Teekay: Top Play on LNG

05/05/2014 8:00 am EST

Focus: STOCKS

Elliott Gue

Editor and Publisher, Energy and Income Advisor and Capitalist Times

For investors seeking pure-play exposure to rising demand for liquefied natural gas (LNG), shipping companies that own fleets of LNG carriers are an option, especially conservatively run names with reliable distributions, explains Elliott Gue, editor of the Energy & Income Advisor.

With limited liquefaction capacity coming onstream in 2014 and 2015, investors should expect renewed weakness in short-term charter rates.

Against this backdrop, we continue to favor conservatively run shipowners whose fleets have secured long-term fixtures and have little exposure to the spot market over the next two years.

Teekay LNG Partners LP (TGP) owns a fleet of 27 ships that transport liquefied natural gas (LNG), five vessels that carry liquefied petroleum gas (LPG) and 11 conventional oil tankers. All its existing ships are contracted under long-term time charter arrangements at fixed day-rates.

Not only would Teekay LNG Partners’ cash flow be insulated from near-term weakness in the spot market, but management also sees opportunities to acquire vessels from marginal shipowners that made ill-advised bets on short-term tightness in the spot market.

Last year, Teekay LNG Partners inked an innovative sale-leaseback deal with the struggling Awilco LNG ((ALNG:NO) in Oslo). Teekay agreed to purchase two Awilco newly built LNG carriers for US$205 million apiece and then lease the ships back to the Norwegian shipowner for a period of five years.

We also like the master limited partnership’s move into midsize vessels via its purchase of 50% stake in Exmar ((ENX:EXM) in Brussels) (OP:EXMRF). This joint venture will take delivery of 12 LPG carriers over the next four years, providing plenty of upside.

Teekay LNG Partners has also ordered four long-haul LNG carriers, two of which have already secured fixtures.

And the MLP has the option to order five additional vessels that would arrive when new liquefaction capacity starts to come onstream and the supply-demand balance for LNG tankers potentially tightens.

Although the shipowner has zero exposure to near-term weakness in the spot market for LNG carriers, the expiration of long-term contracts starts to become a concern toward the end of the decade.

With a distribution yield of 6.4%, Teekay LNG Partners LP is a good bet for conservative investors seeking current income; the stock rates a buy on dips to less than $40.00 per unit.

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