GasLog Partners LP (NYSE: GLOP) is one of the fastest-growing shipping master limited partnerships (MLPs) globally. The partnership's existing fleet on the water and attractive asset dropdown potential lay the foundation for a multi-year distribution growth story. In addition to dropdowns, the long-term fundamentals of the LNG shipping industry remain among the best in all shipping end markets.
GasLog Partners and its parent company, GasLog Ltd (NYSE: GLOG), should continue to take advantage of the growing seaborne liquefied natural gas (LNG) trade, driving further vessel growth at the partnership level.
A little background
GasLog Partners is a growth-oriented limited partnership formed to own, operate, and acquire LNG carriers used for the transportation of LNG under long-term charters. The company has a fleet of three modern ships chartered under long-term contracts to a subsidiary of BG Group (NASDAQOTH: BRGYY). GasLog Partners' fleet growth will stem from its relationship with its parent, GasLog Ltd. The LP has created a stacked pipeline of 12 modern vessels to drop down into GasLog Ltd.
Distribution growth potential
GasLog Partners has a highly attractive distribution yield of 4.6% backed by solid long-term charters. The company currently makes quarterly distributions of $0.375 per unit ($1.5 on annual basis). GasLog Parters' initial feet of three LNG carriers have contracts with a strong counterparty, BG Group, and are chartered for at least 3.5-5 years. Moreover, the charterer has the option to extend contract for each vessel for another eight years.
The duration of the contracts and reputation of the counterparty provides the partnership with stable cash flows and protects it from the near-term weakness in the LNG shipping market. In case BG Group does not exercise the option to extend contracts at the end of 2018-19, I believe that these charters will be rolled over at higher levels as liquefaction projects are completed and new supply enters the market in 2016-17.
Dropdown candidates
GasLog has a long pipeline of dropdown candidates, and I expect the company to grow its dividend significantly over the next two to three years as its fleet expands through dropdowns. GasLog Partners has the option to purchase 12 additional vessels from GasLog Ltd. Moreover, these dropdown candidates have already secured long-term contracts with strong counterparties, BG Group and Royal Dutch Shell (RDS.A).
Blue chip counterparties
GasLog plans to grow its fleet at the rate of three to four ships every year, with the first dropdown expected by the end of the year. I would like to point out that the identity of the counterparty is just as important as the length of the contract. Blue chip counterparties are the goal here.
As I mentioned earlier, the partnership's initial fleet is all contracted with the BG Group, a major international oil and gas company. Out of the 12 dropdown candidates, all six steam vessels are contracted with BG till 2020. Two of the TFDE are contracted with Shell through 2020, and the remaining four TFDE vessels (which will be delivered in 2016) are also contracted with BG Group past 2022.
Source: Company Documents
Long-term fundamentals remain strong
The LNG shipping industry is going through a rebalancing phase as vessels are delivered before new liquefaction projects come online. While the companies with unemployed vessels in the water might be at a disadvantage for the next two years, GasLog Partners' current fleet has already secured long-term contracts. Even the dropdown candidates have also secured contracts with strong counterparties.
Broader market fortunes should turn and demand growth should accelerate in 2016-17. According to Morgan Stanley estimates, more than 60 million metric tons per annum (MMtpa) liquefaction capacity will come online in that time frame. This represents nearly twice the growth of the last two years.
As a result, I believe that the LNG carrier market is not facing a shipping glut. Instead, it's just that a large number of vessels were ordered at the top of the market. This has resulted in a surplus at present, but many more vessels will be needed as more liquefaction capacity comes online.
