Capital Link’s Annual MLP Conference, held in New York, featuring a session devoted to the LNG shipping sector. LNG shipping is suitable for MLP structures, which are, by law, restricted to the energy sector, because of the predilection for lengthy contracts, with very credit-worthy entities. The news is not all bad.
Obstacles facing the shipping MLP reflect the broader set of shoals facing the overall MLP sector- composed of some 121 entities with an overall capitalization of $287bn as of end February, according to Yorkville Capital Management, a packager of MLP funds. As highlighted by Tortoise Capital, an MLP fund specialist, the primary concerns facing “midstream” MLPs - and shipping finds, with a itself in that niche - are counterparty risk, volume outlook, as well as sector-wide worries about the three C’s: capital expenditure reductions, capital market access, and credit ratings.
Moderator Ben Nolan, the analyst at Stifel, a large US brokerage active in the shipping space, offered a series of provocative questions for the shipping panelists - representing Golar LNG Partners, Hoegh LNG Partners and GasLog Partners. A message from this year’s panel, following though from a similar event a year ago as oil prices were in free fall, is that many solid MLPs are being unfairly tarnished by the broader energy brush.
Panelist Andrew Orekar, ceo of GasLog Partners, told the audience that: “You have to parse the facts for each company” rather than engaging in broad categorisations. He added that for GasLog’s partnership, the MLP structure was “a logical model, with a cost of capital advantage.” Richard Tyrrell, from the Hoegh partnership- which has a heavy emphasis on FSRUs, said “The business lends itself to the MLP model,” and that investors needed to look at the degree and length of contract coverage, as well as unfunded capital expenditure commitments.” He stressed that the dropdown model, where the partnership takes on a completed vessel with a charter, is a very sensible structure.
MLP’s can purchase assets from their parents with equity (raised from the sale of partnership units), debt, or some combination thereof. Against the backdrop of recent challenges facing shipping MLPs not appearing on the panel, the subject of leverage came up in Nolan’s questioning.
Debt is not always a bad thing; panelist Graham Robjohns, the ceo of Golar LNG Partners, mentioned that it’s newest acquisition FSRU Golar Tundra is being financed with debt. He explained that the additional leverage builds upon a previously low amount of leverage, and brings the partnership up to a 4x ratio of debt to EBITDA. He summarized “If you have the debt capacity, leverage is not always a bad thing.” Hoegh’s Tyrrell hinted that “in the next few months, we do see a number of opportunities that might result in dropdowns, financed with equity”.
In talking about the market, where LNG hires have lately waned due to an oversupply of vessels, the panelists all pointed to a rosy outlook. Andrew Orekar, from GasLog Partners offered a rousing endorsement of the sector, saying, “We feel very good about the demand picture. We are on the first page of huge growth of gas supply/shipping demand”. He added that he thought that important projects on the drawing boards will indeed get built.
Responding to an inference about the staying power of long term contracts presently in place, he stressed the importance of “security of supply” to buyers of gas under large contracts” they need the gas.” In a similar vein, Tyrrell emphasized the strategic importance of Hoegh-owned FSRU’s to charterers, which included governmental entities who must keep their grids supplied with gas.
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