- TGP has just completed one of the largest LNG Carrier newbuild programs on record, without diluting equity and even managing to maintain a sizeable quarterly distribution.
- We believe that TGP’s high-quality portfolio of vessels, combined with long-term charter contracts, will produce an attractive return to investors, once the full profitability of the newbuild fleet becomes evident.
- Valuation models underpin our $22/share price target, implying an upside of 100%, plus another 20-30% in distributions expected before the 2023 timeframe.
LNG shipping company Teekay LNG Partners (TGP) is the MLP daughter of Parent Company Teekay Inc (TK), but unlike most other MLP’s in the LNG shipping space, TGP essentially behaves as a stand-alone entity, funding its own newbuilds without the use of the typical Parent Dropdown mechanism. TGP boasts an LNG carrier fleet of 49 total carriers, 24 of which are minority-owned Joint Ventures. TGP has a strong and diverse list of major LNG player counterparties, the likes of which include Shell, Ras Laffan, Cheniere, and Yamal LNG, and maintains a presence in every major region around the globe. It recently executed a large newbuild program which coincided with the latest wave of new LNG export facilities worldwide.
Newbuilds Growing Free Cash Flow
TGP concluded a newbuild program at the end of 2019 which saw 15 new MEGI-type vessels financed, built, delivered, and deployed onto long-term charter. These newbuilds will add $280 million in EBITDA annually. In addition, it has gained a minority stake in a Regas terminal in Bahrain which will produce dependable cashflow.
Similarly, distributable cash flow (DCF) will have experienced a sharp increase from 2018 levels through 2020, stabilizing around $2.50/share.
During 2021 and 2022, free cash flow (FCF) will see a dramatic increase as the newbuild Capex program rolls off the books and the newbuild, as well as legacy, assets produce consistent cashflow.
Management has stated the intention to use a majority of the additional FCF to reduce debt—a wise move in our view as lower leverage should lead to more financial stability during economic uncertainty due to COVID-19. Down the road, we expect capital allocation to markedly shift toward distributions until reaching an annualized level of $2/share by end of 2023. At today’s share price, this would equate to an attractive distribution yield of 18%.
One of Ashland’s key measures on LNG midstream companies is our metric “Cyclically-Adjusted Free Cash Flow” (CAFCF). It is a measure which normalizes the large bumps in FCF for a capital-intensive industry, such as LNG shipping, due to Capex programs. The CAFCF metric is similar to conventional FCF, except that it replaces actual Capex with Depreciation. We believe Depreciation is a better proxy for the replacement cost required to maintain modern assets. We also believe that it is a superior measure of investor returns than GAAP net income or EBITDA—essentially, it represents the investor’s cash return on investment through the market cycle.
TGP’s CAFCF yield—the investor’s annual return—currently registers a remarkable 27%. This level of yield is well in excess of the general stock market and even the MLP space where distribution yields are often observed in the mid-teens.