GasLog Partners (NYSE: GLOP), which owns liquefied natural gas (LNG) carriers, expects to benefit from a rebound in charter rates and continued demand for shipping from export project developers.
GLOP reported net income of $20.4 million for the first quarter of 2019, down 45 percent from the same period last year. The fall was largely due to a non-cash $12 million decline in derivative valuations, and to a lesser extent, lower rates for three vessels after their previous charters expired.
GLOP is the master limited partnership (MLP) ‘daughter’ of separately listed GasLog Ltd (NYSE: GLOG). An MLP focuses on steady long-term contracted revenues. When GasLog Ltd secures a multi-year charter for one its vessels, the ship is ‘dropped down’ or sold to the MLP. GLOP has purchased 12 ships from GasLog Ltd since it went public and has 13 additional drop-down opportunities from its parent.
The LNG shipping market is divided into two very distinct categories – the extremely volatile spot market and the much more stable multi-year long-term charter market. All but one of GLOP’s 15 vessels is in the long-term market.
The spot market reached an all-time high of around $200,000 per day in the second half of last year, then collapsed to $40,000 per day – near the break-even level – in the first quarter of 2019.
During the quarterly conference call, GLOP chief executive officer Andrew Orekar attributed the slide to pre-buying by Chinese interests prior to last winter, and a much warmer winter in Asia than expected, which lowered the price of LNG.
When Asian LNG spot prices do not possess a high enough premium compared to commodity pricing in Europe, fewer U.S. export cargoes take the longer route to Asia. As voyage distances shorten, the effective vessel supply increases, a negative for spot shipping rates.
Orekar affirmed that spot rates have now stabilized. “We believe the market is poised to return to higher spot-rate levels,” he continued, pointing to the very high amount of new LNG export capacity coming online relative to new shipping capacity. He said that that 89 million tons per year of new global export capacity is expected to debut through 2024.
Export capacity in the U.S. is particularly important to vessel demand, he explained, estimating that for every million tons of LNG per year that is shipped from the U.S. to Asia, two LNG ships are required.
He noted that in the first quarter of 2019, 110 cargoes were shipped from the U.S. to North Asia “despite the fact that there was limited price arbitrage between the Atlantic and Pacific.” Since 2016, when exports began to flow from the U.S. Gulf, he said that around 1.8 ships have been required for each million tons of exports from the country, up from the historical global multiplier of 1.3 ships per ton per year.
He also explained that “recent history shows that strength and weakness in the spot market has effects on the multi-year market,” and he expressed confidence that a spot-market recovery would help GLOP secure better long-term charter rates for its fleet going forward.