Source: Dynagas LNG Partners
It's no secret the stock market has been red hot since hitting its February 11th low. However, the recovery in stocks has paled in comparison to how well oil stocks have done, as crude has rallied as much as 50% off its low of $26 per barrel.
GLOG Total Return Price data by YCharts
Even better performing have been LNG or liquefied natural gas Tanker stocks such as: GasLog (NYSE: GLOG), Golar LNG (GLNG -0.36%), their respective MLPs, GasLog Partners (NYSE: GLOP), Golar LNG Partners (GMLP), as well as other LNG MLPs, Dynagas LNG Partners (NYSE: DLNG), and Teekay LNG Partners (TGP).
Find out why, despite business models curiously unrelated to oil prices except in perhaps the most tangential way, these stocks have benefited most greatly. More importantly, find out which of these four LNG stocks still make great long-term dividend growth investments; despite the recent run up in share price.
Business model doesn't really justify share rally...
On the face of it the recent rally in LNG Tanker stocks makes no sense. After all, other than Golar LNG, who has 65% of its fleet operating in the short-term spot market, all of these stocks and MLPs derive their cash flows from long-term, fixed-fee contracts that have to do with the transportation of natural gas.
Thus, a rally in oil prices wouldn't seem to benefit them much, if at all. However, this isn't necessarily true.
For one thing, low oil prices have resulted in oil companies slashing expenses, and LNG export projects are immensely costly and take many years to bring online. Thus, cash flow desperate oil firms may end up cancelling LNG export projects out of necessity, potentially reducing demand for LNG tankers.
In addition, many LNG contracts in Asia and Europe -- the major LNG import markets -- are linked to oil prices. Thus as crude prices have collapsed the price advantage of importing US natural gas has plummeted right along with it.
US Natural Gas Imports Price data by YCharts
...BUT here's why that doesn't necessarily matter
Still, the magnitude of the rally in LNG Tanker stocks and MLPs seems excessive and many investors might think it best to avoid purchasing more shares, even if it conflicts with solid long-term investing strategies such as dollar cost averaging.
While the idea of avoiding investing in such stocks seems reasonable, you need to remember two things. First, market timing simply doesn't work.
Second, the primary reason to invest in LNG Tanker stocks or MLPs is for income. Four of these six companies make potentially compelling arguments for becoming excellent dividend growth stocks over the coming five to ten years.
| Company or MLP | Yield | Q4 2015 Payout Coverage Ratio | 5 Year Expected Annual Growth Rate |
| GasLog | 4.6% | 1.33 | 14.5% |
| Golar LNG | 0.9% | NA | 3.7% |
| GasLog Partners | 10.4% |
1.43 |
10% to 15% |
| Golar LNG Partners | 13.5% | 1.39 | 5.8% |
| Dynagas LNG Partners | 11.6% | 1.16 | 0.9% |
| Teekay LNG Partners | 4.1% | 5.5 | 4.3% |
Sources: Yahoo Finance, Fastgraphs, Morningstar, company 10-Ks, management guidance
Note that Golar LNG generated negative free cash flow as well as a large loss in its latest quarter. This resulted in it not covering its dividend, which was slashed 89% this quarter.
This was a result of Golar LNG's heavy exposure to short-term LNG tanker pricing, which has been depressed over the past few years due to an oversupply of vessels.
Meanwhile Teekay LNG Partners also recently cut its distribution, by 80%, which explains the sky high distribution coverage ratio.
This cut was made necessary by the MLP's heavy debt load and the large amount of legally contracted capital expenses it has coming due over the next few years; mostly new tanker construction.
Finally, while long-term payout growth projections should be considered always remember that they merely best guesstimates, whether coming from management or analysts. For example, while analysts believe Dynagas LNG Partners' distribution isn't likely to grow over the next few years, given the fact that the MLP has the potential to double the size of its fleet from five to ten tankers, this view may prove overly pessimistic.
Far more important to dividend investors is the long-term sustainability of a payout. This requires two primary things. First a solid distribution coverage ratio, which represents a distribution that's well funded by cash flow.
As you can see from the above table, GasLog, GasLog Partners, Golar LNG Partners, and Dynagas LNG Partners all have reasonably secure payouts. While this makes short-term distribution cuts less likely, it doesn't necessarily guarantee it. That's because payout sustainability can be wrecked by an overly leveraged balance sheet.
Risks to think about
| Company or MLP | Total Debt | Debt/EBITDA (Leverage) Ratio | Contractual Obligations Through Next 2-3 Years |
| GasLog | $2.38 Billion | 9.9 | $1.57 Billion |
| Golar LNG | $1.82 Billion | NA | $1.03 Billion |
| GasLog Partners | $742 Million | 5.3 | $84 Million |
| Golar LNG Partners | $1.052 Billion | 3.3 | $452 Million |
| Dynagas LNG Partners | $575 Million | 5.2 | $131 Million |
| Teekay LNG Partners | $1.924 Billion | 6.0 | $1.75 Billion |
Sources: Morningstar, company 10-ks
The LNG Tanker business isn't cheap so a great deal of debt is to be expected. However, as you can see GasLog has a sky-high leverage ratio as well as nearly $1.5 billion in contractual obligations coming due over the next three years.
This makes me skeptical of the long-term sustainability of its dividend, despite recently announcing the successful refinancing of all debt maturing through 2017.
Teekay LNG Partners has a similar problem; high debt and enormous obligations on its distributable cash flow, which is what funds the payout.
Meanwhile while GasLog Partners and Dynagas LNG Partners have relatively high leverage ratios -- credit rating agencies usually like to see no higher than 4.5 -- their ratios are manageable. In addition, their small capital obligations through 2018 means that, should energy prices not recover by then neither would have to take on additional debt.
Bottom Line
Oil prices will eventually recover and drive strong global LNG trade growth over the coming decades. However, dividend investors wanting to cash in on this trend need to be careful that they only invest in LNG Tanker operators that have: well covered payouts, manageable debt levels, and little or no exposure to short-term contracts.
Since they have all three characteristics, Golar LNG Partners, GasLog Partners, and Dynagas LNG Partners, represent the best long-term income opportunities in the LNG Tanker industry.
