Golar: Value in Vessels

10/11/2013 7:00 am EST

Focus: STOCKS

In an effort to leverage its relationships, expertise, and reputation in the shipping industry, this company formed a growth-oriented partnership, explains Geoffrey Seiler, editor of Bullmarket.com.

Bermuda-based Golar LNG Partners (GMLP) is the growth-oriented master limited partnership formed by Golar LNG Ltd. (GLNG) to own and operate floating storage and regasification units (FSRUs) and LNG carriers.

The partnership's goal is to leverage the alliances, proficiency, and reliability of its parent, which operates the FSRUs and LNG carriers that were dropped into the partnership.

Those vessels are signed to charters of five-years duration or more. The company said, as of the end of the second quarter, it had $2.5 billion in future revenue under contract, with an average contract term of 7.1 years.

The MLP currently owns eight vessels that are operated by the parent. GLNG announced the signing of charters for two of the 13 vessels that are in its newbuild pipeline and they are the most likely candidates to be dropped down into the partnership in the near future.

One of those vessels is due to be delivered at the end of this year and commence service in early 2014. Management indicated that it is likely to purchase that vessel from GLNG early next year.

The second vessel, which is set to commence operations on behalf of Jordan's energy ministry in 2015, could be added at the end of 2014 or early in 2015.

The partnership generated $26.4 million of distributable cash flow in the second quarter, down from $27.6 million in the first quarter.

Both operating income and distributable cash flow were affected by the dry-dock activity that started in Q4 with the Golar Spirit and continued through Q1 and Q2 with the Golar Mazo, the Methane Princess, and the Golar Winter. All of those vessels are now back in service.

Golar Partners generated $78.3 million in revenue in the second quarter, which topped the consensus analyst estimate of $77.4 million.

The dry-dockings represented a sizable portion of the partnership's fleet and now that they are completed and no further dry-dockings are anticipated until 2017, distribution coverage is expected to improve.

Golar tries to schedule bringing its vessels into dry-dock every five years when they typically go off-hire and before they begin a new charter, the company said.

We singled out Golar LNG Partners as our top pick among Sea Transport MLPs in our 2013 MLP Special Report. LNG transport is one of the most solid subsectors in the shipping industry and Golar clearly has a long runway for drop-downs from its parent company's newbuild program.

We like the fact the vessels owned by the MLP are largely on long-term contracts, which provides a lot of visibility into future revenue. With two drop-downs likely in the next year, investors can reasonably expect to enjoy a lengthy period of distribution growth.

As is the case for the parent, the biggest long-term risk to the partnership would come from an increase in competition from other players jumping into the market and ordering FSRUs. However, given the length of time it takes to finance and have new vessels built, the company would appear to have some reasonable breathing room.

At current levels, the partnership's payout is still yielding 6.3%. We still find the name attractive for income-oriented investors, given the steady revenue profile and growth potential. The parent is also a reasonable option on a pullback, as it will also benefit from the distribution growth from the MLP.

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