Why I Am Bullish On This 9.4% Distribution Yield MLP


Investment Overview

A MLP offering 9.4% cash distribution yield sounds attractive, and if financial projections see sustained growth in cash distribution, there is a strong case for investment.

This article will discuss why GasLog Partners (NYSE:GLOP) is an attractive MLP to consider for the long-term with focus on the key factors that will drive sustained and improving cash distribution.

From a unit price upside perspective, GasLog Partners is higher by 43% for YTD16, and I see unit price also trending higher as cash flows swell along with growth in cash distribution. Overall, GasLog Partners is worth holding for the next 3-5 years.


Cash Distribution Stability

For the third quarter of 2016, GasLog announced cash distribution of $0.478 per unit, which translates into an annualized cash distribution of $1.91. This part of the discussion will elaborate on why this distribution is sustainable in the coming years.

The LNG vessels owned by GasLog Partners operate on 100% fixed-fee revenue contracts. Largely, these long-term contracts are not sensitive to commodity price volatility. Therefore, with stable cash flows, cash distribution will continue.

GasLog Partners currently has contracts for LNG vessels that are extending until 2020. Further, the contracts for nine LNG vessels have the option to be extended, which potentially implies average contract duration of 8 years.


Strong Cash Distribution Growth Outlook

While stable cash distribution is entirely likely in the coming years, I expect unit price upside to be dependent on potential LNG vessel growth in the next 12-24 months.

Just to put things into perspective, GasLog Partners has a drop-down agreement with GasLog (NYSE:GLOG) with the former having the right to acquire new LNG vessels that are on long-term contract.

According to GasLog Partners, there are 13 potential drop-down candidates. It is certain that all 13 LNG carriers will not be selected for drop-down, but the key point is that GasLog Partners has an excellent pipeline for LNG vessel deliveries that will trigger cash flow and distribution growth upside.


Looking at the financial impact, GasLog Partners recently took delivery of GasLog Seattle from GasLog and the LNG vessel is likely to add $20 million to the EBITDA and $10 million to net distributable cash flows. This translates into 5% increase in annualized cash distribution.

GasLog Partners has a steady track record of meeting 10% to 15% cash distribution growth CAGR, and this implies target drop-down of 2-3 LNG vessels on an annual basis from GasLog. With a strong drop-down pipeline, I see steady cash flow growth and cash distribution upside.

Financials Support Steady Drop-Down


As discussed, 2 to 3 drop-downs in one year can potentially imply cash distribution growth of 10% to 15%. With GasLog having existing LNG vessels along with new deliveries that are eligible for drop-down, the only factor that can prevent cash distribution growth is financial constraint.

It is therefore important to discuss the LP’s financial flexibility. As of 3Q16, GasLog Partners had $109.7 million available in cash along with $30 million available under the revolving credit facility. This provides a total cash buffer of $139.7 million for near-term capital investments.


However, drop-down of new LNG vessels will be largely through debt, and investors might point out that GasLog Partners already has a net debt to EBITDA of 4.0 even when its debt to capitalization is just 51%.

My view is as follows – While leverage seems to be on the higher side, GasLog Partners reported EBITDA interest coverage of 6.0 as of 3Q16. In other words, debt servicing is smooth and likely to remain smooth. It is also important to note that with each additional delivery of LNG vessels, the EBITDA increases as all drop-downs will be on long-term fixed-fee contracts. Therefore, the company’s debt headroom is likely to remain strong, and this will ensure smooth drop-downs and cash distribution growth.


Oil Upside Is Positive

With OPEC deciding to cut production for the first time in 8 years, oil has surged above $50 per barrel, and I believe that the uptrend is likely to sustain.

In the coming 12-24 months and beyond, higher oil prices will be positive for LNG demand in emerging economies. This will ensure that strong demand sustains for LNG carriers with the current market not characterized by oversupply.

In particular, I expect strong LNG demand from China and India. These two countries are home to 2.5 billion people and the per capita consumption of natural gas in these countries is still low as compared to advanced economies.


Conclusion

GasLog Partners will continue to deliver strong cash distribution, and with the company having strong financials, growth in number of LNG vessels in operation will translate into sustained cash distribution growth.

The unit price for GasLog Partners has surged in YTD16, and I expect the trend to remain positive in the next 12-24 months, backed by sustained drop-downs from GasLog.

Overall, GasLog Partners is an attractive investment for dividend seekers, and long-term contracts ensure that cash distribution is relatively certain even during times of energy price volatility.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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