JP Morgan Pair Trade: GasLog Ltd Upgraded, GasLog Partners Downgraded

JP Morgan’s Noah R. Parquette downgraded the rating for GasLog Ltd GLOG from Neutral to Underweight, while upgrading the rating for GasLog Partners LP GLOP from Underweight to Neutral. The analyst cited a forecasted dividend cut by the parent company.

GasLog is expected to run out of unrestricted cash by the back half of 2017 if it continues with its current $0.56 annual dividend payout, analyst Noah Parquette pointed out. Although the recent refinancing by the company improved its liquidity situation, it needs to plan for 2018 maturities.

Parquette believes that the only way the company can plug this gap is by announcing a substantial dividend cut of about 80 percent. He added, “While we believe a move like that would be the right one by management to protect liquidity in the long run, typically stocks have a knee jerk negative reaction to a dividend cut.”

GasLog

The price target for GasLog has been cut from $10 to $9. GasLog intends to use its MLP subsidiary GasLog Partners for the monetization of security and long-term nature of many of its contracts by dropping down vessels into the MLP.

The company aims to exploit a cost of capital arbitrage to grow the MLP’s distribution while retaining significant value at the parent company. The analyst mentioned, however, that this strategy may no longer be viable in view of the deterioration in MLP valuations.

“As such, our valuation only reflects the NAV at GLOG, and excludes any adjustments from the IDRs and the MLP arrangement. Furthermore, we see risk that GLOG cuts the dividend at the parent level in the face of a persistently weak LNG spot market,” the JP Morgan report stated.

GasLog Partners

The price target for GasLog Partners has been raised from $13 to $15. The NAV for the company takes into account the overall market value of its assets based on quoted prices from shipping brokers, adjusted for balance sheet items. The NAV values are normalized on the basis of historical median values using data for 2000.