Master limited partnerships (MLPs) are a great way for income investors to participate in America's oil and gas renaissance and earn generous and growing income, as well as, market beating capital gains. Within the world of MLPs there are many choices from oil and gas producers to pipeline partnerships to refiners, but this article is meant to highlight two of the newer MLPs (and one general partner) in an industry many investors haven't heard of or considered -- LNG (liquefied natural gas) shipping.
The basic thesis behind LNG shipping is this: America's shale gas boom has resulted in much cheaper natural gas than Europe or Asia, where gas is two to three times as expensive.
With growth in gas demand from Asia expected to increase substantially through 2035 (China's demand alone is projected to grow at 5.9% CAGR), China and India are investing heavily in the infrastructure to import LNG (import capacity in China and India expected to double by 2016 and triple by 2018). Because LNG must be stored at -260 degrees Fahrenheit, LNG carriers are highly complex vessels requiring long lead-times to build and commanding much higher day rates than other energy carrier vessels ($80,000/day compared to $23,500/day for even the largest oil tankers).
By 2016, 90 million metric tons/year of LNG export capacity is coming online, a 32% increase in just three years, which will require 100 additional LNG carriers; the world fleet currently at 362. With only 90 LNG carriers expected to be delivered by that time and 20-30 carriers to be scrapped, the current short-term glut of LNG carriers (61 new ships to be delivered through 2015 with 20 uncontracted) should be gone by 2016, with Teekay LNG Partners predicting a rising deficit of ships (35 to be exact) by 2018.
This should ensure strong day rates and, with LNG charters often being very long term, investors should be rewarded with high yields, growing distributions, and strong capital gains.
Three excellent LNG investments
One of the newest LNG shipper MLPs is Dynagas LNG Partners LP (NASDAQ: DLNG). IPOing in November of 2013 with just three LNG carriers, it recently acquired its fourth vessel, The Arctic Aurora, for $235 million from its sponsor Dynagas Holdings LTD. The vessel was built in 2013 and is under charter with Norwegian oil giant, Statoil through the end of 2018. With 76% gross operating margins and $117.2 million left on its contract, management is recommending a 6% to 7.5% distribution increase due to the accretive nature of the acquisition.
The investment case for Dynagas LNG Partners is simple -- yield and growth potential. The yield of 6.1% has a distribution coverage ratio of 1.12 and is not only safe (secured by an average charter duration of 6.1 years and a $652 million backlog) but likely to grow quickly in the future.
This is for two reasons. First, Dyngas Holdings LTD has two LNG carriers on the water and four set to be delivered through Q2 2015. Dynagas LNG Partners has the right to purchase these within 24 months of delivery, representing the potential for 160% fleet growth within the next two to three years. And as its latest charter contract with Gazprom shows (13-year charter at $78,200, a 2.7% increase from its previous rate), management is very good at securing good day rates even in challenging market conditions.
Golar LNG LTD (NASDAQ:GLNG) and its MLP Golar LNG Partners LP (NASDAQ:GMLP) are part of the John Fredriksen empire of ocean based, high-yield growth companies. They yield 3.9% and 6.3% respectively and a strong case can be made for owning both. That case is that Golar LNG has eight vessels, three of which are candidates for FLNG conversion. This means turning an LNG carrier into a floating LNG export terminal, which Golar's recent FEED study found is 20%-33% cheaper than land-based export facilities.
Golar LNG also has nine new builds under construction to be delivered through 2015. The company plans to drop down many of these to its MLP as it has with all of its FSRUs (floating storage and regasification units, ie floating LNG import terminals).
This will result in massive fleet growth for Golar LNG Partners, which will fuel strong distribution growth (11.8% CAGR since its IPO and analysts projecting 7% CAGR growth over the next decade).
This in turn will trigger increased IDR (incentive distribution rights) fees to Golar LNG, which is already up 400% since Q3 2012 and expected to double within nine months with the next FSRU dropdown.
This will fuel dividend growth at Golar LNG (18.5% CAGR in the last 3.5 years) and make this one of the best dividend growth stocks in America.
The best time to invest in a long-term strong growth industry is during times of short-term weakness. Now is that time for LNG shippers, with yields at Golar LNG, Golar LNG Partners, and Dynagas LNG Partners at elevated levels. Long-term income investors would do well to consider locking in those generous yields and cash in on one of the most exciting long-term megatrends in the energy sector.