Published by Nick McCullum on July 6th, 2017
When investors think about investing in master limited partnerships, the first subsector that likely comes to mind is midstream energy companies – operators of pipelines and storage vessels.
What investors likely don’t think of is marine-based vessel transportation partnerships. There is a reason for this. It is a relatively small market with one MLP holding a dominant leadership position.
That MLP is Hoegh LNG Partners LP (HMLP), which trades on the New York Stock Exchange and has a market capitalization of $647 million.
What immediately stands out about this partnership is its exceptionally high dividend yield. Hoegh LNG Partners currently trades with a yield of 8.9%, more than 4.5x the average yield in the S&P 500.
Hoegh LNG Partners is one of a short list of stocks with 5%+ dividend yields, ideal for investors looking to generate meaningful portfolio income.
Hoegh LNG Partners also has other appealing characteristics. As an MLP, the company’s distributions are highly tax-efficient.
In fact, master limited partnerships are the most effective investment vehicle for generating after-tax income, primarily because they avoid paying tax at the organizational level.
Hoegh LNG Partners’ high dividend yield and tax efficiency make it an appealing investment for investors looking to synthesize a passive income stream from their nest egg.
This article will analyze the investment prospects of Hoegh LNG Partners in detail.
Hoegh LNG Partners is a publicly-traded master limited partnership that provides floating, marine-based liquid natural gas (LNG) transportation services under long-term contracts.
The partnership owns and operates five floating storage and regasification units (FSRUs) which act as floating import terminals. Hoegh LNG Partners is the only pure play FSRU company in the public markets and owns the most modern FSRU fleet.
Hoegh’s general partner is Hoegh LNG Holdings Ltd (HLNG), which is domiciled in Bermuda. In addition to its general partner interest, Hoegh LNG Holdings owns a 46.4% limited partner stake in Hoegh LNG Partners. This significant alignment of interest is beneficial for all parties involved and should be noted by Hoegh’s investors.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 4
From an investment perspective, Hoegh LNG Partners is attractive from a number of angles.
It is the only publicly listed FSRU pure play in the market, which gives it a leadership position in its industry.
Further, the partnership’s revenues are generated under long-term contracts with a weighted average term of 12.2 years.
Hoegh LNG Partners’ earliest contract renewal occurs in 2025 and the partnership has no near-term debt maturities, giving it a measure of recession resistance in the short-term.
More details about the Hoegh LNG Partners investment thesis can be seen below.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 5
Hoegh LNG Partners benefits from the advantages that come with operating FSRUs.
FSRUs are faster and more cost effective infrastructure assets for important liquid natural gas.
These transportation vehicles move energy products at half the time and half the cost of land-based transportation terminals, with a much more limited environment impact (since they float, they can be easily transported and removed once their useful life has terminated).
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 9
Presently, Hoegh LNG Partners owns 5 FSRUs:
- GDF Suez Cape Ann
- PGN FSRU Lampung
- Hoegh Gallant
- Hoegh Grace
Note that Hoegh LNG Partners does not own 100% of each FSRU. Some of these vessels also have a part ownership from the MLP’s general partner. FSRU-specific details about each marine vessel can be seen in the following diagram.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 11
With only 5 marine assets, one might think that Hoegh LNG Parters operates within a fairly limited geographic region.
Surprisingly, this is not the case.
Along with the company’s significant FSRU presence, it serves smaller markets by barges and other marine vessels. The end effect of this strategy is to have significant geographic diversification, serving each continent except for (surprisingly) North America.
Hoegh LNG Partners’ full geographic footprint can be seen below.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 21
Hoegh LNG Partners’ growth will be primarily driven by its sizeable revenue backlog.
In fact, the company has a revenue backlog of $6.2 billion, certainly more than it can handle in the immediate future. Remember that this is an MLP with a market cap of less than $700 million – so a ~$6 billion revenue backlog is substantial.
The partnership’s backlog is well-diversified by counterparty, and 55% of the backlog counterparties operate in investment grade countries – an important risk mitigant for a geographically diverse enterprise such as Hoegh LNG Partners.
Source: Hoegh LNG Partners First Quarter Earnings Presentation, slide 7
Hoegh LNG Partners will also benefit from the rising supply and demand for liquid natural gas as an energy source.
In fact, it is estimated that LNG supply will exceed demand, keeping LNG prices reasonable and allowing for continued growth in transportation volumes – the source of revenue for Hoegh LNG Partners.
Source: Hoegh LNG Partners First Quarter Earnings Presentation, slide 13
All said, Hoegh LNG Partners’ impressive backlog and the tailwind from the rising popularity of liquid natural gas will drive this MLP’s growth for the foreseeable future.
Competitive Advantage & Recession Performance
Hoegh LNG Partners’ main competitive advantage comes from its leadership in the FRSU market and its strong relationships with large players in the world’s largest energy markets.
The company also benefits from its attractive revenue stream. Hoegh LNG Partners’ revenue is generated under long-term contract agreements. This minimizes the risk of a revenue decline in a recession since Hoegh’s counterparties are legally obliged to pay for their contracted services.
Hoegh LNG Partners’ five wholly or part owned FSRUs are contracted through at least 2025, while many have an option to be used for much longer than that. The partnership has an average remaining contract length of 12.2 years, removing much of the short-term risk of investing in this MLP.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 12
The company also has a favorable debt maturity profile.
Other than negligible bank debt amortization, Hoegh LNG Partners has no debt maturing until 3Q2019, which gives it plenty of near-term liquidity to fund growth projects. In 2018, the partnership’s balloon payment for its Gallant FSRU comes due, followed by balloon payments for its other vessels shortly thereafter.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 26
Hoegh LNG Partners’ IPO was in August of 2014, so the partnership was not a publicly-traded investment vehicle at the time of the last recession. This can make it difficult to assess the company’s recession resilience.
With that said, Hoegh LNG Partners’ contracted revenue stream and favorable debt maturity profile indicate that it is well-positioned to endure any incumbent recessions.
Valuation & Expected Total Returns
Hoegh LNG Partners’ expected total returns are composed of valuation changes, dividend yield, and growth in the company’s per-share profitability as measured by the non-GAAP financial metric ‘funds from operations’ – or FFO for short.
As a master limited partnership that specializes in the ownership and operation of marine vessels, Hoegh LNG Partners incurs significant non-cash depreciation and amortization charges, impairing the partnership’s GAAP net income.
As a result, the partnership’s valuation cannot be meaningfully assessed using the traditional price-to-earnings ratio. A straightforward solution is to compare the partnership’s current dividend yield to its long-term historical average.
Hoegh LNG Partners currently pays a quarterly dividend of $0.43 per share which yields 8.9% on the company’s current stock price of $19.25.
The following diagram compares the partnership’s current dividend yield to its long-term average.
Hoegh LNG Partners’ current dividend yield is 8.9% and its long-term average dividend yield is 8.7%. Based on dividend yield, the partnership appears to be trading just shy of fair value.
With a dividend yield of almost 9%, it’s important to research whether Hoegh LNG Partners’ payout is sustainable. If not, a dividend cut could be imminent, which would trigger an automatic sell using The 8 Rules of Dividend Investing.
Fortunately, the company’s dividend is well-covered and has been covered by its distributable cash flow for some time.
In fact, if it hadn’t been for an equity offering in December of 2016, Hoegh LNG Partners would have reported a distribution coverage ratio exceeding 1.0x in each quarter since 1Q17.
Source: Hoegh LNG Partners June 2017 Investor Presentation, slide 5
Even in light of that equity offering (which dropped distributable cash flow to .97x), the company returned to full distribution covered in the subsequent quarter.
Aside from dividend yield and valuation changes, the remainder of Hoegh LNG Partners’ growth will be driven by profit growth, as measured by the non-GAAP financial metric funds from operations.
The company’s quarterly FFO growth since inception can be seen below.
While Hoegh LNG Partners’ quarterly FFO has been lumpy since its IPO, the trend is certainly up and to the right. I conservatively estimate that the partnership is likely to deliver 2%-4% FFO growth over full economic cycles.
Altogether, Hoegh LNG Partners’ expected total returns are composed of:
- 8.9% dividend yield
- 2%-4% FFO growth
For expected total returns of 10.9%-12.9% before the (likely minimal) impact of valuation changes.
Hoegh LNG Partners’ exceptionally high dividend yield and tax-efficient structure as an MLP are two reasons why this company stands out to income investors.
Further research reveals that the MLP has a well-covered dividend and is positioned to grow thanks to its impressive backlog and secular tailwinds from the liquid natural gas transportation industry.
Thus, this MLP merits further research and potential investment for those looking to improve their overall portfolio yield. Investors should keep in mind that Hoegh LNG Partners is a small-cap stock with a market capitalization of less than $700 million, and accordingly poses unique risks that are not associated with larger investment vehicles.