GasLog Partners (GLOP) – Expected Higher Bid – 40% Upside

Current Price: $8.75

Target Price: $12.00

Upside: 40%

Expiration Date: end of 2023

MLP buyouts was a successful theme for SSI last year (see SIRE, BKEP, PBFX, SHLX). All these previous setups so far have followed a similar pattern: (1) the general partner with a majority stake in MLP keeps dividends depressed despite the recovery in the underlying business operations; (2) then opportunistically lowballs the initial offer to buy out the minority shareholders; (3) eventually, after a few months of deliberations with the special committee, the offer gets increased by c. 20-40%. MLP structure has lost most of its tax advantages making it hard to raise fresh equity capital to grow the asset base. This eliminated the reason for these vehicles to remain public. That’s why the last few years saw an increasing number of MLPs getting taken private. The latest addition to the theme is the buyout of GasLog Partners (GLOP). I am a bit less excited about this particular setup mostly because I find the cyclical LNG shipping industry to be much more difficult to understand and analyze, and therefore have much less confidence in my assessment of GLOP assets value. However, there are certain aspects of the case that might make GLOP even more lucrative compared to the previous MLP buyouts.

Owner and operator of LNG tankers GasLog Partners has received a $7.70/share takeover offer from its general partner, GasLog Ltd. Part of the consideration would be paid in $2.33/share dividend to be distributed immediately prior to the closing of the transaction. The special committee of independent directors is currently reviewing the proposal.

The offer came at just a 10% premium to the pre-announcement prices and a 50%-60% discount to the ~$15-$20/share levels at which GLOP traded during 2018-2019 before the dividend was suspended. The market is expecting an improved bid and the company’s shares already sit 12% above the offer. I do not have a hard number for the fair value of GLOP assets, but the offer looks way too low relative to the current FCF generation, historical trading levels, and peer valuations. I think there is a decent chance of a price bump to $10-$12/share (15%-40% upside) or even higher. I would expect the case to play out over the next 6 months.

I will start by elaborating on a few details that make this setup different (and potentially more lucrative) compared to the other MLP buyouts I have reviewed. Then I will delve into GLOP’s financial performance over the last few years to show that the business continues to perform well and the company’s share price is depressed only because of the dividend elimination. Finally, I will share some background details on the LNG shipping industry and its cyclicality.

Important note: please consider any potential tax implications due to part of the buyout consideration being paid in MLP dividends. Also there is 10% withholding tax for non-US residents upon MLP unit sale.

 

What makes GLOP case different from other MLP buyouts? 

There are 4 main distinctions that make GLOP stand out from the rest of the MLP buyouts covered on SSI. The first three are clear positives, while the last one is the main difficulty for this case in my eyes:

• Shareholder approval requirement for the final offer from GP. The main point that makes GLOP situation even more attractive than all other MLP buyouts is that the GP has only 30% stake in the partnership. In all the previous ones, GPs held majority stakes, and the push for the higher offer was in the hands of the special committees only. For the GLOP buyout to pass the shareholder vote, nearly a third of the minority holders will need to be in favor. It gives unitholders power and leverage to negotiate a price increase. It also makes the situation much less dependent on the special committee review, incentivizes the independent directors, and also significantly reduces the risk that GP will steal the company at a lowball price. The only nuance is that aside from the GP no other unitholders can exercise more than 4.9% of the voting power, even if they own a larger stake. However, the only other holder that owns more than 5% is Cobas Asset Management (10% stake), so this restriction is unlikely to have a material effect on the final vote outcome and is mainly meant to limit any activist from jumping on board with a new large stake.
• 45% ownership of GP by Blackrock. The GP was founded and is controlled by billionaire Greece shipping tycoon Peter Livanos. Till 2021, the general partner used to be a public company trading under the ticker GLOG. In 2021, Livanos partnered with Blackrock’s Global Infrastructure Fund III to take the GP private in a transaction where the PE group took a 45% stake and Peter Livanos retained 55%. I think the involvement of Blackrock further reduces any governance risks and increases the odds of limited partner shareholders eventually receiving a fair deal. Not much information is available on Blackrock’s Global Infrastructure Fund III, but the PE group has recently raised $4.5bn for the new Global Infrastructure Fund IV. The freshly raised capital might be used to invest in GLOP post-buyout to renew and grow its fleet.
• GLOP trades at a wide 50-60% discount to pre-dividend-elimination levels. All previous MLPs that I’ve covered before have been opportunistically acquired during a period of depressed unit price after a major dividend cut or suspension. The initial bids were lowballed at 10%-30% discount relative to the pre-dividend cut prices. The final offers interestingly always came exactly in line with share price levels before the dividend change. Setting up the privatization process this way allowed the GPs to effectively buyout their limited partners without paying any premium for the materially improved balance sheets and favorable industry tailwinds. GLOP’s bid follows the same pattern but comes at an even larger discount of 50%-60% to the $15-$20/share price levels before the dividend cut. The discount seems unreasonably wide. Despite the dividend cut, the company’s fleet has remained largely unchanged, the balance sheet has significantly improved while GLOP’s earnings and profitability stayed stable. I’ll expand more on these points in the section below, but the bottom line is – the current offer seems significant to low relative to where GLOP used to trade and a material premium will be needed for this privatization to go through.

• GLOP is a shipping company, so its asset base and profitability dynamics are very different compared to other covered MLPs. In the previous MLP buyout cases the underlying assets were in much more stable, predictable industries – pipelines, terminals, soda ash mine and etc. Meanwhile, LNG shipping, like any other shipping, is a very cyclical industry that I find difficult to value and analyze, especially given the recent turbulence driven by the Ukraine war and Europe shifting away from reliance on Russian energy, pro-longed China lock downs and etc. Most of the company’s vessels operate with short-term contracts that are directly exposed to charter rate fluctuations, whereas GLOP provides limited visibility into the signed contract rates and future earnings potential. GLOP’s vessels are aging and the supply of new more cost-efficient vessels is increasing. Putting it bluntly, this makes it more difficult to get a good feel for how strongly the GP wants to have full ownership of GLOP’s ships and what the final price threshold might be. I’ll expand more on the industry background and related risks in further sections below.

 

Stable business performance since dividend elimination

GLOP trades at a massive 50%-60% discount to pre-dividend cut levels, whereas the company’s EV is currently 40% or about $1bn lower than it was back in 2019. A discount of this size seems unwarranted given that GLOP’s fleet/asset value has remained largely unchanged, the balance sheet has been significantly improved and earnings stayed stable since 2019. Higher interest rates should a negative effect on the company’s valuation, however, 40% change is too extreme

GLOP currently owns 12 LNG carriers – 9 TFDE (tri-fuel diesel electric propulsion) vessels and 3 older, less efficient steam turbine vessels. It also leases 2 more ships (1 TFDE and 1 steam). Only 3 out of 12 GLOP’s owned vessels are currently contracted on longer-term charters (expiration in 2026+). Most other ships operate on short-term (1-year) time charters. 

The current fleet has remained fairly similar over the last 4 years. Back in 2019, the company owned 15 ships, 2 of which were later sold and then leased-back, and one steam vessel was sold. While the number of owned vessels went down from 15 to 12, it is important to note that the value of the remaining ships might have actually increased driven by the recent industry tailwinds and ramped-up demand for LNG carriers. The price of newbuilds went up from $180m in 2018-2019 (FLNG presentation – 3rd slide) to $250m last year. The same higher price dynamic was observed in the 5-year-old second-hand tankers. While most of GLOP’s fleet is quite a bit older, it seems like the value of its ships might be higher compared to 2018-2019 levels.

GLOP was originally structured as a funding vehicle for the general partner to dump off older vessels. Following the tax reform, MLPs’ cost of capital shot up, and GLOP found itself in a tight spot as equity issuance became no longer feasible and debt financing was out of the question due to the already levered balance sheet. GLOP and the GP did a few more asset dropdowns financed by pref. equity in 2018-2019 and then at the beginning of 2020, announced a major dividend cut from $2.244/share to $0.5/share to focus on deleveraging. The dividend was eliminated completely in Q3’20. Over the last 3 years, the company has repaid $0.5bn+ of debt and significantly improved its balance sheet.

Last year, GLOP already reached its Debt/EBITDA leverage target (excluding prefs) – see graphs below from the Q4 presentation. The cap ratio (debt over assets) target should also be reached in the short term if the current tempo of debt paydown continues – potentially by the end of 2023 or early 2024.

Despite the dividend cut and sharp fall in the share price, GLOP’s earnings have actually remained strong over the last few years. 

* Note: Adjustments made in adj. profit calculations are mostly ship impairment write-downs.

EBITDA for 2023 is expected to remain somewhere in line with the 2022 figure. Currently, all GLOP’s ships are contracted and 87% of available days for 2023 are covered (first graph below). Management guided the contracted adj. EBITDA for 2023 at around $265m (second graph below). However, this figure doesn’t include the remaining unfixed days for vessels that come off contracts mostly in Q4’23, so the final 2023 EBITDA figure is likely to be higher. The average cash burn of a non-utilized ship per day is around $17.5k/day. Open days adj. EBITDA sensitivity to charter rates can be seen in the third graph below.

 

Current earnings can support historical $100m dividend levels

Prior to 2020, GLOP was paying around $100m in annual dividends. Declared cash distribution size was calculated by taking adj. EBITDA and deducting financial costs (mostly debt interest), certain capital reserves for ship maintenance/replacement, and pref. equity dividends. In 2017-2019 total deductibles ranged from $110m to $164m. 

The company no longer reports the exact figures for the reserves and financials costs, etc. but estimating it around $145m seems reasonable enough given that since 2019 interest and pref dividend expenses dropped by $20m+, whereas the fleet size shrunk from 15 to 14 (GLOP is liable for the maintenance of leased-back ships). With $265m of already contracted EBITDA, the company would easily be able to support $100m+ dividend for MLP owners. Per unit, this would result in a $1.9 annual distribution, which equals to 25% yield at the current price. In comparison:

• In 2018-2019 GLOP was trading at around 8-12% yield.
• Yields of MLP ETFs (MLPA, AMLP) are 7-8%, very much in line with 2018-2019 levels, even though I would expect investors to demand higher returns given interest rate hikes over the last year.
• The same average 7-8% yield range of MLPs is confirmed by this MLP list (Feb 1), which also shows that currently only several MLPs trade above 10%.
• Finally – a superior LNG carrier competitor FLNG, with a much newer fleet and longer-term contracts (more stable earnings) trades at 10.7% yield.

GLOP would probably trade at a higher yield than FLNG, but 25% is clearly unsustainable and indicates significant re-rating potential if the dividend was to be reinstated.

 

The offer is too low relative to peers and relative to FCF

GLOP looks undervalued based on peer comparison as well, although, not many directly comparable competitors are available. The company currently trades at 5.3x trailing EBITDA. Smaller, more levered peers like DLNG, ALNG.OL, which also don’t pay any dividends and have similarly old fleets, are valued at much higher trailing EBITDA multiples of 7x and 10x respectively. The above-mentioned FLNG trades at almost 12x.

One more illustration of how cheaply the GP is trying to snatch GLOP. The current offer is $5.37/unit + $2.33/unit special dividend to be distributed before transaction closing. Given its 30% stake, the GP will receive around $38m from the special dividend and will then have to pay $204m to buyout the remaining 70% minority shareholders. That’s a net $167m of cash needed for GP to take GLOP private. In comparison, just over the last two years, GLOP has generated $343m of free cash flow to equity holders, calculated as OCF less CAPEX, interest, and pref dividends. Most of this FCF was used for aggressive deleveraging, with debt repayments totaling $442m during 2021-2022.

 

Industry Background

LNG shipping, as well as any other type of shipping, is a highly cyclical industry prone to boom and bust cycles. Seasonality is also strongly present with Q4 being the seasonal peak due to the Northern hemisphere ramping up LNG inventories for winter heating. 

Industry dynamics are quite complicated as LNG shipping demand and charter rates are affected by global supply/demand of LNG, supply/demand of LNG ships, availability of LNG terminals as well as political considerations. 

The most recent boom cycle was sparked by the war in Ukraine and Europe’s move towards energy security beyond Russian pipelines. This has created a sharp spike in Europe’s LNG imports and has potentially catalyzed mid/long term tailwinds for the whole LNG industry, including LNG shipping.

Increased demand for LNG carriers drove up the orderbook of LNG ship newbuilds as well as the price of new and secondhand vessels. Charter rates of TFDE ships, which comprise most of GLOP’s ships, was steadily rising in 2022 before spiking to record highs in November. TFDE spot rates reached $450k/day and 1-year time charters broke $200k+/day, pretty much doubling the historical norms for a seasonally high fourth quarter.

Historical TFDE 1-year time charter (TC) rates until early 2022 are shown in the chart below (CoolCo presentation). 

And charter rates for the last two years in GLOP presentation:

However, the winter turned out much warmer than expected leaving Europe with 20% higher LNG inventories compared to historical averages. Consequently, TFDE spot/TC rates have tumbled, but still remain significantly elevated above the historical norms. Spot rate dropped to $70k/day in January and currently stands at $77k/day (vs around $50k historical norms for this time of the year). 

Going forward, Europe is expected to continue replacing Russian pipeline volumes and the demand for LNG should stay elevated for the foreseeable future. Moreover, an additional rise in global LNG demand is expected this year from China, following the lift of Covid restrictions a few months ago. Overall, the LNG market is expected to stay tight for the next 4 years as little incremental supply is expected to hit the market through 2026. LNG ship supply paints a very similar picture, with the majority of current newbuild orders coming online only in 2025 and onwards (see graph from Awilco presentation below). Worth noting, that most of the newbuilds have already been chartered in advance. 

I wasn’t able to find any charter rate projections for TFDE ships, however, Spark Commodities forecast (see graph below) that the average spot rate for the newest design MEGI/XDF ships this year will stay above 2022 levels. Although TFDE ships are not as new and efficient, positive projections for MEGI/XDF ships might be a decent indication of general expectations for other vessel types as well. From FLNG presentation:

Risks

• It’s not clear how biased GLOP’s special committee is. It is comprised of 4 independent directors (total board size is 5 seats) – Curtis Anastasio, Julian Metherell, Roly Fisher, and Kristin Holth. Julian Metherell definitely looks partial to the buyer as he is actually sitting on the board of GP. Curtis Anastasio has been the GLOP’s chair since its inception in 2014. The remaining two, Roly and Kristin, have been appointed rather recently (Feb and Nov of 2021), but Kristin has served on GP’s board for a short period in 2020-2021 before it was taken private. There is a risk that the special committee’s review might lean in favor of the GP and we will see either no bid increase or a very minor bump only. However, I believe this is largely offset by the requirement of GLOP’s shareholder approval. The GP/special committee are clearly very well aware of that. The current market price premium to the initial offer already illustrates how the vote would go if the bid is not increased sufficiently enough.
• There is always a risk that GP will simply walk away if shareholders reject the low-balled offer. Without dividend reinstatement, MLP units are unlikely to re-rate higher. Any internally generated FCF might be piled into buying new vessels. The downside in this scenario is probably around 10-20%.
• GLOP business is exposed to LNG charter rate volatility, general LNG market, and geopolitical environment. Although the outlook seems quite positive at the moment, any unexpected geopolitical changes could affect the outlook drastically.
• GLOP has 4 old steam vessels – 3 owned and 1 leased. All of these were built around 2006-2007 and are substantially older than the other ships in GLOPs fleet TFDE ships (built around 2013-2016). Steam ships are becoming outdated, not because of their age (life cycle is around 30-35 years), but mostly because of their lower efficiency and higher pollution in light of global ESG trends. The industry is already moving towards the newest MEGI and X-DF (two-stroke propulsion) carriers, which are less pollutive and more efficient (30% lower fuel consumption vs TFDE). Meanwhile, steam vessels are getting hit by regulatory pressures, e.g. International Maritime Organization regulations that came into effect in 2023, have put significant speed restrictions on steam vessels (hence reducing efficiency) to control greenhouse gas emissions. These and further regulations might have a negative effect on steam tanker charter rates and impact GLOP’s future earnings – 1 of GLOP’s steam ships is coming out of contract in Jul’23, two more in Oct’23, and the last one in Mar’24.

 

The other MLP buyouts so far

Finally, and at this point, this may very well be a pattern recognition bias, but all recent MLP buyouts have worked out great so far. A number of recent cases followed a very similar scenario. A short description of these is provided below:

• NBLX – an initial bid from Chevron at $12.47/unit in Feb’21. Two months later, the price was raised to $14.27/unit. 14% increase.
• PSXP – first bid at $32.57/unit in Apr’21 followed by two raises and a final offer at $43.85/unit. 35% premium in 10 months.
• BPMP – initial proposal in Aug’21 was at $13.01/unit. The price was raised in 4 months to $14.75. 13% premium.
• BKEP – the initial proposal came at $3.32/unit in Oct’21. In 6 months, it was adjusted to $4.65. 40% premium.
• HMLP – first bid at $4.25/unit in Dec’21. At the end of May’22, the deal was revised to $9.25/unit. A slam dunk of +117%. This was mostly driven by the gas price explosion (also around 2x since the offer announcement until the definitive agreement).
• SHLX – initial takeover interest at $12.89/unit in Feb’22. After 5 months it was revised to $15.85/unit. 23% raise.
• PBFX – buyout intention was announced in June’22, however, the terms were not disclosed. At the end of July’22, a definitive agreement was signed at $18/unit – 30% premium to pre-announcement prices.
• SIRE – first bid in July’22 at $17.90/unit. Revised in Feb’23 to $25/unit. +40% bump in 7 months.