Having a long-term view has helped GasLog become a stable, pure-play shipper of liquefied natural gas. Monaco-based GasLog (GLOG) has mostly stayed away from speculative LNG ship orders, instead favoring long-term contracts that carry set transportation rates.
As a result, while the LNG shipping market has and may experience some volatility due to excess capacity among gas carrier fleets, GasLog has been cruising along, mostly unaffected by spot day rates in the space.
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"GasLog is one of the most established and well respected LNG shipping operators," said Fotis Giannakoulis, shipping analyst at Morgan Stanley.
The company is controlled by its chairman, shipping tycoon Peter Livanos, through his ownership of Ceres Shipping. It originally managed LNG ships for U.K.-based BG Group. In 2006, GasLog started buying and operating its own LNG carriers.
"The fact that BG entrusted them in operating technically their own vessels speaks volumes about the capabilities and the reliability of their technical operation," said Giannakoulis. LNG ships are expensive and require high standards of safety and expertise.
"GasLog's involvement in the shipping industry was very gradual and very carefully designed," he said. "They didn't do a splash into the market. They built operational expertise first, and 10 years later they started buying their first ships."
Natural gas, generally cheaper and cleaner than oil, has increasingly been used for heating, cooking and electricity generation. U.S. production has soared in recent years, thanks to fracking and other unconventional technology. Other countries such as Qatar also are generating a glut of natgas. That's increased demand for the highly specialized vessels to transport the fuel to overseas locations where prices are higher.
The industry experienced strong growth from 2011 to 2013, with vessels earning premium rates of $140,000 to $150,000 per day in the short-term market, says Giannakoulis. This has attracted speculative newcomers to the market.
At the top of the market, you could charter a vessel for a year at $130,000 a day, while five- to 10-year contracts cost closer to $80,000 to $90,000 per day, Giannakoulis notes. Those rates have come down to more reasonable levels.
"The premium of short-term rates vs. long-term rates that we saw in the previous three years has disappeared," he said. "The current market looks in the near term to be oversupplied, because a number of ships are hitting the water this year and in 2015. These ships that were ordered at the peak arrive ahead of the liquefaction projects. However, as new LNG supply comes online, the market is expected to tighten again in 2016."
Moving The Fuel
Natural gas needs to be liquefied to be transported overseas. As a result, it is a regional market. Price varies substantially between continents and countries.
Due to the oversupply in the U.S. and a lack of a liquefaction facility, domestic natgas continues to be landlocked and closed Monday at $4.43 per million British thermal unit. By contrast, in Northern Europe, prices are above $13 per Btu and in Asia $16. The cost of transporting LNG is $3 million to $4 million per Btu, so it would be profitable to export.
The crisis in Ukraine could give LNG an additional, longer-term push. Europe is heavily dependent on Russian natural gas via pipelines. While sanctions vs. Russian gas or a Russian cutoff of gas to Europe are unlikely, Vladimir Putin's aggressive action in Crimea may encourage more LNG exports to Europe.
Liquefaction facilities cost billions of dollars and take years to complete. The first U.S. LNG site in the Sabine Pass in Louisiana is due to come online at the end of 2015.
Yet LNG facilities are expected to be completed in Australia and Indonesia at the end of this year.
So while a short-term oversupply of ships will exist until new liquefaction projects come online, starting in 2016 the market should tighten again. Since it takes two to three years to take delivery of a new-built vessel, companies that don't have contracts now will have difficulty deploying ships when U.S. exports come online in 2016-17.
GasLog owns 18 ships, of which 15 are under long-term contracts. In January the firm said it will buy three existing LNG carriers from an affiliate BG Group for $468 million in a sale-lease-back transaction. Once delivered, the ships will be chartered back to the seller. It also has two more ships on order for 2016.
"We estimate that the industry will need another 150 new-building vessels in order to serve the demand throughout 2020," Giannakoulis said. "This corresponds to over $30 billion of capital investment and is on top of the 114 vessels currently under construction. GasLog is expected to be one of the main beneficiaries of this growth."
GasLog has been adding capacity; Giannakoulis sees it buying more ships, likely from existing players.
The company also has filed a draft registration statement with the SEC for an IPO of a master limited partnership. The MLP will own some of its LNG carriers with multiyear contracts.
Giannakoulis says the MLP will further reduce its cost of capital, because the low-tax corporate structures usually trade at a much higher multiple than traditional companies due to the dividend yield they pay to investors. In addition, GasLog could sell its vessels to the MLP at a premium to what it had built or purchased them for, realizing additional profit. The LNG shipping space, due to its complex and specialized requirements, is a relatively small market of established firms. GasLog's competitors include Golar LNG (GLNG), Teekay LNG Partners (TGP), Dynagas LNG Partners (DLNG) and Maran Gas.
The industry carries risks.
For one, the demand for LNG is usually dependent on oil prices. If oil prices go down, natgas does not offer as much in cost savings. Demand for LNG could suffer and margins could shrink.
It may also be harder for more speculative shippers to get contracts. So having long-term contracts with pricing in place has been a sound strategy for GasLog.
The company mostly has long-term contracts with just one customer, BG Group. While this has been a solid, long-term relationship, GasLog is looking to add clients and partners to its operations.
It is also expensive to build liquefaction facilities, and delays are common in the industry.
Delays in the completion of the Louisiana LNG terminal could postpone the deployment of vessels, and as a result U.S. exports, as well as an oversupply of natgas.
Giannakoulis expects Australia to become the largest LNG exporter by 2017, with the U.S. taking more time, likely beyond 2020.
"Operationally GasLog is considered a top operator, and they have very good relationships with almost all the charters," he said. "It's a long-term oriented company. They are not going to try to maximize the near-term value. They will try to build partnerships, and they would prefer to give up short-term value for long-term value."
After several quarters of flat or declining earnings, GasLog has enjoyed skyrocketing growth, with EPS increases of 175\%, 200\% and 833\% in the past three quarters.
Revenue growth has accelerated for the past six quarters, from 1\% in Q2 2012 to 224\% in Q4 2013.
Source: Investor's Business Daily