Morgan Stanley, the LNG tanker and an investor keelhauling

Demand for liquefied natural gas and anything that can move or store the super-chilled fuel is running hot. So why is Norway’s Höegh LNG Partners about to close on what analysts call a “materially inadequate” takeover offer?

The company owns five of the world’s 45 or so floating storage and regasification units, any one of which gas traders and energy-strapped countries in Europe would bite your hand off to secure. But our story began last summer, way out off the south-east coast of Sumatra, when the Lampung — an FSRU owned by Höegh LNG Partners (HMLP) and chartered by Indonesia’s PGN — suddenly ran into trouble.

In July 2021, HMLP announced that PGN planned to commence “arbitration to declare the charter null and void and/or to terminate the charter, and/or seek damages” because of “certain issues” raised in a letter sent by PGN a fortnight before.

HMLP said PGN’s position was “without merit” but used the same July press release to drop not one, but two bombshells.

First, PGN’s decision meant HMLP was no longer able to refinance a loan backed by the Lampung. At the same time, HMLP said an $85mn revolving credit line extended by parent company Höegh LNG Holdings (HLNG) to bridge its refinancing needs would not be extended, leaving the junior partner with “reduced” liquidity and financial flexibility.

Second, HMLP said it would have to cut its quarterly cash distribution from $0.44 per unit to $0.01 per unit. Shares in the New York-listed master limited partnership unsurprisingly plunged 64 per cent to $6.30 over the following month.

Analysts and investors in HMLP argue it’s unlikely PGN would want to ditch the Lampung considering how hard it would be to secure a replacement. All five of HMLP’s FSRUs are under long-term charters, each of which was agreed before Russia’s invasion of Ukraine.

“The whole thing is mysterious,” says Stifel analyst Ben Nolan. “It hasn’t been disclosed how [the Lampung] is meant to be deficient, neither company will say anything. And since the dispute originally arose, the ship has been active receiving and regasifying LNG, so it certainly is still functional”.

In March 2021, the parent HLNG was taken private by Larus Holding, a 50:50 joint venture between the family office Leif Höegh & Co and funds managed by Morgan Stanley Infrastructure Partners, the latter of which says it takes an “opportunistic approach” to investing in assets providing “essential services to society”. 

Through HLNG, Larus owns 45 per cent of HMLP. It now hopes to take that private, too.

By December, the partnership had found enough cash to table an offer of $4.25 per unit — an 8 per cent premium to HMLP’s by then devastated share price. That bid was rejected in February but upped two months later to $8 per unit as HMLP’s shares began to rise following Russia’s invasion of Ukraine. The value of the group’s small fleet of LNG carriers and FSRUs was by this point growing by the day.

May proved busy. US financier Wes Eden’s New Fortress Energy upped the ante with a $12 per unit bid. Stifel’s Nolan says this was rejected because the parent said it “wasn’t interested in selling”. HMLP went back to its part-owners with a $11 per unit counter-offer, but this too was turned down by the parent, which according to Nolan then threatened to withdraw its improved $8 bid.

A compromise was finally struck at the end of the month, when HLNG (which earlier this year agreed to charter out two of its own FSRUs to Germany for the next decade) announced that subject to approval and a majority vote it would acquire HMLP by merger for $9.25 in cash per common unit. This represented a 35 per cent premium to the group’s share price the previous day but was far from the $17 each unit was worth before PGN said it was unhappy with the Lampung ten months before.

But even HLNG’s improved offer left HMLP’s limited unit holders far from happy. “This is a blatant attempt by the company to force out its minority partners at a large discount to the value of the partnership,” says Cato Brahde, chief investment officer at Oceanic Investment Management.

“There are massive contradictions between the reality as described in market reports that values and charter rates are rising and that the market will be tight for a number of years, and the financial cases presented [by Höegh] showing lower returns both for the Lampung and for the other units as they come off contract,” he added.

Stifel’s Nolan agrees that the FSRU market has “strengthened materially” due to increased European demand for regasification since the outbreak of war in Ukraine, and wrote the following in an August note to clients:

“We continue to believe the parent’s $9.25/unit takeout price, which is ~7x our 2022 EBITDA estimate, is inadequate, especially as there was no need to sell, in our view. We believe that an 8x multiple or more than $12/share is more appropriate for a company with this level of contracted cash flow.

Interestingly, HMLP did receive an offer of $12/share from NFE, but rejected and opted to transact with the parent. Additionally, the current deal is below the midpoint of HMLP’s advisor’s range of values of $8.69 to $15.15 based on 2022 EBITDA. We believe it is materially inadequate and advise unit holders to vote against the deal . . . .

Deals like this further hurt the creditability of the shipping industry and certainly the sponsor, in our view. Governance problems like this continually pop up, especially given the conflicts of interest between private parent companies and public master limited partnerships.

The backlash is fierce. “Master Limited Partnerships are set up to screw little investors,” says Mark Elliott, an early investor in HMLP. “I purchased the shares believing in the integrity of the Norwegians and Morgan Stanley.”

“People might say, ‘contact the [Securities and Exchange Commission], this is market manipulation, they’re abrogating their fiduciary responsibility, they’re not looking out for investors’” Elliot adds. “But the fact is the SEC can and will do nothing. It’s a hard fight for us, because the laws and the partnership agreement do not protect the common investors.” 

Brahde put it bluntly when describing how he felt HNLG and Morgan Stanley Infrastructure Partners had behaved since last July: “For all intents and purposes, this is piracy.”

Morgan Stanley Infrastructure Partners, HMLP and HNLG declined to comment. PGN did not respond to a request for comment.