Teekay: Gas Gains for Tankers

04/14/2014 8:00 am EST



We believe energy stocks will be among the best performing stocks in 2014. For our latest recommendation, we focus on the natural gas theme, says Briton Ryle in The Wealth Advisory.

There is one natural gas ecosystem that seems to have a lot of upside: liquefied natural gas (LNG) shipping. America’s first LNG export facility is expected to come online in late 2015.

That’s the Sabine Pass terminal in Louisiana, owned by Cheniere Energy (LNG). We expect LNG shippers will become more popular investments as the opening date of Sabine Pass approaches.

Teekay LNG Partners (TGP) is a master limited partnership that owns and leases LNG tankers as well as regular oil tankers. It’s the second-largest independent owner of liquefied natural gas carriers in the world.

Teekay LNG owns 67 vessels, 29 of which carry LNG, and are contracted to major oil producers across the globe. And its entire LNG fleet is currently under fixed-rate contracts with a weighted average contract duration of 13 years and $6.9 billion in forward fee-based revenues.

The company has five new LNG vessels for delivery during 2016 and 2017. So, it doesn’t matter to Teekay that the fleet of LNG carriers is scheduled to increase by 16%, outpacing the 10% increase in liquefaction capacity. Global demand is expected to increase 50% over the next 15 years.

The LNG fleet is expected grow by 40 ships in 2014 and another 42 in 2015. Nearly half (27) of them won’t have shipping contracts.

These unbooked carriers will get booked according to spot rates, which may well be higher than Teekay’s contract rate. But we like the fact that Teekay has excellent earnings visibility.

Teekay has beaten earnings expectations in each of the last four quarters. In the latest quarter, it reported distributable cash flow of $63.4 million, an 18% increase from the previous year. For the full year, distributable cash flow hit $237 million, an 8% increase from the previous year.

At current prices, we are buying close to the 52-week low, and just above important support at $39. It trades at two times book value, seven times revenue, and with a P/E of 16. All of these are within range, or better than, its competitors.

The company pays a strong 6.9% based on trailing earnings. But please remember, as an MLP, the dividend is not set. It will vary with earnings. We rate Teekay LNG Partners a strong buy under $42. Our 12 month price target is $48.

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