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Teekay
LNG (TGP) is Expected to Boost Cash its Distributions +12.5%
a
Year |
Published:
January 27, 2008
Teekay LNG (NYSE: TGP,
$28.28) owns a fleet of seven liquefied natural gas
(LNG) tanker ships, some fully owned and some in which TGP owns
a significant stake. LNG tankers are specialized ships designed
to carry natural gas in liquid form to faraway ports that
pipelines can't reach. All of the company's ships are contracted
to major energy firms under long 15 to 20-year contracts at
fixed rates.
Competitive Advantages: TGP's main competitive advantage is
simple: it has long-term contracts covering all of its LNG
carrier ships. These contracts are typically signed with major
international oil companies such as ExxonMobil (NYSE: XOM) and
include provisions to adjust rates higher to keep pace with
inflation.
Companies with major LNG projects want to make sure that they
have access to plenty of tankers to handle all their production.
Thus, rather than trying to contract tankers on an as-needed
basis, these producers sign long-term deals to guarantee
capacity. These are exactly the sort of deals Teekay targets,
and it already has deals covering major LNG developments such as
those in Angola and Qatar.
Even better for TGP, it actually signs these contracts before it
buys a new ship. That means that TGP isn't speculating on demand
but building to meet a known market. In this sense, TGP doesn't
really have to compete with other firms at all -- it already has
its existing fleet committed and has a full slate of tankers
under construction that are also already committed.
Growth Drivers: TGP's main growth driver is the scheduled
delivery of new ships. From its current fleet of seven LNG
ships, four new 40%-owned LNG tankers are scheduled for delivery
this year, an additional two 70%-owned ships are scheduled for
2009, and a further four 33%-owned carriers in 2011.
As these new ships come into service, TGP's long-term contracts
will kick in and the firm will start earning revenues. And
Teekay is always looking for ways to add to its tanker
construction schedule.
Valuation and Outlook: TGP is organized as a
master
limited partnership (MLP), meaning that
it pays no corporate tax and offers a high yield for investors.
The MLP currently pays an annualized $2.12 per share,
divided into quarterly payments. That equates to a current yield
of around 7.5%.
In addition, TGP is expected to be able to boost its cash
distributions at an annualized rate of around +12.5% over the
coming three years.
Typically, MLPs are not valued based on earnings and
price-to-earnings ratios. For master limited partnerships, we
calculate ratios using distributable cash flow rather
than earnings. The reason is that non-cash charges like
depreciation and amortization are included in the earnings
measure. These can be significant for MLPs because their assets
typically throw off large non-cash depreciation charges.
Distributable cash flow is basically the net income figure with
non-cash charges added back. From this adjusted figure we
subtract maintenance capital expenditures, which is a
measure of how much money it costs annually to keep up, repair
and maintain existing infrastructure so that it remains usable.
The final figure is a close approximation of how much cash an
MLP actually has on hand to pay distributions.
With a distributable
cash flow for 2007 of $2.20, TGP trades at about 13 times
distributable cash flow -- a relatively attractive valuation.
-- Paul Tracy
Editor
StreetAuthority
Market Advisor
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