Dividend ideas for shipping investors, Part 3

LNG shipping preferred stocks

LNG is still one of the most exciting energy plays. It is at the intersection of AI, energy, and geopolitics.

The world needs LNG, and ships are demanded to move it across the globe. My long LNG shipping thesis could be summarized in one chart (via Flex LNG).

Unlike crude oil, new LNG projects are arising in the West of Suez and the Far East. The US, Australia, Qatar, Russia, and Malaysia are the top five LNG exports.

Nevertheless, the equation is not that simple. The following chart gives an unexpected perspective on the LNG market.

The chart is based on Graph Theory, which illustrates the relationship between agents in a complex system.

Look at the red nodes that mark supply chain choke points. These are the most important ones in the global LNG network. Suez/Bab-el-Mandeb is off the map, so traffic is diverted via the Cape of Good Hope.

The LNG carrier's order book is high, but more than 90% of the ships are committed. Nearly 30% of the global LNG fleet comprises ships equipped with steam turbines. These inefficient vessels are unable to meet new environmental regulations. In the coming years, steamers will retire, except for ice-class vessels.

Combining geopolitics, AI, energy transition, and steamers, we have the perfect storm for a long LNG shipping position. That said, let’s look at each side of the equation.

LNG carriers market review

Twenty-four ships are expected to be delivered in 2024, resulting in 650 active LNG carriers. The current order book is about 50% or 350 new vessels. Above 90% of the new buildings are committed. Meanwhile, new vessel prices stayed at $260 million, double that of 24 months ago. So, speculative orders have significantly declined.

The fleet's age profile is not very favorable. More than 50% of the ships are under ten years old. Nearly 14% of the fleet is older than 20 years.

About one-third of the active LNG fleet consists of steamers, which, as pointed out, will soon be retired. Apart from ice-class ships, the rest will operate in short-term charters at significantly lower TCE.

For reference, the TCE for a steamer is below $30,000/day. I believe a handful of those vessels will be converted into Floating LNGs. In summary, the retirement of steam-powered vessels will balance the LNG market, thus preventing vessel supply excess.

The demand side for LNG ships is a function of macroeconomic and geopolitics. The chart below shows the LNG export/import balance.

Asia solidified its position as a top importer of LNG. YoY, the country reported 10%. Due to a mild winter, EU LNG imports dropped significantly. Only Qatar, one of the major exporters, reported declining figures.

Nearly 48 mtpa of LNG volumes were contracted during 1H24. While these agreements vary in duration, contracts are at least 15 years long. For most new liquefaction projects, these off-take agreements represent essential milestones for reaching a final investment decision (FID).

New contract volumes for North American projects amounted to 17 mtpa. In the long term, the US and Qatar are set to be the primary drivers of this capacity expansion. Together, they will account for approximately 60% of the total capacity additions between 2025 and 2028, with the US contributing around 40% and Qatar around 20%.

By March 2024, 17 liquefaction projects were reported in different stages of construction worldwide.

The following projects are expected to come into service in 2024: Golden Pass Train 1 and Calcasieu Pass in the US, Fast Altamira LNG in Mexico, Greater Tortue FLNG in Senegal, FLNG in Congo, and Arctic 2 in Russia.

LNG tonne-mile demand growth surpasses the fleet growth rate. For LNG shipowners, this means growing backlog and revenue visibility. Today's theme is LNG preferred stock, so revenue predictability is critical. The higher the backlog, the better the dividend safety.

The Competitors

LNG segment offers three options for preferred equity investors:

• Dynagas LNG Partnership LP

• GasLog LNG Partnership LP

• Seapeak LNG LLC

Dynagas LNG Partners LP is another esoteric Greek Company. Its parent company is Dynagas LTD. Behind the latter is the Greek shipping mogul George Prokopiou.

The company has a fleet of six vessels with an average age of 14.3 years. Three are equipped with steam turbines, and three with TFDE (triple-fuel diesel-electric) propulsions. Five of the ships are ice class, with the exception of Clean Energy. Dynagas has a backlog of $1.04 billion, or $173 million per vessel.

At first glance, Dynagas seems doomed because 50% of its fleet is obsolete. The devil is in the details. The company’s steamers are ice class. So, they will not retire any time soon.

GasLog LP has 11 LNG carriers with an average age of 11.9 years. Three are steamers, while the rest are diesel-electric. Gaslog's average contract is 3.2 years. 60% of the fleet comes with charter extension options. As expected, LNG carriers with steam turbines have shorter contracts and no extension options.

The parent company of GasLog LP, GasLog Ltd., was taken private by its major shareholder, Blenheim Holdings, a company owned by the Livanos Family and Onassis Foundation. Hence, only preferred units are available if you want to invest in GasLog.

Seapeak LLC is the reincarnation of Teekay LNG Partners L.P. It was rebranded as Seapeak in early 2022 following its acquisition by investment funds managed by Stonepeak, a New York-based private equity firm. The company has interests in over 90 vessels: 49 LNG carriers and 38 LPG carriers. Six of its LNG carriers are ice-class.

Seapeak was converted from a limited partnership to a limited liability company in February 2022. In January 2022, its common shares were delisted from the NYSE, but preferred units continue to trade.

Technically speaking, SeaPeak is not a pure LNG player because it also owns LPG carriers. Nevertheless, its fleet of LNGs is larger than that of Dynagas and GasLog combined.

The following tables sum it up.

The chart is divided into a few sections. The top one shows fleet specs, type of propulsion, and age; the following two show companies’ balance sheets and valuations.

Financially, all three companies are sound.

They cover the basic safety requirements:

The dividend payments on the preferred equity have to be below 50% of the FCF, and interest expenses vs. operating income should be no more than 70%.

It is worth mentioning that none of the companies have zero debt. For preferred equity investors, some debt is good because it implies a lower probability of redemption.

Preferred equity comes with a higher cost of capital, but it usually represents a small fraction of the company’s capital structure. Hence, outflows for distributions are considerably lower than interest payments. That’s why repaying and restructuring debt is a priority.

In summary, the contenders have the perfect dose of indebtedness: neither too low to consider calling its preferred units nor too high to compromise liquidity and dividend safety.

Let’s look at our contenders' preferred issuances:

GasLog offers three variants, while Dynagas and Seapeak have two. All three issues have comparable specifications. They are cumulative, redeemable, and perpetual.

I like more SeaPeak and Dynagas. SeaPeak brings exposure to LNG/LPG segments while Dynagas to ice class LNGs. GasLog falls in no man’s land. Its vessels are neither equipped with MEGA/MEGI engines nor are its steamers ice class. Sooner rather than later, the non-ice class steamers will become a drag for their owners.

Final Thoughts

The LNG shipping stocks are probably the most attractive income picks because of their huge backlogs.

Tanker companies usually employ their fleets under time and voyage charters; dry bulk shipowners prioritize short-term time charters, while LNG shippers focus on long-term commitments. Multiyear contracts result in extensive backlogs, hence in revenue predictability and enhanced dividend safety.

PS: The article will be freely available for two days before being locked behind a paywall.

Reminder: GasLog and Dynagas are C-corp and require a tax form 1099.

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On the markets, we are wrong until proven otherwise. So, take the above thoughts with a grain of salt.

Everything described in this report has been created for educational purposes only. It does not constitute advice, recommendation, or counsel for investing in securities.

The opinions expressed in such publications are those of the author and are subject to change without notice. You are advised to do your own research and discuss your investments with financial advisers to understand whether any investment suits your needs and goals.