A long way to go despite recent balance sheet improvements

0

GasLog Partners LP (GLOP) is a growth-oriented MLP focused on the acquisition, management and employment of LNG carriers used in the transportation of LNG through multi-year charters.

The partnership has significantly expanded its fleet since its first IPO in 2014. Specifically, the partnership has grown from three vessels to 14 to date, nine of which operate on modern TFDE propulsion technology. The other five are conventional steamships.

I am neutral on the title.

Why did the units collapse?

Unfortunately, the development of the partnership’s fleet from its IPO until recently has been very expensive, despite achieving GLOP’s growth targets. In particular, in order for GLOP to finance the purchase of these vessels, a large portion of common units, preferred shares and long-term debt securities were issued, thus deteriorating the capital of the unit holders.

For example, publicly traded preferred shares of GLOP were issued with initial yields ranging from 8% to 8.63%. Thus, net margins were squeezed, while GLOP’s balance sheet became overwhelming on the liability side. With the unit price collapsing from its IPO levels, GLOP’s cost of equity has become even more expensive over time with respect to future unit issuances to finance vessel acquisitions, creating a downward spiral in unitholders’ equity value.

You can see the effects of these issues on common shares over the past few years, with stocks trading at a fraction of their previous levels. You might be wondering why the partnership would make such disastrous investments. In short, charter rates were expected to improve over the years, and this has not materialized significantly over time.

On TipRanks, GLOP scores 9 out of 10 on the Smart Score spectrum. This indicates potential for the stock to outperform the broader market.

Opportunities for improvement

Following Russia’s invasion of Ukraine, the market dynamics have completely changed. The West has focused its efforts on achieving energy independence. Consequently, the demand for LNG carriers has increased considerably, which should translate into higher charter rates, and therefore better profitability for space companies.

This is illustrated by the GLOP stock price, which has risen almost 70% over the past year. Investors are likely expecting the improved profitability outlook to allow the partnership to improve its balance sheet and make it healthier.

Such efforts have been taking place lately, the most notable development being the continued reduction of long-term debt. Since suspending its fleet expansion, the partnership has earmarked cash flow from vessel charters to reduce its long-term debt. Specifically, long-term debt fell from $1.29 billion in mid-2019 to $953.2 million, according to its latest quarterly results.

To further lighten the balance sheet, GLOP also repurchased its preferred shares on the open market. Similar to coupons on debt, although distinct in some respects, preferred dividends can be viewed as mandatory “interest payments” for the partnership. By redeeming approximately $18.4 million of preferred stock in fiscal 2021, the company realized approximately $1.5 million in preferred dividend savings per year. In the first quarter of 2022, the company repurchased an additional $10 million of preferred stock, bringing its annual preferred dividend savings to $2.4 million per year.

Additionally, it should be noted that GLOP Series C Preferred Shares have a fixed-to-float structure that comes into effect after the series call date in 2024. This implies that GLOP will call this series by 2024, significantly reducing its overall preferred obligations, or it will not. In this case, the Series C dividend rate will change from its current rate of 8.5% to LIBOR plus a spread of 5.317%. Assuming LIBOR stays below 2-3%, the company will realize some sort of savings, even if it doesn’t call/redeem all of its Series C Preferred Shares.

Overall, by reducing its liabilities, GLOP’s balance sheet should continue to improve in the medium term. With higher rates potentially leading to better charters in the future, GLOP’s profitability finally has the potential to improve significantly in the future.

Can distributions resume?

Due to its MLP structure, GLOP is set up to distribute most of its net income to unitholders. Nevertheless, due to the challenges described above, the partnership has reduced its distributions per share more than once. The most recent distribution has all but halted payments, with the quarterly rate running at a tiny $0.01.

On the upside, given that GLOP’s balance sheet has improved lately and ongoing macroeconomic developments should benefit its earnings in the medium to long term, distributions could pick up strongly.

The partnership is expected to post earnings per share close to $1.50 in fiscal 2022. Assuming GLOP starts paying just $0.50 per year, this would yield a return close to 8.7% at levels of current GLOP prices. Yet the timing of such a recovery is ultimately speculative.

The Taking of Wall Street

As far as Wall Street is concerned, GasLog Partners has a Moderate Buy consensus rating based on one buy and two hold assigned over the past three months. At $5.50, GasLog Partners’ average price target implies downside potential of 4.10%.

Carry

GLOP is currently trading at just 3.8 times this year’s projected earnings, although the units are looking pretty cheap for a reason. While the current macro environment could be a tailwind to the company’s future earnings prospects, the partnership is more than likely to continue to improve the balance sheet before significant payouts occur. After all, GLOP’s total debt is about 1.8 times the value of its common stock.

Once the balance sheet has improved sufficiently, who knows whether the macro environment will be favorable or hostile for GLOP? Therefore, there is undoubtedly a lot of uncertainty and speculation regarding GLOP’s investment case. Investors should beware of the underlying risks before allocating capital to the stock.

Disclosure

Share.

About Author

Comments are closed.