GasLog Ltd.
Q3 2019 Earnings Call Transcript

Published: 6 Nov 2019

[Operator:]

Good morning. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2019 GasLog Limited Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there'll 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:]

Thank you, Josh, and good morning or good afternoon, and thank you for joining GasLog Limited's third 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 two 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 third 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 the 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 third quarter earnings call. Before I begin, those of you who've participated in our previous calls may have noticed our new presentation format. This is part of a larger re-branding initiative of both GasLog Limited and GasLog Partners to emphasize our priorities of safety, operational excellence, and customer focus, and we're delighted to be sharing this with you today.On today's call, I'll begin with our highlights for the quarter, including our recent commercial successes. Alastair will then take you through the quarter's financial performance. Finally, I will review the current trends in the LNG and LNG shipping markets before opening the call for questions.Turning to slide three, during the third quarter we continued to see the positive financial impact of our charter-backed newbuilding program, as well as improvement in the earnings of our vessels operating in the spot market. For the nine months ended September 30, our revenues increased 7% year-over-year. For the same period, EBITDA was 9% higher, driven in part by continued good progress on our cost reduction initiatives. Notably, the earnings allowed us, [those trading] [ph] in the spot market were enhanced by market-linked charters on both the GasLog Shanghai and GasLog Salem.In late July, we took delivery of our fifth X-DF vessel, the GasLog Warsaw, which immediately commenced the charter with Cheniere, ahead of her long-term charter with Endesa. We were also successful in signing a 10-year charter for one of our TFDEs to act as a floating storage unit for gas-fired power project being developed in Panama. We've declared an unchanged dividend of $0.15 per share for the quarter. I'm also very glad to share with you that the crew of Methane Alison Victoria was awarded Crew of the Year at the year's IHS Markit Safety at Sea Awards for their excellent safety performance over a number of years.And finally, following our planned transition, Paolo Enoizi assumed full COO responsibilities, in September, and he's already a great addition to the senior management team. I'm also pleased to report that our outgoing COO, Richard Sadler, has agreed to take on a new role as Head of Sustainability as we focus on defining our sustainability strategy and reporting, and I look forward to providing further updates in 2020.And slide four provides detail of our Panama FSU charter. In September, we announced a 10-year charter award with the Chinese company Sinolam, which is developing a gas-fired power project in Panama. The power project has signed long-term power purchase agreements with leading Panamanian utility companies as well as a 15-year LNG purchase agreement with Shell. We expect to fulfill the time charter through the conversion of the GasLog Singapore with about 2010-built PFDEs. Since September, 2016, this vessel has been trading in the LNG carrier spot market. The 10-year FSU contract will deliver 100% utilization and fixed rate of hire for the duration of the charter, resulting in approximately $20 million of EBITDA per annum over the life of the charter.The conversion will take place during the vessel's scheduled five-year special survey in the third quarter of 2020, enabling both time and cost synergies with the vessel's regular dry docking. The charter commences on delivery of the FSU in Panama, which is scheduled for November, 2020. We're looking forward to working with Sinolam on this project to displace coal and oil products in Panama's energy mix with cleaner burning natural gas.Now, let me hand over to Alastair.

[Alastair Maxwell:]

Thank you, Paul, and good morning or good afternoon to you all. I'm pleased to report another strong quarter in terms of our operating and financial performance. Please turn to slide five.Our quarterly and nine-month financial results were underpinned by the operational performance of our fleet, which continue to be excellent with year-to-date uptime of 98%. As you can see in our 6-K for the quarter, following our exit from the Cool Pool we now segment our fleet and our revenues into two categories. First, those vessels operating under multi-year charters at fixed rates regardless of the remaining duration of their contracts, and second, the remainder of the fleet comprising vessels operating in the spot and short-term markets and vessels which are chartered under variable rate contracts.For completeness, we have also include the Cool Pool net performance in the table, where you will see that there was a very limited contribution to the Q3 financial performance as the last of our vessels exited the pool early in the quarter. While total year-to-date revenues of $463 million increased by 7% year-on-year, our fixed rate net revenues increased by 9% as a result of the growth in our fleet of on-the-water vessels with multi-year charters. While not directly comparable with the historical net Cool Pool performance, our variable rate new revenues reflected lower year-on-year earnings in the spot market, and previously disclosed unscheduled dry dockings of around 100 days.Although OpEx increased in absolute terms as a result of new vessel deliveries, unit OpEx and unit G&A in the first nine months of 2019 declined by 5% and 4% respectively compared to 2018, benefiting from our cost control initiatives and fleet growth as well as a favorable U.S. dollar euro exchange rate. We continue to anticipate full-year 2019 unit OpEx will come in at or below our formal guidance of $15,000 per vessel per day. Cost controls and revenue growth combined to deliver a 9% increase in year-to-date EBITDA.Turning to slide six, further information on our variable rate earnings, as I mentioned on the previous slide [indiscernible] revenues into variable rates vessels and fix rate vessels. During Q3, we had seven variable rate vessels including the GasLog Shanghai and the GasLog Salem, both of which are on time charters, but at market linked rates. During the quarter, our variable rate vessels earned time charter equivalent net revenues at least over $36000 per day.Looking forward to the fourth quarter, and based on current book revenues and expenses as well as our remaining open days, we expect that our variable rate vessels will deliver TCE net revenues of $60,000 to $70,000 per day. This estimate reflects the fact that the ceilings in our market linked charters, while at very attractive levels compared to historical mix cycle rates are below current headline rate as well as the fact that the charters on two of the vessels looked prior to the recent strong recovery and headline rates. On the other hand, a number of fixes on our variable rate vessels will extend well into the first-half of next year. Thus, providing some cover against potential spot market seasonality.Turning to slide seven, which discusses our balance sheet, we continue to amortize our debt at twice the rate our vessels depreciate, de-leveraging the balance sheet and creating equity value over time. In 2020, we expect to amortize $220 million of debt equivalent to the average debt of two of our vessels. Furthermore, we're proactively managing our upcoming maturities. We have already commenced planning for the refinancing of the two secure debt facilities, which mature in 2021 as well as the $750 million Norwegian Krone bonds, which matures in the same year, and we expect to complete these re-financings well in advance of that final maturities.During the third quarter, I am also pleased to report that we made very good progress on the financing of our seven remaining newbuilds. We have seen strong interest from our banking partners [indiscernible] in the proposed new facility being significantly oversubscribed. We are currently in the documentation phase and plan to close the financing later this quarter. In parallel, we have been working on improving the financial commercial covenants across all of our debt facilities along the lines of the financing of the GasLog Warsaw and at the GasLog Partners level the new $450 million facility which closed in March of this year. We will provide further information in due course.Turning to slide eight, we set out the analytics growth secured debt per vessel for our different classes of ship. As you can see our steams and 155 TFDE have considerably lower average debt per vessel than our more modern vessels, all of which operate under long-term charters. As a result, the steam vessels also have the lowest breakevens in the fleet in the mid to high $30,000 per day and trending down over time.Moving to slide nine, we have updated the chart illustrating our capital commitments. We currently forecast cumulative future cash payments for the equity and the remaining newbuilds represented by the light blue tranche at the top of each column to the $93 million achieving 80% loan-to-value which is the most likely outcome of our newbuild financing. On this basis, our current unrestricted cash balances and available RCF capacity plus operating cash flows from our growing underwater fleet and a stronger spot market are expected to more sufficient to cover the equity funding requirement.Finally on Slide 10, we show the evolution of our contracted revenue backlog. Our successful chartering activity this year, including new charters with JERA, [indiscernible] continue to add to our backlog, which reached a new high of $4.1 billion at the end of the third quarter. Despite underpins of future earnings and cash flow generation as well as our unrivaled access to cost-effective capital at both GasLog and GasLog Partners.I will now hand back to Paul to discuss the LNG and LNG shipping market.

[Paul Wogan:]

Thank you, Alastair. Turning to slide 11, which shows the increase in LNG import by country on a trailing 12-month basis, LNG demand grew by 43 million tons year-over-year, an increase of 14%. China posted the largest increase in absolute volumes, importing 11 million tons more LNG at 22% increase year-over-year. Natural Gas continues to grow its share of the country's overall LNG mix, and recently [indiscernible] stated that it expects China's gas demand to increase by more than 80% from 2018 to 2030. While Chinese demand continues to be strong, LNG growth has been broad-based. Europe's imports grew by nearly 36 million tons over the period of 105% year-over-year increase, driven by declining indigenous gas production, continued coal to gas switching for power generation and available gas storage plastic.Turn to slide 12, in the future outlook for LNG demand by geographic region. In terms of what we can expect net energy demand to grow by 150 million tons between 2018 and 2025. Although China's imports have increased significantly in recent years, it's important to note that other countries in Southeast Asia together with Europe, accounted nearly two-thirds of projected LNG demand growth to 2025.Turning to slide 13, which shows new LNG supply, next year, over 22 million tons of new LNG capacity is due to begin production, mostly from projects in the U.S., which should have a significant positive impact on ton miles. In particular, the second and third trains of both Cameron and Freeport are expected to begin production and ramp up throughout 2020 and into 2021. Further ahead, 94 million tons of new capacity is scheduled to start production in 2021 through 2024, including [indiscernible] Pass in Louisiana and the Arctic LNG 2 project, both of which took FID in the third quarter 2019.Turing to slide 14, and the future supply growth, the LNG supply although continues to be dynamic in growing. While 2019 is already a record year for new project sanctions Wood Mackenzie expect an additional 7 million tons of LNG capacity to reach FID prior to a year-end followed by another 61 million tons in 2020 and 21 million tons in 2021. These proposed supply expansions have been supported by continued momentum a new long-term LNG seller purchase agreements with over 170 million tons per annum having been signed since beginning of 2017.Slide 15 shows how U.S. exports have positively impacted shipping demand. According to Poten, 119 cargoes were exported from the U.S. in the third quarter 40% of which were delivered into North Asia and the Middle East. Destinations that require more than two ships, a million tons of LNG exported per annum, compared to historical global average of 1.3 ships needed for LNG exported from the rest of the world. Since exports out of the U.S. began in 2016, an average of 1.8 ships have been required for 8 million tons of LNG exported, positively affecting shipping demand. 79 million tons per annum of LNG capacity is expected to be online in the U.S. by the end of 2020, approximately half of which has been sold on long-term contracts to Asian buyers.Slide 16 illustrates our view of shipping supply and demand through the end of 2021. Based on Wood Mackenzie and Poten data, this analysis implies structurally tighter market through at least the 2020 2021 winter, with expected high levels of fleet utilization, even at the lower end of the range.On slide 17, we discussed the rate trends in the LNG shipping market. The last panel shows the monthly average headline spot rates for TFDE carriers during 2019. The right panel shows the average headline rate by month from 2011 through 2018. While the absolute values may differ from the historical monthly averages, the trend in 2000 19 as closely followed previously observed seasonal patterns, with headline spot rates generally bottoming in early spring and peaking in the fourth quarter. As you can see from the figure, headline spot rates have risen sharply in recent weeks, predominantly as a result of two factors. Firstly, increased demand for LNG ahead of the winter heating season in the northern hemisphere, and secondly, the continued increase of production from new LNG liquefaction facilities, particularly in the U.S.Slide 18 shows how periods of strength and weakness in the spot markets have historically influenced activity for multi-year charters. Most recently, 14 charters between six months and three years in duration were reported in third quarter of 2019, the highest number since Q2 of '18. Of these 14 charters, six TFDEs, and six steamships were fixed on charters greater than six months. Poten currently assesses the one-year time charter rate at $84,000 per day for TFDE and $50,000 per day for steam vessel, which are helpful benchmarks when discussing term charter opportunities. Although we would note there's presently limited liquidity for charters of one year or greater.Turning to slide 19, let me finish on why GasLog represents a compelling investment proposition. Our over 20 years of experience in LNG shipping has allowed us to build a leading operating capability founded up on an uncompromising approach to the high standards of safety. GasLog is continually recognized by our customers and industry bodies as best in class. We continue to modernize our fleet, and when our seven X-DF newbuildings deliver, in 2021, we will have one of the largest fleets of latest generation vessels all backed by long-term contracts to high quality charter counterparties.Our seven newbuilds alone represent $144 million of annualized EBITDA growth on a fully delivered basis. We continue to work with our customers to develop innovative commercial structures that meet their needs and optimize the earnings of our fleet. The Panama FSIU or FUS Award is yet another example of this capability, in turn pushing our fixed charter backlog to an all-time high of $4.1 billion. We have a strong balance sheet with scheduled amortization leading to de-leveraging over time.We remain confident that the increasing demand for LNG will lead to structural tightness in the LNG shipping market, potentially increasing spot market earnings and providing opportunities to reach out to vessels operating in the spot market. And finally, we remain proud of our track record of paying a progressive dividend, which has grown at a compound rate of 4% since our IPO, not including the special dividend we paid in the fourth quarter of 2018. And we continue to explore opportunities to enhance shareholder returns against the backdrop of a strong LNG shipping market.With that, I'd like to open up for Q&A. Operator, could you please now open the call for any questions.

[Operator:]

Yes. [Operator Instructions] Our first question comes from Michael Webber with Webber Research. You may proceed with your question.

[Michael Webber:]

Hey, good morning, guys. How are you?

[Paul Wogan:]

Hi, Mike. Good. And you?

[Michael Webber:]

Paul, I just wanted to first kind of touch on the spot market as we're ramping into Q4, and I kind of wanted to think about kind of the context of just a year-on-year context. Last year we saw a big ramp in storage early, a big seasonal draw, and then we had a hard landing in Q -- in the middle to backend of Q1, and it took a market a little while to recover from that. Just curious, as you see the market developing into the backend of Q4, how would you compare what we're seeing this year to what you saw last year just given where we're at from a storage perspective and just different market dynamics?

[Paul Wogan:]

Yes, I think certainly if you look at the way the markets reacted this year it has been following the trend of 2018. And yes, there is storage. The storage, I think is quite interesting, because I think the way that people are looking at storage is not only vessels which are just sat there waiting to discharge somewhere or offer a port, but also vessels that are taking longer to reach their destination. And I think what we're seeing in this market is some stories of some people doing what we've been talking about for a while, which is playing the arbitrage and saying, okay, where do we take these ships, what's the best place to put them.Let's put them, if you like, on a midpoint route between two areas while we decide to go, [well, that's low steam] [ph]. So there's a lot of that going on, which is trying to maximize the arbitrage opportunities to maximize the pricing on the vessels. So I think some of it is out in our storage, but I think some of it just people trying to optimize their trading portfolio. The second think I think that's happening is we are seeing now -- and it was, and I think it has been slower than we would have liked, we are seeing this ramp up in new projects. We talk now about Freeport and Cameroon coming on stream, those projects coming on. So I think there is an underlying drive of a demand for ships in the market, which we hope will not lead to a fall off in the rates that we saw last year, but the final thing I would say is that we have [indiscernible] out the ships which we're trading in the spot market and I'm sure we're remember is a small part of our fleet with the fully delivered [technical difficulty], seven at the moment.

[Michael Webber:]

Right.

[Paul Wogan:]

But a number of our ships are due for dry docking next year, and so what we've done is looked to try to fix those ships through until their dry docking in their sort of first, second, third quarters next year, and locking to the rates that we can see now to make sure that there is that falloff, which I'm not saying they're expected, but there obviously is also a possibility that we maintain our earnings at a higher rate. So we're hopeful we don't see that return. We think there are some factors which mean it isn't going to be a play out of 2018 and 2019, but I think we are also making sure that we position ourselves if there is that falloff to maintain good earnings on our ship's might.

[Michael Webber:]

Got you. That makes sense. And that kind of leads into my next question, and Paul, you've been pretty clear about kind of looking at 2021 with a pretty big question-mark and I'm just happening to be staring at slide 16 in which I was like -- you put out in terms of different projections sort of supply and demand, and it looks like there are scenarios in 2021 where you've got a bit of excess capacity. I'm just curious, as we edge closer to 2021, you guys put in place a pretty tactical dividend policy around potentially paying out specials depending on what you're seeing in the market and where rates are. Obviously, we're entering a pretty firm environment. I'm just curious, has your thought process and math around that changed as we've gotten closer to 2021 or should we think about -- should we think about it in a pretty similar context to 2019?

[Paul Wogan:]

Yes, I mean I think as we've said, Mike, we're very focused on making sure that we can create good value for our shareholders. And I think as we look at this market, the strengthening that we think is potentially there in the short-term and medium-term, we would like to rewards our shareholders. We will tough make sure that we're in a good place in '21, '22 if we do see that market coming off so it's balancing those two things. But certainly if we continue to see strengthening in the market we think that's potentially there for the longer-term we would like to reward our shareholders.

[Michael Webber:]

Got you. Okay, thanks for the time, guys. I'll turn it over.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jon Chappell with Evercore. You may proceed with your question.

[Jon Chappell:]

Thank you. Good morning, good afternoon.

[Paul Wogan:]

Hi, Jon.

[Jon Chappell:]

If I could follow-up on one of Alastair's comments with Alastair, yourself, I appreciate the breakdown of the fixed rate and the variable rate, and I understand the reasoning behind the 60 to 70 that you gave for this year given kind of the spiky nature of the market in booking some ships ahead of that, I mean for this quarter. But you also mentioned the ceilings on two of those contracts, and we've talked before about how the 100% utilization on those floating rate contracts is incredibly important. But I guess we don't really have a true sense of what the ceiling is. So understanding the commercial sensitivities, but also understanding the volatility in the markets, is there any way you can kind of put us in the right range on where those things kind of tap out so we don't kind of overestimate when the market gets as hot as it is today?

[Alastair Maxwell:]

Yes, I mean I -- unfortunately, Jon, I can't because of the commercial sensitivities. We did in the prepared remarks talk about the fact that it is well in excess of the mid cycle rates, which we've always talked in the mid 70's. It is well in excess of that, but it is not up in the sort of $130,000-$140,000 a day rates that we're seeing now, but it's difficult for me to give any more kind of guidance on that unfortunately because it is guiding commercially sensitive for the people, we have those ships on Charter 2.

[Jon Chappell:]

Okay, then, let me ask about the other two ships. You said, or Alastair had said, you'd booked to kind of right before the rate movement, which is why maybe the 60% to 70% range is a little bit lower than what people who've been tracking the market would have thought. What's the duration of those voyages, and what we're getting at is, can you be able to -- do you think you'll be able to re-charter them at some point in the fourth quarter where at least in the past two years, the market has been seasonally at its peak, and then create that buffer as Alastair mentioned in the 1Q?

[Paul Wogan:]

What we'd be trying to do on these ships, Jon, is we have a number of ships, it's going to be dry docking next year, we will be trying to -- because the thing that tells you in any of these markets is utilization. When you add a factor in there, which is the dry docking, what that does is create uncertainty around the voyages you can take, you often have an inability to take ships close to dry dock and then try and take you, get them a month before you suddenly find you catch-off. So, what we would be trying to do is to fix our ships through to the dry docking. So when we're talking about the sort of lower rate is because we've locked those ships into rate, which take them through to dry docking which from memory take us into sort of the end of the first into the second quarter of next year, but as we said also, if we did see a fall-off in the right seasonal rates, those earnings on those ships will be quite strong.

[Jon Chappell:]

Okay, final one for me. Maybe we thought going into this winter couldn't be as strong as the last two and maybe not as peaky as last year's winter, but as strong as maybe last year's average and the winter before. Last year you pleasantly surprised with a pretty robust special dividend. So, given where you kind of sit today with the financing, the rates that you think you'll achieve on the 4Q, but also given the fact that the stock prices almost 50% lower or 30% to 40% lower than where it was in November of the prior two years, how do you think about capital return for this fourth quarter period if you do attain these very healthy rates, is special dividend on the table, or do you think maybe you'd be more aggressive with the buyback given the valuation today?

[Alastair Maxwell:]

Hey, John; Alastair. I think that -- before talking specifically about one or the other, I think that we continue to have that as priorities in terms of capital allocation, but we're making sure that the newbuild program is funded, and I think where we sit today with we're very confident about that, especially given the stage that we're at with the financing, as I talked about in my remarks. So I think having that as our first priority, we do continue to monitor the market and the cash flows that are coming from our ships that are trading in the spot market. We look forward to where we stand in the fourth quarter of this year. Clearly the market is seeing a significant pick-up, although we're not getting as much benefit if you like for the reasons that we talked about, and Paul was explaining earlier on.So, I think that as we think about the scope for enhanced shareholder returns, it's something that we consider on a continual basis, and we're always looking to see if we can find ways to do it, but we are watching in particular the performance of the spot market. We're also looking at other elements of our strategy, including, for example, capital raisings by GasLog partners, dropdowns, those kinds of things also play into how we think about shareholder returns. And you'll recall that last year, we had three things all at the same time, we had a dropdown, we had the IDR adjustment modification, and we had a very strong market. And those are the three factors that together put us in a position where we were able to pay that special dividend.So I think, again, Paul said earlier something that we monitor continually, we're always looking for ways that we can enhance shareholder returns, and it's too early to tell at this stage if we do find scope to do that, where we will do it through share repurchases or through special dividends, I think we need to see where we were at the time.

[Jon Chappell:]

Okay, I understand. Thanks, Alastair. Thanks, Paul.

[Alastair Maxwell:]

Thank you.

[Operator:]

Thank you. Our next question comes from Chris Wetherbee with Citi. You may proceed with your question.

[Unidentified Analyst:]

Hi guys, James on for Chris. I wanted to actually touch on the automotive, there's still some speculative newbuild up there. I wanted to get a sense of market positioning going in for past peak and going into next year and how like - how the marketability to handle some early season softness, I'm trying to really get a sense of that the industry is evolving around its ability to handle some of the downside surprises that can happen?

[Paul Wogan:]

Yes. Hi, James. A very interesting question, I think we for some time have been saying we need to be careful in terms of newbuildings in the industry, because we see continued build-out of LNG capacity, especially in the U.S. for 2021, but then, there was a period between 2015-2018, when very little was -- FID, just all moves forward to that '21-'23 period, where right now there's not a lot of new capacity due to come on stream. And I think one thing as an industry we have to learn is that, well, we haven't built the -- on the shipping side in the past, what we have done is have the ships arrive at the wrong time. So I'm pretty certain all the ships which are on order, at some point will be required, because this is a growing industry. LNG demand is really very robust, but if you get the timing wrong, you can have two or three years where you have new ships coming out waiting for that new capacity to come on. And so, I think from our point of view, to continue to order into a period where we don't see new production doesn't make a whole lot of sense for the industry. So, especially the people who are going out and ordering I think speculatively into that market, I think should be weary.The second factor that of course is that there is another factor which plays into this, which is ton miles, and if you have a [indiscernible] where we start to see a rebalancing, a strengthening, if you like of the pricing of the LNG, which may -- which creates more arbitrage opportunities, you can other situations in 2021, where you actually see the ton miles increasing all the other you haven't seen new production coming on. So, there are some other factors playing at play here, but certainly we in GasLog we're not the advocates of going rushing out and doing newbuildings at this point. We think as an industry, we don't need those coming out in the sort of '21, '22, '23 period.

[Unidentified Analyst:]

Got it. So, just wanted to actually touch on some of the strategy that was played out at your Investor Day, how does that potentially impact what you might do in terms of what's the next leg of growth, it seems like you're a little more conservative about the market from 2021 forward. So, what might be the things that you focus on there? Would it be leveraging potentially thinking about increasing returns to shareholders, would sort of be the next set of priorities?

[Paul Wogan:]

Yes, I think both of the above. I think there's natural de-leveraging as Alastair talked about in the business through the amortization. I think that continues to be very positive for us in the future years. I think, returns to shareholders, we've talked about it as very important to us as well, and we want to make sure that we're in a position to return money to our shareholders, as and when we are able. I think the other thing that happens if you have a strong balance sheet, good cash flow, it gives you opportunities for M&A -- on the M&A opportunities consolidation opportunities which going into a period if there is a softening market, we want to be in a strong position where we could possibly take advantage of those. So, those are the sort of things that we're thinking about as we look two or three years down the track.

[Unidentified Analyst:]

Got it. And then just one quicker one with all the impact with all the refinancing occur, how do we think about potential interests and what are some of the other challenges you might get in terms of financing costs? Thank you.

[Alastair Maxwell:]

So, I think the savings or -- what, James, in terms of the financing costs?

[Unidentified Analyst:]

Basically, just the cost of financing -- the financial costs one should be just think about that moving down slowly over time, that's a percentage better, is there anything from modeling perspective that we just need to be aware of, as these re-financing occur, particularly anything around fees or anything around that side?

[Alastair Maxwell:]

So, the biggest driver of all about financing costs -- I'll tell you that the total amount of debt, and we will see that on the one hand, we continue to monetize it away today at about $220 million that will go off as we take delivery and roll down on financing for newbuilds. So our total amount of debt will increase during the course of 2020 as we take delivery of those ships, and they will clearly contribute EBITDA over time. So that's the first driver, which is offset by scheduled amortization.The second driver is obviously LIBOR, because all of our mortgage debt, secured debt is on a margin basis to LIBOR. We have had some success in reducing our margins outside the LIBOR. I don't think there's significant scope for further reductions in our margins. I think we already borrow at extremely competitive levels. The third factor is clearly the impact of the derivatives, which is obviously non-cash, but that has had a significant impact, both positive and negative, positive during the course of 2018 negative, during the course of 2019. And it's very subject to the behavior of LIBOR and the LIBOR curve overtime, so I don't anticipate other than moving to LIBOR, which still you have as good as you on as I do, and the total amount of debt, I don't imagine that there any other factors, which will significantly impact our financing costs going forward.

[Unidentified Analyst:]

Thank you.

[Operator:]

Thank you. Our next question comes from Greg Lewis with BTIG. You may proceed with your question.

[Greg Lewis:]

Yes, thank you and good day.

[Paul Wogan:]

Hi, Greg.

[Alastair Maxwell:]

Hi, Greg.

[Greg Lewis:]

Alastair, just following up on the last question, I guess we would -- there's a preferred that comes to in April of 2020, that's probably some of your more expensive debt. And I don't ever treat it or they treat as equity or debt, but it's some of your more expensive, I guess access to capital, relative to some of your bank debt. How should we be thinking about you know, I guess, that piece of that piece of data, and how you think about going forward, if that's something that we think we're going to maintain inside the capital structure, just given all these things that you're talking about yesterday, taking on a lot more vessels, the balance the amount of debt on the balance sheet is going to be going up, just kind of curious how you think about trying to position the balance sheet over the next call it one to two years and what you expect the primary sources to be?

[Alastair Maxwell:]

Great. Thank you. So the practice is obviously, permanent capital, and we can pull -- really pull from second quarter of next year, but it is not a maturity. And so my gut feel is we believe that the breath in place for the time being, as I said in my prepared remarks, I think our next priority, also putting in place the financing for current newbuild program and working on the common's amendment. So that I spoke about, I think our next priority can be dealing with the 2021 maturities, which is two bank facilities and the North bond. And we're already working on those in terms of preparatory work. And we expect to as I said to complete those refinancing well ahead of maturity and that was sometime in the middle to early second-half of 2020 is when I would expect to have those refinancing's completed. I think those are our initial priorities. And as I said earlier in the background, we have a continual scheduled amortization underway, which runs roughly, as we said often in the past roughly twice the rate at which the ships depreciate.

[Greg Lewis:]

Okay. And then just thinking about the FSU contract with the -- I guess the Singapore. I guess as we look at the timing of that it looked like there was the potential to slip into the steam vessel. So just kind of curious if that was something that was thought about, or are we going or are we now in a market where when we think about infrastructure type LNG asset isn't really. There's now just more advantages to using -- the advantages are so great that it's just more -- as we think about the next three to five years, could we see more [indiscernible] fuel diesel electric vessels sort of become sort of the infrastructure of storage for LNG, where maybe if you were to ask maybe two, three years ago I think the expectation was that was primarily going to be where all the steam vessels were going to go kind of further final days.

[Paul Wogan:]

Hi Greg, it's Paul here. And this one is simply a factor of size, even though there's not a huge amount of difference in the size between the two vessels. The steam right now our steams on this was just slightly too small for the requirements. So it fitted into our TFD, but we are in early stages looking at another couple of FSU projects which actually would fit would be helpful for our steam vessels. So, I don't think I will read too much into what happened in Panama. I think it was just, the size requirement for that particular project.

[Greg Lewis:]

Okay, thank you very much.

[Paul Wogan:]

Thanks.

[Operator:]

Thank you. Our next question comes from Randy Giveans with Jefferies. You may proceed with your question.

[Randy Giveans:]

Hi gentlemen, how is it going?

[Paul Wogan:]

Hi Randy.

[Randy Giveans:]

I have a few follow-up questions on the FSU. So what is the kind of total time for conversion total CapEx? I know you mentioned a new lower daily OpEx number, if you can give us kind of a more exact number around that. And then also, I found it interesting that the FSU contract is for 10 years, but the power project has a 15-year LNG sale and purchase agreement with Shell. So is there a five year action after the initial 10 years?

[Paul Wogan:]

Hi there taking your last question first, yes, they have, there are options to extend the vessel for a longer period. We're really talking about the third period that we have on the vessel, rather than talk about the options, but there is that opportunity. In terms of the cost of the conversions, I think maybe we talked about before you're looking there at somewhere in sort of $15 million to $20 million range in terms of the cost, and then we haven't gone into detail around the OpEx because what we really talked about there is just what is the EBITDA that you get from the ship and the EBITDA comes out at around $20 million per annum for the vessel.

[Randy Giveans:]

All right, and then the off-hire days for the conversion?

[Paul Wogan:]

I will say off-hire days it is you are looking at something like 50 to 55 days in total, you normally put dry docking have something like a 25 day, 25, 30 days. So it's an additional sort of 25 days on top of that.

[Randy Giveans:]

Okay. And then one more question, one reason obviously GasLog joined the Cool Pool was to improve utilization, improve scale. Now that you've left the Cool Pool, do you expect to kind of partner with other owners to recreate that spot exposure scale next year? And then also looking at your spot exposed vessels, are all of them currently employed for the fourth quarter?

[Paul Wogan:]

Yes, so at present all our ships up presently employed, we do have a couple coming up in the fourth quarter, which is still going to be which are open to the market. As we talked about Randy, I think our focus is very much around making sure that we take opportunities to put those ships away. And so one advantage of not having the ships in the Cool Pool is that, that gives us that opportunity to have discussions with charters about spot charters, which often kind of rolled into discussions about longer-term charters, not the two ships that we have on the floating rate with utilization, we are exactly that. So, at the moment, I think we're quite enjoying having that ability to have a discussion with our customers across the period. And we're finding I think in terms of utilization, our ability to do that helps us to make sure that we lock in the utilization. So I think we will be open to having discussions with other people around how we could maybe pull together to improve the service to the customers, things like that, but at this moment, that's not something that we as a company are looking to sort of be proactive on.

[Randy Giveans:]

All right, that is fair. Thanks so much.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Espen Landmark with Fearnley. You may proceed with your question.

[Espen Landmark:]

Hey, good afternoon. I just wanted to go back on the floating storage. I mean, Paul, you mentioned there are some differences this year with the degree of slow steaming into this as well. I guess another difference from last year is that more vessels are actually storing in Europe versus mostly Asia. I mean, sure, with the different dynamics around the floating storage just maybe this year or should we need a cold winter and the steeper compact on the curve for not to fall off by mid November again?

[Paul Wogan:]

Yes, very good question, Espen. I mean I think you kind of hit the nail on the head when you talk about the weather. I mean, the weather is such a large factor in how that the market turns out. Last year, we had a very mild winter, more or less sort of across the world and I think that affected the demand for LNG, interesting to see this year, does that pattern repeat in the cold winter, just demand for LNG continue to build a high level through. As I talked about a little bit earlier, I think we think there are some more structural factors which are playing in especially with the new production coming on. We don't think that the strength in the market is wholly dependent on floating storage, because we did little bit ships coming back at one-time into a market that does have a downward factor but we do believe that there is more of a structural tightness given the production that's coming on stream than we saw last year and we're hopeful with a cold winter.

[Espen Landmark:]

Let's hope of that. You also are just putting $20 million more in terms of LNG into the market next year we have European inventories. So already bringing a Euro worry that we will see cargo cancellations sort of reworked off-take agreements from Asian buyers next year maybe around the typical shoulder months?

[Paul Wogan:]

Yes, I mean, it's interesting. The growth, I think continues, the demand growth continues to be there certainly in Asia, a lot of it, I think is infrastructure bottlenecks which continue to be worked on. If we seen this year apart from the fact that as you point out in Europe, quite large amount of storing, but actually a huge amount of new demand for LNG as that becomes cheap and replaces coal in power generation, et cetera especially in countries such as Spain, and Germany. I think the low prices are driving that behavior across the globe, but certainly in terms of Europe. So I think my view is the low prices continue to stay, that once people have made that swap over from the coal into gas, power generation and industrial use, et cetera.You don't often see that going back, especially if we see continuously competitive pricing, which we expect. So given that and given the fact that if somebody doesn't want to lift the cargo, they have to make, make that clear three months ahead of time, the people who are producing the cargo then have the option to produce that cargo and sell it with very low variable costs, if you like. We don't believe that we will see production being rained back on the basis of the market. We think as we go through 2020 and it's 2021 that we will start to see that market rebalancing.

[Espen Landmark:]

Yes, that's interesting. Thank you.

[Operator:]

Thank you. Our next question comes from Chris Snyder with Deutsche Bank. You may proceed with your question.

[Chris Snyder:]

Hey, good morning and afternoon, guys. And thanks for squeezing me in. So you gotten to a mid-point of about, I think $65,000 for the variable fleet in Q4. I know there's a lot of moving parts here, some still truly in the spot market, a couple on index win contracts, and you signed two contracts prior to the inflection, but it is disappointing in my perspective, to see the variable rate come in below your average term rate, which I think is $75,000. And then the one-year rate you quoted in the prepared remarks about the mid-80s. Just given that we're in the seasonal peak and the spot market is very tight. So in this context, what are the benefits of the variable contract structure and the broader spot approach relative to the fixed rate term market? Is it that these index linked contracts are allowing for a longer duration allowing you to potentially bridge a weak 2021, 2022 market?

[Paul Wogan:]

Yes, I mean, if you look at the one of the index linked contracts that we've done is done for three and a half years. We are also looking at some longer-term index linked contracts, but I think it also is focused on optimizing the earnings of the vessels over both the longer-term and if you like short-to-medium term. And so I think one of the things that you see falling out of how we've been looking at structuring our portfolio of chips in the short-term market, as we did see a fall up rates in the first and second quarter, our earnings will be much more robust, and if you kind of look at it over the period, we think that we've done a fairly good job of making sure that we have those reap of things, and again if you look at, how do you want to reward your shareholders having some certainty around how you see the market, and how you see the earnings of the ship, it's actually quite advantageous for us.

[Chris Snyder:]

Yes, okay, fair enough. I appreciate the color. And by my count, you have four vessels that are still true trading the spot market excluding the variable rate contracts. So the spot markets obviously very tight right now, can you just maybe talk about the breadth and you know of opportunities in the time target market for these vessels. I know you've kind of talked about transitioning vessels out of the spot market, you know, in just given the tightness in the market, it seems like a pretty good time to do so. You know, are you guys just maybe thinking that, hey, the markets going to keep getting tighter and rates and term rates should get better, maybe or longer duration kind of what's kind of the strategy there?

[Paul Wogan:]

Yes, I mean, yes, it's really around the liquidity of the market. So we saw a number of term deals with about 14 in the third quarter this year, you consequent to the strength of the market, I think timing market especially - if it stays tighter for longer does allow you to fix ships for our potentially for longer periods as well. So A little bit around the earnings, but a lot of it is around duration as well, I think, we as a company have really sort of made our money out of our longer-term contracts. And so our ability to lock into rates for longer periods is something that we find attractive, and we would like to make sure that we're in a position to take advantage of that, it's when we see those, those opportunities, but to be -- to on the other side, then to be fair, Chris, it that also depends upon the liquidity in that market, which does come and go depending on the views of the chapters and the strength of the spot market.

[Chris Snyder:]

And then just following up on that real quick as the recent spot rate inflection led to any sort of increase inquiry for time charters, whether it's a longer duration, better rates, if I remember last year, there were some pretty good time charters signed over the winner, have you seen any positive impact here just given how tight the spot market has gotten?

[Paul Wogan:]

Yes it does without a doubt, increase the charters interest in those, and the conversations that we're having around those opportunities, so yes, that's definitely the case.

[Chris Snyder:]

Got it. Thank you, I appreciate the time.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Ben Nolan with Stifel. You may proceed with your question.

[Ben Nolan:]

Yes, thanks, guys. So I have a couple of just the last ones, but the - as it relates to sort of well going over to slide number nine, where you kind of talk through that, you have the cash flows and the liquidity and the financing to be able to fund the remainder of the CapEx commitments that you have without it appears needing any dropdowns. How does that make you think about the dropdown cadence or need and it yes unit price isn't good enough, does that been postponed or sort of along those same lines to make you a little bit more available to maybe some vessel swapping ideas where there might be a steamship down there that is coming off contract, and you don't necessarily need the cash so you can deliver a contracted vessel to them in exchange for a steamship and cash or whatever.

[Paul Wogan:]

Yes, I think the nice thing is a few things I would emphasizing, first of all, we continue to be in a fortunate position where our MLP is functioning well and does work for us. I think it's been active when others haven't been shown its ability to access different parts of capital. So that's nice, but it's also nice to be in a position where you don't necessarily have to have that happen to be able to fund the newbuildings. So, that just gives us optionality in terms of -- GLOG doesn't have to go out and raise capital and we do not have to drop the ships down, but it works for to both parties, and I think that's works very well. I think in terms of the support if you like -- GP support for GLOG, those things that we continue to have discussions around. It has to work for both companies, but you know it's something that we continue to discuss as I said, because it's advantages for us to have a well-functioning MLP.

[Ben Nolan:]

Okay. Well, then sort of shifting gears little bit. As it relates to the steam ships and this applies also for GLOG, but certainly even for you guys. In this market, where there is multiple tiers of ships in that it appears to be permanent, is there anything that you can do adding re-liquefaction or something else to really set your steam ships apart so that maybe even if it's not necessarily better rates that you are able to sort of out earn in terms of utilization? Older ships -- I am just curious if there is any levers that can be pulled to give you a competitive advantage with those little bit older ships?

[Paul Wogan:]

Yes, to certain some extent, we kind of have that competitive advantage. If you look at the 50% of the fleet, the steam ships we are -- variety of those are more modern end and the larger end. So, quite effective ships specially compared to the sort of first-generation steam ships. We have continued to look at potential ways to enhance those vessels. But when we do a cost-benefit analysis, it doesn't necessarily make sense for us, Ben. But the thing that we are focusing on really with our ships is saying, okay, what we need to do is to make sure that have the lowest cost, if you like, in terms of breakevens for those vessels. And therefore, can be competitive in the market. And I think as Alastair talked about, we are really looking at somewhere in the mid 30s at the moment with those vessels and continuing to flow. So I think that's how we look at those steam vessels at the moment just ensuring that we keep the cost base down. And part of that is being around, thus the continued focus we have as a company around our cost initiatives to make sure we as a company get the OpEx as low as possible and get the G&A as low as possible while continuing to deliver this very I think safe and reliable service to the customers.

[Ben Nolan:]

Okay. And then, the last one from me this, you -– Paul, you mentioned earlier that you are preparing the balance sheet in the event that there may be a little bit of a weaker market and that introduces M&A opportunities that has not been much traditionally M&A activity outside of individual assets, is that something you think will develop I mean again with caveat that it's market dependent, but there has been a number of new owners that ordered LNG ships that are -- I don't know is that process do you think actually starting now where there could be some further consolidation in the industry and actual M&A activity, not just talk about it?

[Paul Wogan:]

Yes. I mean you are absolutely right, Ben. There has been very little kind of M&A consolidation activity historically in the market. But, I think you are also right in pointing to trend of a if you like greater number of orders coming in especially while the new orders coming. I think when we saw the last if you like round of new orders coming in lower than very strong financially and potentially not necessarily using other people's money to do it as well. This time around I think it looks a little different. I couldn't put my hand on my arm, and say we are definitely going to have more M&A activity, but I think that sort of if you like increased number of players in the market in a way that some of those would be funded et cetera make sense that we are likely to see more M&A activity through the next cycle.

[Ben Nolan:]

Okay. Very helpful. Appreciate it. Thanks, Paul.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Paul Wogan for any further remarks.

[Paul Wogan:]

Well, thank you, Josh, and thank you to everyone today for listening and for 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 feel free to contact the Investor Relations team. Thank you very much for your time.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today's conference call.