In the battle to win the hearts, minds and dollars of energy users, natural gas has been putting up a pretty good fight against the traditional heavyweight champion, oil.
Natural gas has gained popularity as an energy source for heating, cooking, generating electricity and fueling automotive fleets, partly because it is usually cheaper and cleaner than oil, and cleaner than coal.
With rising demand for natural gas -- and plentiful supply amid the U.S. drilling boom -- comes demand for ships to transport liquefied natural gas ( LNG ). One of the beneficiaries isGasLog ( GLOG ), which owns, operates and manages LNG tankers.
Favorable energy and shipping market trends have helped it run off four straight quarters of double-digit revenue growth. And GasLog stock has risen 56% so far this year.
'Up Day' In Ukraine Crisis
GasLog vaulted more than 7% in the stock market Monday as natural gas prices lifted on news that Russia's Gazprom curbed natural gas piped to Ukraine in a debt dispute. The flap led to worries about future natural gas supply for Europe from within the continent.
GasLog delivers LNG across oceans. It has a fleet of 23 LNG carriers, including three it is in the process of buying from BG Group. Fourteen ships are on the water and nine are due to be delivered over the next three years to help meet the world's demand for fuel.
Modern drilling methods, such as hydraulic fracturing coupled with horizontal drilling, get natural gas out of the ground efficiently. They spurred the U.S. energy production boom and drove prices sharply down in 2008. After a 2012 dip deeper, natural gas prices have been largely on the rise again.
Amid a boom in LNG production, GasLog is expected to deliver annual earnings per share growth of 40% this year and 52% in 2015, according to the consensus of analysts polled by Thomson Reuters.
"With the growing number of liquefaction and re-gasification facilities, we believe that demand for seaborne cargoes will remain strong, while the supply of vessels should be kept in check by high barriers to entry," Christian Wetherbee, analyst at Citigroup, noted in a report this month re-initiating coverage on GasLog with a buy rating.
Wetherbee also cited "newly developed trade lanes," which he says should have a multiplier effect on demand and shipping rates.
"We believe that rates should accelerate, particularly in 2015 when global liquefaction projects come on line," he said.
Short-term rates charged by LNG carriers fell in the first quarter with more ships on the water. That didn't impact GasLog much, as it usually signs long-term contracts that guard it from price volatility.
Under long-term deals, companies that need to ship LNG will typically commit to a tanker for several years. Because GasLog has established itself as a pure-play LNG shipper, rather than deliver different types of products, it has been successful in winning a large number of long-term contracts, analysts say.
It "offers exposure to one of the most attractive segments of the shipping industry from a long-term supply-demand perspective," noted JPMorgan analyst Nishant Mani.
Although Golar LNG has had spotty financial performance of late, with five straight quarters of lower sales, its stock recently set a record high. Teekay LNG is trading near all-time highs though it hasn't produced a quarter with a double-digit revenue gain in years and has grown EPS by double-digit percentages just once in the past five quarters.
GasLog has made a better go of it. In the first quarter it posted earnings of 13 cents a share, up from 5 cents the prior year but 3 cents below consensus estimates.
The miss was mainly due to higher-than-expected costs, CEO Paul Wogan said in a statement.
"We carried out some major scheduled maintenance during the quarter on a number of vessels. This resulted in higher-than-average maintenance costs," he said.
First-quarter revenue gained 162% to $57.1 million, which like EPS came in short of analyst views.
To help ease the cost of its rapid fleet expansion, GasLog last month spun offGasLog Partners ( GLOP ), a master limited partnership (MLP) created to buy new vessels. From an IPO price of 21 in May, the MLP's stock has risen 52%.
Dropping Down To GLOP
The spin-off will own and run three GasLog LNG tankers and has the right to buy more. The process of selling assets to an MLP is known in the industry as "dropping down."
"We believe that GasLog has up to nine more LNG tankers in its fleet that could attractively be sold into the MLP," noted Urs Dur, analyst at Clarkson Capital Markets. "As ships are dropped to the MLP, we would not be surprised to see GasLog order more ships for delivery in 2017-2018 to meet the forecast shortage of supply that may be commencing during that period."
Morgan Stanley analyst Fotis Giannakoulis recently initiated coverage on GasLog Partners with an overweight rating, calling it "the fastest-growing shipping MLP globally. It has a long pipeline of drop-down candidates and is expected to grow its dividend by over 50% within the next two to three years."