GasLog Partners: Profits to Serve Liabilities, not Unitholders

GasLog Partners LP (GLOP) is a growth-oriented master limited partnership specializing in purchasing, owning, and operating LNG carriers involved in LNG transportation under multi-year charters.

Since the partnership’s IPO, GLOP has expanded its fleet from three vessels to 14 vessels as of its latest filings. Specifically, nine of GLOP’s vessels run with modern TFDE propulsion technology, while the other five are steam vessels.

As of Russia’s invasion of Ukraine, demand for LNG carriers has skyrocketed amid the West’s growing efforts for energy independence. Consequently, GLOP shares have run by more than 54% during the past month alone.

While the partnership should be able to renew its current chartering contracts at higher rates amid the recent macro developments, there are several risks attached to GLOP’s investment case. For this reason, I am neutral on the stock.

Fleet Expansion Was Expensive

While GLOP’s fleet expansion over the past several years has met the company’s growth goals, it came at a heavy price.

In order to finance its fleet expansion, GLOP issued substantial portions of common units, preferred shares, and long-term debt, which ended up eroding unitholder value. Despite the stock’s massive rally over the past month, you can see that units still trade at a fraction of their past levels.

GLOP’s publicly traded preferred shares, for instance, were issued with initial yields ranging from 8% to 8.63%, squeezing the bottom-line margins and overburdening the partnership greatly on the liability side of the balance sheet.

This resulted in GLOP’s unit price collapsing from its IPO levels, further increasing the partnership’s cost of equity during the following unit issuances, resulting in even more expensive vessel acquisitions. The relatively weak charter rates during these years didn’t help either.

Is GLOP’s Investment Case Improving?

Despite GLOP’s prolonged and expensive fleet expansion, the partnership has been lately making positive progress in improving its balance sheet.

The most significant development is the ongoing reduction of long-term debt. Amid pausing its fleet expansion, GLOP has been allocating capital to reduce its long-term debt, which has declined from $1.29 billion in Q2 2019 to $990 million in its latest report.

Furthermore, GLOP has been repurchasing its preferred units in the open market. Like the coupons on debt, although different in some regards, preferred dividends are a form of obligatory “interest payments” for the partnership. By repurchasing close to $21 million worth of preferred stock during last year, the company will now be saving around $1.5 million worth of preferred dividends per annum.

Additionally, GLOP’s series C preferred stock has a fixed-to-floating structure post its call date in 2024. This means that either the company calls this series in 2024 and starts saving on all the underlying preferred dividends attached to this series, or it doesn’t, but still has the dividend rate on series C decline from 8.5% to LIBOR plus a spread of 5.317%.

Hence, we see another catalyst that should ease the partnership’s balance sheet moving forward one way or the other in the near to medium term.

Distributions & Valuation

As per its MLP structure, GLOP is to distribute the majority of its net income to unitholders. However, amid the challenges described earlier, GLOP has slashed its distributions per share more than once. The latest distribution cut essentially suspended payouts altogether, with the current quarterly rate at a meager $0.01.

However, with GLOP improving its balance sheet lately and the possibility for the company to see significantly higher earnings amid the ongoing macro developments in the LNG space, distributions could return vigorously.

The company is expected to deliver EPS close to $1.49 this year. Assuming GLOP were to start distributing just $0.50 per annum, that would automatically translate to a yield close to 9.7% at the stock’s price levels. After all, this estimate implies a forward P/E of just 3.7, which would suggest that shares are quite attractively priced.

That said, the stock is cheap for a reason, as GLOP is more than likely to keep executing on its deleveraging plans before any such distributions occur. Don’t forget that GLOP’s total debt is nearly 50 times the value of its common equity.

By then, who knows whether the macro situation will be positive or negative for the partnership? Hence, there is definitely a lot of uncertainty and speculation attached to GLOP’s investment case.

Conclusion

GLOP has recently attracted increased investor interest following the West’s determination toward energy independence. The partnership is likely to roll its current contracts at significantly higher rates over the next few years, which should help accelerate its ongoing deleveraging efforts.

While the stock may appear undervalued on paper and based on future profit expectations, it’s unlikely that dollars that will be generated over the next few years will end up in unitholders’ pockets. GLOP should be using most of its operating cash flows to service its liabilities.

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