand to remain strong.
10-second takeaway
Despite the backtrack in terms of earnings, GasLog seems to have all of its ducks in a row here. It has secured financing for its newbuild program through 2018, seven of the eight new vessels have long-term charters in place, and its existing fleet is well contracted out until at least 2018. Barring any major contractual changes that could, but not likely, occur when BG gets folded into Royal Dutch Shell, GasLog looks to be well positioned to take advantage of the coming boom in LNG shipping.
