Source: GasLog LTD
Anytime a cyclical industry such as energy experiences a massive crash Wall Street is prone to overreact and throw out the baby with the bathwater. In other words, both low and high-quality income investments get beaten down to extremely low levels, creating the potential for long-term dividend investors to lock in market crushing total returns for the next five to ten years.
Take for example the LNG tanker stocks such as: GasLog Partners, (NYSE: GLOP), Golar LNG Partners, (NASDAQ: GMLP), Dynagas LNG Partners, (NYSE: DLNG), Teekay LNG Partners, (TGP), and general partners GasLog LTD, (NYSE: GLOG), and Golar LNG LTD (NASDAQ: GLNG), all of which have suffered mightily over the past year.
GasLog Partners has by far held up the best of its peers and that is no accident. Let's take a look at why this high-yield MLP is suffering the least through the worst oil crash in 50 years, and more importantly, see why it continues to make a potentially exceptional income investment, despite the recent rally.
2015 sees gangbuster growth
| Metric | 2014 | 2015 | Change |
| Revenue | $65.9 Million | $168.9 Million | 156% |
| Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) | $48.2 Million | $122.8 Million | 155% |
| Distributable Cash Flow (DCF) | $27.1 Million | $72.3 Million | 167% |
| Annual Distribution Per Unit | 1.74 | 1.91 | 10.1% |
| Distribution Coverage Ratio (DCR) | 1.13 | 1.29 | 14.1% |
Sources: earnings release, Yahoo Finance
Last year's exceptional growth was a result of growing its fleet 60% via the acquisition of three additional LNG tankers from its sponsor, general partner, and manager GasLog LTD.
What investors should especially pay attention to is the growth of GasLog Partners' coverage ratio, which is the best metric for measuring the long-term sustainability of the MLP's generous distribution.
Not only did GasLog Partners' manage to grow both it DCR during exceptionally challenging market conditions, but management has shown remarkable forethought in growing its coverage ratio over time. This despite impressive payout growth of 18% CAGR since its IPO.
Source: GasLog Partners' investor presentation.
In fact, in the last quarter of 2015 GasLog Partners reported a record high DCR of 1.43, indicating not only that the current distribution is far more secure than the sky-high-yield would suggest, but also that 2016's DCR is likely to increase even further. That's especially true given that management's current payout plans don't involve any short-term distribution growth.
Payout profile remains one of the strongest in the industry
| LNG Tanker MLP | Yield | Q4 2015 DCR | Q4 2015 Excess DCF | Q4 2015 Excess DCF Margin |
| GasLog Partners | 11.2% | 1.43 | $6.8 Million | 13.2% |
| Golar LNG Partners | 15.5% | 1.39 | $14.8 Million | 12.9% |
| Dynagas LNG Partners | 17.9% | 1.16 | $2.6 Million | 7.0% |
| Teekay LNG Partners | 4.2% | 5.5 | $50.3 Million | 48.7% |
Sources: earnings reports, Yahoo Finance
High-yielding investments are often a sign of the market's lack of faith that a company can maintain the payout going forward. For example Teekay LNG Partners, owing to a large short-term financial obligations and a lack of access to cheap growth capital markets, was forced to slash its distribution by 80%, in order to finance its upcoming liabilities with excess DCF.
On the other hand GasLog Partners' ability to retain a large amount of cash flow puts it at a distinct advantage to both Dynagas and Teekay. That's because LNG tankers are very complex and expensive to build and so MLPs in this industry require access to both cheap debt and low cost equity in order to allow them to pay out such generous distributions.
However, if investors become overly bearish on the industry, such as over the past year, then growing DCF per unit becomes extremely difficult, which means long-term, sustainable distribution growth becomes all but impossible.
Luckily, GasLog Partners has a way to do this that is independent of energy prices and fickle Wall Street sentiment.
Putting excess DCF to work to prepare for future growth
| LNG Tanker MLP | Total Debt | Debt/2015 EBITDA (Leverage) Ratio |
| GasLog Partners | $742 Million | 5.3 |
| Golar LNG Partners | $1.052 Billion | 3.3 |
| Dynagas LNG Partners | $575 Million | 5.2 |
| Teekay LNG Partners | $1.924 Billion | 6.0 |
Source: Morningstar
A distribution that has to be slashed, as occurred last year with Teekay, can result in massive investor losses, which is why the sustainability of a payout should be the first priority of any dividend lover.
Thus the coverage ratio, while very important, isn't the only thing to monitor closely. An MLP's debt load is also of paramount importance, because creditors or ratings agencies, under threat of a credit downgrade that will greatly increase borrowing costs.
Which is why I am thrilled to see that GasLog Partners put its excess DCF to good use in Q4 by using it, in combination with its cash and operating cash flow, to pay off $30.6 million in debt. Half of that was on its revolving credit facility which represents the MLP's highest borrowing costs.
According to management the debt repayment actually improves DCF per unit, further increasing the security of the payout in 2016 and likely increasing GasLog Partners' excess cash flow margin.
This bodes well for GasLog Partners' future growth because the MLP and its sponsor just announced the successful refinancing of all debt coming due in 2016 and 2017.
Combined with $1.3 billion in financing completed in October of 2015 by GasLog LTD to finance eight tankers, GasLog Partners' potential dropdown pipeline now includes no less than 19 potential future acquisitions by 2019.
Bottom line
GasLog Partners' isn't likely to be able to grow its payout until its equity recovers enough to make further tanker acquisitions accretive. However, investors should have confidence in management's use its excess cash flow to pay down debt and prepare for strong growth once energy prices recover and cause its unit price to rise.
