Gaslog Ltd: Great Upside Upon A Merger With GasLog Partners – The Preferreds Offer The Safer Avenue

Some context

Over the past few weeks, we have covered a variety of preferred stocks in the shipping industry, highlighting their different risk/reward profiles. When it comes to shipping companies, investing in their common stock, while very rewarding periodically, can often lead to heavy capital losses.

The struggles that come with the supply and demand of LNG carriers have historically resulted in downright awful balance sheets in the shipping industry, leading to massive losses for common stockholders. As a result, a more prudent and risk-adjusted method to gain exposure and potentially satisfactory returns from the shipping industry is through its preferred shares. In this article, we want to take a look at a case in which not only the preferred shares are investable, but the common stock also offers significant upside.

More specifically, we want to take a look at Gaslog Ltd’s (GLOG) and its preferred stock (GLOG.PA), after we previously examined its daughter company’s Gaslog Partners (GLOP), and its own preferred shares (GLOP.PA), (GLOP.PB), and (GLOP.PC). We believe that a potential merger would unlock great value for the former, while for those seeking to achieve more predictable returns, the preferred shares remain the safer avenue.

For context and full disclosure, in our Wheel of Fortune marketplace service, we are Long in GLOG’s common and preferred shares. We are also Long in GLOP’s preferreds but never held its common stock.

Up until earlier in the year, Gaslog Ltd, the parent company of Gaslog Partners, had a quite decent track record. The company had been overall fairly managed slowly but gradually growing its dividends, providing investors with a fair amount of tangible capital returns.

However, when GLOP cut its dividend by 78% back in February, it was quite obvious that GLOG’s financials would also be hurt due to receiving fewer distributions going forward. Not long afterward, GLOG cut its own dividend by 67%. While revenues have not been particularly affected compared to last year (Q1-Q3/2019 $486M, vs. Q1-Q3/2020 $481M,) the market was not particularly happy with the outcome, sending the stock significantly lower. Source: Google Finance

As we mentioned in our GLOP article, however, a dividend cut in the common stock can be great news for preferred holders, who should now enjoy expanded dividend coverage and an improving balance sheet.

When it comes to comparing GLOG and GLOP, we can safely state that the parent company features much higher qualities. Its chartered fleet alone is younger than GLOP’s (5 years vs. 8 years.), while its average chartered duration is 7 years, compared to GLOP’s much more vulnerable 2.6 years. Source: Q3 presentation

However, when it comes to comparing GLOG and preferreds, things become more complicated. In short, GLOG holds a higher potential upside, but its preferreds offer higher safety/predictable returns.

A merger between GLOG and GLOP: Unlocking the upside for GLOG

GLOG merging with GLOP is what we believe is the ultimate outcome here. GLOG is going just fine, while GLOP is functioning as its “junk-yard” to which GLOG is sending old/problematic ships. This has been the case for years, but as long as the shipping arena was flourishing – so did both entities. Now that things are way more difficult for tankers, GLOP is sinking, and that’s exactly what GLOG wishes to.

If and when GLOG absorbs GLOP, it will do so for the bare minimum. GLOG has zero incentive to pay more than they really have to, and from their perspective – this can be as low as nothing. So the lower the price of GLOP – the better it’s for GLOG, assuming a merger is on the table.

Cutting the distribution to zero (as GLOP has essentially already done) can be part of the “take-under” playbook that dictates killing the value of the entity, which is being absorbed first, and then take control of it for peanuts.

For us, GLOG (common and pref.’s) AND GLOP (only) pref.’s shareholders, this would be a most welcome development because there’s zero value (and only extra costs) in running the two entities, while GLOP isn’t fulfilling the purpose for which it exists – paying distributions to the parent company.

Since GLOP is likely a dead horse, a scenario that sees GLOG absorbing GLOP is perfect because in such case:

  1. GLOG would get GLOP for peanuts. That should be positive/accretive for GLOG shareholders (Assuming GLOP has no negative value)
  2. GLOP pref.’s are (very likely) going to be absorbed as is. That would automatically lift the prices, although nowhere near par.
  3. The combined entity would be more cost-efficient, and there can be added-value out of the synergies.

Why you still may prefer the preferreds…

Still, when it comes to projecting investor returns, it’s hard to forecast how GLOG’s common stock is going to perform. Adding in the fact that the current DPS is not enough to compensate investors, the preferred shares offer both satisfactory returns while also adding a higher element of predictability when it comes to its distributions.

Again, GLOG’s common stock could be subject to a much higher upside going forward, as a potential take-under should be positive/accretive for GLOG shareholders (Assuming GLOP has no negative value.) However, for those seeking a more predictable outcome when it comes to their returns, the preferreds are likely to better fit your needs.

For context and full disclosure, in our Wheel of Fortune marketplace service, we initially went long in Gaslog’s Preferreds in early February. Upon the market’s massive selloff, we issued further buying alerts when shares were trading for as low as $13.81 and have held all our positions open to date.

Overall, GLOG’s preferred shares should also be reliable for income investors. As a reminder, when Peter Livanos, who is the Chairman of GLOG and a Director of GLOP was asked about GLOG’s then $0.60 annual dividend and its safety in February’s earnings call, he answered “Very comfortable. Next?” Then the company cut its dividend in May, as we mentioned earlier. Such behavior/outcome is most unlikely to be the case with the preferred shares.

Assessing the preferreds…

Gaslog’s preferreds are currently trading beyond their call date, and considering that the company is lacking the funds to redeem them do so, it’s unclear if the preferreds are ever going to get redeemed. In the meantime, however, investors can enjoy a current dividend yield of around 10.2%.

No matter how you want to assess GLOG’s preferred coverage, its dividends, which amount to around $2.5M on a quarterly basis ($7.5M for the nine months ended,) are covered by multiple times the company’s net cash from operating activities (post interest payments), or the company’s adjusted profit ($64.8M for the nine months ended Q3).

Source: Q3 results

Additionally, as we mentioned, a potential merger with GLOP is likely to lift GLOG’s preferred stock closer to par value, adding the possibility for some extra capital returns there.

It’s important to state that GLOG’s preferreds are not risk-free and have their own share of dangers, in spite of them probably being the safest security amongst all the Gaslogs. Still, in our view, they provide a fair risk/reward profile, and a great source of stable income generation.

The wide scope of the service allows us to cater all types (of investors) and (investment) needs/goals, making WoF a true one-service-fits-all.


Credit: SeekingAlpha

1 Comment

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