GasLog Ltd.
Q1 2018 Earnings Call Transcript

Published:

  • Operator:
    Good morning. My name is Grace, and I will be your conference operator today. At this time, we would like to welcome everyone to the GasLog Limited's First Quarter 2018 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.
  • Phil Corbett:
    Good morning or good afternoon everyone, and thank you for joining GasLog Limited's first quarter 2018 earnings conference call. For your convenience this call, webcast and presentation are available on the Investor Relations section of our website www.gasloglimited.com where a replay will also be available. Please now turn to Slide 2 of the presentation. Many of our remarks contain forward-looking statements. The factors that could cause actual results to differ materially from these forward-looking statements please refer to our first quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the appendix of the presentation. I will now hand over to Paul Wogan, Chief Executive Officer of GasLog Limited.
  • Paul Wogan:
    Thank you, Phil. Good morning or good afternoon to you all. Thank you for joining our first quarter earnings call. I'll begin with the highlights of the quarter, Alastair will then take you through the financial review following which, I will update you on current trends in the LNG and LNG shipping markets, before opening up the call for questions. Turning to Slide 3, Q1 2018 was another quarter for revenues and EBITDA aided by the delivery of three new builds in the period and improved spot LNG carrier rates. The improving financial performance combined with our strengthening balance sheet and confidence in the long-term prospects of the company made I am delighted to announce a 7% rise in the quarterly dividend to $0.15 per share, our first increase since late 2014. During the quarter, the GasLog Houston, Genoa and Hong Kong were delivered on-time and on-budget, all three vessels are equipped with the latest XDF propulsion and benefit from an enhanced boiler performance. We also moved to take advantage of cyclically newbuild prices by ordering two vessels for delivery in 2020. We continued to recycle capital from GasLog Partners dropping down the GasLog Gibraltar during the quarter and we’ve also made further progress on the Alexandroupolis FSRU project in Greece. Signing the operation and maintenance agreement in February and I am pleased to report that earlier this week Gastrade reached a preliminary off take agreement with DEPA the Greece national gas utility an important step in figuring firm off take and financing for the project ahead of FID, which is still planned for late 2018. Slide 4 contains further details of our three newbuilds which were delivered during g the first quarter. Taking delivery of the three ships in one quarter requires expertise, planning, and coordination across the organization and I am pleased to report that our team executed flawlessly. These vessels have modern XDF propulsion and benefit from very low boiler freights resulting in some of the lowest unit price costs in the global fleet, a key attraction for our customers. By the end of the year, all three vessels will be on long-term charter to either Shell or Total. The commencement date for the GasLog Hong Kong charter to Total was brought forward from the end of 2018 to current sizes her delivery from the yard. The charter rate for this additional period is lower than the rate we will receive for the remaining seven year charter starting in December 2018. But it’s still significantly in excess of current spot market levels and eliminated positioning costs and utilization risk prior to delivery into the original Total charter. 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 5 where I’d like to take you through our first quarter results. We achieved record revenues in the first quarter driven by the initial contribution of our three newbuilds delivered in the quarter and our spot vessels which benefited from higher spot shipping rates and improved utilizations during the Northern Hemisphere winter. From an accounting perspective, the contribution of our spot vessels is recorded partly in the revenue line, but also in the net allocation from the Cool Pool, which I will address in more detail shortly. Our unit OpEx in Q1 was $16,536 per vessel per day. Higher year-over-year, but a 6% reduction on the levels seen in Q4 2017. Part of the increase in OpEx was caused by the scheduled phasing of technical maintenance and we continue to expect that 2018 unit OpEx will be broadly in line with 2017 levels on a full year basis subject to FX movements and actual cost incurred for the scheduled dry-docking during the year. In absolute dollar terms, our OpEx was higher year-on-year, driven primarily by the new vessel deliveries, but also by increases in scheduled technical maintenance costs during the quarter, the dry-docking of the GasLog Santiago, and clearing costs, all of which were affected to some extent by unfavorable movements in exchange rates between Q1 2017 and Q1 2018. Of the total year-on-year increase at $6.8 million, $1.6 million was due to the increase in the size of the fleet. $1.9 million was due to scheduled maintenance costs related to main engine overhauls carried out during the quarter as I mentioned at our Investor Day, and a $0.4 million was due to dry-docking and intermediate survey costs. In addition, as you may recall, some 50% of our OpEx is denominated in euros and $2.8 million of the any increase in OpEx was due to a stronger euro relative to the U.S. dollar in Q1 2018, compared to the previous year. As you can see, G&A cost also increased year-on-year, again mainly due to currency effects at some 70% of our G&A cost are denominated in currencies other than the U.S. dollar. The stronger euro and British Pound relative to the U.S. dollar added around an $0.9 million to our G&A costs year-on-year. On a unit basis, our G&A cost were broadly in line with Q1 2017 on a like-for-like U.S. dollar basis demonstrating our ability to grow the fleet with limited impact on G&A cost. To manage part of our exposure to the exchange rate movements over time, we do have economic hedges in place and the benefit of this is reported in the gain on swaps line. Around $1.5 million of the total FX impact on our OpEx and G&A is recovered by these hedges. Our reported EPS for the quarter after accounting for non-controlling expense and the dividends on our preference shares was $0.21 per share or a small loss of $0.01 per share after adjusting to the impacts of the gains on swaps. Moving to Slide 6, which sets out additional information on the contribution of our spot vessels. This has been included in the 6-K for the first time due to new rules governing the accounting for and disclosure of revenues applicable from 1 January 2018. The first line in the table shows the direct revenues from GasLog owned vessels in the Cool Pool, which are included within the revenue line. Similarly, voyage expenses and commissions to GasLog owned vessels in the Cool Pool are included within the overall fleet’s voyage expenses and commissions in our P&L. The next pool allocation represents the adjustment made by the Cool Pool to ensure that all participants receive the same net results based on the revenue and cost sharing mechanics of the pooling arrangements. This figure can vary significantly depending on which vessels are fixed and for what voyages during any given quarter. The total net results on this table is a factor with a main contribution from our spot ships during the quarter. And as you can see, the Cool Pool was able to capitalize on the relative strength in spot LNG sea rates and improved utilization during the Northern Hemisphere winter months. However, despite some very recent green shoots of activity, we anticipate that the Q2 net revenues from our spot ships will be lower than Q1 levels given the seasonal roll off in spot rates and the accounting impacts on spot fleet utilization. Paul will discuss the current status of this spot market in more detail shortly. On Slide 7, we set out the CapEx schedule for our newbuilds and our vessel enhancement program which will see the installation of reliquefaction units on three of our TFDE vessels. Total cumulative payments from Q2 to end 2020 are estimated at some $190 million, comfortably less than our March 31 cash balance of almost $350 million and at the appropriate time, we will look to put debt financing in place for the one charter and two uncommitted newbuilds we have on order. The second chart on this slide updates our debt amortization schedule following the full repayments of the junior tranche of the Five Vessel facility. Our next maturity is in Q4 2019, on a facility that would shape at the GasLog Partners level. Our plans for addressing this maturity are well underway. Finally, on Slide 8, let me summarize the dropdown of the GasLog Gibraltar from GasLog Limited’s perspective. The consideration for the Gibraltar was in a combination of cash, common units and assumed debt. We believe the GasLog Partners’ units yielding 8.8% of the price at which they were issued are an attractive currency and receiving them reduce the earnings impact of the sales. After the closing of the acquisition, our ownership interest in GasLog Partners has risen to 29.1%. Finally, GasLog Partners has recycled $45 million of cash back to GasLog through the repayment of the intercompany loan. The continued recycling of cash from the Partnership back to GasLog in the form of both distribution and payments for dropdowns is one of the factors that has given us the confidence to increase our dividend to $0.15 per share this quarter. Now let me hand back to Paul.
  • Paul Wogan:
    Thank you, Alastair. Slide 9 summarizes our current thoughts on LNG and LNG shipping markets. The robust LNG demand growth seen in 2017 has continued into the first quarter of 2018 with clear industry consensus that demand growth will continue throughout the next decade and beyond. We expect significant capacity growth this year and remain optimistic that FID s for further supply will be taken in the near future to meet rising demand. While LNG carrier spot rates have been seasonally weak in recent months, they are now about 40% above the lows of 2017 following signs of market improvement in recent weeks. Slide 10 shows how demand evolves country-by-country in the first quarter expressed on a trailing 12 month basis. China led the way importing 15 million tons more or 54% growth rate year-on-year. In aggregate, the top-10 countries registering a 24% increase in LNG imports year-on-year. Turning to Slide 11, of the 33 million tons of new liquefaction capacity is scheduled to start up this year, an increase of 10% over 2017. Dominion Energy’s Cove Point facility in the U.S. began commercial production last month becoming the second U.S. LNG export facility. Cameroon FLNG is expected to export its first cargo imminently and Wheatstone Train 2 is expected to begin operation later this quarter. In 2019, an additional 44 million tons of new LNG is expected online including trains at large projects such as Cameroon and Freeport, which should increase ton miles as more gas is exported from the U.S. Further ahead, Wood Mackenzie identified approximately 700 million tons of new LNG production in various stages of planning, a significant proportion of which is in North America. At least 125 million tons of this potential capacity is estimated to have a breakeven of less than $10 per MMBTU, a price level which has historically generated interest from long-term bias. Slide 12 demonstrates how U.S. LNG exports are increasing ton miles. In Q1, Sabine Pass exported 76 cargoes, of which nearly 70% were delivered to Asia with a number of these routed by the Cape of Good Hope. For the second consecutive quarter, approximately two ships were needed for every 1 million tons supplied, significantly higher than the historical multi plan for global LNG trade of around 1.3 times. Since inception, nearly half of all Sabine Pass cargoes have been exported to Asia leading to a longer-term ship multiplier of 1.8 vessels to 1 million tons exported. Slide 13 illustrates the developments of spot rates since 2011. Since the beginning of 2016, when spot rates were at historic lows, rates have begun to set a series of higher highs during the seasonally strong winter period, as well as higher lows during the spring shoulder months. Although we anticipated the seasonal weakness in rates seen in recent months, the fall was more severe than we expected. Unplanned downtime at several LNG facilities and delays in commissioning of new LNG liquefaction capacity combined with the delivery of 18 newbuild LNG carriers during Q1, all contributed to the weakness. However, earlier this week, Clarkson’s assessment of headline spot rates increased for the first time since December 2017 suggesting that the market is now starting to improve ahead of the Southern Hemisphere winter and the Northern Hemisphere cooling season. In addition, spot fixing activity continues to increase and in recent days, we have seen charters coming to market to seek multi-month cover for the Northern Hemisphere 2018-2019 winter. The table in the upper-right corner highlights 71 spot fixtures during the first quarter of 2018 representing a 15% year-over-year increase. Headline rates reported by ship brokers are a useful parameter of market health. But they may not be a particularly accurate guides to the TCE rates achievable by spot vessels. When trying to interpret headlines spot rates it is worth bearing in mind the following
  • Operator:
    [Operator Instructions] And our first question comes from Chris Wetherbee with Citi. Your line is now open.
  • Chris Wetherbee:
    Yeah, hey, thanks. I guess, good afternoon guys. Thanks for taking the question.
  • Paul Wogan:
    Hi, Chris.
  • Chris Wetherbee:
    I guess, I first wanted to start on big picture sort of with the market, and get a sense, you highlighted where spot rates are kind of at currently – as you think about sort of the activity in the market and entering sort of the seasonal period that we are kind of moving into, how do you think about this? I mean, do you feel like there are a number of incremental vessels that need to be sort of hired? Do you think that there is a bit of a firming? I just want get a rough sense, I know it’s very difficult to predict spot rates for this, I am curious what your sort of shorter take is in the market?
  • Paul Wogan:
    Yes, it’s interesting, as all spot markets, Chris, it moves very quickly. Even in the last few days, we have seen a pickup in activity. If you look at Q1 as we said, the number of spot fixtures are up 15% on Q1 2017. So we’ve had an active market even allowing for the outages in some of the projects that we talked about in our prepared remarks. But, as we’ve gone – said in the last few days, we’ve seen a pickup in activity not only in the spot market, but also in the interest being shown by charters in taking period cover especially period cover over the 2018, 2019 winter. And as we are looking forward over the next 30 days at the ship availability talking to our chartering guy here, he is seeing that coming down quite quickly which is usually a good indicator that rates would pickup and as we highlighted again in the prepared comments, Clarkson’s have increased their headline rate last week for the first time since December. So, I think the stars are aligning. We are coming out of the shoulder months and we are going into the Northern Hemisphere cooling season. The Southern Hemisphere winter and it seems we are reacting in a way that we would expect.
  • Chris Wetherbee:
    Okay. Now that’s helpful. I – difficult to forecast them, just great perspective. Do you think that with some seasonal strength it might provide the ability to put away one of the sort of future vessel deliveries on period charter, do you think that’s – we are close enough or the market could be better enough to do that and what do you think the timing might look like on something like that or do you feel like we need to wait a little bit closer to delivery for those 19 vessels?
  • Paul Wogan:
    It’s interesting, as I said, we’ve had a number of charters in a few days coming in and looking for multi-months charters, but also a couple of charters coming in and looking for longer-term fixtures as well. And I think our view on the longer-term fixtures is very much around where do those price. It’s good to see those opportunities in the market, but also we wouldn’t necessarily rushing into the first ones that we see because we do believe that the strengthening market will create a lot of opportunities for multi-year charters going forward. So, positive signs and we’ll be thoughtful around when we commit our ships to long-term charters. But as we’ve always said, whilst we like to have one or two ships in the spot market and keep a window on that market, our strategy is very much around putting our ships around long-term charters at the right time and I think we will have those opportunities, Chris.
  • Chris Wetherbee:
    Okay. That’s helpful. Last one from me is just sort of non-drop – thinking about dropdowns into GLOP. You took shares last time when you think about sort of the desirability of that or maybe do you have a target sort of ownership level, do you think equity from GLOP is attractive for potential future. How do you think about sort of that mix of financing for those dropdowns going forward?
  • Alastair Maxwell:
    Yes, hi, Chris. This is Alastair. Interesting question. I think that there are a number of factors that go into this. I think that first of all, as we said in the remarks, we thought that was an attractive currency. It significantly mitigates the earnings impact and we don’t have immediate need to redeploy cash or to deploy cash over and above what we already have on the balance sheet today. And it tells to us that that was a way to earn a very attractive return on the consideration we received from the ship given the yield which they’ve locked shares at trading. So I think it’s something that we will look at on a case-by-case basis. We don’t have a target ownership level. And depending on the circumstances of time, we may welcome to resume something similar in the future.
  • Chris Wetherbee:
    Okay. That’s helpful. Thanks for the time. I appreciate it.
  • Operator:
    Thank you. Our next question comes from Jon Chappell with Evercore. Your line is now open.
  • Jonathan Chappell:
    Thank you. Paul, I appreciate all the commentary on the capture of the headline rates. I think that’s really important if people kind of get caught up in the momentum and the seasonality. With that being said, I am also trying to understand on Slide 13, I mean, there is no doubt this winter was better than last winter. It doesn’t matter what you captured in this weather. Yet in the fourth quarter of 2016 and in the first quarter of 2017, you had an adjusted profit in the fourth quarter 2017 and first quarter 2018 an adjusted loss. So I am just trying to understand how is the breakeven of your fleet kind of progressed over this period? I mean, this is also with the bigger fleet, so, obviously there was more absolute cost associated with that, but there should have – also been more absolute revenue especially to the new vessels were time chartered coverage. So can you just walk us through the evolution of the breakeven rates and why we can have this variance between profit and loss in a period where the loss period was a certainly a better market?
  • Alastair Maxwell:
    Jon, it’s Alastair. I’d have a crack at them, and Paul may add something at the end. I think that it’s not so much a function of the breakeven on the ships which haven’t really changed over that time periods. You are right, there is a better contribution from the spot ships year-on-year. I think the one significant factor which affects the bottom-line which is the dropdown, because every time we dropdown a ship, and we receive cash back as consideration for that, clearly what we earn on the cash and leaving aside the unit for the Gibraltar dropdown what we earn on the cash is very limited compared to what we were earning on the ship until such time if we redeploy that cash. But obviously, if GasLog Partners raise money with that in the form of common units, whether it’s in the form of preference units, respectively increases be minority interest in that pool. There was more profit under the way the waterfall mechanism works, it’s more proper to get allocated to GasLog Partners as opposed to GasLog Limited and that’s probably been, when you look at just the EPS level of – probably been the most significant driver, I think the other which has had an impact is, we’ve had a gradual increase in interest rates, LIBOR rates during the quarter of the last year. We have some hedges in place to protect this, and the rest of those, that you are looking at this from an adjusted basis, so in terms of actual cost that has had some impact as well. But I think the most important impact is the dropdown.
  • Jonathan Chappell:
    Okay. And then, I mean, so, we definitely have to have a minority interest conversation offline and I am plan to do that today. But, just help me with the idea, I mean, is it more repetitive in the current IDR structure right now than it had been earlier in GasLog Partners development and if there is a reset or a restructure whatever is happened with the IDR will that be helpful at least to the calculation to GasLog’s EPS?
  • Alastair Maxwell:
    So the answer is, it can be helpful to the extent that it reduces the non-controlling interest portion of any dropdown. And again, we said at the Investor Day, that the IDR that something which is under active consideration between the two companies. But part of the answer depends on what we do in terms of what the impact is on the future accountings were. I think we are definitely – we are not in a position to say anything more today than we said at the Investor Day. But yes, it may have an impact depending on what route we go down.
  • Jonathan Chappell:
    Okay.
  • Paul Wogan:
    The other thing I would just to that as well, Jon, when you are thinking about the earnings for this quarter as the cost of three ships which delivered in, two of those came right at the end of March and so, had a very limited effect on this quarter as we were saying, the annualized earnings, especially as they go into the long-term charters it will be around $70 million per quarter of EBITDA.
  • Jonathan Chappell:
    That makes sense. And then, Alastair, one more for you. Last quarter, and then also this quarter in the press release, I think you mentioned of the OpEx runrate being similar to that of the full year 2017. Obviously, we look at these five unit OpEx 16.5 versus the 1Q 2017, just under 14. There is some catching up to do there. So, that’s still your thought process that the OpEx for 2018 on a unit OpEx basis is going to be similar to full year 2017?
  • Alastair Maxwell:
    That is still out, the one thing which does have an impact as I said in my remarks is the exchange rate. And we have some hedges in place, but they don’t protect you fully from all of the underlying movements in the exchange rate. But obviously we get the benefit of that and in the gain on swaps line and not in the OpEx line. But the big picture, yes, we are still looking for this year to be broadly in line with where we were in 2017. We have had some incremental maintenance cost in particular during the first quarter of this year. But that’s a question of phasing. We will have two dry-dockings as well in the second quarter. So you will see the impact of that in Q2 and we spoke about that on the GLOP call as you all know. But for the year as a whole, that still looked what we are aiming for.
  • Jonathan Chappell:
    Okay. That’s helpful. Thanks, Alastair, thanks, Paul.
  • Paul Wogan:
    Thank you.
  • Operator:
    Our next question comes from Michael Webber with Wells Fargo. Your line is now open.
  • Michael Webber:
    Hey, good morning, guys. How are you?
  • Paul Wogan:
    Hi, Mike.
  • Michael Webber:
    Thanks, I had just an handful of questions, but just to follow-up on Jon around just year-on-year earnings. I mean, you sort of say your market exposure this winter versus last winter would have been materially different to begin with right. So, I mean, in terms of where we got to from a reference rate perspective versus spot rate. The market exposure is going to be an apples-to-apples comparison.
  • Paul Wogan:
    That’s correct. We did have more ships in the spot market through this winter we did the previous well, yes.
  • Michael Webber:
    Gotcha. Okay. It’s helpful. Just from a – I guess, to go back to the dividend for a second, it’s not a ton of money. I mean, it’s a significant bump on a percentage basis. But it’s at least valid I guess as a question of what does that say about the opportunity set for new business, just considering the size of the strings that you guys are probably looking at and the equity checks that are usually associated with that. I am sure that was some kind of consideration when you made the move. So just maybe can you put some context around that for us and maybe if that dovetails into a bit more color around the different sleeves of the tonnage you guys are looking at right now from a newbuild perspective?
  • Paul Wogan:
    Mike, so, you are working in terms of our fleet dollar terms, it’s not a huge amount in terms of money and little over – we do think it’s a meaningful percentage of increase and we also would reiterate, I think what we said at the Investor Day which is, in the downturn, we were able to maintain our dividend at the $0.14 level when a lot of other companies were not able to maintain their dividend. And so, in some ways it’s been sometime since we had an increase, but I think that we’ve been very careful to maintain our shareholder remuneration during the last two or three years of a weak market. I think the second thing I would say is, we don’t see this as an either rule. We think that we have significant growth opportunities. We continue to feel very confident that we will deliver our growth targets as we set out at the Investor Day. And this is not a question of deciding whether to focus on shareholder remuneration at the expense of growth or instead of growth. And that’s really not the case. But as we said again in the Investor Day, we are mindful of all the need to consider shareholder remuneration especially in the context of a growing fleet and the financial benefits, the EBITDA and profit contributions is what we are saying of the new ships and the fleets and the ships that we’ll deliver in 2019 as well, in addition to the strengthening market backdrop. And so, sort of all of those factors that gave us the confidence to increase the dividend thinking about the business over the next two to three years and not just on a quarterly basis. But it’s not something which it’s signaling anything in terms of how we think about growth, but to shareholder returns.
  • Michael Webber:
    Now that’s helpful and then I guess, within that context, can you talk about the number inside the tenders you guys are looking at right now for new tonnage and other – some because we probably we can’t get into, but maybe and even kind of comping that Paul, on a quarter-on-quarter or year-on-year basis around whether activity has picked up or remain relatively flat for large tenders?
  • Paul Wogan:
    Yes, it’s – the tender activity for longer-term tenders has definitely picked up. As I was saying even in the last couple of days, we’ve seen a pickup. But generally, we’ve got a number of people now looking to cover positions for the build out of the U.S. production that we talked about through 2021. And so, if you look at it quarter-on-quarter there is quite a lot – our commercial teams are working quite hard on it on a number of different opportunities. That’s probably the best way to put it.
  • Michael Webber:
    Gotcha. Just one more for me and I’ll turn it over. I know most of the focus is around newbuilds, but you’ve one pretty successful second-hand acquisition in the Chelsea. That was all cash. I know there are a handful of second-hand tonnage opportunities that are floating around the markets, some of them are kind off size but with lower or shorter payback periods. What’s the likelihood we would see you guys step into attractively price dollar tonnage in the next year? I know, it’s not going to really drive your CapEx program, but in terms of one-off opportunities or possibilities are kind of adding in attractively priced tonnage. What does that look like right now?
  • Paul Wogan:
    Yes, I think there are going to be opportunities attractively prior to tonnage and looking at that, I think it’s something we are quite – do. You have to be opportunistic in these markets. There is two things I thing behind that. One is, that we feel that the risk reward is correct in terms of taking those vessels and two, do we have the ability to use those vessels in a good way. And I think some of the work we are doing around looking at different commercial constructs with our customers may give us opportunities I think to place more vessels on things like contracts affreightment, et cetera. So, two things, we are looking at it. We do stay opportunistic and as we develop these commercial constructs, you may well see us looking at those, because I think there could be some good opportunities coming up, Mike.
  • Michael Webber:
    Gotcha. All right. That’s helpful. Thanks for the time guys.
  • Paul Wogan:
    Thank you.
  • Operator:
    Thank you. [Operator Instructions] And our next question comes from Espen Fjermestad with Fearnley. Your line is now open.
  • Espen Fjermestad:
    Hey, good afternoon. Paul, you noted the interest for periods charters are picking up and we’ve seen a couple of representatives I would say, fixtures already in 2018 first sailing. So when you compare the Santiago charter with a – that was fixed within the same time period. It seems there is differentials as we understand this is probably 15,000 to 20,000 of a difference. Is that – is that just the – reflecting the consumption wall of difference, or is it all the other factors that are do you think?
  • Paul Wogan:
    I think it’s difficult to illustrate comparison, because I think if you look at – there each deal has obviously got its own priorities. I think, some of the deals that we’ve seen that being done on charter terms, the ones that we will – we did on the Santiago as a longer-term 3.5 year deal as opposed to a one, one and a half year deal. But, certainly I think that’s the start-up date, I think are also slightly different. So, it depends a little bit on those factors, but certainly also, there is a UFC advantage in the modern ships that we see that with the ships that we have and I think the charter will be taking a look at that when they are chartering in. However, it is also a factor of the market as we saw in the last strong market, where we saw steam ships which were disadvantage to TFEs still getting in excess of $100,000 a day for long-term charters, because they were the vessels that were available. So, it’s partly driven by the UFC and partly driven by the supply demand at the time.
  • Espen Fjermestad:
    All right. And on that note, I mean, some other turbines are now coming in the SMP market, Exmar has sold one. We know the Shells are looking to divestiture they are not with – the price talks with these vessels seems to be well below what it is accounted for in the books and I guess, as technology improvements has been massive in terms of fallouts and size, but could you argue you are seeing a similar trend between the 2007 to 2014 TFE is carrying 150,000, 160,000 cubic on the brand new ones. I mean, do you think there is a similar price discount on these TFEs in say, the next five to ten years, when they have the SMP market?
  • Paul Wogan:
    Well, I think the – first of all, the SMP market tends to be very liquid. There are few fixtures there. I think if you look at the steam ships, especially that pre-2000 first-generation steam ships, there is no doubt that those ships are very disadvantaged. Most of the sales we’ve seen in that have gone to people who are buying at – just about scrap value and then putting those ships into layup and I question whether we’ll have to see those ships back in the markets. So as we haven’t seen much scrapping, I think in effect, we probably have. I think in terms of the TFE vessels though, there is going to be a huge demand for LNG shipping for many years to come. We are in the middle of a secular growth trend in the business. I think those ships are going to be required. I also think that those ships give a huge amount of flexibility to traders. So as we see the market moving more into a traders market, I think we saw 27 million tons between three or four traders, traded last year which is 10% of the market. Those ships I think, the flexibility we see for the ability to get into any part in the world, I think will come into their own. So, without a doubt in terms of UFC, if you are going doing long voyages from the U.S. Gulf, they disadvantage in lots of other ways. I think they do have advantages. The second thing – from our own point of view, one of the reasons that we’ve been putting reliquefaction on some of our TFE vessels, because, one of the factors is really around the boiler freight and bringing up boiler freight down, again moves them – makes them much more effective in terms of their UFC comparison with the modern vessels.
  • Espen Fjermestad:
    That’s helpful. Thank you guys.
  • Paul Wogan:
    Thanks.
  • Operator:
    Thank you. Our next question comes from Fotis Giannakoulis with Morgan Stanley. Your line is now open.
  • Fotis Giannakoulis:
    Yes, hi, Paul. Paul, I want to try to understand at what point do you think about the charterers will start worrying about the charters that you are expecting to come in the next few years to start signing long-term contracts? And also if you can give us some guidance of how do you think about the rate that is necessary in order to cover your cost of capital? How do you view your cost of capital right now, given the interest rates and given the available financing from your lenders?
  • Paul Wogan:
    Okay, yes. This is – yes, I am thinking about how to answer the first to the question, Fotis, because, needed gut reaction is, I think it’s started. I think to be careful because we are kind of literally a few days into this, but all of a sudden, we’ve seen a number of charterers coming into the market, not only looking for multi-months but a couple looking for multi-year charters and I think it is slowly dawning on the charters that this could become a very tight market and they should do something about it. It’s always difficult to kind of make a conclusion on the back of something that’s happened over a short period of time, which is why I am a little hesitant. But I would say that we are seeing the signs of that happening now in terms of people looking to take cover, because they are seeing the same thing we are in terms of this tightening market. Maybe I’ll turn the second half of your question over to Alastair.
  • Alastair Maxwell:
    Thanks, Paul. Morning, Fotis. Obviously, when you are talking about it, the newbuild vessel, probably the driver of rates for a new vessel is obviously the cost of putting this – which is on the water, part of which is capital cost. And yes, you would expect that over time, it is going to be meaningful increases continuing increases in interest rates than that would feed through into how we think about dayrates and what we are – very disciplined on how we think about cost of capital overall and required returns for investing in newbuild ships. And we haven’t changed our criteria in terms of how we think about those return requirements. But, you are correct. We are seeing an increase in interest rates. Broadly people are expecting that that will continue, there will be some further increases through 2018 and – but I think we are prudent in terms of we think about factoring those considerations into what we would bid for a new tender.
  • Fotis Giannakoulis:
    Thank you, gentlemen. I would like to ask you about this pickup in interest for long-term contracts. At the same time, we have seen that the last few years, the market is quite seasonal and quite volatile, we’ve seen the winter months a significant increase in charter rate, in the summer months a slowdown. It seems that these rates h as grown in the last few years. And I am wondering all this incremental demand that is going to come in the future, how shall we think the ratio between vessels that are required to be under long-term contracts and vessels that – and part of this incremental demand that will come from vessels which are going to be spots?
  • Paul Wogan:
    Yes, good question, Fotis. I think what’s interesting as if you look at the market, actually, we return to seasonality starting really in 2016, 2014, 2015, the market was either coming off a very flat. And at that point I think the market was so over tonnage. There wasn’t seasonality, because even when demand picked up, it wasn’t enough to make a difference in terms of the utilization rate to the fleet. So, the rates tended to flat line around the $30,000 a day. You still return to seasonality, sort of in 2016, and then much more episodic in 2017 and going into the 2018 winter. And I think that this is a second phase in the market, I think the first phase is where the market tightens and I think even though you will have some seasonal effect, what happens is the rates go ratably high for a sustained period of time, because the market is so tight that you don’t get up to the fall-off in rates even if there is a low demand during the shoulder months and I think, that’s been our view of what will happen in the market for some time and I haven’t changed that view as yet. I think though in terms of how we see the market, I think, you will see a continued growing of the spot market, but at the same time, the amount of ships that are on longer-term charters is also going, because the actual pie or the LNG transportation pie is growing as well. So I think you will see a growing spot market with a number of ships in there. Our personal – our company view is that, whilst we’d like to have one, two, three ships in that spot market at the right point, we would look to put our ships on long-term charters because that’s been our strategy and we think that’s been a good strategy to have over the long-term trends in this market. And so, as and when we see the time is right, you would see us looking to put some of our ships that are open now back on to long-term business.
  • Fotis Giannakoulis:
    Thank you, Paul. And one last question. I want to repeat the question that I asked. On the few days ago, regarding the – in the call on U.S. liquefaction capacity on U.S. production, because this is quite important for the shortage of ships as you demonstrate in your slide then more obviously U.S. demand – the demand for U.S. capacity even more the number of vessels as we are going to require. How many new projects do you expect that the world will need overall? And how many that will need to come from the U.S.?
  • Paul Wogan:
    I think, I mean, just taking the U.S. first of all, I do believe that we will see a number of U.S. projects essentially taking FID. I think the U.S. gases, set the stage cheap for a long time and I think what’s impressive, I was in the Houston recently and went to see some of the project developers down there. I think what was impressive for me is how focused they are on keeping down the capital and operational costs. So that they are able to deliver the primary engine with a very competitive source. I think the other thing is of course that the increasing oil prices are very helpful, because that increases the knowledge in between oil indexed LNG prices Henry Hub prices. So I think, in terms of the overall demand, we do see a large demand requirement starting and it’s earlier, 2020, 2021 and we think a large proportion of that will come out of the U.S.
  • Fotis Giannakoulis:
    So, is there a way that you can put a number on that? Are we talking about 10 million tons or more?
  • Paul Wogan:
    I think we are talking – I think in terms of – if we look at the 2025, I think we are talking more in the hundreds of millions of tons and tens of millions tons. But I don’t have a figure to hand right now on that, Fotis.
  • Fotis Giannakoulis:
    And so…
  • Alastair Maxwell:
    A couple things I would say is, we’ve seen some interesting news flow written on the OPEC commitments from U.S. projects. I think it was yesterday, when there was another commitment I think got permitted to 1 million tons from Benton Global in the – projects. And so we are seeing more signs of people starting to come in. And the other thing that we’ve – there’s been a lot of news flow around recently as the Panama Canal and the number of slots available to LNG vessels on the Panama Canal. To the extent that there will be two and perhaps even more slots per day available that can only be supportive of incremental U.S. capacity as well as being good for shipping and for ton miles, because it’s still whatever it is, 9,000 odd nautical miles, because there is no phase of either Panama Canal, twice the distance to Europe, et cetera. So, we think that’s not a helpful take upon.
  • Fotis Giannakoulis:
    Thank you very much, Alastair. Thank you, Paul.
  • Paul Wogan:
    Thanks.
  • Operator:
    Thank you. Our next question comes from Randy Giveans with Jefferies. Your line is now open.
  • Randy Giveans:
    Hey, thanks and good morning guys. Just two quick questions for me. Any changes in asset values, either on the newbuilding side or second-hands that you can owe it to the last month or so?
  • Paul Wogan:
    Yes, I think, certainly, we talked a little bit about at the Investor Day, Randy, that we certainly see pressure on newbuilding prices at the yards. Partly because is that I think that we saw a number of new LNG contracts signed in the first quarter of 2018. But also I think primarily because in a number of sectors we are seeing quite a lot of interest at the yards in particular for new container ships. And they compete for boat space with LNG carriers. So I think, we’ve seen it can further that from the major three yards in somewhere to increase the pricing, because they are under pressure from the parent company, from the bank, from the government to return to profitability after quite a few years of loss. The other thing actually is quite interesting around that, is that, a lot of the demand looks to be being driven by people taking a view on the new emissions targets in 2020. And so, there is a lot of interest right now on newbuildings that are also LNG capable – being bunked by LNG or driven by LNG. So, quite interesting in terms of a new source of demand for LNG that it looks very much as if we could see that growing quite quickly as newbuildings for carriers, for container ships and even for tankers and bulkers are looking to be LNG suitable.
  • Randy Giveans:
    Okay. And then, secondly, there is newbuilding delivery delays in the last quarter, but it didn’t seem to be any changes to the expected delivery dates currently. Once we slip those dates from 1 and 3Q 2019 and 2020, a quarter or two?
  • Paul Wogan:
    So, are we talking about the newbuildings. So the.. I didn’t quite catch you.
  • Randy Giveans:
    Correct. Yes, your four newbuildings, any possibility those slip a quarter or two?
  • Paul Wogan:
    No, not at the moment. I think we have heard with Samsung and a couple with Hyundai has been excellent at delivering the ships on time and on budget and there is certainly nothing to suggest that the newbuildings that we have on order now will slip. So, that’s all looking very good right now.
  • Randy Giveans:
    Good deal. All my other questions are asked. Thanks so much.
  • Paul Wogan:
    Thank you.
  • Operator:
    Thank you. I am showing no further questions at this time. I would like to turn the call back over to Paul Wogan, Chief Executive Officer for any further remarks.
  • Paul Wogan:
    Well, thank you very much everybody for taking the time to listening to our call today. Very much appreciated and we look forward to speaking to you in the next quarter if not before. Thank you.
  • Operator:
    Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program. You may all disconnect. Everyone have a great day.