What: Shares of GasLog Partners (NYSE: GLOP) shed a little more than 10% in June as its general and managing partner, GasLog Ltd. (NYSE: GLOG), announced that it was offering an additional 7.5 million shares.
So what: The secondary unit offering by GasLog Partners was done in conjunction with the drop down of three vessels from LNG carrier specialist GasLog to the partnership level. The total acquisition cost of those vessels came in at $483 million. The secondary unit offering, on the other hand, was only $175 million, making the total amount of capital raised in this equity issuance about one-third of the total acquisition cost. That's a pretty good deal considering that the three vessels will increase the partnership's transport capacity by 57% without wiping out all unitholder equity at the same time.
Another thing that should keep this deal in perspective is that the parent company had plans to drop these vessels down to the partnership for quite some time. In fact, management said at its 2014 investor presentation that these three vessels and seven others were considered drop-down candidates in order to fuel the parent company's ambitious plans to almost double the size of its fleet between now and 2040.
To make these drop downs possible, the partnership will need to balance how it funds those acquisitions. If the partnership relies on too much debt, it could find future access to capital constrained. But with a mix of debt and equity it can maintain some balance sheet discipline that should help make this major growth phase a little more financially feasible. Besides, there doesn't seem to be any indication that this equity issuance will significantly impact the company's ability to pay its distributions.
Now what: Secondary share or unit offerings are rarely seen as a good thing, but in this case it's not as bad as GasLog Partners investors seem to believe. Adding vessels under the long-term charters featured in this deal will be immediately accretive to EBITDA and cash flow. Plus, by splitting up the acquisition costs for these vessels between debt and equity the company is maintaining some balance sheet discipline while not completely diluting shareholder equity. If the company can continue to acquire vessels at these sorts of debt and equity exchange rates, the partnership should set itself up well to increase both its fleet size and distribution to shareholders.
