Profits to serve liabilities, not unitholders
GasLog Partners LP (GLOP) is a growth-oriented master limited partnership specializing in the purchase, ownership and operation of LNG carriers involved in the transportation of LNG on multi-year charters.
Since the IPO of the partnership, GLOP has expanded its fleet from three vessels to 14 vessels from its latest depots. Specifically, nine of GLOP’s vessels operate on modern TFDE propulsion technology, while the other five are steamships.
Since Russia’s invasion of Ukraine, demand for LNG carriers has skyrocketed amid growing Western efforts for energy independence. As a result, GLOP shares are up over 54% in the past month alone.
While the partnership should be able to renew its current charter contracts at higher rates amid recent macroeconomic developments, there are several risks associated with GLOP’s investment case. For this reason, I am neutral on the title.
Fleet expansion was costly
Although GLOP’s fleet expansion over the past few years has met the company’s growth objectives, it has come at a high cost.
In order to finance the expansion of its fleet, GLOP issued substantial shares of common units, preferred stock and long-term debt, which eventually eroded the value of the shares. Despite the stock’s massive rally over the past month, you can see that units are still trading at a fraction of their past levels.
The publicly traded preferred shares of GLOP, for example, were issued with initial yields ranging from 8% to 8.63%, which squeezed profit margins and significantly weighed down the partnership on the liabilities side of the balance sheet.
This caused GLOP’s unit price to collapse from its IPO levels, further increasing the partnership’s cost of equity on subsequent unit issuances, resulting in even more expensive vessel acquisitions. The relatively low charter rates in those years didn’t help either.
Is GLOP’s investment case improving?
Despite GLOP’s protracted and costly fleet expansion, the partnership has recently made positive progress in improving its balance sheet.
The most significant development is the continued reduction of long-term debt. Amid the suspension of its fleet expansion, GLOP allocated capital to reduce its long-term debt, which fell from $1.29 billion in the second quarter of 2019 to $990 million in its latest report.
In addition, GLOP redeemed its preferred shares on the open market. Like debt coupons, although different in some respects, preferred dividends are a form of mandatory “interest payments” for the partnership. By redeeming nearly $21 million in preferred stock over the past year, the company will now save about $1.5 million in preferred dividends per year.
Additionally, GLOP’s Series C Preferred Shares have a fixed-to-float structure after its call date in 2024. This means that either the company calls this series in 2024 and begins saving on all underlying preferred dividends attached. to this series, either it doesn’t, but the dividend rate on the C series drops 8.5% to LIBOR plus a spread of 5.317%.
Therefore, we see another catalyst that should lighten the balance sheet of the partnership one way or the other in the short to medium term.
Distributions and Valuation
In accordance with its MLP structure, GLOP must distribute the majority of its net income to unitholders. However, amid the challenges described above, GLOP has reduced its per-share distributions more than once. The latest distribution cut essentially suspended payments, with the current quarterly rate standing at a paltry $0.01.
However, with GLOP improving its balance sheet lately and the company’s potential to see significantly higher earnings amid ongoing macroeconomic developments in the LNG space, distributions could come back strong.
The company is expected to generate EPS close to $1.49 this year. Assuming that GLOP starts distributing only $0.50 per year, this would automatically translate to a return close to 9.7% at the stock price level. After all, this estimate implies a forward P/E of just 3.7, which suggests the stock is priced quite attractively.
That said, the stock is cheap for a reason, as GLOP is more than likely to continue to execute on its deleveraging plans before such distributions occur. Remember that GLOP’s total debt is nearly 50 times the value of its common stock.
Until then, who knows if the macro situation will be positive or negative for the partnership? Therefore, there is certainly a great deal of uncertainty and speculation attached to GLOP’s investment case.
GLOP has recently attracted increased investor interest following the West’s determination towards energy independence. The partnership is likely to renew its current contracts at significantly higher rates over the next few years, which should help accelerate its ongoing deleveraging efforts.
While the stock may appear undervalued on paper and based on future earnings forecasts, the dollars that will be generated over the next few years are unlikely to find their way into unitholders’ pockets. GLOP is expected to use most of its operating cash flow to service its liabilities.
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