GasLog Ltd.
Q3 2018 Earnings Call Transcript

Published: 1 Nov 2018

[Operator:]

Good morning. My name is Dallam and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Limited's Third Quarter 2018 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. Today's speakers are Paul Wogan, CEO of GasLog Limited; Alastair Maxwell, CFO of GasLog Limited; and to commence the call, Phil Corbett, Head of Investor Relations. Mr. Corbett, you may begin your conference.

[Phil Corbett:]

Good morning or good afternoon, and thank you for joining GasLog Limited's third 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 third quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the appendix of this presentation. I will 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 our third quarter earnings call. I'll begin with the highlights of the quarter. Alastair will then take you through the financial review and an update on project Alex and our wider FSRU strategy. Following which I'll update you on current trends in the LNG and LNG shipping markets and on GasLog’s strategy before opening the call for questions. Turning to Slide 3. I'm happy to report what we believe is a significant shift in the LNG shipping market. For some time we've been talking about how shipping markets reach inflection points, where rates move higher very quickly. We believe that we have now reached just such an inflection point with Clarksons assessing headline spot shipping rates at around $150,000 per day. Against this favorable backdrop, we delivered record quarterly revenues and EBITDA in the last quarter due in large part to the highest ever earnings from our spot vessels. We also continued to grow our fleet through the ordering of two new buildings backed by seven-year charters to Cheniere. Last week we announced the sale of the Methane Becki Anne to GasLog Partners for $207 million, which continues our successful strategy of raising equity through GasLog Partners to fund our fleet growth. There has also been a marked increase in multi-year offtake agreements and we believe it is no coincidence that we have started to see the sanction of new projects such as LNG Canada. We remain confident that this trend will continue. We have declared a dividend of $0.15 for the quarter, unchanged from Q2, but a 7.1% increase on the same quarter last year. Having reached its inflection point, we believe the LNG shipping market is in the early stages of an upcycle, where the coming two to three years looking especially strong. This backdrop should strengthen even further the ability of the GasLog Group to execute its strategy. If we are correct in our assessment of the cycle, we believe that the future financial performance of the business creates the potential for the delivery of additional value to our shareholders above and beyond ordinary dividends, through either special dividends and/or share buybacks. I will now hand over to Alastair to take you through the financials.

[Alastair Maxwell:]

Thank you, Paul. And good morning or good afternoon to you all. Please turn to Slide 4, where I'd like to take you through our third quarter and year-to-date results. As Paul has mentioned, we reported record results with significant improvements in quarterly and year-to-date revenues, EBITDA, and adjusted EPS due to the growth in our fleet and the strong results from our spot ships. Sustained cost control also played a meaningful part. And I'm pleased to report that year-on-year quarterly unit OpEx and unit G&A declined by 5% and 11%, respectively. This demonstrates the operating leverage in our platform as our fleet continues to grow. As a result, while our revenues increased by 21% year-on-year on a quarterly basis and by 10% on a year-to-date basis, our EBITDA increased by 27% and 14%, respectively. We continue to expect the unit OpEx for full year 2018 will be broadly in line with 2017. And as a result, we anticipate that Q4 2018 absolute OpEx will show an increase on the quarterly run rate so far this year, primarily due to the timing of maintenance and our one scheduled dry-docking later this quarter. Turning to Slide 5. We currently anticipate that the TEC revenues for our spot vessels in Q4 will be an excess of mid cycle spot rates. And this slide gives further insight into our leverage to a tighter LNG shipping market. The left column shows our total EBITDA in Q2 of 2018. The next column shows our Q3 EBITDA with the delta being largely due to the performance of our spot ships in the quarter. The columns to the right show what our EBITDA would have been in an even stronger market for spot vessels, all else being equal. In essence, each incremental $20,000 per day would have increased our EBITDA by $11 million on a quarterly basis. That's $44 million on an annualized basis or just over $0.50 per share on a consolidated basis. Slide 6 provides the detail of the dropdown of the Methane Becki Anne, which was announced with the GasLog Partners third quarter results last week. The sale price is $207.4 million comprised of $113.5 million in cash and $93.9 million in debt which will be transferred to the partnership. We are working hard to close this transaction later this month. We will have recycled nearly $180 million in equity from the two dropdowns to the partnership this year. And in total equity recycle to GasLog and debt assumed by the partnership now exceeds $2 billion. Since its IPO in 2014, GasLog Partners has recycled an average of $140 million per annum of equity to GasLog. Moving to Slide 7. We've updated the chart illustrating our future capital commitment to incorporate the Cheniere newbuilds enact in August. We currently forecast cumulative cash payments for the newbuild program at around $280 million. And we plan to fund this from current unrestricted cash balances of around $160 million, free cash flow generation from a growing underwater fleet and the strongest spot market and further dropdowns to GasLog Partners. Moreover, scheduled debt amortization continues to free up balance sheet capacity. Slide 8 provides an update on the FSRU market as well as encouraging recent progress on the Alexandroupolis FSRU project in Northern Greece. On the boarder FSRU market, a significant overbuild has resulted in an overhang of tonnage, depressing the returns below returns achievable for new charters. As a result, we will continue with our disciplined approach to capital allocation in the FSRU space. Considerable progress was made in the third quarter on project Alex, firstly, Gastrade in which we own 20%, launched the tenders for the procurement of the FSRU and associated pipeline and onshore infrastructure. This procurement phase is expected to take around four to five months and will result in the purchase of an FSRU vessel by Gastrade. Earlier this week, Gastrade also announced that the market test was launched. The initial phase is open for a minimum of 45 days. And during this phase, parties are invited to express a nonbinding interest in committing to take capacity and the project. In tandem with the progress on the project, DEPA and BEH continue to work towards the formularization of their respective shareholdings in Gastrade as was confirmed by the Energy Ministry of – Minister of Bulgaria just yesterday. A final investment decision is targeted in the first half of next year. Now, let me hand back to Paul.

[Paul Wogan:]

Thank you, Alastair. I'm turning to Slide 9. As I said earlier, we believe that the LNG shipping market has reached an inflection point with the current LNG market dynamics been strongly supportive of the GasLog equity story. LNG continues to experience the fastest growing demand of any fossil fuel, which in turn is leading to increasing cargo volumes and voyage distances. This has resulted in a significant increase in the utilization of the global LNG fleet and a drastic reduction in prompt vessel availability, pushing spot rates to multi-year highs. And this positive dynamic is not only a near-term phenomenon. In recent months, increased interest in long-term offtake contracts has stimulated the sanctioning of new production facilities such as Corpus Christi Train 3 and the LNG Canada. With these two projects expected to deliver almost 20 million tons per annum of incremental liquefaction capacity. This new LNG supply will require incremental shipping capacity, creating an opportunity for GasLog’s fleet growth to continue secured by long-term charters. Slide 10, shows the increase in LNG imports by country on a trailing 12-month basis. LNG demand grew by 23 million tons over the 12-month period ending September 30, an increase of 8%. China posted the largest increases in volumes, importing over 50 million tons more LNG, up 44% year-on-year as the country continues to expand its usage of natural gas. Well, Chinese demand has been strong. Growth has been broad based, particularly in Asia. A demand from South Korea, Pakistan, India, and Taiwan has grown by combined 14% year-over-year or approximately 11 million tons. Slide 11 illustrates the significant increase in offtake agreements during the quarter. In particular, Qatargas and PetroChina signed an 18 year SPA for 3.4 million tons per annum. PetroChina secured additional new supply through its ownership interest in the recently sanctioned LNG Canada project. And also has an interest in Mozambique’s area for LNG project, which continued to make good progress in the quarter. Recent news reports, suggest that both the Golden Pass project in the U.S. Gulf on the total two LNG project offshore Mauritania could be sanctioned before year end, which would deliver a combined 20 million tons per annum of capacity. Around 75 million tons per annum of LNG supply contracts have either been signed or agreed since the beginning of 2017 with a broad base of bias. Slide 12 shows the updated trade flows from U.S. liquefaction terminals, which are a key driver of increasing ton miles. According to potent, during Q3, 77 cargoes were exported from the U.S. 30 of these cargoes delivered into North Asia, a destination with the shipping multiplayer significantly about two times. DuringQ3, the average shipping multiplier implied by U.S. LNG exports was 1.8 times, a slight decline from level seen earlier in this year following seasonal trends, but still significantly above the historical global average shipping multiplier of 1.3 times Slide 13, shows recent Goldman Sachs and DNB forecasts, which support our view that continued U.S. LNG supply growth combined with an increasing Pacific basin demand will drive further expansion in tone miles, a positive for LNG shipping demand. Slide 14, shows both TFDE spot rates from 2011 and the number of reported spot fixtures quarterly from 2015 through to the third quarter of 2018. The green shaded areas highlight the peak years of 2011 to 2014, and the recent significant increase in spot rates. The chart highlights the dramatic move up within spot rates since the beginning of September. Clarksons are now reporting headline TFDE rates of $150,000 per day compared to $58,000 per day at this time last year, an increase of approximately 160%. This has been driven by a combination of high cargo volumes and the very limited pool of available from tonnage. The table in the top right corner shows that were 76 reported spot fixtures in Q3, down from the record 110 in Q2. Many of the Q2 fixtures with a multi-voyage and multi-month charters commencing in Q3 andQ4, as charter moved to locking in tonnage ahead of an anticipated strong winter market. As a result of which there are limited number of open ships available to take advantage of the current high headline rates. Given the strengthening rate environment, we expect the earnings of our spot vessels to be above mid-cycle in the fourth quarter. We also expect continued strength in the shipping market to create attractive opportunities to find term employment for our open underwater vessels and uncommitted newbuilds during 2019 and beyond. Slide 15, plots the TCE of our spot ships against the Clarksons average headline rate assessment. On a quarterly basis, since the start of 2017 lagged by 45 days to reflect the vessels in the spot market are usually fixed forward. And you can see the strong relationship between the two. We turn the ratio of time charter equivalence to headline rate as the capture rate, which incorporates utilization, ballast bonuses, positioning fees on all five days between fixtures. In both Q4 2017 and Q3 2018, the two best quarters for the spot market in recent years, the capture rate has been around 70%. We believe the capture rate can move significantly above this level if we see a right to be tied to market over a sustained period of time. Slide 16, uses Poten data, and shows 95 – 96 LNG carriers on order. Given expected deliveries in 2018 and 2019 and assuming no further orders, the order book would fall to 9% of the underwater fleet by the end of next year, a relatively low level by historical standards. 34 of these vessels are roughly one-third are currently uncommitted with the majority of these due to deliver from Q2 2020 onwards, providing further evidence of a tightest spot LNG shipping market this winter and next. Only five unfixed LNG carriers are scheduled to deliver in 2019, one of which is a GasLog vessel. Slide 17 provides our view of shipping supply and demand through the end of 2022 based on Wood Mackenzie and Poten data. As you can see the market is expect to be extremely time between now and 2021, based on Wood Mackenzie’s latest demand growth estimates, and the underwater fleet plus current order book. As a reminder, a ship ordered today will now deliver in 2021. Looking out to 2022, we estimate that the market still requires incremental shipping capacity. However, in a tight market, it is unlikely that will be much if any scrapping and any marketable ships will be pulled out of layup. Therefore we believe that there is more than sufficient time in our capacity for vessels to be delivered and owners need to be careful not to overbuild the market. Slide 18 shows our progress towards our Investor Day target of more than doubling consolidated EBITDA over the 2017 to 2022 period. There are four building blocks for this target. The first is a recovery in TCE’s to mid-cycle levels. Q4 spotted earnings are expected to be above mid-cycle levels with the prospect of relatively stronger market for at least the next two to three years. The second is the contribution of our new building program. This now includes the Centrica newbuild announced in May and the Cheniere newbuilds announced in August. Furthermore, our two highly competitive uncommitted newbuilds are expected to deliver into a tight market and we should be able to charter these out at attractive rates. Third the incremental market share capture target has already been reduced by some 40% following the fleet growth announced this year. Finally, we’re making good progress towards delivering a 1,500 per vessel per day reduction in combined G&A and OpEx. So let me finish on Slide 19. We use this slide to conclude our Investor Day in April, and we’ve updated it to summarize the delivery on our strategy since then. We have continued to grow and modernize our fleet through ordering new buildings, backed by multi-years contract to Centrica and Cheniere, demonstrating our ability to win new business and new customers. We’ve continued to deliver high levels of safety and operational performance. And in particular, I’d like to take this opportunity to congratulate our team on the recognition they received at the recent Safety at Sea Awards, demonstrating again the safety means the world to us, but our standards are recognized as being industry leading. We have accessed new pockets of capital as evidence by Tortoise’s recent investment industrial partners enabling the partnership to continue recycling capital back to GasLog. The strong LNG shipping outlook provides the backdrop for a sustained period of highest spot rates. In addition, we believe it will provide opportunities to find term employment for our underwater vessels and our uncommitted newbuilds at attractive rates. If we are correct in our assessment of the cycle, we believe that the future financial performance of the business creates the potential for the delivery of additional value to our shareholders above and beyond ordinary dividends through either special dividends or share buybacks. And with that, I would like to ask the operator to open the call for questions.

[Operator:]

Thank you. [Operator Instructions] Due to the essence of time, we ask that you please limit yourself to one question and one follow-up. Our first question comes from Michael Webber from Wells Fargo. Please go ahead.

[Michael Webber:]

Hey, good morning, guys. How are you?

[Paul Wogan:]

Hi, Mike, fine. How are you?

[Alastair Maxwell:]

Good morning, Mike.

[Michael Webber:]

Good. Paul, just around rates, we've obviously – we’ve hit a point where the improvement in rates is no longer linear and it kind of moves to kind of an exponential improvement pretty quickly. It seems like, at least from what we're hearing in the market that anyone with an open vessel can effectively strip the majority of the harbor away from somebody with the cargo with a statistical short position that's uncovered. Is that something you guys are seeing? And if you're really talking about spot rates on a one-off basis that are in the $190,000 to $200,000 a day range and $3 to $3.50 or more per MMBtu, how long can that kind of tight market persist? I mean, we've hit these highs very briefly in the past, it got extremely tight very quickly. Just curious just any historical context and how you think about this kind of situation continues for awhile?

[Paul Wogan:]

Yes. Sure, Mike. Yes, I mean, obviously, as the rates go as you put it exponentially higher, it does have an effect. We talked about this previously and we talked about it in the prepared remarks about hitting this inflection point, where you got this tight market where the rates move very, very quickly. I think those rates coming to an equilibrium which allows the cargoes to move. But we did some work on this quite a while ago and these rates can easily be into the six figures and keep the ability to move cargo certainly from the U.S. Gulf and potentially from Europe into the Far East. So there's that side of it. The other side of it is, part of the strength of this market I think has been driven by the arbitrage opportunities, but part of it is now being driven simply by the new cargoes coming on stream. So in fact, this market, unlike the previous ones we've seen was led by the Pacific market tightening up as we just saw more – the ramp up of volumes coming out of Australia. So I think the shipping rates do find an equilibrium that allows those arbitrage cargoes to move. I think that equilibrium rate is pretty high. But I think that just as well as the arbitrage that's just a very strong underlying cargo need to move – need to move cargo which is underpinning this market.

[Michael Webber:]

Okay, that's helpful. And then as a follow-up, you guys always do a good job of kind of laying out the order book and your thoughts on kind of forward dynamics. We've obviously seen some new entrance and it seems like there’s less ability there to go out and place big orders on spec, but they're rather kind of acting as a bit of a drag on the near-term, charter market kind of hitting twos and two kind of – two plus two plus two type of vessel strings. I'm just curious; one, do you think that's – how much of a drag do you think those new engines are actually having on the near-term, again, the immediate long-term charter market. And is that more of kind of a pain trade that you're taking upfront rather than having someone come in and put an order in for 10 or 15 spec vessels that you'll pay for 10 times over in a few years. And then in terms of the order book in general, how many more orders over the next six months would you need to see for your outlook to get significantly more cautious?

[Paul Wogan:]

Yes. I think the great thing is that, of course, when we look at the short-term market, Mike, it takes 2.5 years to build these vessels. So we're really talking about vessels order now coming in 2021. We signaled it a bit in our prepared remarks. We still believe that there is a need for additional ships in 2021, but the ability to – certainly the shipyard capacity and certainly the ability of owners to overbuild the market. If you look at the last three years, actually what happened was, ship owners didn't actually overbuild the market, they built the ships too early and they'd been waiting for the production to come online. And I think our concern is similar. You could have a similar effect here, where we haven't seen many – much FID taken over the last two to three years and there won't be a lot of new production 2021, 2022, 2023. And so what people shouldn't be doing in our opinion is building ships into that period, hoping for an expanded demand for vessels. I think we need to be very sort of disciplined in building ships into the new production which is undoubtedly coming, LNG Canada, Corpus Train 3 et cetera, just being the first – the start of it. So I think you'll see us being very disciplined around our ordering. Now in terms of what – in terms of the market, I don't think we're in a situation yet where we have overbuilt the market. I think there are still opportunities for a company such as us to get the returns that we need for new buildings, but certainly, again, will be disciplined. And I think that if people are coming in and undercutting the market with the new buildings’ rates which still make sense, you won't see us competing with them as we've shown in the past. We'd like to be disciplined with our capital and we've signaled that we were willing to – very much willing to return capital shareholders as well as look at growth.

[Michael Webber:]

Right. And that mechanism of maybe coming in and undercutting the market for long-term charters, would you think that's more efficient than say, last cycle where you saw just a lot of spec orders too early that kind of had to cutaway in the market for a couple of years before they could find employment?

[Paul Wogan:]

I think it's difficult, especially for new entrance to take long-term contracts. That's still the case that the operational expertise having that operations in house, having a good reputation I think is very – all very important factors. I don't think those have lessened since the last cycle. So I think some of the new entrance coming in will struggle to find long-term contracts. And of course, if that is the case, then of course that makes our financing more expensive, it means that they have to put more equity into those ships and put other disadvantage. So I don't think those barriers have fallen at the moment, Mike.

[Michael Webber:]

Got you. Thanks for the time, guys. I appreciate it.

[Paul Wogan:]

Thank you.

[Alastair Maxwell:]

Thank you.

[Operator:]

Thank you. Our next question comes from Jon Chappell from Evercore. Please go ahead.

[Jon Chappell:]

Thank you. Good afternoon, guys.

[Paul Wogan:]

Hi, Jon.

[Jon Chappell:]

I thought this capture rate chart was very interesting because I think a lot of people see the headline numbers and apply 100% utilization to that and maybe have some expectations that are a bit – sit in the bar a bit too high. So, is there any way you can kind of give us, I think you put in the press release $82,000 was the Clarksons average for the third quarter. I understand there's some commercial sensitivities around what the Cool Pool does and what your ships aren’t. But thinking about things sequentially 3Q to 4Q, kind of where were you and your open ships on an effective TCE? And I know you said above mid cycle for 4Q, but how much above mid cycle if we're assuming 100% utilization on the ships currently?

[Alastair Maxwell:]

Yes. I think if you look at the slide that we put in for – on Slide 15, we sort of showed there the returns in the Q3 for the vessels, which has got us into the low 50s for those vessels. And we have seen the market being very much stronger. There is a timeline that we talked about, but we're pretty confident to say we're going to be above mid cycle levels, Jon, because at this point we're beating up fairly comfortably. But I think we'd have to go – not get ahead of ourselves. Because when a ship broker shows you a rate, they usually saying, what do we think the next fixture is going to be at; where do we – how do we see this market. He’s not saying the last 10 fixtures have been done at $150,000 a day, so to speak. So again, there's a little bit of – we use the headline rates to give some guidance, but they’re actually sort of more of a forward view of what's going to be fixed and you may only one or two ships fixed at those type of levels in a quarter and that's where we talk about the sustainability of it. Because if you get the market up to a level and it’s sustained over a longer period, then your capture rate becomes higher.

[Jon Chappell:]

I completely understood, just didn't want to get the expectations too high, it could cause some undue volatility. So my follow-up. We probably talked about increasing return of capital to shareholders before, but it seems just a lot more prevalent in this market or in this press release, which is obvious given the strength of the market. So can you talk about the timing that you're thinking about? I mean, do you need to see, to your point of sustainability two to three quarters of real strong above mid cycle levels before you start thinking about introducing either one of those leverage that you talked about the special dividend or the share buyback? Or do you feel confident enough in the near-term outlook that it's a bit more imminent than that?

[Paul Wogan:]

Yes, you're right. I think how we're seeing this market developer has certainly given us more confidence, but it wasn't actually that we used at our investor day as well, Jon, where we started to talk about this because we were anticipating that we were going to be going into this stronger cycle and it's something. I think even going back to our IPO in 2012, where we talked about wanting to be a good steward of capital for our shareholders. I think our shareholders have been very patient over the last two to three years of a bad market. So I think it was important for us today to sort of say, we see this market moving, we see the sort of changing dynamics and that we're going to be very thoughtful about being able to then enhance our shareholders returns. In terms of the timing, I think I have to defer to the fact that that's actually a board decision for us something that they kind of look at and will take these things into consideration. So I wouldn't like to go into detail on when and how much at this point, but certainly I think the dynamics that we're seeing in the market are all very positive right now.

[Jon Chappell:]

Okay, understood. Thank you, Paul.

[Operator:]

Thank you. Our next question comes from Chris Wetherbee from Citi. Please go ahead.

[Chris Wetherbee:]

Yes. Thanks for taking the question. Wanted to pick up on that last question. Presumably you're talking dividend increases I guess in terms of returns to shareholders, but maybe you're not. I guess I just wanted to maybe get a little bit more specific when you think about that; is there other avenues you could take. I'm trying to get a sense of what exactly you're thinking.

[Paul Wogan:]

Yes. We wanted, I think in the prepared remarks and the presentation we talked about the fact that we see sort of a special dividends and share buybacks in particular as the way that we could enhance a shareholder returns. We have a – we've had ordinary dividends. We've might pay that through the vicissitudes of the market and sort of slowly increase that. But we see I think the share buybacks and the special dividends as the way that we would be able to sort of do this in the coming market.

[Chris Wetherbee:]

Okay. And any one of those have a particular preference from a management perspective, understanding that the board, obviously, it's got to approve it as well?

[Paul Wogan:]

No.

[Chris Wetherbee:]

Okay. Fair enough. One question, I guess about the order book, and if you look out over the course of the next couple of years, what would you expect sort of progression of new orders coming into the market to look like? Should we see sort of a flood of new orders as we turn the page into 2019 presuming we can see sustainability of the current strength in the market? Do you think it kind of gets layered in a little bit more gradually to try to time with upcoming projects in the out years? I'm just trying to get a sense of maybe how we should expect to see that because clearly we're going to need more vessels particularly in those out years.

[Paul Wogan:]

Yes, I mean, I would hope, Chris, that we would see this done in a measured and thoughtful way. You're absolutely right. There's a lot of a new production we believe is going to come on stream. But let's say that someone saying it's going to be 2023. We should learn from history and then sort of factoring us more likely to be 2024. And so to rush out in order ships in 2019 to deliver in 2021 just where we may be seeing a plateauing until the new production comes on, I think risks are getting into the same situation we got into in 2013-2014 when a strong market load people into going out and overall during. So I think that's where we see a measured approach. You're absolutely right. There will be certain need for some ships and there will be the ability to put those for people to come in and put long-term contracts against ships. But that I think it's going to be a very important that, that we're disciplined in that. I think the other thing that’s interesting as well is yard prices have started to move up. I think this yard prices start to move up the returns that we need to – for those ships, obviously, start to increase. So I hope, again, people are thoughtful about that as they’re looking at their new building plans.

[Chris Wetherbee:]

Okay, that's helpful. And for me, one last one here, just as you think about the strength in the market. Is there any opportunity? And I apologize if you missed this in previous remarks; I was just jumping between two calls. Is there any opportunity for some of the open shifts? Would you consider potentially putting anything away? I'm not sure if there would opportunity to do that now, but do you think that this is the right mix of spot versus contract currently?

[Paul Wogan:]

Yes. I mean, we have six ships in the group currently trading in the spot market. I think as we've said before, we would very much like to have access to the spot – ships in the spot market because that gives us the ability to have an understanding of what's happening in that market and gives us the ability to showcase what we hope is our operational excellence to new customers. So we'd like to do that. But I think as we work through this cycle, I think there will be a lot of opportunities to put the term ships out, put ships on multi-year contracts. And I think you would see us doing that with some of our open ships. And probably in an ideal world taking – take two, three of our ships open to the market so that we have that window, if you like, on what's happening.

[Chris Wetherbee:]

Okay, that's very helpful. Thanks for the time, I appreciate it.

[Operator:]

Thank you. Our next question comes from Espen Landmark from Fearnley. Please go ahead.

[Espen Landmark:]

Hey, good afternoon. On the spot market, people tend to talk down the turbines, but they're actually doing say, $100,000 a day now, which is not bad for the vessels with typically a little depth on it, but the gap of $50,000, $75,000 a day towards the TFDE is kind of larger, what the fuel and boiler differences suggest. So I mean, I guess there's more focus on arbitrage cargoes. Are you seeing best interest in turbines despite the apparent cheaper economics?

[Paul Wogan:]

Well, we’re not actually trading any steamships or turbines in the market at the moment, Espen, but I can give you my kind of view on this. As we've seen before, when the market becomes this tight, then tonnage becomes – the last ship off the block if you like, they often get higher rates. So there's no reason why a steamship shouldn't be going at higher rates if people need to move the cargo. However, I think for people who've had steamships in the market for the past two or three years, I think there are a little bit gun-shy of the returns they've been getting and probably willing to accept [indiscernible] rates which are lower than the actual arbitrage the TFDE would suggest. But I think as we move into a higher market and people become more confident, you may well see that, if you light the arbitrage between those two, closing to a much closer difference in terms of the landed freight costs for each type of vessel.

[Espen Landmark:]

Okay. And then kind of sticking to this arbitrage, I mean, the freight, I guess, $3, $4 per MMBtu for freight cargoes. But when you look at the spread, do you think the charters are treating the liquefaction costs as kind of a sunk cost or is it included in the delivered price? And I guess does that change for spot cargoes out of the U.S. above the nameplate capacity?

[Paul Wogan:]

Yes, I mean, we would – it seems a long time ago now when we were talking about potential shut-ins in the U.S. Gulf and we were talking about liquefaction cost being sunk costs, but for a lot of people those are some costs. But a lot of this has been taken – a lot of this product has been taken on long-term charters where people are going to move the cargoes, contracts into the Far East. And so I think, the cost of the shipping is important. The fact that people need to move the cargo, need the cargo is also very important and if you can't stand that cargo from anywhere else, it's going to move longer distances. But as I said earlier, I think what we're seeing now is both a arbitrage driven business but also business which has just been driven by the sheer weight volume of cargoes, which have been shipped from the ramp up of the new facilities. And I think the other thing is, there are a number of ships which are on longer term charters, et cetera, which are not necessarily costing the owners $3 or $4 and that delivered cost. So, we're going to be careful as I’ve said, the spot fixtures that we're seeing are very small percentage of the market right now.

[Espen Landmark:]

Good point. Thank you.

[Operator:]

Thank you. Our next question comes from Randy Giveans from Jefferies. Please go ahead.

[Randy Giveans:]

Hey, thanks, operator. Good morning guys.

[Paul Wogan:]

Hi. Randy.

[Randy Giveans:]

Two quick questions. So first, obviously spot term rates rally in recent months. Have you seen any impacts to either the multiyear time charters or asset values in the last four to five weeks?

[Paul Wogan:]

In terms of asset values – we haven't, but it's a very liquid market. So we – you seldom see sale and purchase of the ships which would give you sort of asset value, my guess is that if you – if you wanted to buy a LNG ship now you wouldn't pay a lot more, but that's kind of only my view of it. And in of time charter rates on multiyear charters then yes I think there is definitely pressure on those. And I think again – as you look at it from an alliance point of view, you would always looking at what you earn in the spot market over the next few years against maybe going out for a longer period against the time charter market and certainly those rates move up. But I think, one of the things we have talked about in the past is that we do foresee as we see this market tightening that produces traders et cetera, don't want to be sure shipping and will come in to make sure they lock in. So I think we will see more longer term business coming available and I think it will go at higher rates.

[Randy Giveans:]

Okay. And then as you noted, spot rates and capture rates are both increasing with that all the vessels in the Cool Pool currently employed or any of them currently looking for cargoes?

[Paul Wogan:]

No. They are all currently employed.

[Randy Giveans:]

Okay. Awesome. I guess, I'll throw one more quick one. So 20% shareholder in gas trade, you've already secured the operation and maintenance contract, so I guess how do you feel about your chances for securing the FSRU contract? And then with that is the FID likely in the first half of 2019? Is that when they announced who has won that FSRU tendered over that combo four FID?

[Alastair Maxwell:]

Randy, hi, it’s Alastair. I'm looking to point out here that where you will see, if you like on the, on the other side of this, we are a 20% shareholder in gas trade, but we are a participant in the procurement process to secure a FSRU for the project. And so we’re not privy to the information on how that process is going and we participating and so on and so forth, but we are participating actively and we're hopeful that it might be one of our ships that is selected. I think that, that process will clearly end before if ideas taken until I would expect that an accident on that would be – would be made ahead of FID been taken.

[Randy Giveans:]

Awesome. And congrats on the record quarter. Thanks again.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Max Yaras from Morgan Stanley. Please go ahead.

[Max Yaras:]

Hi guys, thank you. I want to dive in a bit on the special dividends or share buybacks. Paul, this Slide 5, you talked about what an uplift in rates would mean for EBITDA, I'm just wondering what would the mechanism be for dividends and buybacks. And could it potentially be based off of that? Let's say we do see a $20,000 a day uplift over mid cycle. Could it be a percentage of that or how are you thinking about, what that would be based on?

[Alastair Maxwell:]

Max, hey, it’s Alastair. So what that slide does is, it tries to illustrate the leverage that we have to a stronger spot market. And as we said, we reached $20,000 a day increments in TCE rates right across the six ships that we have trading in the spot market at the moment results in that $11 million on a quarterly basis. As Paul said earlier. I think what we're doing here – was signaling clearly our intent to consider enhancing shareholder returns going forward, I think what we're doing is tying that to any particular spot rates or any particular target in terms of cash flow generation, but we do feel confident given the backdrop for the industry, and competence in terms of the execution of our strategy that we will be able to increase returns to shareholders over the coming quarter, but there's no intention in that slide the tie that two together is really to illustrate the leverage that we have to a stronger market.

[Max Yaras:]

Okay. And then just any color on kind of where one to three-year rates are at, where five-year rates are at. And are you still just kind of waiting for those five or longer rates to be over mid cycle before you fix or kind of how should we think about when you fix long-term vessels?

[Paul Wogan:]

Yes. I mean I think that’s quite a lot of discussions going on in the market at the moment in both anywhere from one to five years. And I think it also depends upon the ships as well. If you are doing it with the steam ships, you are probably talking lower rate, you are talking lower rates in TFDEs and the XDF. But if you took the TFDE, I think certainly at this point anybody talking around multiyear charges talking at or above mid cycle rate. If we talk about mid cycle rates in the 70s, people are talking about that. Now we’re still waiting to see that was deals actually be consummated, but just to give you some sense of where people are looking at it.

[Max Yaras:]

That’s helpful. Thank you.

[Operator:]

Thank you. Our next question comes from Donald McLee from Berenberg. Please go ahead.

[Donald McLee:]

The first one just around growth, in terms of growth potential, how is the recent rates for the LNG carrier market may be impacted your view on incremental FSRU opportunities?

[Alastair Maxwell:]

Don, say that question again.

[Donald McLee:]

Yes. I was just wondering as the LNG carrier market has picked up from a rate perspective, has that impacted your view on maybe additional opportunities in FSRU space?

[Paul Wogan:]

I think we’ve always sort of made it clear that. We were – how we allocate our capital. We want to put our capital to work in the best sort of risk reward area that we can. I think we’re very, very much believers in the FSRU market in the longer-term, but as we talked about earlier, the overhang of tonnage which is in the market, which needs to work through is pulling down returns in that market. And of course the opportunities and the returns in the LNGC market are improving. So when we look at either potential projects to either convert our ships into FSRU or keep them as LNG carriers will obviously be taking that into account. So I think you’re correct, the LNG market makes the, if you like push the hurdle up a bit for the FSRUs. And in addition the FSRUs need to work through the overhang at the moment, but I think longer-term, I think the FSRU space is still one that would be attractive for GasLog.

[Donald McLee:]

Got it. And then just one more on our growth, what are your views on the small scale LNG market and that’s something that you’ve explored as a potential avenue of growth?

[Paul Wogan:]

Yes. I mean I think as we see the growth in LNG and the take up across the world, I think there’s going to be a lot of opportunities both in the LNG – small LNG space and in the bunkering space as well. I think it’s something that’s interesting, something that we would be very interested in talking to our customers about. I think right now we have a lot of opportunities in the larger carrier space, which I think plays to our strengths and we’re happy to do that. But certainly I think as the market develops, you will see us showing keen interest in other areas of the LNG transportation chain.

[Donald McLee:]

All right, that’s helpful. I appreciate you taking the time.

[Paul Wogan:]

Thank you.

[Alastair Maxwell:]

Thank you.

[Operator:]

Thank you. Our next question comes from Chris Snyder from Deutsche Bank. Please go ahead.

[Chris Snyder:]

Hey, good morning. So I’m just trying to differentiate between the capture rate and just the natural lag that you always see in a rising spot rate environment. So for example, if headline rates were to stay at they are, where they are now at say $150,000 a day every week through the end of Q1, could we expect that Q1 2019? You pull Cool Pool vessels to earn that $150,000 rate or will it still come in below that?

[Paul Wogan:]

I think as we talked about the two things probably on this Chris. One is, as you say, this is the sustainability of it. So if you saw it through, I would say suggested would be like two or three quarters, then any historical fixtures have finished, you’re fixing into that market. You would be fixing at that rate. The second is the actual headline TC rate has been quoted, is it actually the rate of which fixtures have been done on a regular basis or is it for example, the brokers view of what the next fixture would be. But certainly if we saw it staying at a $150,000 for a long period and there were a number of fixtures done at those rates, then yes, you would expect the capture rate vis-à-vis, but that’s the thing. You need those two things to happen. You need a number of fixtures done at the rate, that’s actually been said and you need them done over a period of time. So you touch up on that lag effect.

[Chris Snyder:]

Okay. Yeah, thanks. I just trying to get a feel for when the capture rates kind of approach 100%. So and just a follow-up, I mean obviously everyone is pretty bullish on rates for 2019. But when you guys kind of look out to next year, what gives you the most concern, unlike maybe hey, what could potentially go wrong here in 2019? And then just kind of excluding just continue to elevate a newbuild ordering, because that will hit the market till 2021.

[Paul Wogan:]

Yes. I mean it’s a very good question. It’s difficult to see right now what stop – what stops that market being strong. As we look at the demand – supply and demand forecast for the ships, it actually tightens further in 2019. And in theory, from our slide that we show actually the shipping supply goes into a deficit, which is very obviously a very theoretical thing. So I suppose the only thing that would stop that is somehow if we had some kind of a demand destruction that somehow there wasn’t the demand for the ships. But it’s difficult to see something given the fact that we’re seeing the supply coming from a large number of areas. We’re seeing demand globally increasing across the Board. It’s difficult to see anything in particular that could do that. So I suppose that then you’re really looking at very large macro trends is there a big recession, which cuts down on energy consumption or something like that. But certainly in terms of the micro where we have some views, some ability to affect it is very difficult to see what makes this market a weakened considerably in 2019.

[Chris Snyder:]

Well, thanks for the color. I appreciate it. I’ll be gone.

[Paul Wogan:]

Thank you.

[Alastair Maxwell:]

Thanks.

[Operator:]

Thank you. Our next question comes from Magnus Fyhr from Seaport Global. Please go ahead.

[Magnus Fyhr:]

Yes, good afternoon. I just had a question on Slide 17, on your supply and demand balance looks like 35 to 63 vessel shortage by 2020 – end of 2022. The new vessels impacting 2021 deliveries, it only looks like you need to build between 18 to 35 vessel a year to meet that shortage. Do you have any idea what the annual capacity is now from the yards to deliver LNG vessels in that timeframe?

[Paul Wogan:]

Yes. I would difficult to put an exact figure on it Magnus, but I would say somewhere around about 50 vessels give or take five either side, 45, 55 kind of vessels. So that’s kind of our point. It is – there isn’t a shipyard shortage of availability, which can affect this. It really does come down to the owners being very disciplined in terms of that ordering. The shipyards have enough capacity to be able to build the vessels to meet this demand without a doubt.

[Magnus Fyhr:]

So I mean discipline, we always know it’s a somewhat questionable, what’s – is there anything different this time around besides potentially pricing moving higher, but you’re also seeing higher spot rates. So didn’t seem like that would be, it had turned toward or more ships.

[Paul Wogan:]

No. I mean I think it – in terms of the pricing does, I think help in terms of being a bit of a return as we talked about earlier. Unless you’re very confident, you can put the ships on long-term charters when they deliver, especially for a new entrant, you’re going to be looking at higher financing costs. You’re going to be looking at a largest slug of equity into the ships. That is a problem I think for new entrance. We saw at the last time around whether the new entrance order ships and then struggled to put them on long-term charges and found themselves in a spot market, which was not particularly happy place to be for two to three years. And so I just hope people learn from history.

[Magnus Fyhr:]

All right. Just one last one, you guys have done a good job on getting the cost down here in the last couple of quarters, both on OpEx and G&A. Is there anything it left there to do or these kind of good run rates going forward?

[Alastair Maxwell:]

Hey Magnus, it’s Alastair. We think we have got more to do. We’re working very hard on the cost base in terms of the absolute level of costs across all areas of OpEx and G&A. In addition to that, particularly as far as G&A is concerned, but also as far as not insignificant piece of OpEx, which includes vessels management is we do have the scope to leverage the platform, we haven’t to achieve economies of scale is the fleet growth without there being substantial increases in OpEx and G&A at least those aspects of updates. So I think we're working hard on both of those fronts in terms of delivering the targets that we set out at the Investor Day which was a $1,500 per day between OpEx and G&A over the horizon of the Investor Day.

[Magnus Fyhr:]

All right, great. Thank you guys.

[Operator:]

Thank you. Our last question comes from Noah Parquette from JPMorgan. Please go ahead.

[Noah Parquette:]

Thank you. Paul, in the past you've talked about the traders would look to optimize the cargo value. Has that changed at all? Have you seen any difference with the move up and spot rates or attempt to optimize freight? And I know [indiscernible] mentioned it briefly last week, but would love to hear your thoughts on what do you see?

[Paul Wogan:]

Yes. It’s very good question. I think it does, once you get to the point where the market gets very tight, you obviously trying to optimize your earnings on your cargo, but there does come a point where you say, well, actually, I do try, need to try to optimize on my freight either because there are no ships available, therefore, how can I get around that or is there ability to sort of swap out. So I think the higher prices do push the charters to try to do that. The ability to do it though I think especially in a short timeframe, it is not always achievable, but, certainly I think they were looking at it. But fundamentally what they're looking at is, where's the best price for their cargo and how do they somehow extract that best price.

[Noah Parquette:]

Okay. That's all. Thank you.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. This concludes our Q&A session. At this time, I'd like to turn the call over to Paul Wogan, CEO of GasLog Limited for closing remarks. Please go ahead.

[Paul Wogan:]

Thank you. Thank you to everyone today for listening, and for your continued interest in GasLog Limited. We certainly appreciate it and we look forward to speaking to you in the next quarter. And in the meantime, if you have any questions, please contact the Investor Relations team. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen for attending today's conference. This concludes the program. You may all disconnect. Good day.