GasLog Ltd.
Q1 2019 Earnings Call Transcript

Published: 3 May 2019

[Operator:]

Good morning. My name is Tiffany, and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Limited's First Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. Today's speakers are Paul Wogan, Chief Executive Officer; Alastair Maxwell, Chief Financial Officer; and to commence the call, Phil Corbett, Head of Investor Relations. Mr. Corbett, you may begin your conference.

[Phil Corbett:]

Good morning and good afternoon to everyone and thank you for joining GasLog Limited's first quarter 2019 earnings conference call. For your convenience, this webcast and presentation are available on the Investor Relations section of our Web site www.gaslogltd.com where a replay will also be available. Please now turn to Slide 2 of the presentation. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our first quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the appendix of this presentation. I will now handover to Paul Wogan, CEO of GasLog Limited.

[Paul Wogan:]

Thank you, Phil. Good morning or good afternoon and thank you for joining our first quarter earnings call. I’ll begin by outlining why I think GasLog offers a compelling investment case, in large part due to the continued execution of our strategy throughout the quarter. I’ll then handover to Alastair who will take you through our financial position and performance. I will then review the current trends in the LNG and LNG shipping markets before opening the call for questions. Turning to Slide 3. Let me explain to you why I believe GasLog today presents a compelling investment case. Firstly, we continue to execute on our strategy and deliver on our promises. During the first quarter, we charted our two previously uncommitted newbuildings to JERA and Endesa, two new high quality customers. We took delivery of the GasLog Gladstone, a state-of-the-art newbuilding which immediately commenced its 10-year charter to Shell. We dropped down the GasLog Glasgow to GasLog Partners as we continued the strategy of using our MLP to recycle capital to the parent. And GasLog Partners refinanced its upcoming debt maturity on better terms. We also made further progress on the Alexandroupolis FSRU project in Greece. Secondly, we believe the spot shipping rates will increase markedly from their seasonal lows and deliver a significant increase in earnings and cash flows from our six spot ships. And finally, if our expectation of a strong recovery in spot shipping rates during the second half of 2019 is correct, we should be well positioned to further enhance shareholder returns following on from a special dividend we paid in November last year and recent buybacks of almost $5 million in aggregate by GasLog and GasLog Partners. Slide 4 illustrates our continued progress during Q1 2019 towards our target of more than doubling the run rate EBITDA over the 2017 to '22 period. While the spot market was weak in the first quarter, on an annual basis spot rates more than doubled in both the 2017 and 2018. We believe this longer-term trend is symptomatic of a tightening LNG carrier market. As a result, we remain confident that a recovery to at least mid-cycle spot rates remains on track. All the vessels in our 2018 to 2021 newbuilding program now have turned charters providing value and enhancing returns. We also remain committed to further reductions in OpEx and G&A and improvement in our financing terms following our successful efforts over the past 12 months. Please turn to Slide 5. In the first quarter, we continued to execute on our customer diversification strategy. We agreed a 12-year time charter with Japan’s JERA, one of the world’s largest LNG buyers for one of our state-of-the-art newbuildings. The charter commences on vessel delivery in April 2020 and is particularly noteworthy as GasLog is one of the first non-Japanese LNG owners to secure a long-term charter with a Japanese energy company. We also chartered the GasLog Warsaw to Endesa, a leading European utility. Charter will commence in May 2021. As the vessel is due to deliver to GasLog in July this year, it will be available during an expected stronger spot market spanning the next two winters. The vessel’s extremely competitive transportation cost should make it particularly attractive to potential short-term charters, and we received several inquiries about her availability since the Endesa announcement. We’ve been developing these and other new customer relationships for some time. We are proud to add both JERA and Endesa to our list of high quality customers which already includes Cheniere, Centrica, Total and Trafigura in addition to our largest customer Shell. Turning to Slide 6. We continued to execute on our newbuilding program. In March, we took delivery of the GasLog Gladstone, the fourth of our vessels with X-DF propulsion and Mark III Plus containment and she immediately commenced a 10-year charter with Shell. GasLog has been responsible for the construction of 26 out of the 27 vessels in our consolidated on-the-water fleet with an enviable track record of delivering these ships safety, on time and on budget. This does not happen by chance. It’s achieved by excellent coordination between our highly experienced newbuilding and operations teams along with numerous other people in the company. Our experience and knowledge provide our stakeholders with confidence that our eight newbuildings will also deliver safely, on time and on budget and seamlessly commence their long-term charters. As it concerns [ph] the broader GasLog team, we also look forward to welcoming Paolo Enoizi when he joins us as COO designate in August this year. Now let me handover to Alastair to take you through the quarter’s financials.

[Alastair Maxwell:]

Thank you, Paul, and good morning or good afternoon to you all. I’m delighted to report another strong quarter in terms of our operating and financial performance and our progress towards achieving our financial objectives. Please turn to Slide where I’d like to take you through our first quarter results. Operationally, our fleet performed exceptionally well with 100% uptime and the delivery of our latest newbuilding, the GasLog Gladstone. During the quarter, despite the expiry of the initial charters on three of our TFDEs and a slightly weaker spot market in Q1 2019 compared to Q1 2018, our revenue net of royalty expenses and commissions increased by 8% compared to the same period last year, driven primarily by fleet growth. As you can see from the chart on the left, our EBITDA growth was even stronger at 15% year-on-year, largely as a result of continued success in reducing our unit cost by vessel per day with first quarter unit OpEx and unit G&A declining by 12% and 21% year-on-year, respectively. The reduction in unit OpEx was driven by a combination of a decrease in vessel taxes of $0.5 million and a decrease of $0.6 million in employee cost, crew wages and technical maintenance expenses due in part to the favorable movement of the euro/dollar exchange rate. The reduction in unit G&A cost was due to cost control, fleet growth and the same movement in FX rates. In full year 2019, we continue to anticipate that unit OpEx will be around $15,000 per vessel per day which excludes minor one-off cost associated with tank cleaning activities to comply with IMO 2020. We expect unit G&A cost in 2019 to be slightly below 2018 levels. As always, our OpEx and G&A costs will be subject to movements in FX rates, particularly the euro/dollar exchange rate. Please turn to Slide 8 where I’ll discuss our financial position. Although we saw net debt to trailing 12 months EBITDA increase at the end of Q1 as we took delivery of the GasLog Gladstone, the increase was modest and our leverage continues to trend downwards with our current ratio of 6.3x EBITDA markedly down on the March 2018 level of 7.6x. While our total debt will continue to increase as we take delivery of our newbuild vessels through 2021, we still anticipate that the overall deleveraging trend will continue as these vessels start to generate EBITDA and as we amortize our debt at over $200 million per annum. On Slide 9, during the quarter we signed and completed the new 2019 GasLog Partners facility for $450 million replacing the existing facility which was due to mature in November of this year. The new facility provides incremental liquidity of $90 million, matures in 2024, had significantly more favorable covenants and a spread to LIBOR which is approximately 50 basis points lower than the previous facility. As you can see on the slide, the low figure includes two leading Japanese banks. Taken together with our new charter JERA, we are extremely proud to be developing meaningful and mutually beneficial relationships with key industrial and financial players in the world’s largest LNG market. Moving to Slide 10. We’ve updated the chart illustrated in our capital commitments. We currently forecast cumulative future cash payments for the equity in the ships represented by the light blue tranches at the top of each column to be $305 million assuming 70% loan to value for the financing of each new vessel. We plan to fund this from unrestricted cash balances of approximately $80 million and available RCF capacity of $190 million at the end of Q1. As shown by the thick green line plus free cash flow generation from our growing on-the-water fleet, a stronger spot market and further dropdowns. We’re also well advanced in discussions for the financing of the GasLog Warsaw which delivers in July of this year. Turning to Slide 11. This chart shows the evolution of our contracted revenue backlog with the inclusion of the JERA and Endesa charters, our backlog at the end of the first quarter increased above $4 billion for the first time. This represents approximately 19% compound annual growth since the end of 2012, the year in which we IPO’ed. This backlog underpins our future earnings and cash flow generation as well as our unrivaled access to cost effective capital at both GasLog and GasLog Partners. Slide 12 sets out the backlog and contracted EBITDA with our 2018 to 2021 newbuild program is expected to deliver. In total, our on-the-water X-DFs and newbuildings accounted for $2.6 billion of our existing backlog and should generate approximately $260 million in annualized EBITDA by 2022. In line with our strategy, our current priority is to continue to deliver on our existing newbulding program and in future we will look to balance carefully further growth with our strong focus on balance sheet strengthening and shareholder returns. Slide 13 updates our data on the capital raised and recycled by GasLog Partners to GasLog following the sale of the GasLog Glasgow in early April. In total, since its IPO, GasLog Partners has raised nearly $1.2 billion of equity from diverse sources and GasLog has received over $2.3 billion of gross proceeds from the partnership, including debt transferred on dropdown and the consideration for the modification of the IDRs in November last year. GasLog Partners remains our preferred source of equity and we continue to have confidence in its ability to raise funding for growth through both traditional and non-traditional pockets of debt and equity capital. Finally, turning to Slide 14, which illustrates our leverage to the spot market with six ships now trading spot. All other factors being equal, $20,000 per day increase in TCE rates over and above Q1 2019 results in $44 million of aggregate incremental consolidated EBITDA and cash flow for our spot ships on an annualized basis. As Paul will discuss shortly, we anticipate a significantly stronger market in the second half of 2019 and through 2020 which should facilitate the funding of our committed CapEx, continue deleveraging, the rechartering of our open ships and the potential for additional returns to shareholders as evidenced by our recent buyback activity at both GasLog and GasLog Partners. Now let me hand back to Paul.

[Paul Wogan:]

Thank you, Alastair. Turning to Slide 15 which shows LNG imports by country on a trailing 12-month basis. LNG demand grew by 31 million tons year-over-year, a 10% increase. China posted the largest absolute increase reporting over 30 million tons more LNG, a 31% increase year-on-year. However, LNG growth was broad based, particularly in Europe with France, the UK, the Netherlands and Belgium increasing their combined imports by 14 million tons year-on-year. Slide 16 focuses in on Q1 '19 versus Q1 '18 and shows year-on-year demand growth at 11% despite a warm Northern Hemisphere winter in both Europe and Asia. The European figures demonstrate clear evidence of a price led LNG demand response further supported by declines in indigenous gas production. We believe the competitively priced LNG will continue to remain attractive and find markets, maintaining production levels and stimulating the need for shipping. Slide 17 shows how consensus LNG demand forecast continue to rise. The green line is the LNG demand forecast range at the time of our Investor Day last year. The solid grey, dark blue and light blue lines represent the updated analysis, which have increased as LNG consumption continues to surprise to the upside. As a result the consensus forecast is for 6% compound growth in LNG demand between 2018 and 2025 from a broad range of countries. Slide 18 demonstrates how U.S. exports continue to positively impact shipping demand. According to Poten, the U.S. exported 110 cargoes in Q1, 45% of these cargoes which is very much in line with the contracted uptake delivered to North Asia, a destination that requires more than two ships per each million tons of LNG exported per annum. This was the case despite there being periods when there was little or no arbitrage opportunity between the Atlantic and Pacific markets. Since 2016 when U.S. exports commenced, an average of 1.8 ships have been required for each million tons of LNG per annum, positively impacting the shipping demand. In total, approximately 90 million tons of new capacity is scheduled to start production in 2019 through 2024 with 56 million tons of this capacity in the U.S. Furthermore, Wood Mackenzie forecast an additional 50 million tons of LNG capacity will reach FID this year. Based on this demand picture, Slide 19 illustrates our view of shipping supply and demand on a quarterly basis through the end of 2020 based on underlying data from Wood Mackenzie and Poten. If there’s a key message from today’s presentation then it’s the one on this slide. The market is expected to tighten significantly as we go through the second half of 2019 and into 2020 which will be very positive for ship demand, for GasLog and for our shareholders. Slide 20 illustrates a number and average duration of spot fixtures since the beginning of 2018. A number of factors exacerbated the usual spot market seasonality so far this year, including pre-buying ahead of last winter by Chinese importers, a warmer than average winter in Asia, unplanned downtime of several LNG export terminals and the majority of newbuildings delivering in the first half of 2019. There’s only one uncommitted vessel delivery remains between now and year-end. Taken together, these dynamics significantly impacted both the number and average duration of spot fixtures. Poten estimates that the average duration in February was 13 days, down from 94 days in November last year. These trends will also impact spot vessel earnings during the current quarter of 2019 which are unlikely to exceed the level of the first quarter. However, in recent weeks market activity has begun to pick up with both the number of fixtures and the average duration beginning to increase, in our view a leading indicator of stronger spot vessel earnings in the months ahead. Slide 21 reinforces this point. The grey line on this chart shows the weekly average headline TFDE spot rates and the blue line shows the number of immediately available ships in the spot market. As you can see there’s a clear inverse relationship where spot rates tend to rise as shipping availability declines. You can also see that over the last few years following the seasonally weak period in late winter and early spring, the number of available prompt ships in the spot market has declined despite the growth in the global LNG shipping fleet. Importantly, fewer ships now need to be removed from the spot market at this point in the year relative to previous years to lead to a significant recovery in rates. As the dotted green circle highlights, as available prompt shipping capacity declined in recent weeks, spot rates for LNG carriers have stabilized in response and we anticipate they will begin to move higher in the coming weeks. So turning to Slide 22, let me reiterate why I believe GasLog is a compelling investment case. Irrespective of the market backdrop, GasLog has continued to deliver on all aspects of its strategy and through our continued focus on operational excellence, I’m very confident of further commercial and financing success throughout 2019 and 2020. The trends we have highlighted in this presentation lead us to believe we are on the cusp of a significant spot market recovery which will lead to a materially positive impact on our earnings and cash flow. In turn, this could pave the way to further enhancement of shareholder returns later this year. With that, I’d like to ask the operator to open the call for questions.

[Operator:]

Thank you. [Operator Instructions]. Our first question comes from Michael Webber with Wells Fargo. Please proceed.

[Michael Webber:]

Hi. Good morning, guys. How are you?

[Paul Wogan:]

Hi, Michael.

[Michael Webber:]

Paul, I wanted to start off with active tenders. There is a lot of headlines around non-U.S. projects specifically starting to come out with some pretty large tenders and at the same time we’ve seen what seems like a pretty healthy escalation in pricing for term business as well as I think you mentioned some longer terms and some interesting kind of option strings in the back of it. So if you could maybe give a little bit more detail around just the number of ships that are available for tender right now, how you guys are kind of attacking that without having necessarily a formal foothold in the yard at that moment? And then I guess I’ll save my follow up for kind of that option pricing structure. But just a bit of color on the tenders would be helpful.

[Paul Wogan:]

Yes. Thanks, Mike. As you say, it remains very active. We still have the build out of the U.S. production not all of which has taken vessels at this point, and I think there will be the opportunity for existing vessels to take some of that slack up. But looking forward, there is so much interest in LNG and we’re starting to – in LNG as the commodity and you’re starting to see the pickup in FIDs, LNG Canada, Mozambique, Golden Pass, Qatar, all of which are going to need new vessels. From our point of view I think we’re in a very comfortable place having got all our newbuildings put away on what we believe are good charters. We remain very much open to looking at business with good counterparties at good rate. But we don’t feel compelled at the moment to be in the shipbuilding market. I think we want to see when those new projects will come out. We do think there will be a hiatus in projects potentially for a year or two, '22, '23, before the new production comes in. So whilst we’ve been very happy to look at them and there’s plenty of time for us to do that, we don’t feel compelled to go out and order speculatively at the moment. But we don’t think that’s the right thing to do.

[Michael Webber:]

Got you, okay. That’s helpful. And then just in terms of some of the structures we’re seeing in the market, again I believe you guys signed eight plus six with kind of a delayed start which seems like it’s about as good as you could have possibly hope for and we’ve seen it I believe three plus two plus two. And in the past you’ve talked about – you’ve been pretty outspoken about your expectations for a firm 2019 and a firm 2020 at least seasonally, and then maybe getting a bit more measured in terms of what your exposure to be to 2021. Are you seeing that reflected in the term structures, in some of these option structures that we’re hearing about in the market? And if not, is that an opportunity maybe to – I guess maybe what kind of escalators are we seeing, if any, on those option strings and a bit of color there would be helpful?

[Paul Wogan:]

Yes, you definitely see increases on the optional period but we have to be sort of I think also realistic about that because those options usually at the behest of the charter. So if those options are out of the money, they wouldn’t necessarily take them. But what that does do I think is have the discussion. If they’re in the money, they definitely will. So we’re always realistic about those options. But the fact that you’re able I think to put them into place at higher rates covers you if the market continues to be very, very strong because you’re happy with the returns but also gives you that opportunity I think to talk to your customers. In terms of the length of the charters that are available, I think it’s really interesting to see a real range of charter periods. As you said, we just did the 12-year with JERA. There are other people who are there looking for sort of three-year periods. I think a lot of it backs into what the customer needs in terms of them feeling comfortable that they’ve got coverage on their SPAs that they have. JERA very comfortable stay at longer terms. Some of the traders are trying to look for sort of three plus years because they got the shorter SPAs, et cetera. So I think we’ll continue to see that sort of width of charter availability, which actually is quite positive for ship owners because it allows you to then say, well, how do you want to place our ship? How do we want to place our portfolio? Because we don’t want a lot of ships coming off at the same time and having the ability to sort of be a bit choosy on it I think is helpful.

[Michael Webber:]

Okay, great. I’ll hop back in the queue. Thanks for the time, guys.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jon Chappell with Evercore. Please proceed.

[Jonathan Chappell:]

Thank you. Good afternoon, guys.

[Paul Wogan:]

Good afternoon, Jonathan.

[Jonathan Chappell:]

Alastair, probably the first one for you. I think Slide 10’s incredibly important as you laid out pretty limited equity requirements to fulfill the newbuild program. But I just want to be clear about one point. The dropdowns to GasLog Partners clearly having been turning yield, it seems that maybe prohibitive from the MLP to go out and raise funds for new dropdowns. So this sub-50 million of equity commitments through 2021, is that under the assumption that there is no further dropdowns to GasLog Partners or is there an assumption that you do want to do more and that’s how you get to that lower level?

[Alastair Maxwell:]

So, Jon, the charter doesn’t pursue any dropdowns. That just if you like it based on the existing available cash balances, both cash balances and RCF capacity. That is the gap if you like. It doesn’t assume any dropdowns in that. We see that on the right of that chart, we think we have a number of different options to fund that delta which is a pretty modest delta as you think about it. And we’re not counting on GasLog Partners. We do think that the market will come back to GasLog Partners we think as we said on the call last week is we’re caught a little bit in the eye of the storm of what’s going on in the broader MLP space at the moment, performance in some of our peers is what adds the current softness in the spot market, maybe all those factors have had an impact and we believe that it will all go away and that the headwinds will turn into tailwinds. But funding the gap that we show on the page is not predicated on being able to do more dropdowns. We have other options in terms of funding that difference, including, for example, taking the LTV on newbuilds from 70% to 75%. That would effectively deal with that in one go. And the ships with eight-year charters and 12-year charters I see no reason why we wouldn’t be able to do that.

[Jonathan Chappell:]

All right, that makes sense. And the follow-up question a little bit of I believe into that. On Slide 14 then we talk about the leverage on the ships and the comment in the bar at the bottom about further enhancement of shareholder returns. Obviously last year in a super strong winter market, you decided to go the special dividend route but now it seems like you benefit more active on the buyback. So if we were to have a winter similar to one of the last two, maybe not as great as last year’s but maybe in line or better than two years ago and you think about capital return, how do you feel about that special dividend route maybe a little bit Monday morning quarterback on how that worked versus buyback versus maybe deleveraging or building that liquidity buffer so you don’t need to raise the LTV to meet the equity requirements on your ships?

[Alastair Maxwell:]

A good question, Jon. So I think you’re quite right. There were three factors that led into the payments of the special dividend in Q4 of last year. I think those were first of all the strong spot market which we referenced. Secondly, we did a dropdown to GasLog Partners in November. And thirdly, we reached agreements on a modification to the IDRs and there was a small payment of consideration, cash consideration between GasLog Partners and GasLog as you will recall. So all of those factors went into us feeling comfortable with the payment of the special dividend last year. I think instinctively we probably would lean more towards special dividends as opposed to buybacks. We have bought back shares recently and bought back units in the partnership since the results last week. In part that was to cover [indiscernible] this year and next year at GasLog. But I definitely think as again we said on the call in reference to GasLog Partners last week, I definitely don’t think that GasLog is being paid for the current competitive positioning, growth prospects of the business in terms of where the shares are trading today. And so I certainly wouldn’t rule out further share repurchases as well or instead of special dividends. You’re also right to say and I’ve said in my remarks that we are also focused on the balance sheet and I think we would like to see leverage continue to trend down over time. I’ve also got one eye on the balance sheet and one eye on the charter portfolio. I think as we fix ships over time, ships that are open today or coming back from charter at the end of this year and into next year, again that plays into how we feel about both the balance sheet and ability to make – pay special dividends or repurchase shares.

[Jonathan Chappell:]

All right, that’s a great answer. Thanks so much for the detail, Alastair.

[Operator:]

Thank you. And our next question comes from Randy Giveans with Jefferies. Please proceed.

[Randy Giveans:]

Howdy gentlemen. How you doing?

[Alastair Maxwell:]

Hi. Good, Randy.

[Randy Giveans:]

So Asian LNG prices have clearly come under some significant pressure in recent months, although has risen recently back to around, I don’t know, 5.50 per MMBtu. Now do you describe this solely to seasonality or is it also due to some structural weaknesses, maybe Chinese re-gas infrastructure is not expanding as fast as expected or desired?

[Paul Wogan:]

Hi, Randy. It’s Paul. I think a lot of it I think are seasonal factors. We saw 2017 a very cold winter and the move from coal to gas and not enough gas available for some of the residential and industrial uses. So the Chinese moved really quickly last year to make sure that they had enough gas and definitely are a driver in the really high rates of the last quarter 2018 was that movement. They then had an unseasonably warm winter and so you saw them if you like taking the girl that they have not having not bring more in. So I don’t think those two things necessarily play out over the coming year. I think the second thing is that in terms of – if you say in terms of pricing, we’ve seen it come off the bottom in the last few weeks, 15%-25% up from the bottom that we saw earlier in the year as it’s sort of normalizing. This year I think we’ve seen already a quarter-on-quarter 11% increase in Chinese demand from Q1 2018. So the demand continues there. Certainly I think from the work that we’ve done and from our time in China I think it’s almost like you have an infinite demand there, so again the infrastructure is definitely going to play a part in that as well. And I think if we see more infrastructure going in, you will see more demand. But I think in terms of the actual pricing right now, it’s more around some of the seasonal factors than just the fact that they come and haven’t got the infrastructure to bring it in.

[Randy Giveans:]

Sure, okay, that all make sense. And then clearly short-term spot rates have fallen in recent months around 35,000 a day or so but when your time charter rates are still in the, let’s call it mid-$70,000 a day range. So how many deals are actually getting done at these kind of one-year levels? Is it pretty a robust time charter market? And to you specifically is GasLog looking at moving some of its maybe spot vessels out of the Cool Pool and into one to three-year time charters?

[Paul Wogan:]

Great questions. Yes, I think that to be honest, Randy, there’s a mix match right now. You’re exactly right. The lower headline spot rates against the future rate and there has been I think a bit of mix somewhat between [indiscernible] and charters in terms of where they see the market. I think what’s happening and what we’re seeing anecdotally in the last couple of weeks is the market is starting to pick up, the amount of inquiry going through on the spot, charters, et cetera is picking up. And I think the one-year rate moving very quickly towards where the owners see themselves hasn’t been a great amount of transactions done I think in the first quarter to just say, but I think you’re going to see that changing. And we again anecdotally had a couple of reports which I can’t give you of other companies who have actually started to – where their transactions are being done at markedly high prices for the period especially as you’re going to cover this coming winter.

[Randy Giveans:]

Sure. Yes, I can imagine this is a pretty large bid-ask spread at this point. All right. Thanks for so much. Have a good one.

[Paul Wogan:]

Thanks, Randy.

[Alastair Maxwell:]

Thanks, Randy.

[Operator:]

Thank you. Our next question comes from Ben Nolan with Stifel. Please proceed.

[Benjamin Nolan:]

Hi. Thanks, guys. So I wanted to follow up on Mike’s question as it relates to the tenders a little bit. And specifically as you look at it and it just seem like there’s an awful lot of be it Exxon or Qatar or the Russians people who are looking to lock in equipment for their longer-term projects. Was curious what you think is your real capacity to be able to do that without needing incremental equity capital? And maybe at the risk of throwing in an enormous number of questions into one question, would you maybe do business with the Russians as kind of aside?

[Paul Wogan:]

Ben, I’ll take that. I think what’s interesting is of course the projects that we’re talking about; Mozambique, Qatar, Russian, et cetera, these are all projects which are going to be taking FID and meeting – and being up and running and meeting shipping '23, '24, '25. So it’s not something that is kind of there immediately. I think you’ve seen we’ve been fairly disciplined in our growth making sure that we’re able to fund that. We’ve been very – it’s been very helpful having the MLP to help us fund that growth. But I think as you see us looking forward, we will be again very careful to make sure that any growth that we have for the sort of future of projects have in '23, '24, '25 that we’re able to fund those without necessarily having to go for [indiscernible]. That’s the last thing. If you look at the growth that we have in-built into the company right now, we’ve got $2.6 billion worth of backlog from our newbuilding program from 2018 to '22. That’s going to throw about $260 million worth of EBITDA per year as our ships deliver. We’ve got a lot of in-built cash flow coming into this business which if we decide that the growth is the right thing to do with it, we’re able to place that long-term fixed rate definite cash flow to do that. So we do have quite a lot of options for the forward-looking projects that we’re talking about, Ben.

[Alastair Maxwell:]

I’ll just add one to that, Ben, which is we had a number of different sources of capital and people often focus on common units or common shares as the only way to raise equity. And I think there are other ways to raise equity both to GasLog and to GasLog Partners. And so bear that in mind.

[Benjamin Nolan:]

Okay, helpful and appreciate it. And I’ll leave the Russian bit for contemplation. But to just switch gears for the second question, obviously the Alexandroupolis FSRU project is kind of taking time and I realize that that’s somewhat out of your control and when it happens it happens. But just thinking through perhaps the FSRU market in general, I believe that you guys ordered equipment for FSRU conversions several years ago and I don’t know what has happened with that. But is there any discussion about or thoughts about maybe stepping back into that in terms of conversions with some of the older either steam powered ships or TFDEs is a way to get good long-term employment on those in a market where you’re not really seeing at least long duration business for those kind of assets?

[Paul Wogan:]

Remember, Ben, we did buy long lead items which we still have [indiscernible] for the conversion of a ship. Our view is that having those long lead items puts us in a good position for the Alexandroupolis project when it takes FID and as you say it creates the ability for us to put a long-term business on one of our existing ships. So that I think all place to be good. We haven’t been as active in the FSRU market over the last 12 to 18 months because we just feel that that market is over tonnage. We’ve seen a number of people committing capital to it, ordering vessel speculatively and then driving down the pricing to a point where we don’t think the risk-reward is necessarily good when we compare to what we can do by putting our money to work on LNG carriers. However, I do think though in time that will change. I do think that what we’re seeing in terms of the low pricing for LNG will stimulate demand and FSRU is a quick way to get access to that. So having our hand in that market I think and being able to as you say quite rightly convert some of our ships is very useful. But we’re not going to chase that market at any price.

[Benjamin Nolan:]

Okay, I appreciate it. Thank you.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Chris Wetherbee with Citi. Please proceed.

[Chris Wetherbee:]

Hi. Thanks for taking the questions. Let me come back to an earlier conversation you were having about the spot market and sort of how you’re thinking about deploying assets out of the Cool Pool potentially into maybe the one to three-year market. It sounded like you’re talking a little bit more generally about what you might think could happen across the industry. I wanted to get – maybe get a little bit more specific. Do you think there’s an opportunity whether it be in the next six or maybe even after 18 months for you guys to deploy some of those assets out of the Cool Pool into some of these short-term charters?

[Paul Wogan:]

Yes, Chris. It’s Paul here. In the past we’ve talked about the fact that we would like to have some play in the spot market, some exposure to it because it gives us the opportunity to showcase our capabilities to a larger number of customers. And I think that’s been helpful as we increase our customer base over the last few years to be able to show that. So we’d like I think to have two or three ships in that spot market. But at the momentum we have six ships. I think if we see opportunities for some of those ships in the one to three-year market, we would certainly look at that very closely. But we will keep one, two, three ships trading in that market as well to give us that showcase and that window on it.

[Chris Wetherbee:]

Okay. It make sense certainly in adding incremental charters to the portfolio has been I think pretty helpful over the course of the last couple of years, so it definitely makes sense from my perspective. Maybe a follow up here just on the leverage, a helpful chart in the deck there. I wanted to get a sense of if you could think out – assuming the market plays out according to plan, because I know that was sort of the comment you had to take market dynamic in consideration when thinking about where you want to be from a financial leverage perspective. If I were to look out into a potentially robust market into 2020 or beyond, what would you like that number to be? What do you sort of think it is? If you can give us sort of intermediate term leverage target, it’d be helpful.

[Alastair Maxwell:]

Yes, we don’t have a set target, Chris. Clearly the fact is we’re taking a play into this as I said in my remarks. So first of all we will take on incremental debt as we take delivery of new ships and we have one more to be delivered this year. We then have five ships to deliver in 2020. So if you think about five ships, it will finance roughly 70% to 75% debt to equity. So clearly a little bit of step up in the total lines of debt in 2020. Most of the debt will be paid for those two deliveries in '21 if only that can be offset largely by our [indiscernible] during Q1. So I think you will see the total debt go up. That will be offset by the EBITDA from those ships as they hit the water and start to generate cash flow. And as you rightly say, another – one of the significance to impact us is it’s had spot ships to trading in the spot market at what rates they are re-charted. But over time as I said in my remarks, we really expect those numbers to trend downwards and maybe a tick up during 2020, particularly in Q2. But [indiscernible] '21 and beyond are expected to continue to trend downwards and would like to head down [indiscernible] range.

[Chris Wetherbee:]

Okay. That’s very helpful. Thanks for the time. I appreciate it.

[Operator:]

Thank you. And our next question comes from Fotis Giannakoulis with Morgan Stanley. Please proceed.

[Fotis Giannakoulis:]

Yes. Hi, gentlemen. Thank you. Paul, I would like to ask you about the structure of the market and how you see it developing? How many vessels out of the 500 ships arrived now in the water and the 120 under construction? They operate under long-term contracts and how many vessels they are operating under – up to one year employment or in the spot market? And how do you view this developing in the future after new liquefaction capacity comes online? And especially how LNG prices – actual LNG prices given the reduction in the cost of construction of those new projects impact LNG shipping market?

[Paul Wogan:]

Yes. Hi, Fotis. On the ships, if you look at the order book right now I think as you go through '19 and '20, the vast majority of the ships which are due to come out are against projects. So, for example, in '19 we have just one uncommitted ship delivering in. If you go further out into '22, there are a number of open ships I think of the order book, then it’s something like 65% are against committed; 35% are non-committed. And I think that’s where we as owners are saying we need to be a little bit careful, which is why we would not be going out and ordering speculative ships right now. I don’t believe we’ve necessarily over tonnage the market now, but there’s the opportunity for us as ship owners to do so if we’re not careful in how we look at the market. There are a number of ships operating the spot market right now, like I don’t know the exact figure who are waiting for their projects to come online. So, for example, Cameron and Freeport which is due to come on this year, those ships would take it up into their projects as those projects get up and running and expand. So over time, you see a natural decrease in the amount of available spot tonnage. And I think the supply and demand that we showed shows you that as these new projects are coming on, I’d say the amount of volume that’s coming is actually much greater than the ships that are available. So we see that spot market, the number of ships available in the spot market tightening quite quickly and we think that forces other charters to want to take ships on one, two, three-year charters at that point.

[Fotis Giannakoulis:]

And can you also discuss about the residual risk? When you buy vessels and you put them in five to seven-year charters or the vessels that they will come off charters from legacy projects, how do you view the earning capacity of the vessels in the second stage of its useful life? And what kind of returns on your capital are you expecting to get when you make the decision to invest in a newbuilding vessel?

[Paul Wogan:]

Yes, I think in terms of [indiscernible], it really comes down to do we think we have a use for that ship at the end of its contract? I think you’ve seen it in the last few years we haven’t done five-year charters. We’ve only done seven-year plus. And as I said the last one that we did was 12-year charter which I think it’s helpful. But if you look at the shipping market right now and how we see this coming out, we need all the ships that we have in the fleet to meet the demand that’s coming down the track. And so if we start to see ships being taken out of the market, as people are talking about, then we’re going to have a much, much tighter market than we have now. So there’s a home for those ships without a doubt. And so as we look at our returns, I think we’ve been fairly open in the past. If you imagine a ship which is say roughly $200 million give or take and you’re throwing off $21 million, $23 million of EBITDA, that gets you into the high single figures for [indiscernible] returning gets you into sort of the low to mid-teens in the returns. And that’s how we look at the investment. We think given the charters we have, it’s a very nice risk-reward return.

[Alastair Maxwell:]

Fotis, the only thing I’d add to that is you asked about residual risk and the earnings power of the ships, clearly 12 years after a ship was delivered it’s been our long-term charter and clearly the breakevens on that ship are significantly lower at the end of that charter than they are once you first delivered.

[Fotis Giannakoulis:]

Thank you, Alastair. Thank you, Paul. I appreciate your answers.

[Paul Wogan:]

Thanks, Fotis.

[Operator:]

Thank you. And our next question comes from Donald McLee with Berenberg. Please proceed.

[Donald McLee:]

Could you talk a bit about your order book financing strategy? And if there are any factors that prevent you from more proactively raising financing ahead of the vessel deliveries, given the long-term charters attached to them?

[Alastair Maxwell:]

Hi, Donald. It’s Alastair. So as I said in my remarks, we’re well on the way towards putting in place financing for the GasLog Warsaw which delivers in July of this year. The GasLog Gladstone which delivered in the middle of March was the last ship to be financed by our 8x newbuild ECA facility. The next ship to deliver is not until 2020 and you obviously need to get the right balance between paying commitment fees on the one hand but on the other hand ensuring that you have financing in place for the pipeline of new deliveries that we have coming over 2020 and '21, which we why we decided to do the GasLog Warsaw as a standalone financing. But we’re not standing still. We’ve already started working on financing ships for the remainder newbuild in 2020 and '21 and I would anticipate having something further to report later on this year in terms of that financing. But we’re not concerned about it, because I think what we’re really focused on is making sure that we optimize the terms of that financings.

[Donald McLee:]

Okay, that’s helpful. And then one more follow up to John’s earlier question around dropdowns. Could you talk a bit more about some of the alternatives you would consider at the parent level in the event that the MLP continues to trade near the current yield for an extended period?

[Alastair Maxwell:]

So first of all on this to make a point that I think where GasLog Partners units are trading today, it’s clearly not helpful in terms of raising common equity at GasLog Partners. But as we’ve demonstrated with our partnership [ph] in November of last year and with the refinancing of the full 50 facilities just now, we believe that GasLog Partners has other sources – other pockets of capital both in the private and in the public markets in addition to common units. So just to make a point that we’re certainly not raising [indiscernible] dropdowns which is probably in today’s conditions not funded by dropdowns, but funded by common equity. In terms of other opportunities at the parent, we – again, as I said we amortize $200 million per year of debt. The debt amortized is roughly twice as fast as the ships depreciate. That creates balance sheet capacity over time. We have bonds trading in the North Bond Market. We have bonds trading in the U.S. market. We have preference shares of the parent. I think we have multiple pockets that we can potentially tap into if we need to.

[Donald McLee:]

Okay. I appreciate the color. Thank you.

[Operator:]

Thank you. And our next question comes from Chris Snyder with Deutsche Bank. Please proceed.

[Chris Snyder:]

Hi, guys. Thanks for squeezing me in. So the first question is around the uptick in market activity. Is this the result of just low Asian LNG prices driving a new round of inventory building or charters maybe trying to take advantage of counter-seasonality to take on more vessels?

[Paul Wogan:]

I think it’s actually the underlying [indiscernible]. We’re really of what we would always call the colder months, but this point Chris where you come off the winter demand, you haven’t seen the summer cooling season, Northern Hemisphere cooling season demand kick in. But that’s starting to pick up again. So this is – if you look at – this is almost exactly following the same trend that we saw last year around the same time we saw – we started to see the activity pick up. So I think it’s more just the normal seasonal trend driving at this point. And then I think what you’re seeing is the customers saying, My goodness, last year this moved so quickly that some of us got caught at the wrong end of it when we were trying to take ships. So people I think are anticipating that and saying, okay, let’s start talking about the ships now so that we don’t get caught out if we see this market moving in the same way that it did last year.

[Chris Snyder:]

Yes. It certainly feels like a peak season can get pulled forward. So just following up, has this uptick in activity shown through to improve utilization in the Cool Pool relative to maybe two or three months ago? And could this allow for a better capture rate compared to Q1 even if just maybe Q2 average headline rates are lower because it’s starting from a much lower point?

[Paul Wogan:]

I think it’s really in the second quarter, but so far no. It hasn’t increase in the utilization rate. I think that will be true. But at this point I wouldn’t see a high utilization rate than we saw in Q1.

[Chris Snyder:]

Okay. Thank you for that. And then just lastly, I guess I’m a little surprised that maybe you guys don’t sound more interested on the newbuild market just in light of all the success you’ve had in marketing your existing programs. And it seems like newbuild rates maybe are kind of picking up a little bit and there’s certainly a lot of demand with all the FID momentum. Is this impacted at all by just the dropdown pipeline getting a little more difficult?

[Paul Wogan:]

I think there are two things. Actually whist we tried to make it look fairly effortless, taking in a huge number of new ships actually takes a lot of work. We need to employ the seafarers, make sure we have the high quality seafarers that we want to have on the ships. We need to have – make sure we have the right people to show [ph]. And once we have fantastic operational team in Greece, really good seafarers on our vessels, we want to make sure that we keep our quality up. So there’s a certain amount of actually just making sure that we absorb that in-built growth that we have. We believe there’s going to be huge opportunities for us in this great secular growth trend for LNG. We don’t have to rush into doing all that growth in one period and potentially putting our operational excellence at risk. So I think you can see us in lots of ways we’ve been very measured but we talked a lot this quarter about execution and execution is around commercial success, financial success but it’s also around safety and operational success as well. So we won’t put that at risk just to chase after growth.

[Chris Snyder:]

Yes, and certainly that feels like the operational side is somewhat overlooked from our seat, but I appreciate that. And thanks for the time.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. And this concludes our Q&A session for today. I would like to turn the call back over to Mr. Paul Wogan for closing remarks.

[Paul Wogan:]

Thank you, Tiffany, and thank you to everyone for listening and your continued interest in GasLog Ltd. We certainly appreciate it and we look forward to speaking to you next quarter. In the meantime if you do have any questions, please contact the Investor Relations team. Thank you.

[Operator:]

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.