posted on 20 July 2016
by Robert Rapier, Investing Daily
In this week's monthly web chat for subscribers of The Energy Strategist and MLP Profits, someone asked a question about the master limited partnership Hoegh LNG Partners (NYSE: HMLP). It's been a while since I took a close look at HMLP, so I said I would report back. Here is the question, followed by an overview and update of HMLP.
Q: Do you have HMLP on your radar? I´m residing in a country where I don't have to pay tax on foreign investment income, so the fact that there is no withholding tax for HMLP´s distributions is quite a plus for me (compared to US-based companies). Should this additional benefit of HMLP make me want to own it?
Hoegh LNG Partners (NYSE: HMLP) made its public trading debut in 2014. The Marshall Islands-registered partnership was formed by the Norwegian company Hoegh LNG Holdings, a fully integrated liquefied natural gas (LNG) service provider offering long-term floating production, transportation, regasification and terminal solutions for LNG.
HMLP operates four floating storage and regasification units ("FSRUs"), is one of only three operators of FSRUs in the world, and is the only publicly listed FSRU pure play. In addition to transporting LNG, the regasification vessels function as floating LNG import terminals.
The business opportunity for HMLP is clear. Natural gas is projected to be the fastest growing fossil fuel for the foreseeable future, and LNG production capacity is projected to increase by nearly 40% by the end of 2020. Seaborne LNG exports are projected to grow more than twice as fast as overall natural gas consumption through 2035.
The number of countries importing LNG has more than doubled from 12 in 2000 to 29 in 2014. Because LNG can be shipped to a wide variety of destinations, as long as regional price differences in gas persist more countries will pursue LNG imports. Three of four new markets commencing LNG imports in 2015 chose to employ FSRUs, which are approximately half the cost and construction time of a land-based LNG terminal.
HMLP has grown its distribution by 22% since its IPO. Its current fleet has an average age of 3.4 years, and an average remaining contract term of 14 years plus options. The company has no direct commodity exposure. It also has a pipeline of up to 4 more FSRUs dropdown candidates to drive earnings growth and distribution expansion.
The revenue stream looks secure. For Q1 2016 HMLP generated Adjusted EBITDA of $25.2 million versus $15.9 million for Q1 2015. Distributable cash flow was $11.0 million with coverage of 1.0x. The partnership currently yields 9.2%.
Like many other partnerships with significant foreign or marine operations, Hoegh LNG Partners has chosen to pay taxes as a corporation, which means distributions will treated as qualifying dividends and reported on form 1099. (To better understand why a partnership would elect to be taxed as a corporation, see Marshalling the Marines.)
In contrast with U.S.-based partnerships, Hoegh LNG does not, in fact, deduct backup withholdings from distributions made to foreign owners, eliminating the need to file a U.S. tax return in order to obtain a refund. That's certainly a point in its favor, but the only one for U.S. residents to consider this promising LNG venture.
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