Encouraging Outlook for LNG/LPG Shipping

Drewry Maritime Equity Research initiates coverage on five liquefied gas transportation companies, Golar LNG Ltd (GLNG), Teekay LNG Partners (TGP), GasLog Ltd (GLOG), Exmar NV (EXM) and StealthGas Inc (GASS).

By MarEx 2014-03-21 09:20:00

LNG/LPG shipping companies are banking on better demand fundamentals developing, with the US export of LNG/LPG expected to be a major impetus for seaborne transportation. Increasing gas consumption has also been fueled through seaborne transportation of liquefied gas, especially to regions that do not have developed pipeline infrastructure or do not have easy access to gas reserves.

Devanshu Saluja and Rahul Kapoor, analysts at Drewry Maritime Equity Research stated, “We see an encouraging outlook for both LNG/LPG transportation sector with more positive bias towards the LPG segment.”

Despite headwinds in the short term, due to factors such as increasing orderbook and limited addition in liquefaction capacity, Drewry remain positive on LNG shipping over the medium term as under-construction liquefaction projects start coming on line at the beginning 2016. This will lead to higher demand for transportation of LNG coupled with improving freight rates.

Drewry have taken an increasingly positive view on the LPG segment as it benefits from rising US exports and increasing trade distances. Demand will be driven by factors such as lower international prices and increasing consumption. LPG demand from the Far Eastern countries will be increasingly met by the US, as it becomes a leading exporter of liquefied gas in coming years on abundance of shale gas reserves.”

GasLog is Drewry’s preferred pick amongst the LNG transportation companies. The company has embarked on an aggressive fleet expansion in recent years’, with strong revenue visibility backed by high charter coverage and forecast revenues to increase at a CAGR of over 40% between FY13 and FY16. Strong earnings momentum boosted by cost efficiencies and a well-staggered delivery schedule are seen. Despite strong returns year to date, Drewry continue to find valuations attractive and see sustained outperformance. GLOG scores a green light and an orange light respectively, indicating attractive valuation and medium risk. 

StealthGas is Drewry’s preferred pick amongst the LPG transportation companies. GASS is a global leader in Handysize LPG vessel segment, where Drewry remain highly optimistic. There is limited availability of smaller vessels, and significant growth is not expected, considering its small order book. Delivery of newbuilds is expected to boost revenues from FY14 and estimate revenues to increase at a CAGR of 22% between FY13 and FY16. Robust earnings growth, as cost efficiencies from new eco-vessels enhances profitability, is forecasted. According to Drewry’s estimates, adjusted EPS will grow almost threefold by FY16. Valuations have been found to be compelling on strong earnings profile. GASS scores a green light and an orange light respectively, indicating attractive valuation and medium risk.

Golar LNG is an established player backed by a strong parent. The company has already established itself as a leading player in LNG shipping and has been aggressively expanding in the FSRU/FLNG segment. Drewry see strong revenue growth and an earnings boost in years to come as the company successfully takes delivery of a large orderbook and achieves strong contact coverage. However, in the near term Drewry remain sceptical owing to GLNG’s high exposure to the spot market and muted rate development in the short term LNG spot market. We see current valuations reaching fair territory. GLNG scores an orange light both on Drewry’s bespoke value and risk rankings, indicating a Neutral valuation and Medium Risk.

Teekay LNG Partners will continue to be a frontline dividend play. TGP’s long term contracts increase revenue visibility backed by long-term contracts, especially for the LNG fleet, with an average contract life of 12 years remaining at the end of FY13. Strong revenue visibility and a favourable business outlook for TGP are likely to ensure sustainable generation of distributable cash flows. Drewry see delivery of new vessels and the Exmar LPG JV to augment cash-flow and distributable cash flow per share to increase from USD 3.3 per unit in FY13 to USD 4 per unit in FY16. At current levels, the stock is fairly valued with limited upside in the near term. TGP scores an orange light both on Drewry’s bespoke value and risk rankings, indicating a neutral valuation and medium Risk.

Exmar NV is a leading owner/operator of mid-size LPG vessels and an owner of a fleet of LNG carriers having established itself as strong player in both LNG and LPG shipping segments. Drewry forecast Exmar will see accelerating earnings on ongoing fleet expansion and expect revenue to increase at a CAGR of 1.9% between FY13 and FY16, driven by the delivery of LPG vessels on order and completion of two floating natural gas projects. Drewry also estimate adjusted EPS to more than double in the next three years with annual dividend set at USD ~0.40. Drewry see current valuations as fair as stock is trading near its long-term averages. EXM scores an orange light both on Drewry’s bespoke value and risk rankings, indicating a neutral valuation and medium risk.