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Teekay LNG: Liquid Opportunities

 November 23, 2012 12:54 PM

By Elliott Gue, editor Energy and Income Advisor

When natural gas is cooled to minus 260 degrees Fahrenheit at a liquefaction facility, the fuel condenses to roughly 1/600th of its original volume, facilitating overseas transport in specially designed ships.

Japan and South Korea have traditionally accounted for the bulk of global LNG demand. In coming years, we expect the global LNG market to expand significantly, with China and other emerging markets in Asia driving much of the upsurge in demand.

For investors seeking pure-play exposure to rising demand for LNG, we prefer shipping companies that own fleets of LNG carriers, especially conservatively run names that boast ample long-term contract coverage and reliable distributions.

Teekay LNG Partners LP (TGP) owns a fleet of 27 ships that transport LNG, five vessels that carry liquefied petroleum gas (LPG) and 11 conventional oil tankers.

All its existing ships are contracted under long-term time charter arrangements at fixed day-rates; the MLP's LNG carriers have no impending fixture expirations through 2015, while the average outstanding contract for its LPG and conventional oil tankers stands at 15 years and 10 years, respectively.  

Although the unit price of the publicly traded partnership has lagged peers that have more exposure to the spot market, we prefer the MLP's conservative positioning over the next few years.

Not only would Teekay LNG Partners' cash flow be insulated from near-term weakness in the spot market, but management also sees opportunities to acquire vessels from marginal shipowners that made ill-advised bets on short-term tightness in the spot market.

With a distribution yield of 7.3 percent that's backed by cash flow from solid, long-term time charters and ample liquidity to take advantage of future growth opportunities, Teekay LNG Partners LP rates a buy up to $39 for conservative investors seeking steady income.

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