GasLog Ltd.
Q4 2017 Earnings Call Transcript

Published: 16 Feb 2018

[Operator:]

Good morning. My name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Limited's Fourth Quarter 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be 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, Andrew. Good morning or good afternoon to everyone. And thank you for joining GasLog Limited's fourth quarter 2017 earnings conference call. For your convenience this call, webcast and presentation are available on the Investor Relations section of our website www.gasloglimited.com, were replay will also be available. Please now turn to Slide 2 of the presentation many of our remarks contain forward-looking statements. The factors that could cause actual results to differ materially from these forward-looking statements please refer to our fourth 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 to this presentation. I'll now hand over to Paul Wogan, CEO of GasLog Limited.

[Paul Wogan:]

Thank you, Phil. Good morning or good afternoon to you all and thank you for joining GasLog Limited's fourth quarter earnings call. I'll begin today's call with the highlights of the quarter and the year ended December 2017. I'll then handover to Alastair to take you through the financial review following which I'll update you on the current trends in the LNG market. Before I summarize and we open up for Q&A. Turning to the highlights on Slide 3, we delivered strong operational and financial performance during the fourth quarter and 2017 as a whole, resulting in record annual and quarterly revenues and EBITDA. In addition, in 2017 we continue to strengthen our financial position, primarily due to the 3 dropdowns to GasLog Partners as well as the improved performance of our spot vessels. During the Northern Hemisphere winter there was a significant increase in demand for LNG which grew at a stronger than expected 12% over 2016. This growth has continued into 2018 with both China and Japan setting new records for LNG imports in January. While there is a seasonal element to this robust demand strong secular growth means we expect the LNG market will come into balance sooner than we had originally anticipated. The 2017 demand growth has led to a tightening of the LNG shipping market with spot rates rising to multi-year highs during the final quarter of the year. These factors underpin a positive backdrop for the longer-term fundamentals of the market for which we are well positioned. This positive outlook gave us the confidence to order a 180,000 cubic meter newbuild from Samsung, which will deliver and to what we expect will be a strong market in Q3 of 2019. Additionally, the GasLog Houston delivered from the shipyard in early January and immediately commenced to the short-term charter with a major LNG producer. Well, Alexandroupolis FSRU project continues to make progress towards FID. With the operation and maintenance agreement nearing finalization and negotiations with Greek and Bulgarian State gas companies over equity participation and offtake progressing well. Finally, our quarterly dividend was maintained at $0.14 a share resulting in an unchanged full-year dividend of $0.56 per share. I'll now hand over to Alastair to take you through the financials.

[Alastair Maxwell:]

Thank you, Paul, and good morning, or good afternoon to all of you. Please turn to Slide 4 for the financial highlights. As Paul's already mentioned, Q4 and full-year 2017 delivered yet another set of record revenues and EBITDA for GasLog. Vessel operating days in 2017 increased by 12% as a result of the new vessels delivered in 2016. Revenues and EBITDA in 2017 were also boosted by the improved trading of our ships and The Cool Pool. You will notice that the fourth quarter unit operating expenses increased primarily driven by increases in technical maintenance expenses as a function of the timing of both scheduled and unscheduled maintenance activities as well as by an increase in crude related expenses. However, on an annual basis 2017 unit OpEx was comparable to 2016. Total debt held by approximately $100 million year-on-year, reflecting scheduled amortization the repayment of the majority of the Junior Tranche of the Five Vessel Refinancing Facility and the repurchase of the 2018 NOK bond. Cash balances at the end of 2017 were significantly higher year-on-year primarily reflecting the equity rates by GasLog Partners during the year, leading to a decrease in net debt of $250 million. Moving to Slide 5, where you can see that our leverage has fallen meaningfully as a result of the increase and cash flow delivered by our fleet additions as well as repayments and amortization during 2017. These factors have combined to reduce the net debt to EBITDA from over 9 times of mid-2016 to just over 6.5 times at the end of 2017. While net debt per vessel declined from $114 million at the end of 2016 to $103 million at the end of 2017. Looking forward our gross debt will clearly increase as we take delivery of our 2018 newbuildings, but this will be offset by the incremental EBITDA contribution of these ships. We are also pleased at the strength, scale and maturity of our business has been reflected in our declining cost of capital for both GasLog and GasLog Partners. The GasLog 2017 U.S. dollar has traded at a premium to pass in issuance in March 2017 and is now yielding 7.3% compared to the coupon of 8% and 7.8%. The GLOG and GLOG preferred are trading in line with or below their issue yield and it was particularly pleasing, the GasLog Partners Series B preferred were priced 42.5 basis points inside the Series A preferred which were issued only 8 months previously. On Side 6, as I mentioned previously, we expect significant growth in cash flow in 2018 as a result of the improvement in the spot market and the delivery of 3 new vessels in the first quarter of this year. The top chart shows that at current headline spot rates of $70,000 to $80,000 per day, our 5 open vessels could generate upwards of $100 million in annual cash flow. Nonetheless, I would emphasize that this assumes 100% utilization and round-trip economics. In addition, as shown in the bottom chart, we estimate that the vessels in our newbuild program which have associated time charters could generate over $100 million of incremental EBITDA by 2020 without including the potential contribution of the uncommitted Hull No. 2212. Slide 7 illustrates how successful GasLog Partners has been and the source of funding for the Group. Since IPO, over $500 million of equity has been recycled to GasLog to fund our growth. GasLog Partners has also been highly successful in diversifying its sources of funding having raised net proceeds of $250 million of preferred equity since the start of 2017 and over $60 million of common equity towards ATM program. With that, I'll hand back to Paul.

[Paul Wogan:]

Thank you, Alastair. Slide 8, summarizes the recent developments in the LNG and LNG shipping markets. The key message is that robust LNG demand growth and the recent lack of FIDs for incremental liquefaction capacity are bringing forward the point of market balance in both LNG and LNG shipping. Continued demand growth should lead to the sanction of incremental liquefaction capacity over the next 12 months to 18 months in turn increasing the demand for LNG shipping capacity. Slide 9, updates our expectation of near-term LNG capacity additions. Over 30 million tons of annual capacity was added in 2017 and 11% increase over 2016. A further 25 million metric tons per annum and 45 million metric tons per annum are expected on stream during 2018 and 2019 respectively. Turning to Slide 10, despite forecasts of a glut of LNG in recent years, demand continues to absorb incremental supply. China's demand growth in absolute terms was significantly ahead of other markets as it overtook South Korea to become the world's second largest consumer of LNG. Wood Mac currently forecast that China's LNG demand will increase by further 24% of this year. However, the growth in demand during 2017 was broad-based with 9 other countries increasing their LNG imports by over 1 million tons, but even established markets such as South Korea and Taiwan growing by 10% and 14% respectively. And outside Asia, demand also grew strongly in several European markets including France, Turkey, Spain, Italy, and Portugal. Slide 11 provides additional detail on the drivers behind China's growing LNG consumption. In addition to robust economic growth, demand has been driven higher by initiatives to address air quality through coal to gas switching has been enabled by the supply of LNG by truck to regions with limited pipeline connectivity. In aggregate, according to Wood Mac, 40% of gas demand growth was due to coal to gas switching and 30% was due to new connections in the residential and commercial sectors. These important secular drivers of demand growth were augmented by the seasonal impact of the cold winter. As a result, LNG share of China's gas supply has increased from 11% in 2014 to 22% in 2017. The right hand side of the slide shows Wood Mac's current view of China's LNG demand growth compared to contracted volumes. China is no longer over contracted after the significant growth in LNG demand in 2017. Spot purchases increased from 1.5 million tons in 2016 to 8 million tons in 2017, with China sourcing multiple cargoes from outside the Pacific Basin driving ton mile demand higher. Looking forward, China's demand is expected to significantly outpace contracted supply during the next decade. And as a result, we expect to see China move to cover this potential shortfall with further long-term supply agreements in addition to the Cheniere contract with CNPC announced last week. Turning to Slide 12, which uses forecasts of LNG supply and demand over time to illustrate the timing of the market and the scale of the longer-term growth opportunity for LNG, longer-term demand forecast have been revised higher in recent years, pulling forward the point of market balance. As can be seen from the points, where the red and the blue lines intersect with the total supply, Wood Mac now expects balance to be 2020 and 2022, instead of 2023. Based only projections, the market is forecast to be short by approximately 50 million tons per annum in the middle of the next decade, increasing to 158 million tons per annum by the end of the next decade according to a range of different sources represented by the green shaded area. Turning to Slide 13, we have used Wood Mac's database to illustrate the potential supply options, split between possible and speculative projects. Over 700 million tons per annum of potential new production is competing to meet demand in the next decade. While it's unlikely that all of these potential projects will advance, it illustrates the scale of the gas resources, which are available to be monetized. Turning to Slide 14, which aggregates the long-term offtake agreements signed since January 2017. In total, 22 new deals have been inked, representing over 24 million tons per annum of incremental contracted demand. To put this in context, this represents over 95% for the new capacity, which is expected to come on stream this year. Furthermore, a significant proportion of this new supply commences delivery in 2018, which is indicative of a tightening market. We were particularly interested to note the recent deal between CNPC and Cheniere, which is the first direct firm long-term supply agreement between the Chinese importer and the U.S. supplier. We would also highlight the recent comments from a spokesperson for India's ruling party, outlined plans to more than double the share of natural gas, in India's energy mix to 15% by 2022. To achieve this target, India plans to add 11 LNG import terminals to the 4 in operation today, raising its import capacity from 20 million tons per annum to 70 million tons per annum. Since Q3 2016 Wood Mac has upgraded its Asia-Pacific LNG demand forecast by 6% to 10% equivalent to approximately 25 million tons per annum of additional LNG imports by the middle of the next decade. We believe that the growing willingness of consumers and gas marketers to connect to new offtake contracts will lead to new project FIDs and then incremental energy supply will require additional shipping capacity. Moving to Slide 15, I'd like now to discuss the LNG shipping market in the context of this positive macro outlook. The total number of spot fixtures during 2017 was up 22% year-on-year and almost double 2015 levels. Vessel utilization also continue to improve given the tightening of availability, leading to increased headline rates and improved commercial terms, including round trip economics becoming more common. Slide 16, utilizes data from Sabine Pass exports to illustrate one of the key drivers of the markets in 2017. The facility shipped during 200 cargoes in 2017, over 50% of the cargoes in the fourth quarter of 2017 were exported to Asia facilitated by the opening of the arbitrage window between the Atlantic and Pacific basins. And notably, a number of cargoes destined for Asia as transited around the Cape of Good Hope due to the lack of available slots for passage through the Panama Canal. And then calculates the based on Q4 2017 Sabine Pass shipping data. Two ships where needed for each 1 million metric tons per annum of supply. This compares to a multiplier of 1.76 for the year as a whole and compares to a global average of around 1.3 times. Turning to Slide 17, which shows the development of spot rates. In 2017, compare to the peak years of 2011 to 2014, when headline rates averaged around $100,000 per day and the trough years of 2015 to 2016, when headline rates averaged approximate $35,000 per day. Stronger than anticipated demand for LNG in Q4 2017 tighten the availability of ships in the spot market, driving headline rates to over $80,000 per day by the end of December, but highest level in over 3 years. As flagged on our third quarter earnings call we have not been surprised to see some seasonal softening in headline spot shipping rates in recent weeks. However, we believe that the market will continue to become structurally tighter through 2018 and 2019. Turning to Slide 18, and an update on our FSRU business. I am pleased to report that we have made good progress in the execution of the Alexandroupolis FSRU project. The operation and maintenance agreement with gas trade is nearing finalization and negotiations with DEPA and Bulgarian Energy Holding regarding equity participation are progressing well. We also continue to see strong interest from potential lenders in the project including EU agencies. We aim to align Alex FSRU project with the start-up of the Greece Bulgaria gas interconnect to pipeline. As a result we are now planning for the Alex FSRU start-up in the second half of 2020 and consequently expect to take FID in late 2018. Please turn to Slide 19. So 2017 was a year of strong operational and financial performance for GasLog. We anticipate the revenues and EBITDA will continue to grow in 2018 with the delivery of 3 newbuilds during the year and an expected ongoing recovery in spot rates. We're also encouraged by this recent strength of LNG demand, which should bring forward the point of balance in the LNG market. This underpins our confidence that incremental offtake commitments will enable the sanctioning of new liquefaction capacity of the next 12 months to 18 months. This increase in supply will require additional shipping capacity and we are confident that GasLog fleet of modern LNG carriers, customer relationships, operational excellence, safety record and financial strength, leaves us well positioned to capitalize on this growing need for shipping. We also look forward to making further progress on the Alexandroupolis FSRU project as we build towards FID later this year. And finally, before I hand over to Q&A, I'd like to remind you of our planned Investor Day in New York on April 10, where the management of GasLog and GasLog partners will provide an update on the strategy and outlook for both businesses as well as the wider LNG and LNG shipping markets. We look forward to see you all that. Operator, could you please now open the call for any questions.

[Operator:]

Thank you, sir. [Operator Instructions] Our first question comes from Jon Chappell with Evercore ISI. Your line is now open.

[Jonathan Chappell:]

Thank you. Good afternoon.

[Paul Wogan:]

Hi, Jon.

[Jonathan Chappell:]

Thanks for the industry backdrop Paul. I'll leave questions on that to others, I just want to ask couple company specific especially fleet question. So mentioned in the press release that the Hong Kong, the charter is now going to commence upon the delivery of the vessel in March of 2018? What happened there? Why was it moved up a little bit and are the terms the same, both the duration and the rate you are going to earn?

[Paul Wogan:]

Yes. It was moved up because the customer wanted to take the ship early. Had a need for it given the tightening of the market. It was great because we get delivery right out of the yard, which is really beneficial for us means that the ship [indiscernible] we don't have to do things like cool the ship down, position it, get us [indiscernible] report, so very beneficial for us. It doesn't - starting too early additional to the period, so I think about eight months early, Jon and we still have the seven years at the end of it, so it becomes a seven-year eight-month project charter instead of a seven-year charter. And the terms are broadly in line with what we had originally fixed on the vessel.

[Jonathan Chappell:]

All right, that's great. Similar question seems a little bit different though on the Centrica. Can you just walk through the dynamics of ordering this new ship, getting the delivery in the slot where the Centrica ship was supposed to be delivered and now that ship is being pushed out a year and just also some clarification does that Centrica charter still start in 2019 or does it start 2020, when the original ship is delivered?

[Paul Wogan:]

Yes. So Centrica, we are having obviously a very close relationship with them, but we're trying to line up with them, so that we meet their requirements. They were happy for us to have a vessel that would deliver in 2020, which now we'll do and same terms, conditions et cetera. Well that did allow us to do was then order an additional ship which can go into Centrica, and means that we have now one uncommitted ship, which is available for us in 2019, Q3 which we think is a very attractive position. So it was a win-win all around because we were able to help the customer and get ourselves a vessel, which we think is going to be really - in a really advantageous position. So good example of working closely with your customer I think.

[Jonathan Chappell:]

Okay. Great. Another one. This is going to just be Symantec or whatever, but in the voyage expenses comments, it says movement in net allocation from the Cool Pool results. Could you just explain what that means? Where there have been more ships added to Cool Pool, different pool point's kind of developments happening there?

[Alastair Maxwell:]

Jon, it's Alastair. A lot of that is a function of timing in terms of the allocation of voyage expenses and when some of those go back to the charter, some of them absorbed by the Cool Pool is a relatively small number, but it's more a function of timing than anything else.

[Paul Wogan:]

And just to follow-up, Jon, no additional ships, no change in pool points or anything like that, just those allocations.

[Jonathan Chappell:]

Final quick one for Alastair, also on the timing, the OpEx, I mean you mentioned it really briefly in the call, but it wasn't noticeably higher and I think it's important to point out that the headline EPS missed pretty meaningfully from consensus, but that wasn't a function of rates or utilization of the topline, it was mostly like a bottom line or an expense issue. So how much of that is purely timing as opposed to cost inflation and should we expect kind of a return to the first nine-month run rate going forward?

[Alastair Maxwell:]

Good question. So there was some scheduled maintenance including the drydocking of the Shanghai. There was an unscheduled maintenance, which we had to carry out on a number of the ships relatively material, but it did take those ships apart for some period of time and resulted in increased OpEx as a result. And so those I think - either planned to one-off, and then there were some increases in crew-related expenses as I said, which is to do with wages, bonuses, training, some of which are one-off, and some of which are effectively recurring. Jon, if you want more color, we can give you bit more color offline?

[Jonathan Chappell:]

All right. I appreciate it. Thanks, Alastair. Thanks, Paul.

[Operator:]

Thank you. Our next question comes from Michael Webber with Wells Fargo. Your line is now open.

[Michael Webber:]

Good morning, guys. How are you?

[Paul Wogan:]

Hi Mike. Good, thanks.

[Michael Webber:]

Paul, I wanted to just to start-off with a - I guess a couple industry questions and I would appreciate when you guys run through the vessel multiples per ton and you made a point to kind of highlight some of the inefficiencies and kind of the early spot trading. I believe you mentioned we are running at about 1.3 times globally in terms of vessels needed per ton of export volumes. If we look forward two years from now, do you think that number is higher or lower than that level?

[Paul Wogan:]

I think it's higher. The reason I think it's higher is that the incremental - if you look there is 100 million tons still to come on, which I think about 50 million tons is due out in the U.S. Then you look at the multipliers that we're getting out of the U.S. volumes, especially as Asia pulls in the cargoes and I think that moves that multiplier meaningfully higher over time, Mike.

[Michael Webber:]

And I guess it seems pretty germane for figuring out. How long some sort of secular bull market and LNG spot rates would be that lingering inefficiency. When you think about that conceptually, what do you think needs to happen for that to maybe normalize and if you think about maybe the crude market as a parallel, I guess what's lacking if you will and what are you looking forward in terms of how that develops for the next five years, 10 years? I know it's a difficult question, but it's certainly one of interest for many clients.

[Paul Wogan:]

Yes. I mean I think as I look at the market, I think it is very much influx. I think we're seeing this as we've talked about before going from a point-to-point market to a traded market. When that happens, the driver is price arbitrage rather than shipping efficiency and it's one of the reasons for a while we've been saying that we think that there is - probably like to be more inefficiency built into the market as it migrates to that trading way rather than more efficiency. So I think there's an outside of it and I think also in terms of where the cargoes are coming from. I do believe we will continue to see strong demand in Asia and I do think a lot of that is going to be coming out of the U.S., again for some time we've been saying. There was a thesis that we would sale the U.S. product going into Europe and all the Australian product going to Asia. And our thesis was actually you just see it go where the pricing signals gave you the right pricing mechanism to exactly what happened this winter in Asia. So if I was a betting man, I would say that we're likely to continue to see shipping inefficiencies and as it becomes in more traded market, potentially more shipping inefficiencies than we're seeing right now.

[Michael Webber:]

Gotcha, okay. That's helpful. Around the structure in general, and I asked Andy a version of this question on the GasLog Partners call that, your valuations, your cost of capital at least on an NAV basis between GasLog Partners and GasLog inverted the last, call it three to six months, and I know you guys and GasLog Partners have talked about the fact that the parent would be willing to step in and swap vessels or find a way to kind of backstop the daughter distribution. It seems like more of an - less of an issue now than it did maybe six or 12 months ago, but if anything the economics of the credit GasLog parent is getting for their spot exposure seems like it makes the other side of that equation work pretty well. It seems like you guys doesn't want to swap this vessels. So I'm curious what needs to happen for you guys to think about doing that proactively and is there a scenario where you would think about doing that even if it's not in a kind of a protectionist move for the daughter distribution?

[Alastair Maxwell:]

Hey, Mike, Alastair. How are you doing? I don't think our view has changed since we spoke on the GasLog Partners Cool couple of weeks ago. And I think that the fundamental strategy of both companies is to have ships on term charters. We haven't had five ships trading in the Cool Pool today and clearly that has been beneficial to us over the 2017, 2018 winter. I think that GasLog Partners would clearly have the preference to having stable, visible cash flows of having it ships on charter. I think that continues to be the fundamental strategy of GasLog as well. And so I think - I don't see us taking measures to increase our exposure to the spot market as you all suggesting.

[Michael Webber:]

Okay. That's helpful. And then one more, Paul, the question on asset values, certainly it seems like if you just look at kind of discounted forward cash flows associated with LNG carriers the values, the implied values have been rising. I'm curious maybe outside of what you'd pay for the yard, if there is something prompting on the water. Do you think - I guess how close to par, do you think we've become now in terms of the potential upside in the spot market in the next two to three years versus in fact we're still kind of - on a real economic basis probably still slightly inside of the reference rate.

[Paul Wogan:]

I think - just so I understand your question - in other words do I think that the asset values are reflecting the earnings that were likely to get over the next few years, is that what you're saying Michael?

[Michael Webber:]

Yes, basically if you had the market, if you had a newbuild needed to market somewhere do you think at this point to be able to market a book or do you think you'd be - you made a case two years ago. You could mark the assets down $10 million to $15 million bucks just given the depths of the trough of these are space is going through, it seems like there's trough values have been would be increasing. There's not a lot of the - these assets don't trade. So we don't really know, but in terms of fleet valuation, in terms how you think about deals in the space if you had props tonnage right now do you think you would basically pay before or do you think you would still have to get some kind of a discount on that if I was on the water?

[Paul Wogan:]

I think well, I guess two things I think as we look at it one thing is what's happening with newbuilding prices and then what's happening with prices on the water. I think we've seen some deflection and newbuilding prices and the yards have been looking to fill, but as you - I think disconnects from having some in the water. The fact you can't get up 2.5 years to 3 years I think people right now it probably would be happy to have something earlier and take advantage of what they see is going to be a very strong market. So I think in terms of the earning capacity of ships, I think yes it's gone up quite considerably. I think from our point of you when we look at it we try to look through the cycle and say what's the value of that shift assuming we're going to have cycles, but the long run average right and so you can say well you could mark it down and the low cycle you mark it back up in an up cycle. But if you go through the cycle I think our view on the value of those ships as being fairly consistent. But certainly right now that added value in having a prop shift on the water without a doubt. So there is if you like billing by willing seller, I'm sure the pricing of that's prop ship on the water is increasing as we speed.

[Michael Webber:]

Gotcha, okay. That's helpful guys. I'll turn it over thanks for the timing.

[Paul Wogan:]

Thanks Mike.

[Operator:]

Thank you. Our next question comes from Ben Nolan with Stifel. Your line is now open.

[Benjamin Nolan:]

Thanks. Paul is sort of combining a couple of Jon's questions and Mike's questions. You talked about ordering the new vessel and sort of being paired a little bit with the Centrica contract and ability to maybe pushback the timing of that other vessel. But there has been a few other - at least one other long-term contract awarded to another LNG shipping company. And just to be thinking through maybe the competitive dynamics there and that is this ultimately something where maybe you feel like it is good to have a ship on order without a contract such that when times get a little bit tighter even sale or a little bit more desperate having that available unable to you to sort of be able to earn a better rate than what's you could get if you were to order something on the backlog contractor directly?

[Paul Wogan:]

Yes, hi Ben, I think as we look at our strategy has always been a combination of fixing ships of ordering newbuildings against fixed rate contracts and having something in the shop window if you like which is available for charter and certainly what we found in the past of having that ship available for spot charter, especially in a good position is allowed us to in writes about what would be the prevailing market at that time. So when we had this opportunity the fact that we had the availability of a ship - committed ship in 3Q 2019 I think was very attractive for us. And in fact already we've started discussions with a couple of people who've seen that and I know very interested in it so it may actually be good timing for us. So yes I think it is helpful. But I do think we'll also continue to have the opportunity to fix long-term business and order ships against it. We are going to be careful - capital though it will only do that if we see the right returns in a contract ask the value accretive for our shareholders.

[Benjamin Nolan:]

Okay. And then as it relates to kind of the spot market obviously I think you made a point of - Alastair made a point of saying here's the cash flow impact of various spot levels, but that assumes full utilization and back to back economics. Currently and maybe even to some extent the fourth quarter, what's the realistic TCE that you guys are earning or affectively how close to full utilization is the spot market for modern ships right now?

[Paul Wogan:]

Yes. We don't give out the actual earnings of the spot ships, Ben, but one of things we did want to make clear is that you do - the headline rates are assuming full utilization round-trip economics. I think in the fourth quarter, we were getting pretty high utilization from the ships, trading the spot market. If you're getting up towards sort of 80% utilization, you're doing - you're probably doing quite well. I think what you will see though is when we - we talked for a while about the inflection point in the market. When you reached the inflection point where the rates I think move out of what we're seeing right now which is a seasonal trend into a kind of structural strength throughout the year. We think that's around the corner. I think when you see that, you actually see the ability to earn over 100%. I mean we had one quarter where we were - get back in 2013 with a spot ship where we actually saw the vessel earning way in excess of headline rates because we were able to fix the ship, full backhaul cargoes get positioning payments, when we didn't to balanced anywhere and things like that. So there is still I would say underutilization in the spot market, but when we hit that inflection point that I think gets - then starts to get very close to 100%.

[Benjamin Nolan:]

Okay. And then lastly for me and I'll turn it over. As it relates to the FSRU project in Greece and you're making progress there. Have you come yet to sort of a decision or prevailing thinking as to exactly whether you're going to be doing a conversion or ordering new vessel or orders that stand?

[Paul Wogan:]

I think given the timings that we're talking about it's going to be difficult to put a new building in there, so it's much more likely to be a conversion at this point, Ben.

[Benjamin Nolan:]

Okay. All right. I'll turn it over. Thanks guys.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Randy Giveans with Jefferies. Your line is now open.

[Randy Giveans:]

Hey guys. Thanks. First, welcome Phil, to the big show. I'm sure you'll enjoy at GasLog. Second, congrats on taking delivery of the GasLog Houston. Really appreciate the H-Town Shout Out there on the name. So quick question on the supply side, we clearly see demands pretty strong, massive liquefaction projects coming online, but it looks like there is about 105 or so large LNG carriers on the order book. How many of these vessels are already contracted versus kind of speculative ordering?

[Paul Wogan:]

I think if you look, roughly it's around 90% of the vessels on order against contracted with around 10% available.

[Randy Giveans:]

Okay. And then based on your other guidance of 24 months to 30 months for newbuild, you would say the kind of order book sold out through end of 2019 into 2020?

[Paul Wogan:]

Yes. I think the order book now is definitely well into 2020.

[Randy Giveans:]

Perfect. And then a last question for me. So for the GasLog dividend, is the $0.14 pretty fixed in coming years kind of looking at it from both perspectives, are you committed to that dividend given going forward, which obviously should be easy looking at your coverage ratios, and then is there a upside potentials to that payout?

[Alastair Maxwell:]

Hey, Randy. It's Alastair. So yes, we're very committed to the dividend. And I think we were very proud of our abilities and maintained it through what was a tough market in 2015, 2016. I think as we think about capital allocation priorities going forward, it's clearly, the first priority is to complete our newbuilds and get those on the water and finance the remaining installments. I think the second priority is further growth and full as outlined in some detail, the growth prospects and the macro backdrop for the business. To the extent that after those there is some surplus and clearly we will consider all options including potential changes to the dividend policy. But I think our approach here at least for the time being for the foreseeable future is to make sure we can continue to grow the business and finance that growth.

[Randy Giveans:]

Sure. And I think that's how investors see at GLOG for going distribution, GasLog for the growth in the fleet. So thanks again and congrats on the solid quarter.

[Alastair Maxwell:]

Thanks Randy.

[Operator:]

Our next question comes from Chris Wetherbee with Citi. Your line is now open.

[Christian Wetherbee:]

Hey. Thanks for taking my question guys. Want to come back to some of your comments Paul on the Chinese market. You talked about some commitments for the first time. Typically from a commodity perspective they've been sort of heavily involved in the spot market. Have you featured in that demand profile playing out over the next several years? Do you think we can see a major step forward as the demand build there for contracted off-take? And then just give us some perspective on how that might sort of build and then as you think about it, does that change anything away that you might approach the market in terms of what you want to have spot versus what you want to have tied up under long-term contracts?

[Paul Wogan:]

Yes. Thanks, Chris. Yes, I think if you look at that the - there are two things, I think if you go back two years, the big concern was that China had over committed itself on contract and was going to be an onward seller of those cargos. Where were those cargoes going to find a home? Flash forward a year and Wood Mac was saying pretty early on, actually we think that under contracted and that's actually come to pause now. So if you look in 2016, I think they imported around 1.6 million tons from the spot market. So most of it was covered in 2017 and that rose to 8 million tons in the spot market. I think as they continue this very fast growth. It's unlikely that they're going to want to be too exposed to the spot market. They're going to want to go out and take some of that on contract and I think that's what's giving us seeing CNPC and Cheniere, I think that's the first of a number of long-term contracts we're likely to see out of China, which I think is going to be enable people to take FID on new liquefaction projects. But I also do believe that they will continue to have a portion of their requirement in the spot market. I think yes, you're correct. I think it goes to the sense of we think that there will be a growing spot market in LNG, just as I think as the LNG market itself grow, the contracted market continues to grow. So I think there's room for both those things to happen.

[Christian Wetherbee:]

Okay. That's helpful. And when you think about sort of your vessels on spot, if you flash forward a few years as you look at fleet development as we get into what all of us I think believe is going to be a tighter market in 2019, 2020 and beyond. It's five the right number, do you think about as a percentage of your tonnage that's available? How do you think about sort of that balances spot versus contract of your fleet specifically?

[Paul Wogan:]

Yes. I think we've always had a strategy to say that we'd like to put ships under longer term contract, but also that we enjoy having ships in the spot market because that gives us an opportunity want to have a real window on what's happening in the market. And two, gives us an opportunity to demonstrate what we think our outstanding operational capabilities in the trade with new customers. So we would always want to have some of our ships operating in the spot market, even through the cycles. I think as you see the spot market improve, what you will do see charters wanted to take cover, there will be more opportunities for ships on longer term contracts. And I think if we see the right price point for that, you would see is doing it. So I think we'll be flexible in the amount of ships we would have, but I would always want to have a couple - three ships trading in the spot market and if that small because of where we are in the cycle and then that would be fine. But when we see the opportunities put ships away a good rates that we would do so.

[Christian Wetherbee:]

Okay. That's helpful. Final one for me, maybe one for Alastair, you talked about free cash flow generation of the fleet, obviously the spot rates being elevated. How do you think about free cash flow deployment in sort of optimal sort of debt levels as you think about maybe the next two years? I think Alastair what you need from the newbuild perspective and then what you could potentially reap in the markets? How do you think about sort of that balance and where do you want to see GasLog net debt or leverage levels as we look out over the next 12 to 24 months?

[Alastair Maxwell:]

Yes. Good question, of course, Chris a lot of it depends on the growth opportunities that might present themselves. I think we feel for the business as it is today in terms of the newbuild program, including the new Centrica ship and in terms of where we are vis-à-vis our debt maturities and how we think about cash flow growth. I think that we can see - there will be some increase in gross debt as we take delivery of new ships. We can see that the multiple of EBITDA, net debt to EBITDA will continue to decline over the next couple of years. And so I think feel very comfortable about where we are today from a financial perspective. So I think a lot of it really depends on what other growth opportunities present themselves and what's the optimal way of funding them going forward. I don't know whether that answers your question.

[Christian Wetherbee:]

Okay. Yes. I mean can you give us some perspective on it and how you think about with multiples coming down. Perfect. Thanks very much for the time. I appreciate it.

[Paul Wogan:]

Thank you.

[Operator:]

Our next question comes from Fotis Giannakoulis with Morgan Stanley. Your line is now open.

[Fotis Giannakoulis:]

Yes. Hi, gentleman.

[Paul Wogan:]

Hi Fotis.

[Fotis Giannakoulis:]

I saw last year about the number of newbuildings remain relatively low and although increased compared to 2016 levels. I'm wondering at what level - how many order vessel we need to see in order to start having some asset price inflation at newbuilding level and how newbuilding prices are connected with the time charter market?

[Paul Wogan:]

Hi Fotis. I think the price for the LNG carriers obviously is partly dependent on the LNG carriers or partly dependent on one of the orders the shipyard has because there is a flexibility between having using berths for different types of ships. So it's hard to give a number in terms of the LNG carriers that start to push up the pricing. But you've had some factors recently around steel pricing and around the one to the dollar, which I think are putting the yards in a position where they're wanting to increase that prices, also they are taking a lot of capacity out the market and I think we talked about this on previous calls 30% to 40% to that capacity out of the market for the major Korean yards. So I think all those will over time press on the pricing of the ships and we will see asset prices going up. And certainly I think when you see what's happening in the longer term market, the pricing that is definitely dependent on the asset pricing because as we look - we are looking to get a certain return for our shareholders when we make an investment in the newbuilding. And I think as we saw the newbuilding prices come down, the actual TCE that you need to want to get a good return for your shareholders obviously comes down as well. So those newbuilding decisions, those pricing around the newbuilding decisions are definitely contingent to a certain extent on what the asset pricing is.

[Fotis Giannakoulis:]

Thank you, Paul. In the slide about the SPA agreement that you signed recently, we have seen at least two traders are signing this contracts and a number of portfolio players. When you think about the future contracts, what kind of percentage do you see, what kind of share do you think the traders will have in the incremental off takes and what will that mean for the shipping market in terms of contracting ability for longer period?

[Paul Wogan:]

Yes. It's interesting. I think if you look last year, I think it was something like 20%, 25% of the cargoes are trades and that I think probably around 20% to 30% was done by kind of kind of coal players like new trade et cetera. So it is a growing part of the market. The obvious conclusion you can drive from that is while if traders in there you are not going to have long-term contracts with their ships. What's really interesting I think is to see Trafigura signing up for a 15-year deal from Cheniere, and the back of that and now they have a commitment in the cargo side, do they take a commitment in the shipping side to make sure that they have the ability to service it. So really dynamic market right now, I think as we've seen more traded there will be people wanted to have ability to take spot tonnage, but I think your trade has taken a long-term commitments as Trafigura do, then you would see them wanted to take at least a part of that portfolio with long-term commitment as well.

[Fotis Giannakoulis:]

And particularly you talked about the Trafigura contract, the language that Cheniere use, will that this is a flexible contract in terms of - I assume in terms of pricing or volume. I'm wondering if there is a time or there any discussions about flexible contracts on the chartering side where pricing might be linked to some index or to the pricing of the commodity, if you have seen something like that some profits share arrangements in a long-term contract that you are negotiating?

[Paul Wogan:]

We haven't seen that yet focused, but I wouldn't be surprised to see that as a possibility because I think shipping can't stand still and say actually we just - the LNG market itself is changing. We're just going to sit back and do things in the same way and I think actually create an opportunity for companies who can actually think about new commercial constructs and actually create something that works for the customer, works for the shipper and I think that could be advantageous. So I think new types of contracting, new types of pricing are highly likely. One of the reasons we start the Cool Pool was we felt that this market was changing and that Cool Pool could offer with a critical mass of ships could offer commercial constructs, which individual ship-owners with smaller number of the ships weren't able to do. So I think we're very willing to look at that, but obviously you have to make sure that the terms and conditions et cetera make sense for us. But I think that's an interesting opportunity for a well-run well managed companies like GasLog.

[Fotis Giannakoulis:]

Thank you very much Paul.

[Paul Wogan:]

Thanks Fotis.

[Operator:]

[Operator Instructions] Our next question comes from Magnus Fyhr with Seaport Global. Your line is now open.

[Magnus Fyhr:]

Hi, guys. Just one question left, follow-up on Ben's question, regarding utilization for the quarter. Would you say I mean you're moving towards 100% utilization? Can you kind of given the flavor on the utilization for the spot vessels during Q4?

[Paul Wogan:]

I think if you look - I think there's been some - again, we don't tend to comment on our own rates or utilization, Magnus. If you look at what's been coming out for some of the brokers, some of the industry analysts, there's been a talking around in Q4 spot ships around sort of 70% to 75% utilization. I think that's probably not a bad market to take.

[Magnus Fyhr:]

Would you say where the market kind of moving towards full utilization, we should see a better impact on that in the first quarter?

[Paul Wogan:]

No, because I think as we've talked about, we've seen sort of some seasonal falloff in the first quarter, which we thought would happen. I think when you see - the point I was trying to make earlier, which I think as you get to what we think is the inflection point when we see this market ratably at a much higher rate, going towards the sort of long-term average over the year. I think that's the point of which you see is much closer to the 100% utilization.

[Magnus Fyhr:]

Okay. I mean would you feel comfortable that the first quarter is going to be better than the fourth quarter on the Cool Pool ships?

[Paul Wogan:]

I would hope so.

[Magnus Fyhr:]

Okay. All right. Thank you, Paul.

[Paul Wogan:]

Thank you.

[Operator:]

And our next question comes from [indiscernible]. Your line is now open.

[Unidentified Analyst:]

Hi guys. Just a short one for me now probably for Alastair. I know you don't normally comment on actual rates and levels, but can you say something generic about when you try to charter out the GasLog Houston, the LP-2S premium that you would expect to get through TFDE or TFDE vessel?

[Paul Wogan:]

I'll take that one. I think there is definitely an advantage with the LP-2S vessels in terms of that consumption and also given the size of the vessel as a better unit freight cost from the size and the consumptions. If you look at that I think we've been in the past we've talked about that being probably somewhere between $10,000 and $15,000 a day depending upon the rates, the price of the LNG et cetera. So that's one of the factors you can take into account. However, the real delta you get between ships is one just theoretical and the other which is what's happening in terms of the shipping market and you could have a TFDE vessel and you could have NZDF vessel, and if the market is very tight, you'll pay the same price for both of them because the incremental ship goes at that price. So it's very difficult to put an actual figure on it, as a theoretical figure because of unit fright cost. But it really is independent on the market dynamics at any given time.

[Unidentified Analyst:]

Makes sense. Thank you very much.

[Operator:]

And this does conclude the Q&A session. I would now like to turn the call back to Mr. Paul Wogan, CEO for any further remarks.

[Paul Wogan:]

Thank you, Andrew. Thank you very much for everyone today for listening and your continued interest in GasLog. We certainly appreciate it and we look forward to seeing as many of you as possible at our Investor Day in New York on April 10. And in the meantime, if you got any question, please feel free to contact our Investor Relations team. Thank you very much.

[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.