New vessel deliveries result in higher earnings: TGP's income from vessel operations increased to USD 50.6m in 3Q16 from USD 42.2m in 3Q15 – in line with our estimate of USD 50.8m. We attribute the increase in earnings to the delivery of Creole Spirit and Oak Spirt and the start of their charter services from February and August respectively. The equity income of USD 13.5m was lower than our expectation of USD 17.3m because of a sharp decline in LPG shipping rates. Net income (excluding gains from derivatives) increased 9% y/y to USD 49.3m, similar to our estimate of USD 50m. Meanwhile, TGP reported ~11% y/y decline in distributable cash flow (DCF) to USD 54.3m in 3Q16 primarily because of unrealised gains compared with losses in 3Q15. The company announced a dividend of USD 0.14 per share, which translates into a dividend yield of ~4% at current prices. We maintain a Neutral stance with a fair value of USD 12.50 per share in view of the quarterly earnings and because we believe the company will prefer to retain most of its earnings considering its high capex obligations.
Raising funds to meet near-term obligations: In October TGP raised net proceeds of USD 120.7m through a public offering of 9% Series A Cumulative Redeemable Perpetual Units, the proceeds of which will be used for debt repayments and installment payments for newbuilds. TGP also issued USD 110m senior unsecured bonds in the Norwegian bond market that are due for maturity in October 2021. The company will use the proceeds to repurchase NOK 292m (USD 35m) of the company's bond from the proceeds that are due for maturity in May 2017 at a price of NOK 101.50 of the principal amount of the repurchased bonds. The remaining amount raised will be used for the payment of newbuilds. At the end of 3Q16 the company had a cash balance of USD 268m, which will increase to USD 490m after factoring in the above transactions.
New charter contracts for LNG newbuilds: TGP has fixed charter contracts for two of its LNG newbuilds that were unemployed. The company entered a 15-year charter contract for the first of the two vessels with Yamal LNG project to move LNG cargo from 2019, while the second vessel – Torben Spirit – will be chartered with an energy company for a 10-month period (with one-year extension option) upon its delivery on 1 March. TGP has 24 LNG vessels on order, including the vessels in which TGP has partnership interest. The company has now secured charter contracts for all its newbuilds, which increases visibility of earnings. TGP has pending capex of USD 3bn towards newbuilds to be incurred over the next five years.
Leverage to remain high with increasing deliveries: TGP has one vessel scheduled for delivery in 2H16, seven in 2017, nine in 2018, five in 2019, and the remaining two in 2020. Given that the company will take additional debt to finance most of its capex, we estimate that net gearing will increase to ~2x by 4Q18 from ~1.3x at the end of 3Q16. Further, net debt/EBITDA will increase from ~8x in FY16 to ~10x by the end of FY18, although it should moderate thereafter with incremental cash flows from the delivered vessels.
Value and risk: DMER has maintained the Neutral view on TGP with a fair value estimate of USD 12.50 per share. We believe that even though earnings are expected to improve from FY17, TGP will find it difficult to materially increase the payout due its large capex commitments although we acknowledge that it has secured earnings for all its newbuilds. That said, an unexpected increase in dividend payout will spur the stock upwards.
Source: Drewry Maritime Equity Research