An Important Update On This 10% Yielder...

Nathan Slaughter's picture

Thursday, September 12, 2019 - 2:30pm

by Nathan Slaughter

Some of you may remember back in June, I wrote about Hoegh LNG Partners (Nasdaq: HMLP), saying it was one of the rare 10%-yielders that was actually worth buying.

I didn't say that lightly. After all, as I frequently tell my High-Yield Investing subscribers, if a stock is yielding double digits, it's for a reason. 

After all, yields go up as prices go down. Logically, if a company were on truly healthy long-term footing, in most cases enough investors would be interested in buying shares to snatch up a healthy yield as the stock sold off on whatever short-term missteps occurred before things get too out of hand.

So with this in mind, I thought it would be prudent to check in on HMLP to see where things stand today.

HMLP Recap
For those of you who missed my previous discussion on HMLP, let's briefly go over the business model... 

Hoegh owns floating storage and regasification units (FSRUs). Basically, these are ships anchored off the coast that have been mounted with regasification equipment. In the simplest terms, they turn liquefied natural gas (LNG) back into a usable product, which is then pumped via pipeline to the shore where it can be distributed to utilities or other end users.  

So, when an LNG shipment arrives, rather than docking on land, it just parks next to the FSRU and unloads the cargo. This mobile setup can be ready on site within a matter of months instead of years. And it's highly cost-effective, costing tens of millions annually rather than $10-plus billion to build a permanent onshore terminal.

Höegh Grace
The Höegh Grace FSRU vessel, source: Höegh LNG

Time Is Money 
Well, it turns out one of Hoegh's LNG vessels spent 16 days in drydock last quarter for planned maintenance. That was about two weeks of "off-hire" downtime where it wasn't earning any income. As a result, charter revenues dipped 4.7% to $33.8 million. 

Between the drop in charter income and rising maintenance expense, distributable cash flow for the period fell to $13.2 million. For perspective, quarterly dividend distributions amount to $15.0 million. So the distribution coverage ratio sank to 88% -- versus rates of 126%, 125%, and 116% in the three previous quarters, respectively. 

Needless to say, I don't like to see this figure drop below 100%, which effectively means the businesses didn't generate enough cash to cover its dividend obligations. Fortunately, the situation is manageable for short periods and the shortfall can be met with cash on hand or lines of credit – but prolonged deficits are a red flag. 

Routine ship maintenance comes with the territory, so I'm not too alarmed. However, there is another situation that bears watching. 

One of Hoegh's vessels, the Gallant, has left its parking spot near Egypt's Suez Canal for a new assignment. It had been moored there since 2015, chartered to the Egypt Natural Gas Company (EGAS). Acting as a floating LNG import terminal, the Gallant received over 100 shipments of liquefied natural gas. Specialized equipment on board converted that super-cooled liquid back to gaseous form, where it was sent ashore and piped to end-users. 

But just like the United States, Egypt no longer needs imported gas from overseas, thanks to recent discoveries (such as the mammoth Zohr gas field in the Mediterranean Sea). So EGAS has terminated its charter contract (which was supposed to expire in April 2020). 

Here's the good news. The Gallant has already been sent out on a new mission as an LNG carrier. While the daily rates aren't as high, EGAS is compensating Hoegh for the difference. 

What happens after April 2020? Well, given the rising global demand for LNG and the cost advantages of mobile, floating regasification vessels, I believe the Gallant will find employment elsewhere. If not, there is a protective clause giving HMLP the right to lease the Gallant back to the firm's parent company at 90% of the former rate through July 2025. 

Action to Take 
HMLP has been as stable as they come. Charter revenues have been visible and predictable, and the share price oscillated in a narrow range between $17 and $19 from 2016 through 2018. But this recent turn of events has scared investors, driving the stock down to the $15 level. 

Until distributable cash flow rebounds, I wouldn't recommend HMLP as a "buy" today for those who aren't already in the stock. That said, my High-Yield Investing subscribers and I are sticking with HMLP. I think this selloff is overdone, particularly given the aforementioned clause. Analysts have a consensus target of $18.96 on the stock -- implying upside potential of more than 25%. 

P.S. You shouldn't have to settle for 2% yields offered by the average S&P 500 stock when you could be earning as much as 11.2% from the safe, reliable picks my team and I find every month over at High-Yield Investing. So if you're looking for more high-yield stocks like HMLP, check out my latest report right here.

Nathan Slaughter does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.