Can Teekay LNG Partners Overcome Its Near-Term Challenges?

The liquefied natural gas (LNG) shipping industry is currently going through a rebalancing phase, and short-term rates are down from their peak in 2012 as new-builds hit the market before new liquefaction projects are completed. For this very reason I expect the LNG shipping market to continue to face challenges in 2014-15. However, their fortunes should reverse in 2016 as liquefaction projects are completed. 

Liquefied petroleum gas (LPG) shipping, on the other hand, continues to benefit from growing U.S. shale gas exports, and this trend is expected to continue until 2016. However, as the new-build deliveries accelerate and the Panama Canal expansion reduces distance, I expect rates to decline in 2016 with larger vessels affected the most. The expansion of the Panama Canal is expected to cut voyage costs from the U.S. to Asia by 24% compared to longer routes. 

Exposure to long-term LNG and LPG fundamentals
Teekay LNG Partners (NYSE: TGP), a master limited partnership formed by Teekay Corporation (NYSE: TK), is the third largest independent owner of LNG carriers. The partnership offers investors favorable exposure to the long-term LNG and LPG fundamentals and generates stable and predictable cash flows because of its focus on long-term (10-25 years) fixed rate contracts.

Teekay LNG is well positioned to take advantage of strong long-term growth in the global LNG and LPG trade. The partnership, through a careful expansion program in the LNG and LPG sectors, has successfully repositioned itself as a growth company.

Teekay LNG offers a healthy yield of 6.1%. While I do believe the long-term distribution growth should accelerate as the LNG market tightens again in 2016 and the company takes delivery of a series of new builds, in the short term the distribution growth will be relatively low, which keeps me on the sidelines.

Vessel deliveries coincide with liquefaction capacity coming online
Teekay has strategically scheduled its LNG new-builds delivery to coincide with large expansion in global liquefaction capacity in 2016-17. Other than the two new-build vessels that the partnership acquired from Awilco last year, Teekay has five LNG carriers on order with delivery in 2016-17. While two of these vessels have already secured employment with Cheniere for five years at $80,000-$85,000 per day, I expect the remaining three to also secure similar rates as the market is expected to tighten in 2016. 

JV with Exmar
In 2013, Teekay LNG decided to expand into the LPG sector, the less volatile midsize segment. The partnership formed a joint-venture with Exmar to invest in the LPG sector in order to expand its exposure to the growth of global LPG trade and increasing U.S. exports as a result of the shale gas revolution. 

The Exmar LPG BVBA JV has grown to 29 vessels, including five chartered in ships and 12 new-builds expected to be delivered gradually until 2018. In addition, TGP directly owns five medium semi-ref vessels with long-term contracts. While the charter rates for LPG carriers are expected to decline in 2016 from their peak level in 2012, when new-builds are delivered, I still expect Teekay's distributed cash flow growth to accelerate as mid-size LPG vessels are expected to remain more resilient vs. larger sizes, and the joint-venture's fleet expands with the deliveries of new-builds.

LPG shipping market remains undersupplied
The LPG shipping market remains undersupplied, and the situation is not expected to change in the near term as rapidly growing U.S. exports drive global trade expansion. U.S. exports, which are expected to double by 2016 from their current level, are leading to an increase in average voyage length as most of the incremental demand comes from Asia.

While the near-term market for LPG ships should remain very attractive, rates are expected to decline in 2016 due to the completion of the Panama Canal expansion and as new-build orders translate into vessels deliveries. The Panama Canal expansion is expected to be completed by the end of 2015 and notably reduces the trading time between the U.S. and Asia. Accordingly, the companies with vessels currently in the water and the ability to take advantage of the current strong spot market are better positioned at this time.

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