GasLog Ltd.
Q2 2016 Earnings Call Transcript
Published:
- Operator:
- Good morning. My name is Michelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the GasLog Limited Second Quarter 2016 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Today’s speakers are Paul Wogan, Chief Executive Officer; Simon Crowe, Chief Financial Officer and to commence the call, Jamie Buckland, Head of Investor Relations at GasLog. Mr. Buckland, you may begin your conference.
- Jamie Buckland:
- Thanks, Michelle. Good afternoon, and welcome to GasLog Limited second quarter results call. As a reminder, this call, webcast, and presentation are available on the Investor Relations section of our website, gaslogltd.com, where a replay is also be available. As shown on slide two of the presentation, many of our remarks contain forward-looking statements. Let me refer you to today’s press release and our reports filed with the SEC where you’ll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, some of our remarks this afternoon contain non-GAAP financial measures as defined by the SEC, and a reconciliation of these is attached as an annex to the presentation. Please now turn to slide three for the highlights of the quarter, while I’ll handover to Paul Wogan, GasLog’s CEO.
- Paul Wogan:
- Thank you, Jamie. Good morning or good afternoon to you all. Thank you for joining us for GasLog’s second quarter results. Pulling the highlights, Simon Crowe, GasLog’s CFO will take you through the quarter’s financials. I will conclude the presentation with an update on the LNG shipping sector before the opening the call up for Q&A. I’d like to start today's presentation by talking about the key highlights of the quarter and post-quarter period, which demonstrate that GasLog continues to execute on its strategy of adding long-term contracted revenue with high-quality customers. Shortly after the end of the quarter, we announced that we have charted our remaining open newbuilding to Total, the French oil & gas major for an initial firm period of seven years. Following this charter, GasLog job had no open newbuildings, all six yet to be delivered vessels are contracted to either Shell or Total, the periods are between seven and 10 years. At the end of the second quarter, we took delivery of the GasLog Glasgow, the second of four new buildings delivering in 2016. The vessel immediately commenced a 10-year charter with Shell. We announced two important financings in the quarter which pushed the majority of our debt maturities out into the next decade. With the financings we’ve done this year, our existing and new build fleet is funded, and we have enhanced our liquidity so that we have the potential to take advantage of some of the interesting opportunities we see. Last week, our MLP, GasLog Partners reported a strong set of quarterly results and earlier this week, following a period of sustained momentum and its unit price, it raised $53 million through a follow-on equity offering. We’re pleased to report a dividend of $0.14 for the quarter. As a reminder, we’d continue to pay this dividend through the recent downturn in energy prices and recognize its importance to all our shareholders. With Total charter we recently signed and the other tender activity we are seeing in the market shows the long-term LNG market remains robust, with returns in line with historical averages. And finally, in the shorter term market, we see encouraging levels of activity with an uptick in rates and utilization and the return of round-trip economics on some routes. So, GasLog has continued to make progress this quarter. We continue to adapt to turbulent, energy, shipping and capital markets, and because of this, we’re well-placed to prosper from the on-going opportunities in the LNG market. And with that, I’ll hand over to Simon to take you through the quarter and the financials in more detail.
- Simon Crowe:
- Thank you, Paul, and good after and good morning to all of you. Please turn now to slide four for the financials for the quarter. Year-on-year revenue for the quarter was higher, largely due to the impact of the GasLog Greece and showing the fleet at the end of Q1 ‘16. During the second quarter, we also benefited from a one-off lump sum of approximately $1.7 million that we received from the early conclusion of a shorter term charter which was fixed ahead of the formation of the Cool Pool. Spot rates were also marginally higher quarter-on-quarter. Adjusted profit year-on-year was higher due to the increased revenue in Q2 ‘16, with EPS broadly in line for the year, reflecting the dropdown we executed this time last year. On the balance sheet, debt and net debt have increased as the result of the addition of the GasLog Greece and the GasLog Glasgow in 2016. And the cash balance has come down as we’ve made a number of stage payments on our new build vessels which delivered through 2019. Turning now to slide five, where I’d like to spend a minute on our recent financing activity. Part of GasLog’s financing strategy has been to push out near-term debt maturities and create liquidity to continue to expand the business. The chart on this slide shows GasLog’s debt maturities at the beginning of 2016. And you can see from some of the smaller blue bars that we had a number of different facilities which are secured against single vessels. This was appropriate at the time we put them in place, as GasLog had a much smaller fleet than today. If you turn to slide six, you can see the impact of the financings that we have carried out in the first six months of the year. In the first quarter of 2016, we did five-vessel refinancing, which pushed out all 2016 and 2017 maturities into 2018 and beyond. We also did a sale in leaseback of a single vessel with Mitsui, which provides us with an entry point into the Japanese financing and LNG market. In the second quarter, we launched a billion-dollar financing which consolidated all of the single-vessel facilities I talked about on the previous slide, and pushed out the maturities to 2021. We also launched a $90-million Norwegian bond issue, which extended the maturity of half of our NOK bond until 2021. The impact of all these financial transactions is that we pushed out the majority of GasLog’s maturities into the next decade, as well as creating additional liquidity for the company in the form of $100 million revolving credit facility, which we can draw on as and when appropriate. The only remaining maturities we have before 2021 could be seen on the slide. We have the $180 million junior tranche of the five-vessel facility, which falls due in 2018, and the $450 million GasLog Partner’s facility, which falls due late in 2019. Our intention is to refinance these in due course. On the remaining Norwegian bond that matures in 2018, we have a number of options to refinance it or extend the maturity between now and the time it falls due. Before we turn to the next slide, I want to reiterate that following the financing actions we’ve taken this year so far, our underwater and new build fleet is financed and we have no refinancing requirements until the second quarter of 2018. Turning now to slide seven, which provides a summary of the two transactions completed in the quarter. As part of both of these financings, there will be some one-off impacts relating to the swaps and the write-off of fees from the old facilities. For the second quarter, the one-offs relating to the NOK bond totaled approximately $9 million. The impact of the fee writes off and the premium paid for the existing bond was around $4 million, with a $5 million charge to settle the old cross currency swaps that were in place. The overall cash impact was zero. For Q3, the P&L one-offs relating to the billion-dollar financing were totaled just over $40 million, made up of $18 million loan fee write-off and $24 million to terminate legacy interest rate swaps and execute on new swaps. Swapping of debt to fixed interest and currency rate is in line with GasLog's treasury policy and we will continue to hedge our facilities to minimize volatility where appropriate. Through the new billion-dollar facility and swap arrangements, we’ve reduced our all in cost to debt to just over 4%, and we’ve created additional liquidity through the RPF, released restricted cash and we have pushed out the maturity to 2021. Turning to slide eight, GasLog's MLP, GasLog Partners has continued to perform strongly in recent months in a wide MLP market. They have seen significant rebounds from its 2016 low. The AMZ is up around 50% from its low point and GasLog Partners is up nearly 100% over the same period. Lastly week, GLOP reported a strong set of Q2 results, beating market expectations. And on Monday, this week, launched an equity of offering after market close raising just over $53 million at a unit price of $19.50. GLOP expect to use this equity to continue to grow its fleet. As a reminder, post the recent vessel charter, GasLog Limited has a pipeline of 13 vessels which are eligible for future drop-down into GLOP. So to sum up before I hand it back to Paul, through 2016 so far, we’ve pushed out the majority of our debt maturities into the next decade, recreated additional liquidity for the business, GasLog Partners continues to perform strongly and this week's capital rates of the MLP demonstrates that the market is open for companies with strong fundamentals and good growth prospects. So, in summary, we’ve put the business on a very firm financial footing from which we can take advantage of some of the opportunities we see in front of us today. That concludes the financial section of this quarter's results and with that I’ll hand over to Paul.
- Paul Wogan:
- Thank you, Simon. Please turn to slide nine. In July, we agreed a seven-year charter with Total with a three-year extension option. Total is one of the world's leading oil & gas companies, with a significant and growing presence in the LNG market. We believe there will be many more opportunities for us to work together as their requirement for LNG vessels grows. This charter adds approximately $190 million of contracted revenue to GasLog’s backlog, which today stands at $3.7 billion. Since IPO, we have consistently sort and concluded long-term business that adds firm, fixed-rate contract revenue to GasLog’s backlog, and this remains our focus. The charter rate is in line with GasLog’s long-term charters which we believe demonstrates the robustness of the longer term charter market, despite the volatility we’ve seen in this short-term market. The seven-year charter make this vessel an attractive future drop-down candidate for GasLog Partners, increasing the drop-down pipeline of eligible assets from 12 to 13. Turning to slide 10, you can see the EBITDA contribution of the Total charter alongside the rest of the eight vessel new build program. The charter which is expected to comments around Q3, 2018, means that GasLog now has no un-contracted new build vessels. These eight new buildings will contribute approximately $180 million of annualized firm and fixed EBITDA when fully delivered. Turning to slide 11, there is a significant amount of new LNG supply coming into the market between now and 2020. And we continue to actively participate in a number of vessel tenders. On the LNG demand side, the low prices are stimulating demand in price sensitive markets. There have been significant increases in demand from large existing importing nations such as China and India, who respectively imported 29% and 45% more LNG in the first half of the year than in the same period in 2015. Other new important nations such as Poland, Lithuania, Pakistan and Jordan are also adding to the increased demand for LNG, largely through the use of FSI use. There has also been an increase in new FID activity in recent weeks. For example, BP took FID on the third train of a Tango plant in Indonesia earlier this month. We believe this multibillion dollar investment demonstrates the willingness of global oil & gas companies to develop their most attractive LNG projects to meet future energy demand. Also Kinder Morgan, without formally announcing FID, stated they expect first LNG from their Elba Island facility by 2018. And this project has 20 year off-take agreement with Shell. However, some project timings have slipped due to the weaker commodity price environment. For example, Shell recently announced the FID on the Lake Charles and West coast Canada project would be delayed. On the M&A side, Exxon’s $2.5 billion offer for InterOil was accepted, as Exxon looks to acquire additional interest in Papua, New Guinea, where it already has the PNG, LNG project. Through this acquisition, we would eventually expect Exxon to increase its energy output at its existing facility, creating additional demand for shipping. Turning to slide 12, the LNG vessel order book. Due to the current uncertainty in the LNG markets, almost no new vessels are being ordered. Only four vessels have been ordered in the last 10 months. If this lack of ordering continues, we believe that could be a significant shortfall of vessels in 2018 and 2019. Turning now to slide 13, the spot market. We talked at our Investor Even in June about a potential inflection point in the spot market over the next 12 to 18 months. This is based on the number of available vessels in the short-term market decreasing, as new LNG projects ramps up production. In the six week since the Investor Event, we have started to see data point that suggest we are moving closer to this inflection point, with increases in both rates and utilization and improvements in charter terms, such as a return to round-trip economics. Whilst we too early to call a rebound in the short-term market, there are positive signs suggesting that the spot market will continue to improve as new liquefaction facilities come online. GasLog’s three open vessels are currently commercially operating in the Cool Pool, which has continued to see encouraging levels of activity in 2016. Many of the Pool’s fixtures have been done with new customers, who appreciate the flexibility and auctionality that the pool offers. We continue to be encouraged by the high levels of engagement with the pool from both new and existing customers. So, please now turn to slide 14. And, in summary, the Total charter adds to our contracted revenue backlog and grows our future inbuilt fixed-rate EBITDA. It also adds a very high quality new customer. GasLog Glasgow was delivered at the end of the second quarter on time and on budget, and immediately went on to a 10-year charter with Shell. Our focus on the balance sheet means our underwater and new build fleet is financed and our maturities have been pushed out further. GasLog Partners continues to perform strongly and raised $53 million this week through an equity offering, providing the partnership with capital for future growth. We once again declared $0.14 dividend for the quarter. And finally, the long-term shipping market remained robust as demonstrated by the Total charter, whilst the short-term market is showing encouraging levels of activity. And with that, I’d like to hand back to the operator for Q&A.
- Operator:
- Thank you. [Operator Instructions] Our first question comes from the line of Chris Wetherbee with Citi Group. Your line is open, please go ahead.
- Unidentified Analyst:
- Good afternoon. This is Prashanth on for Chris.
- Paul Wogan:
- Hi.
- Unidentified Analyst:
- Hi, how are you? So, first question, I wanted to talk about the MLP equity raise and the prospective uses of cash, just wondering to check you guys have done a fantastic job on refinancing that schedule and pushing out payments. With the cash that’s being used, how much could be used to maybe de-lever and how much would be put towards refinancing? And then, just sort of bigger picture, if you’re going to remind us how we should we think about leverage levels back after this year and next year?
- Simon Crowe:
- I mean the - Simon here, the great thing was that the opportunity that was there in the market to raise the equity, as you note, the price to perform very well. So, we took that opportunity and managed to raise the $53 million which was very well received. Now, I think the thing is we have time now, there is no rush to do anything - no immediate rush, GLOP wants to grow its fleet in line with the 10% to 15% CAGR that we have stated on last week’s call. So, I think those options are being evaluated. As we think about leverage, obviously, we’re looking to de-lever as we move forward and we’ll naturally do that as we would do drop-downs as we go forward. We’re also looking to de-lever - throughout the opportunities to do that. We do that also through the natural amortization as you know, we’ve got very limited amounts of non-amortizing debt. So, we’re fairly conservative in the fact that our amortization profile keeps our leverage naturally moving downwards. So, in terms sort of the debt-to-capital, multiples of EBITDA, we sort of like to target sort of the GasLog Limited and overall sort of four, five times, this could have - where we sort of think we might go towards if things come to plan. That’s a sort of target sort of level. Obviously, we’re higher than that at the moment, but we’re having vessels and we’re adding EBITDA as we speak, as we deliver all of our new builds and debt-to-cap, we like to sort of bring it down to sort of low-60s under the 60s, if we can. But a lot of this a function of the market and the function of the opportunities and the function of what we see ahead of us, but we think we have been very conservative, we’ve got a big backlog and that’s enabled us to grow very quickly and we have used an equity to do so.
- Unidentified Analyst:
- Excellent, that’s very, very helpful. Thank you, Simon. You mentioned, switching over to the Cool Pool and to the spot exposure, the uptick in utilization and spot rates and it seems like there has been some progress there that works for you guys and then the overall macro-environment, I know you guys don’t disclose those metrics per say, but if we could get some sort of color around how either of those with the rate and the utilization improved sequentially for your spot exposure. And I think you talked about also the round-trip economics getting better, voyage sticking up, so any color there would be helpful too.
- Paul Wogan:
- As we look at the - we don’t sort of comment on our individual fixtures on the Cool Pool, but if you look at some of the broker reports, Prashanth, the Clarksons - in the last, I think, four to six weeks of increased their rates for the spot market up from 30,000 today where they - the headline rates where it’s been quite a while, up to 38,000 in two steps, and I think that’s probably a good indication of where we’re seeing the market. We’ve been talking about utilization rates as well, sort of anywhere in the past few months between 40% and 50%, I think, you’re seeing brokers now talking utilization rates over 50 - going towards 60%, and I think, again, that’s probably a good indication of where we’re seeing the spot market going at the moment. So, very encouraged, as I said in my prepared remarks, I am not ready to call, but that markets turned completely. We’ve seen the market improve recently, but all the signs, I think, are looking quite good at the moment.
- Unidentified Analyst:
- Excellent. Thank you very much for that. And then, just one final question, sort of structurally, when you talk about the order book, the order levels have remained low and that it’s been helpful for this recovery, but we’ve also noticed some slippage apart from vessels that are idle, if you look through the order book and the current fleet, seems like there has been some slippage into 2017 and maybe further, you said sort of we - that’s continuing to go forward, it’s one of those 2017 pushed into 2018 deliveries, are there any factors that we maybe aren’t thinking or we prohibit this or could we see sort of that being another lever that sort of helps collectively sustain a manageable recovery in the overall order book and market?
- Paul Wogan:
- Yeah, that’s a very good question. I think what’s really important to remember is that, most of the order book is actually ordered against projects, and so, if you see any slippage in those projects, you will I think see people talking to the odds about whether they can line up that ships for those projects and I think that is certainly one factor that comes into play. The ability to do that, I think, depends on the relationship between the ship owner and the shipyard to a large extent. I think it is a factor, I don’t think it’s a huge factor in the market. I think people will continue to do that if we see slippage in the projects, but if you look at the order book, most of those vessels are against projects, and so, they’ll try, I think, just sort of whatever possible to bring them out in time for those projects.
- Unidentified Analyst:
- Excellent, thanks. And just around, very quick one and I’ll turn it over, just any update on the - you talked about the downside in projects for the end of the year in the accessory use site, any further updates incremental on that or thoughts on using the vessel from the current fleet versus a new build or any further color there?
- Paul Wogan:
- Yeah. I think in the last couple of quarters, we talked a lot about our FSRU ambitions. We talked a lot at the Investor Day about what we were doing on our FSRU plant. We’ve continued to push forward on those. We’re making very good progress. We didn’t want to talk about that too much on this earnings call, because I think what we’d like to do is that next time we bring up the FSRUs that we will be coming with positive news on that. I think you’ve seen us before talk about what we wanted to do and then execute on it. We’re very pleased with how it’s going and we look forward to giving positive news into the market.
- Unidentified Analyst:
- That makes perfect sense. Thank you very much for the time gentlemen.
- Paul Wogan:
- Thanks.
- Operator:
- Thank you. And our next question comes from the line of Jon Chappell with Evercore ISI. Your line is open, please go ahead.
- Jon Chappell:
- Thank you. Good afternoon, guys.
- Paul Wogan:
- Hi, Jon.
- Simon Crowe:
- Hi, Jon.
- Jon Chappell:
- Paul, the first thing I want to talk about was the pick-up in tendering activity that you may mentioned to both today and back in June, and just a little bit more clarification on that. Obviously, you’ve been able to lock away the last new build with Total agreement, but has the activity been more focused on projects for the future, therefore, would require new buildings or has there been a pick-up at all in tendering for existing ships such as the three that you have that are on the spot market right now?
- Paul Wogan:
- That being a mixture, Jon, that has been tendering for future deliveries, but what’s interesting is that those are not necessarily all focused on new buildings either, I think, as a view in the market that there are available ships and it doesn’t necessarily have to be a new building that goes in for those projects. So, we’re seeing customers happy to talk about future tendering activity on both new buildings and existing ships. We’re also seeing - and we sort of felt this will happen, as we’re slowly seeing this short-term market tighten, we are seeing a pick-up in interest in people looking at longer term activity for - in the nearer term rather than for future projects. Now, that’s I think just in its early stages, but I think that will be an outcome of the fact that as this market tightens as we expected, people will look to take cover in the longer term market.
- Jon Chappell:
- Now, if we go back a couple of years, I think, part of your shares used to have at least one or two ships exposed to the “market”, just to I guess brought in the customer base and have a feel for what’s going on in the short-term market, but given the depths of downturn over the last 24 months put up against, I guess, the optimism about the future. If given the opportunity to lock away the three that are exposed right now to the market, would you take that on medium and long-term or would you still want to keep one or two exposed to the short-term market?
- Paul Wogan:
- I think our strategy, Jon, is always to be - have the vast majority of our vessels fixed in the long-term market with long-term contracts. Having said that, even allowing for the price of what we’re seeing in the short-term market over the last year or so, I would definitely like to keep ships in the short-term market. Also, I believe very strongly in what the Cool Pool is doing and the way I think it’s adapting to and encouraging the short-term spot market. And I think, for us, we would like to continue to have presence in the Cool Pool, but certainly I think for the vast majority of our vessels, we would see them on long-term contracts as and when that opportunity present itself.
- Jon Chappell:
- Okay. And last one, which is kind of the longer term strategic question is, have been reading a lot lately about how the market’s becoming more like the oil market was a couple of decades ago, which means more destination flexibility as the US projects come online, less willingness for oil and x-linked contracts which it seems to potential spur more near-term activity, but just curious on your thoughts, two fold, one, what you think that this ship means for the market overall? And then, second, how does that kind of play into your long-term strategic chartering strategy if it becomes a bit more of a spot exposed market, would you look to shorten the duration maybe of some of your contracts longer term?
- Paul Wogan:
- I think we view this market going - to get these new projects up the ground, you’re going to need to base load of contracts which is going to need a base load of ships if you like in terms of the longer term contracts, but as we’re seeing with both Australia and the US, there is an amount of cargo which is available to trade and there is much more destination flexibility. What’s interesting from that is that if you know that all your product is going from your liquefaction plant to your receiver, you’re just going to move it backwards and forwards on rails as quickly as you possibly can. As soon as you start to trade those molecules, you start to want to have flexibility and how quickly you move the ship, you may decide to turn the ship around half way and put it somewhere else because the price arbitrage is helpful to you at that point. And so, we look at not only a ton miles, but one of the fewer concepts we’re thinking about within GasLog at the moment is actually what we call Ton Time, so the inefficiencies that we’re seeing created through that - potentially created through that trading market, I think, is good in terms of creating more utilization for the vessels.
- Jon Chappell:
- Alright. Great, I appreciate your thoughts, Paul. Thank you.
- Paul Wogan:
- Thanks, Jon.
- Operator:
- Thank you. And our next question comes from the line of Ben Nolan with Stifel. Your line is open, please go ahead.
- Ben Nolan:
- Thanks. So, I have a handful of questions here guys. Number one, you have a couple of - I think it’s the Sudan and the Singapore that are on with Shell, but come off close to the end of the year, and of course there is options which I expect are probably out of the money, have you had any indication from them or do you have any thoughts as to how those vessels are going to be deployed going forward?
- Paul Wogan:
- Yeah. We do expect those vessels, Ben, to come back to us. I think with Shell’s takeover PG, it looks in the short-term as though that probably have some excess capacity, so we would expect those vessels will come back at the end of the period.
- Ben Nolan:
- Okay. And along those lines, those ones are a little bit older, I think they’re 2010 build relative to several of the other ones you have in the spot market that are a little bit more modern, are you seeing any doubt there or is there a differentiation in appetite among charters in the spot market for vessels and that - or bandwidth, obviously, the older 125 are still pretty out of favor, but call it between a six-year old and one-year old, does it matter or are they relatively interchangeable with respect to how the charters think of them?
- Paul Wogan:
- Yeah. We haven’t really seen, I mean we - also trading the GasLog Chelsea in the market at the same time and we haven’t seen a differentiation between the GasLog Chelsea which is [indiscernible] and the modern ones that we’ve got in the Cool Pool. Where you have seen the differentiation, as you rightly pointed, it’s in the old smaller steam ship, that’s the sort of two-tier market at the moment.
- Ben Nolan:
- Okay. And sort of along those lines, obviously you fixed the your one new building to Total, and I think it was Jon Chappell’s question if I remember right about the appetite for new buildings relative to existing vessels, are some of the tenders that are going or are they tenders for call it 155 class vessels or most people - most incremental long-term charterers still looking for the bigger 174 types?
- Paul Wogan:
- There are number of tenders out there at the moment. Probably - if you look, there are probably six, seven tenders out there. Two or three of those tenders are willing if you like to look at pay range of sizes, what’s really important for them is the delivered cost of the molecule into the destination. And so, the charterers are keeping flexibility and saying let’s have a look, you can help for new buildings, but you can offer existing ships, we’d just like to see how that works. And of course, with the 155s what you do get is more flexibility in terms of the trading that they can do, they’re able to get into more pause and it’s a well proven, we’ve taken them into a number of load and discharged ports around the world. So, that’s an inbuilt flexibility to them. So, some of the tenderers definitely are just looking at larger new buildings, but some of the tenderers are happy to look at a range of vessels.
- Ben Nolan:
- Okay. Great. That’s helpful. And then, last one from me, is it relates to sort of the direction the market going forward, obviously there is going to need to be more ships ordered on the back of these projects and it sounds like you guys would certainly like to be a participant in that activity, but one of the things that we have been hearing as it’s getting really challenging to get refund guarantees from banks on new building orders, do you think that’s a non-factor as it relates to ordering a vessel at a one of the bigger crane yards on the back of a contract or is that a legitimate concern even for potential project backed new buildings?
- Paul Wogan:
- It’s interesting. I think it is a concern for everyone. I think the issues which some of shipyards are facing and the fact that they’re having problem with refund guarantees, I think it’s not something that is going to go away in the short-term, and I think could be one of the factors that restrict the availability of new buildings going forward. As we pointed out, we’ve only seen four new building orders in the last ten months. This is just adding if you like to the - sort of the difficulty and restrictions and increasing that order book, and from a ship-owner’s point of view, that’s positive. It adds to our thesis that we’ll see tightening market. Right now, you kind of order a ship and have it in 2018, well, that’s being 2019, and we’re not seeing people going out, so that I think is a real issue. I think we’ll see how that plays out.
- Ben Nolan:
- Alright. Great. I’ll turn it over, but nice quarter guys.
- Paul Wogan:
- Thank you.
- Operator:
- Thank you. And our next question comes from the line of Noah Parquette with JP Morgan. Your line is open, please go ahead.
- Noah Parquette:
- Thanks. I want to ask you about the Japanese free trade - the ruling that considering that the destination flexibility is invalid in our contracts, how would that - if you give them consideration and how that would affect rating. What are your thoughts there?
- Paul Wogan:
- I think it’s quite natural that - sort of that tightness, especially as we’re seeing the flexibility coming through other contracts that the Japanese would try to change that, because this, in my opinion, is going to become much more of a free flowing market where people are able to product in as and when they want and/or take it to other places. I think the demand for the product will still be there, I don’t see that it changes, it probably just plays back into the inefficiencies that we see in a traded model that we were talking about earlier.
- Noah Parquette:
- The follow-up on that, I guess, could you just elaborate on why you think that will be the case, it just seems to me if you give more options to people, they would choose a more efficient way as opposed to inefficient especially given the cost of transportation of LNG? Can you just talk a little bit more about the individual drivers, why you think those fleet would become more inefficient?
- Paul Wogan:
- I think - my view on trading is that, what the traders are looking at is where do they make the biggest price arbitrage, the efficiency of the shipping is secondary to where the pricing is, so if they can make a price by taking a cargo from Australia to Europe, they will do that rather than taking it to Japan, because it’s the more efficient shipping route. And so, it becomes very much a price arbitrage decision rather than a shipping efficiency decision.
- Noah Parquette:
- Looking at somebody like Shell has like a portfolio use their ship in more efficient manner through backhaul on triangulation; it’s no longer a pipeline business, right?
- Paul Wogan:
- I think that’s one of the advantages of having a large fleet and certainly BG, with that fleet when we were dealing with them, we’re looking at that all the time, but we did have - because of that portfolio, we had occasions when BG would load us at one port, let’s say, Equatorial Guinea set us off about to Europe, and then suddenly we get orders to turn around and go back to Japan, because the price arbitrage was better, they would make money that way. So, I think the portfolio ships gives those chance as an advantage, but they will definitely go where the money is.
- Noah Parquette:
- Okay. And I just have one question I want to ask, is there any sort of mismatch between [indiscernible] charterers come online, and so, do you have some flexibility still with the shipyards to change around those delivery that’s before ‘18 and ‘19 deliveries?
- Paul Wogan:
- There is a small amount of mismatch on some of the chances, for example, on the Total if not an exact match that maybe two or three months where the ship comes out before, but we also have the ability to continue to discuss with the yard whether we hold the ship there or actually whether we think it’s going to be advantages for us to have the ship out early, trade it in the spot market with those few months and then put it into the contract.
- Noah Parquette:
- Got you, makes sense. Okay. Thanks.
- Paul Wogan:
- Thanks, Noah.
- Operator:
- Thank you. And our next question comes from the line of Michael Webber with Wells Fargo. Your line is open, please go ahead.
- Michael Webber:
- Hey, good morning, guys. How are you?
- Paul Wogan:
- Hi, Mike.
- Michael Webber:
- Hey. Just a handful of questions and I missed in one call. I guess first, it’s a good problem to have, I mean in terms of being able to actually think and talk about growth here that kind splits you guys apart, but when I think about the options you guys used to have and the current leverage and exposure to Shell, how much does the deferral of Lake Charles kind of impact the immediate term opportunity set, granted you’re kind of playing with house money, you’re considering the state of space, but just that you can kind of think about, I mean Paul, if you have five or six tenders, kind of add some kind of what seems like kind of captive growth in place there, if you could talk about what that means for that opportunities?
- Paul Wogan:
- I think, obviously, Shell as our biggest charterer and one of the biggest players in the LNG market, it’s certainly someone that we would hope to do more business with in the future, but the deal with Total was shown, and that’s the discussions we have with on the other tenders, that’s not the only way for us if we choose to use to grow the business. There are a lot of opportunities and as we look out at the development of the projects through 2020, there are going to be a lot of need for new ships, and obviously we haven’t talked a lot about it on this call, but also on the FSRU side, we see large opportunity set that we should be looking and we think we have a good opportunity to grow into that market.
- Michael Webber:
- Fair enough. I guess along the lines of Regas, and I know you guys didn’t put it in the deck for a reason, and I get the idea that that wanting kind of trump it for several quarters and kind of making a story of it, if I think about the fact that you’ve got a lot of a major crane yard is going to start for orders, one of the things we’ve been hearing about on the FLNG size, is that the new build economics coming down for either kind of barge-based solutions or new build? And I am wondering when you guys are competing for tenders for converted assets or new assets, where do you see more economic parity right now between conversions versus new builds on the Regas side?
- Paul Wogan:
- I think that’s pressure on both sides at the moment, Mike, there is pressure on the new buildings because of the lack of orders we’ve been talking about. There is also pressure on the conversion yards because a lot of the work they were doing on the drilling side and the off-shore oil site has dried up and that’s becoming much competitive. So what it is doing is I think on both the new buildings and the conversions making that more attractive, more competitive, which I think is going to help when we’re looking at putting these FSRUs in - for the project, you just make them more competitive against the land-based solutions. The other thing, of course, is that with the conversions, you do have a time advantage especially if you are the long-lead items, and so I think that is also going to be an important factor lot of people looking to utilize that FSRUs.
- Michael Webber:
- Okay, that’s helpful. Last one, and that’s actually pretty straightforward, you’d mentioned the way it’s ticking up 35K, your vessels in the spot market, as we kind of look out towards the back half of the year, do you think it’s viable that we get to a level where - I mean average asset in the spot market is not burning cash?
- Paul Wogan:
- That’s a very good question. I would certainly hope so, but as I said, I think for me it’s a little bit early to call the turn in the market. I think all the forward leaning factors are looking quite good at the moment, but longer term, over the 12 to 18 months, I certainly think that’s going to be the case. If it comes sooner than that, then that’s a good thing to happen, but I am not predicting that’s going to be the case at the moment, Mike.
- Michael Webber:
- Wow, it’s fair enough. I appreciate it you’re trying to swing at it anyway. That’s all I’ve got, guys, thanks for the time.
- Paul Wogan:
- Thank you.
- Operator:
- [Operator Instructions] Our next question comes from the line of Fotis Giannakoulis with Morgan Stanley. Your line is open, please go ahead.
- Fotis Giannakoulis:
- Yes. Hi, gentlemen, and thank you. Paul, I want to ask you if you can give us a little bit more color about what has happened in the market the last three months and everybody has reported the earnings so far, has mentioned about the increase in chartering activity, which kind of routes do you think that - where is the demand coming from? And what is happening with the spreads in the market, we’ve seen the Asia-Europe spread increasing a little bit, but it’s still not very different from what it was at the beginning of the year or late last year?
- Paul Wogan:
- I think it’s coming down to the low prices stimulating demand. We talked in the prepared remarks, focused around the fact that - where I see is the price-sensitive markets, China and India, we’ve seen a 45% and 29% increase in LNG demand in the first half of the year, and so I think that the low prices are stimulating that. We’re also seeing demand in Argentina, we’ve seen - and also coming out for a number of tenders into Argentina, we’re expecting the Egyptians to come open for a number of tenders, so it’s just sort of the new markets as well which have been driving the demand. Also being quite a lot of demand into the Middle East this summer with the warm - some of that you’ve seen, some of this are being pass cargos going into the Middle East, so it’s across the board I think globally, but certainly the price-sensitive markets to me have been the interesting increase.
- Fotis Giannakoulis:
- Thank you, Paul. And one last question, you mentioned about this new developments on the liquefaction side, particularly with potential project, can you explain whether the economics right now for liquefaction facilities, there are lot of people either they are concerned about all low prices for natural gas internationally have gone up, they’re still at very low levels, what do this potential producers see in LNG prices and what will it take to CFIBs?
- Paul Wogan:
- I think there is a couple of things. First, in the environment we’re in, you’re going to see people trying to produce gas in the low cost environment, and with Brownfield sites et cetera in the US and the forecast for Henry Hub staying down below $3 if you look at [indiscernible] forecasting that for quite a long period of time, I think people see the US as one of the low cost providers, but of course, when people are making these decisions, they’re also looking forward and saying where do you see the long-term price of gas, and I think - talking to a lot of the traders and lot of the producers, certainly there is a feeling that what we’re seeing now in terms of not too many FID taking places, that’s setting people up for a tightening in the market and an increase in gas prices in 2020 and beyond. So, that’s - I think where you’ll see is a lot of people taking a longer term view on gas prices and saying actually, as long as we’re one of the low cost producers of this gas, it’s got to make sense for us long term.
- Fotis Giannakoulis:
- Thank you very much, Paul. Thank you, Simon.
- Paul Wogan:
- Thanks, Fotis.
- Operator:
- Thank you. And our next question comes from the line of [indiscernible]. Your line is open, please go ahead.
- Unidentified Analyst:
- Yeah. Hi, guys. I just had a one question really if you - I think there is a general consensus in kind of the new volumes coming, just curious to hear your thoughts on what you think these cargos actually will end up considering there has been general softening in the traditional up tickers.
- Paul Wogan:
- Yeah. I think, as I said, we certainly where we have seen price-sensitive markets, the low price in LNG has stimulate the demand. So, and in particular, China, last year was, I think, struggling in terms of its LNG demand, because the prices were being held quite efficiently by the government, they dropped those prices in November, and you’ve seen an increase - I think it’s that of a 20% increase so far in the Chinese LNG import this year. India, likewise, 45% increase, again a price-sensitive market, so what we feel would happen, with low price is stimulating demand, I think it’s doing so. I think it’s also - we expect to see the FSRUs being utilized much more in terms of getting gas into those markets. We’ve seen the big demand growth in places likely - the way near Egypt, Jordan, Pakistan, all the areas which have been using FSRUs have been increasing their demand. And I think, as we see more and more gas coming, that’s why our pieces will see more and more FSRU demand, it’s the quickest, most cost effective way to get access to this cheap and plentiful gas.
- Unidentified Analyst:
- You kind of see - talking them FSUs, are you really adding up to 140 new tons?
- Paul Wogan:
- Well, I don’t think - I think if you look across the market, it’s going to be - them it’s going to be Egypt, it’s going to be Argentina, it’s going to be a global pickup in demand. You’re seeing the UK increasing gas uses and Brazil increasing gas use, so it doesn’t have to be one or two markets that do it, it’s looking towards like that, so it’s sort of a global pick up.
- Unidentified Analyst:
- Alright, that’s helpful. Thank you.
- Paul Wogan:
- Thank you.
- Operator:
- Thank you. And I am showing no further questions at this time, and I’d like to turn the conference back over to Mr. Paul Wogan for any closing remarks.
- Paul Wogan:
- Okay. Well, thank you very much everybody for taking the time to listen into our earnings update. We look forward to speaking to you in the near future. Thank you.
- Simon Crowe:
- Thank you.
- Operator:
- Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.
Other GasLog Ltd. earnings call transcripts:
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