Fans of liquefied natural gas and master limited partnerships have a new way to invest in these increasingly popular opportunity sets.   

Hoegh LNG Partners (NYSE: HMLP) made its public trading debut on Aug. 7. 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. The parent company operates two floating storage and regasification units (“FSRUs”) and four LNG carriers. In addition to transporting LNG, the regasification vessels function as floating LNG import terminals.

Hoegh LNG Holdings’ regasification vessels are the GDF Suez Neptune and GDF Suez Cape Ann, which are both on long-term time charters to GDF Suez, a French multinational electric utility company with interests in (among other things) the distribution, transportation and storage of natural gas. The Neptune is chartered until 2029, with an option to extend for up to two additional periods of five years each. The Cape Ann is chartered until 2030, with the same extension options.

In 2011 and 2012 Hoegh LNG Holdings ordered four new FSRUs for delivery in 2014 and 2015. The first, Independence, was delivered at the end of March and will be employed under a long-term contract beginning in Q4 2014 as a new LNG terminal in Lithuania.

The second is PGN FSRU Lampung, which will serve as an LNG terminal in Indonesia on a permanent basis. PGN is a subsidiary of an Indonesian publicly listed, government-controlled, gas and energy company that builds gas pipelines and distributes natural gas to industrial, commercial and household users. This charter expires in 2034, with options to extend either for an additional 10 years or for up to two additional periods of five years each.

The two other FSRUs on order are not yet contracted.

The LNG carrier fleet currently consists of Matthew, Arctic Lady, Arctic Princess and LNG Libra. Two of these carriers are under long-term contract to Statoil (NYSE: STO) and Total (NYSE: TOT).

Hoegh LNG Partners was formed to own, operate and acquire FSRUs, LNG carriers and other LNG infrastructure assets under long-term charters. The initial fleet consists of interests in the following vessels:

• A 50% interest in the GDF Suez Neptune

• A 50% interest in the GDF Suez Cape Ann

• A 100% economic interest in the PGN FSRU Lampung

The partnership intends to grow through additional acquisitions from Hoegh LNG Holdings and third parties of FSRUs, LNG carriers and other LNG infrastructure assets with long-term charters. The partnership is promoting LNG as a major growth opportunity, noting in the prospectus that:

• Natural gas is projected to be the fastest growing fossil fuel for the foreseeable future

• LNG production capacity based on existing construction projects is projected to increase by nearly 40% by the end of 2020

• LNG exports transported by sea 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 2013

• 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

The partnership expects FSRUs to be preferred over traditional onshore LNG terminals because of greater operational and market flexibility, accelerated project execution, reduced cost and more predictable capital investment requirements. The floating terminals can also function as conventional LNG carriers.

The initial public offering was for 9.6 million units at an expected price range of $19-21 per unit. At the midpoint of that range, HMLP would have had a market capitalization of $526 million. The IPO was six times oversubscribed and opened for trading at $22 per unit, rising subsequently to $25.

The partnership agreement calls for an initial quarterly distribution of $0.3375 per unit for each whole quarter, or $1.35 per unit on an annualized basis. This amounts to a projected yield of 5.4% at Friday’s closing price of $24.85.

The partnership forecasts cash available for distribution at approximately $38.2 million for the 12-month period ending Sept. 30, 2015. This would be just enough to pay out the projected minimum distribution.

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.)

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

A Gem of a Deal for Plains All American  

Our recent recommendations of Plains All American Pipeline (NYSE: PAA) and its general partner Plains GP Holdings (NYSE: PAGP) were based largely on the surging US crude production and the opportunities this has created for domestic refiners.  

Plains All American continued to capitalize on this favorable trend last week with the announcement of a new pipeline linking the principal US crude hub in Cushing, Oklahoma to a Valero (NYSE: VLO) refinery in Memphis, Tennessee.

The 440-mile, 20-inch Diamond Pipeline is to be completed by late 2016 at a cost of $900 million. It will have a capacity to move up to 200,000 barrels a day, roughly matching the Memphis refinery’s input needs and accounting for more than 5% of Plains All American’s current daily throughput.

The project is backed by a long-term contract with Valero of unspecified length, including storage and terminalling fees at Cushing. Valero has the option of purchasing a 50% interest in the pipeline by January 2016.

The deal looks like a win-win, lowering the refinery’s input costs by sourcing crude directly from Cushing, rather than by barge from coastal Louisiana as is currently the case.

In addition to the incremental business boost for Plains All American, the Diamond could serve as a first step toward a crude pipeline to the East Coast for the partnership. That could prove to be a cheaper long-term alternative to the crude-laden trains currently chugging eastward from the Williston Basin in North Dakota and Montana.

Credit Suisse, which has an Outperform rating on PAA units, hiked its price target from $66 to $67 in the wake of the announcement. That likely understates the partnership’s long-term upside. Continue buying PAA below $67.  

— Igor Greenwald