GasLog Partners (NYSE: GLOP)--PE Deals, LNG Storage Deficits Create Optionality Value
- LNG Transport and Storage is seeing a flurry of M&A activity, backed by private equity funds.
- A deficit of storage capacity in East Asia could provide new deployment avenues for GLOP's middle-tier assets.
- GasLog Partners (NYSE: GLOP) has no medium-term liquidity issues, having refinanced all maturities until 2024.
- We introduce an Options strategy, backed by fundamental analysis, which could produce annualized returns of up to 42%.
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The LP company of parent GasLog (GLOG), GLOP is an owner/operator of middle-tier LNG carriers (LNGC), comprised of TFDE and steam engine vessels. The company has backlog of $479M, offsetting roughly half of the outstanding debt on free cash flow basis.
The company is consistently cashflow positive and management is emphasizing debt reduction over common stock distributions as a way of gaining cost advantage in the increasingly commoditized LNGC spot market.
GLOP has managed to keep its dayrate breakeven cost competitive with peers (Figure 1) and below the latest 1-yr time charter and Spot rate assessments for both engine types.
Figure 1. Dayrate Breakevens, Comparison of GLOP with Peers (Source: Ashland calculations compiled from company filings)
The Parent company, GLOG, has recently has recently proposed to take the company private. We believe that if this proposal is successful, the paths of future growth will be limited for GLOP, however, its enterprise value as a part of the overall GasLog group will be supported.
Therefore, we are introducing an Options strategy consisting of selling (writing) out of the money (OTM) Puts, which would stand to benefit from a sideways or increasing GLOP share price. This strategy has the additional benefit to the investor portfolio, providing upfront cashflow without committed capital, which allows for reallocation towards other promising investments.
GLOP's capital structure and our future projections are summarized below in Figure 2.
Figure 2. GLOP Capital Structure (Source: Ashland compilation of Company data with future projections)
Debt to Capital is 51% while Net Debt to EBITDA stands at 6.5x—a level we expect to drop to 5.2x by 2024, even as dayrates could potentially fall with some vessels rolling off their original charters. The average interest rate is 4.5% with half of the debt locked into fixed rates via interest rate derivatives. Annual debt amortization is $110M, which equates to 8% of total debt.
Debt to capital represents book value of equity and not market value which remains significantly depressed, however, we do not see this as a hindrance in the leverage assessment, as GLOP's value does not rely on, and management has not stated intent to issue, further equity raises. Much of GLOP's equity was issued at prices above $20/shr.
During July 2020, GLOP refinanced all of its near-term debt maturities (Figure 3), deferring the nearest maturity to 2024, while collateralizing a set of vessels whose charters end this year. That GLOP was able to achieve this refinance in the middle of the COVID downturn and with vessels lacking long-term charters was a particularly impressive feat.
Figure 3. GLOP Debt Maturity Schedule (Source: GLOG January 2021 Investor Presentation)
GLOP has three classes of Preferreds (A, B, and C), with a total share count of 14.35M and corresponding face value capitalization of $359M. Each class has call dates and floating rate (to 3-mo LIBOR) provisions as summarized in Figure 4.
Figure 4. GLOP Preferred Stock Table (Source: Ashland compilation of Company filings)
The floating rate provision is an attractive feature given the recently rising rates in the 10-yr US bond and generally the reawakening of inflationary factors, including the exchange prices of commodities, such as crude oil and copper. However, this benefit must be viewed alongside the risk of GLOP calling the Preferreds early, thus, potentially cutting short a long-term benefit.
Share count increased from 46.4M to 50.4M, or 8.6%, as a result of the IDR elimination. A certain portion of the new shares are subject to a conversion period extending through 2024. Post-transaction, GLOG holds a 35.3% ownership interest in GLOP.
The quarterly distribution had reached an apex of $0.56 in Q1 2020, before being cut twice to its current rate of $0.01, as several term charters ended and management shifted the free cash flow objectives toward cost reduction via debt amortization.
As we will demonstrate, the elimination of the distribution was not a result of a precipitous decline in cashflow as it may appear, but rather a capital allocation decision emanating from management's strategy to become a low-cost leader in the spot market
With the IDR's having been eliminated and the take private deal with GLOG and BlackRock pending, there is more incentive than ever for GLOG to monetize its stake in GLOP. The proceeds could potentially be used for further development within the GLOG business—an apparent goal of Chairman Peter Livanos made evident by the move to replace public unitholders with BlackRock funds. Approval of this deal remains subject to a majority vote of public unitholders present at the next proxy meeting and is expected to take place in Q2 2021.
Financials & Valuation
GLOP's annual revenue peaked in 2019 when most vessels were locked into long-term charters. It has since fallen in 2020 and we project to fall further in 2021. We believe that GLOP's track record of securing spot charters in excess of breakeven dayrates will stabilize revenue beginning in 2021 and stabilizing in a range of $220-$240M.
Adjusted net income and free cash flow (FCF) have continued to demonstrate resilience, as a result of high utilization rates which have been consistently near 100%. Going forward, we expect utilization in the mid-90's with dayrates slowly tapering off through the mid-2020's, and annual FCF, excluding early debt retirement, of $100M.
Our valuation model (Figure 5) is based on what we view as a worst-case scenario, in which GLOP self-liquidates its spot market vessels, concluding in the terminal year (2026) at which point it is assumed that all remaining vessels are sold at book value.
This valuation model results in a fair value of $3.40/shr, representing a 17% premium on today's stock price.
As we will demonstrate later, this forms the base case for our valuation, with asset-based valuation models slightly lower in a worst-case scenario and FCF models with optimistic assumptions showing a substantially higher upside.
Figure 5. Valuation Model (Source: Ashland calculations and projections based on Company data)
Preferred Stock Analysis
We view the Series A Preferreds as being a solid income vehicle, given the yield of 9.7% and the floating rate feature.
Fixed charges are covered over 1.58 times by EBIT currently. We project that this ratio will remain above 1.24 through at least 2026, indicating an adequate cash flow coverage of the preferred distributions.
We favor the class A shares over classes B and C due to the fact that the call and float features for the A’s extend further into the future, thus sustaining the yield for longer. It also has the highest reset margin among the classes at 631 bps. For example, if the 3-month LIBOR in 2027 is 3.0%, the reset yield will be 9.31%, resulting in a LIBOR margin of 6.31%, compared to today's yield margin of 9.27% (Figure 6). Meaning that, for the next 6 years, an investor could receive a nearly 300 bps premium to the floating rate, resulting in a yield to call above 10.6%.
By comparison, most other Preferreds in the LNG shipping space are callable in the 2022-23 timeframe and trade at or above Par value with current yields of around 8%.
Figure 6. GLOP Preferreds, Table of Rate Resets (Source: Ashland calculations based on Company filings)
Fleet Status & NAV
GLOP's fleet consists of 10 TFDE and 5 Steam engine type vessels (Figure 7).
All but 3 are scheduled to come off charter through 2023 and expected to serve the spot or short-term charter market.
Figure 7. GLOP Charter Status (Source: GLOG January 2021 Investor Presentation)
The 2006/07-built steam vessels are newer than 26% of the global fleet currently on the water, indicating a degree of marketability for these units.
For NAV calculation, we have two cases (Figure 8) - a Base Case which is derived from NPV of vessels locked into term charters with book value being the terminal value thereafter, and a Bear Case which considers only today's book value considering a 30-yr economic life.
NAV models illustrate a range of potential share values from $3.20 to $6.70, indicating that GLOP’s intrinsic value could range from fairly priced to substantially undervalued at current price levels.
Figure 8. NAV calculation (Source: Ashland calculations based on Company filings)
Future Deployment Avenues
GLOP vessels could be sold to Asian importers looking to secure cargoes during the 2024-2026 timeframe when the number of newbuilds is projected to be tapering off and Qatar Petroleum has secured nearly all of the available shipyard slots for their North Field East expansion project.
Additionally, GLOP's fleet would be particularly suitable as candidates for FSU (floating storage units), similar to GLOG's GasLog Singapore vessel, which was a 2010-built TFDE unit converted to an FSU to serve in Panama. A lack of LNG storage in East Asia, particularly Japan, caused the massive spike in LNG spot rates seen this past winter, as JKM surged to as high as $30/MMBtu, up from a low point of around $3/MMBtu less than a year earlier. Capex of a land-based storage tank can cost up to $100 million on a similar volume basis, which is in line with the amortized book value of Steam vessels. But FSUs maintain the additional benefit of increased portability in the case that demand locations shift or dramatically decrease over time.
TFDE and Steam vessels could transport LNG as part of the upcoming ammonia/hydrogen economy, whereby the natural gas is reformed to produce blue hydrogen and blue ammonia, together with capture and re-shipment of the CO2 product gas—similar to a pilot project launched by Saudi Aramco on an LPG shipment to South Korea—an advent that would be an overall boon to LNG transport demand.
Strong LNGC Spot Market Supporting Vessel Values
The Spot market just witnessed an unprecedented surge this past winter with dayrates reaching over $200,000.
Looking back over the past few years, rates have been seasonally strong in the second half of the calendar year (Figure 9). This comes at a time when the number of LNGC Spot fixtures are hitting all-time highs, reaching 450 in 2020 (Figure 10).
The trend of carriers fixed under spot charters is likely to continue as many carriers are tied directly to LNG supply/purchase agreements (SPA) and over 33% of SPA's globally are expiring before 2025. We could quite likely witness a large SPA shake-up in terms of counterparties, pricing, and carrier charters, over the coming years. Trading houses, such as Trafigura, will play an expanded role in the market and these types of traders have historically picked up short-term charters as arbitrage opportunities appear.
As further evidence of prompt vessel shortage, the ratio of uncommitted ships on order to mtpa of Spot trade has nearly halved over the past several years from 0.24 in 2019 to 0.13 projected in 2021 (Figure 11). And looking at the orderbook, the number of uncommitted newbuilds is falling dramatically after Q3 2021 through the current delivery window ending Q3 2023 (Figure 12). Remarkably, there was not a single uncommitted vessel order placed in all of 2020.
This will intensify the demand-side competition for Spot LNGC charters, as more tenders vie for fewer available vessels, amid a time of increased demand for vessels and an ever-increasing bottleneck in the Panama Canal during winter season.
Headline spot rates, as reported by Clarksons, averaged $59,000 for TFDE and $50,000 for Steam in 2020. These day rates are well ahead of GLOP's cash cost breakeven rates of $33,000 and $25,500 for TFDE and Steam, respectively, as well as more than covering full cost breakeven.
Figure 9. Weekly LNG Spot Rates (Source: Cleaves, weekly 11/2021)
Figure 10. Spot Fixtures By Year (Source: GLOG January 2021 Investor Presentation)
Figure 11. Ratio of uncommitted ships on order to mtpa of Spot trade (Source: Ashland compiled data)
Figure 12. Newbuild Deliveries (Source: GLOG January 2021 Investor Presentation)
Recent LNG Deals May Unlock Strategic Options
The LNG midstream sector has seen several recent deals.
As mentioned, GLOG has offered to take the company private with a proposed sale of the publicly held units to BlackRock.
And most recently, Hoegh LNG (Oslo: HLNG) has, similarly to GLOG, offered to take the company private in a joint venture with Morgan Stanley.
Infrastructure funds and trading houses may look to add to their energy vessel portfolios at these historically low book value rates as a way of building out LNG shipping and trading platforms.
We have taken a look at GLOP's valuation relative to these recent deals (Figure 13). The closest comp so far is GMLP which sold at a tad above book value (BV). The other two pending transactions could see price negotiations that take the offer closer to full BV. If GLOP were to liquidate at BV, the value would be closer to $5.0/shr. Given that GLOP's fleet overall is more modern than GMLP, who has several pre-2006 carriers and pre-2010 FSRU's, a good case can be made for GLOP receiving full BV in the case of an acquisition. Also, GLOP and the broader GasLog Group's long-standing relationship with oil major Shell as a counterparty bodes well for asset values. Therefore, we conclude that GLOP is moderately underpriced on an acquisition basis, with fair value falling between $3.60 - $5.00 per share.
Figure 13. Recent M&A Transactions (Source: Ashland compiled data)
Write Put Option Strategy
Our investment strategy consists of writing $2.50 OTM Puts with October 15 expiration, which would receive a premium of $0.61/shr (Figure 14). This combination equates to an Implied Volatility (IV) of 105% - an unusually high volatility which we believe to be mispriced based on the supportive factors outlined in this article.
The strike is 16% below the current share price. In the worst case—the event that shares fall below the net-of-premium strike price ($1.89/shr) - we would take assignment of the shares. Still, it would yield an attractive entry point, in our analysis, given GLOP's fleet of mostly modern TFDE vessels, adequate charter backlog, and de-risked debt position. We accept this risk, given the low odds of a sharp pullback, attractive valuation, and the multiple catalysts that we believe are supportive of GLOP's share price. This strategy is also attractive from a time value of money perspective, as we would receive the premium immediately and can redeploy that capital toward high-yielding investments, potentially setting up for an even larger upside should the written options expire worthless. Of course, on a portfolio basis, sufficient liquidity must be maintained to take assignment of the Puts or close the short position as the case may be.
The return on investment for this strategy is 24% (0.61/2.50) considering the $2.50 strike price to be invested collateral, as this amount would have to be set aside in cash reserves in a “cash-secured Put” transaction. For the 7-month holding period, this equates to an annualized return of 41%. For a higher risk/return profile, the Write Put could be secured by an account securities margin and the premium received could be invested in stable return securities.
Figure 14. GLOP Option Chain (Source: Yahoo Finance)
Analyst Ratings, Catalysts & Risks
GLOP has garnered 5 Holds, and 1 Sell, with an average price target of $3.75. Seeking Alpha Premium’s Quant Rating has GLOP as A+ and A- on Value and Profitability metrics, respectively. It is of course being hammered on Growth and Momentum, metrics related to recent share price trends, amid a general malaise in oil & gas related stocks. Analysts are expecting 2021 revenue of $313M with EPS of $0.88.
We believe that there are several upcoming catalysts coming into play for GLOP. Very active M&A in the sector is supportive of vessel values across the sector. With a role to play in the energy transition, LNGC's can be suitable for alternative types of employment, such as floating storage. Headline rates of LNGC winter spot charters have been attractive for several years, and there are numerous factors that could underpin this trend for several more.
However, in spite of these trends and catalysts, the upside potential of GLOP could be limited by its aging fleet—at a time when other operators are undergoing massive newbuild programs, including its parent GLOG. It is unlikely that potential charterers would sign a new long-term charter with a Steam vessel and similarly for a TFDE, although the latter should have better marketability.
Further, with the announced GLOG takeover, it is unclear how GLOP will be managed in the future, since it has historically relied on GLOG as its source of dropdown vessels. Unfortunately, it's clear that, unlike the parent, GLOP is currently positioned as a commodity business and not a growth business.
For these reasons, we view the share price as being relatively stable over the next 12-18 months, highlighting why we have opted for an OTM Write Put Options strategy rather than buying the shares outright.
Our common stock price target summary, based upon established valuation criteria, is shown below in Figure 15. We have set near-term and long-term price targets at $3.60/shr and $5.00/shr, respectively, however the value and timing of these targets are particularly sensitive to market developments as described above.
Figure 15. Price Target Summary (Source: Ashland calculations)
GLOP's share price has stabilized recently near $3/shr and its Series A Preferred units provide an attractive yield with inflation-protected features.
GLOP's fleet of middle-tier assets has continued to provide cashflow amid the downturn in oil & gas related stocks.
Management is undergoing aggressive cost-cutting measures, as evidenced by its debt amortization strategy, and is the on their way to becoming a low-cost leader.
Several years of attractive seasonal LNGC spot rates continue to support GLOP's business model.
We have introduced an OTM Write Put Option strategy which we believe balances risk and reward given the many parameters surrounding GLOP's underlying fundamentals, the LNGC market, recent M&A, and other potential catalysts.
A prospective investor should only commit to an investment in the Strategy if such prospective investor understands the nature of the investment and can bear the economic risk of such investment. The Strategy is speculative and involves a high degree of risk. The Strategy may lack diversification, thereby increasing the risk of loss. The Strategy's performance may be volatile. There can be no guarantee that the Strategy's investment objectives will be achieved, and the investment results may vary substantially from year to year or even from month to month. As a result, an investor could lose all or a substantial amount of its investment. In addition, the Strategy's fees and expenses may offset its profits.
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