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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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LNG Market Recovery Makes GasLog Attractive

LNG

The LNG market was one of the hottest sectors in the energy space a decade ago. The surplus of U.S. gas and its high price overseas led many to talk about a robust market for liquefying and exporting that gas. The Fukushima disaster in Japan only added fuel to a growing demand for LNG.

Thanks to the boom in LNG pricing, LNG companies went on a building spree in plant construction, and the resulting vast increase in supply led prices to collapse. The scenario playing out over the last few years has been a textbook case of how commodities markets often work, and a preview of both the oil industry as a whole and the deep water drilling market more specifically.

Building giant LNG plants to refrigerate gas, turning it to liquid is massively expensive, and too many plants opened up precisely as prices for LNG plummeted. Against this backdrop, the industry has become brutal. Investment has ground to a halt and just one significant project is still moving ahead; BP’s expansion of a plant in Indonesia.

When everyone else hates a market, it’s often time for smart investors to start looking through the rubble and such is the case here. One good option for investors is GasLog Partners LP. Gaslog is a dull business in a bloody and beaten industry – but it still has some valuable assets and it is well positioned for an industry upturn.

GasLog is a shipper operating a fleet that ferries cargoes of liquefied natural gas to customers around the world. This is a service which has suffered significantly as demand plummeted, but it is integral over the long run to the industry.

While Gaslog’s business is down right now, it won’t be forever.

Indeed, LNG's growth still looks strong over the longer term. Natural gas is fundamentally much cleaner to burn than coal and the vast amounts of gas from North America help ensure that the economics of the business should remain viable over the long term. Moreover, new power plants to consume the fuel continue to be built meaning demand will continue to grow.

GasLog is an integral part of the long term LNG story and it is a story that does have a bright future over the medium term. The IEA has a long-term growth projection for global gas demand of 1.5% per year – a little less than population growth or typical economic growth rates, but far faster than oil or coal. The modest level of demand growth cuts across all types of power largely thanks to increasing renewables usage and greater levels of power efficiency in devices.

Moreover, LNG should pick up market share versus pipelines. Now the reality is that the LNG story is not going to get better overnight – there is still too much capacity out there, so it is probably going to be 2-5 years before the LNG market fully balances. But at this stage GasLog is likely at trough economic performance.

GasLog is likely to see improved performance over the next five years, and it is in much better shape than other parts of the industry.

GasLog has several advantages versus its competitors. It does not have any of the legacy LNG issues that pervade much of the sector, and like many of the pipeline infrastructure players in the US, GasLog is primarily operating on fixed price contracts based on volume of gas transported. This latter point is important – just as pipelines have been partially insulated from the oil price collapse because they benefit from higher levels of production, GasLog gets a similar benefit from excess production.

In fact, Barclays estimates global LNG supply will rise from 2015 production levels of roughly 245 million tonnes to 2020 production levels of 350 million tonnes. GasLog is well positioned to benefit from this.

Moreover, GasLog’s business is probably at a trough point already. Demand for tankers is improving. Spot rates for tankers for tankers have risen from $30,000 a day to $50,000 a day in the last year, and while GasLog has five of its nine tankers rolling off contract by FYE 2019, pricing will probably have recovered even further by that time.

Investors are also paid handsomely for waiting for an LNG market recovery. GasLog sports a roughly 8% dividend yield and it offers tax benefits to investors through its Master Limited Partnership structure. Given all this, GasLog is one stock in an otherwise beaten down industry that investors may want to look at more closely.





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