Golar LNG Partners LP: This 13.6% Yielder Could See Better Days Ahead
A Double-Digit Yielder to Think About
In this day and age, companies usually have a set of expectations to beat in earnings season: revenue and profit. Every three months, Wall Street analysts will form their top- and bottom-line estimates, and if a company can beat these estimates, it could give market participants a reason to warm up to its stock.
Still, not every stock is the same. For certain businesses, such as high-yield master limited partnerships (MLPs), I’m more interested in knowing whether they can generate enough cash to cover their oversized payouts.
Golar LNG Partners LP (NASDAQ:GMLP), an MLP with a very generous distribution policy, is one such business. With a quarterly distribution rate of more than $0.40 per unit and a stock price of $11.89, the partnership offers a jaw-dropping yield of 13.6%. That makes GMLP stock one of the highest-yielding names in the entire stock market.
And since the partnership reported earnings last month, it’s a good time to find out the answer to the question: “Is the distribution safe at this ultra-high yielder?”
Golar LNG Partners LP
To get to the answer, we need to compare the partnership’s distributable cash flow to its actual cash distributions for the reporting period.
In the first quarter of 2019, Golar LNG Partners generated $28.8 million in distributable cash flow while declaring almost $28.7 million in cash distributions. That resulted in a distribution coverage ratio of 1.01 times. In other words, while the partnership managed to outearn its distributions in the most recent quarter, it did so by a rather thin margin. (Source: “Interim results for the period ended 31 March 2019,” Golar LNG Partners LP, May 21, 2019.)
Ideally, as a risk-averse investor, I would like to see a higher distribution coverage ratio for a wider margin of safety. But here’s the thing: management had already anticipated the results that we saw in the first quarter, and these results are not really a sign of trouble.
You see, Golar LNG Partners owns and operates a fleet of floating storage regasification units (FSRUs) and liquefied natural gas (LNG) carriers. And in the first quarter, one of the partnership’s vessels, the “Golar Igloo,” had its scheduled winter downtime.
As a matter of fact, in an investor presentation earlier this year, management told investors that, “Scheduled off-hire of FSRU Igloo will likely see 1Q19 distribution coverage reverting to 3Q18 levels.” (Source: “Fourth Quarter 2018 Results,” Golar LNG Partners LP, last accessed May 22, 2019.)
And what was the level that management was referring to? Well, in the third quarter of 2018, Golar LNG Partners achieved a distribution coverage ratio of 1.02 times. (Source: “Interim Results For The Period Ended 30 September 2018,” Golar LNG Partners LP, November 5, 2018.)
Therefore, I don’t consider the partnership’s first-quarter distribution coverage ratio of 1.01 times to be bad news.
Will This 13.6% Yield Become Safer?
Furthermore, based on management’s latest comments, this ultra-high yielder is well positioned to improve its distribution safety.
“Despite a traditionally challenging quarter, the Partnership has been able to maintain a respectable distribution coverage ratio,” said Brian Tienzo, Chief Executive Officer at Golar LNG Partners. (Source: “Golar LNG Partners LP (GMLP) CEO Brian Tienzo on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, May 21, 2019.)
“This has been achieved through another quarter of flawless operations and testament to distribution level being sustainable. With improved financial results expected from Golar Igloo, Golar Grant and Golar Freeze, we anticipate coverage ratio to be materially better in the second quarter of 2019.”
That’s a very cheerful message. As it stands, Golar LNG Partners LP has already covered its first-quarter distributions. If the partnership can substantially improve its distribution coverage ratio in the quarters ahead, as its management expects, Golar’s 13.6% yield would get even more attractive.
For yield-seeking investors, GMLP stock deserves a serious look.