GasLog Ltd.
Q3 2016 Earnings Call Transcript

Published: 3 Nov 2016

[Operator:]

Good morning. My name is Nova, and I'll be your conference operator today. At this time, I would like to welcome everyone to the GasLog Limited's Third Quarter 2016 Results 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, 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:]

Great. Thanks, Nova. Good afternoon, good morning, and welcome to GasLog Limited third quarter results call. As a reminder, this call, webcast, and presentation are available on the Investor Relations section of our website, where a replay is also be available. As shown on slide two, 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. A reconciliation of these is attached as an annex to the presentation. Please turn to slide three for the highlights of the quarter, while I will 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 third quarter results. Pulling the highlights, Simon will take you through the quarter’s financials. I'll 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 with the key highlights, which demonstrate GasLog continuing to execute its strategy. In the third quarter, we charted our only open newbuilding to Total seven years. All of our yet to be delivered vessels are now contracted for periods of between seven and 10 years. Post quarter end we signed a seven-year charter with Centrica and to fulfil this contract, ordered a newbuilding vessel at Samsung. Both of these new charters are in line with our historical rates and returns reaffirming our confidence in the robustness of the long-term market. We recently took delivery of the GasLog Geneva and GasLog Gibraltar, the final two of GasLog's 2016 newbuildings and they immediately commenced seven year charters with a subsidiary of Shell. All four vessels delivered on time and on budget Earlier this week, we completed the dropdown of the GasLog Seattle into GasLog Partners for $189 million. This is the maritime MLP equity raise and dropdown since 2015 and the transaction provides GasLog with additional liquidity to delever off the future growth. We closed $1 billion refinancing in the quarter, pushing out a number of near-term debt maturities into the next decade. We continue to see improvements in the LNG shipping sector with new LNG volumes coming on line and very few new vessel orders, which we believe, will lead to significant tightening in this market. And finally, we're pleased to report a dividend of $0.14 for the quarter Turning now to slide four, what I'd like to focus on the two new charters. In July, we signed a seven-year charter with Total, the French oil and gas major. Total is a growing player in the LNG sector with future contracted volumes from the U.S., Russia, Australia. This charter will commence in mid-2018. And in October, we signed a seven-year charter with Centrica, the U.K.-based energy and utility company. For this charter, due to start in 2019, we recently ordered a 180,000 cubic meter newbuilding from Samsung. These Centrica and Total contract support GasLog's strategy of diversifying our customer base with high-quality companies that have a growing presence in the global LNG market. Both Centrica and Total have chosen to work with GasLog on the quality of our operational and commercial platform and we look forward to working with both of these companies as their future shipping requirements increase. 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. Good afternoon and good morning to all of you. Thank you for joining us today. Please turn now to slide five for the financials for the quarter. Year-on-year revenue was higher, largely due to the impact of the new vessel deliveries during 2016. Four of our new build vessels delivered this year with seven to 10-year con charters to show. During the quarter, spot rates fluctuated between $30,000 and $40,000 per day and as previously flagged, the GasLog Savannah and the Singapore rolled off their contracts. They operate in the Cool Pool. This partially offset the higher revenue from our contracted newbuildings. EBITDA was higher year-on-year, reflecting the addition of the new vessels and no drydockings. As a result, both adjusted profit and adjusted EPS increased year-on-year. Reported profit and EPS were impacted by the loan fee write and the swap expenses relating to the $1 billion refinancing, which we highlighted on last quarter's call. On the balance sheet, debt and net debt have increased as of end of September due to the three newbuildings that delivered by the end of the third quarter. The debt for the GasLog Gibraltar was drawn at the end of October. The full year positive impact of the revenue and EBITDA for these new build vessels will be seen in 2017. Turning now to slide six, where I'd like to spend a minute on our full 2016 deliveries. Each vessel is a modern TFT LNG carrier and commenced the seven to 10-year charter with Shell. They are all funded with the eight vessel committed ECA facility that we announced last year. All of these vessels delivered on time and on budget and highlight the leading operational platform we have here at GasLog. Combined the four vessels will contribute approximately $90 million of EBITDA on a full year basis. Turning down to slide seven, a slide many of you've seen before. All of our 2016 deliveries have now entered the fleet and we've updated this slide to show our new charter awards. Going forward we now have five vessels to be delivered. All of which have seven to 10 year contract within the Shell, Total, Centrica. Each of these new build vessels through the 2019 is expected to deliver between $21 million, $23 million of EBITDA, meaning that the nine vessels in this newbuilding program will collectively deliver around $200 million of EBITDA. All of the nine vessels have long-term contracts making them excellent dropdown candidates to GasLog partners. Please turn now to slide eight, which shows our committed future CapEx. We've added defense to new build and this year is the only why we do not yet have committed bank financing. However we're already seen considerable appetite from banks to fund this vessel. So with the seven year charter a good rate, with a high quality counterparty we are confident of securing competitively priced debt financing for this vessel. The equity component which is -- will be around $60 million is expected to be funded by cash on the balance sheet, future operational cash flow and current dropdown proceeds. Turning now to slide nine, this week we closed the dropdown of the GasLog Seattle to GasLog Partners for a $199 million. GasLog Limited received over $60 million of cash in the transaction which is sufficient to pay the equity portion of the Centrica vessel. This dropdown is the third transaction between the two companies since the IPO. And the GasLog Partners fleet now stands at nine vessels. The MLP allows us to raise equity at an attractive cost of capital to fund growth [without recourse to Sector] shareholders. We created MLP to fund growth of GasLog Limited. As GasLog Partners resume this dropdown program, GasLog Limited will continue to move through the idea of split, which will enhance the value of the general partner. The table on this slide illustrates the potential valuation uplift the GasLog of dropping down the Seattle. Applying the acquisition multiple of 9.4 times to the additional LP and GP distributions to GasLog Limited. Along with the annual management fee gives a valuation uplift of around $36 million over the headline acquisition price. So that brings me to the end of my section. In summary, it's been another good quarter with the finalization of much of our refinancing efforts. New contracts announced with new counterparties ships delivering on schedule with attractive long-term contracts and the MLP resuming its dropdown activity. We are now well-positioned to create significant value for our vessels. And with that I hand back to Paul to take you through the industry section.

[Paul Wogan:]

Thank you, Simon. Please turn to slide 10, which shows around a 150 million tons per annum of new LNG production between 2016 and 2020. This production is from projects that have taken FID, so we are confident these facilities will be built. However, whilst this considerable transparency and confidence around the amount of new LNG production and where is coming from the differing views around LNG demand and where it will go. In recent weeks there has been number of data points which support our thesis but the demand for the gas will continue to increase rapidly. Looking first a large price-sensitive markets. In the first nine months of 2016, Chinese LNG imports were up 29% year-on-year with India up 36%. By the end of 2016 these two countries combined are expected to have imported around 45 million tons of LNG. India's Minister for Petroleum and Natural Gas recently stated that India would like to more than double their regasification capacity to 50 million tons per annum and targeted natural gas to increase from 6.5% to 15% of the energy mix by 2020. And FSI use start to play a significant remote -- role in the demand picture. The fall of most recent LNG importing nations to use them Egypt, Pakistan Lithuania and Jordan. A forecast to import around 15 million tons of LNG in 2016 versus 6 million tons last year, an increase of 150%. At GasLog we continue to develop our own FSI new capabilities and making good progress with a number of potential opportunities. These two examples demonstrate a demand in new and developing markets is growing significantly. But demand is also held it well in mature markets. In Japan, Korea and Taiwan who have historically made up almost half of global demand. Imports year-to-date totaled approximately 94 million tons of LNG. This compared to just over 95 million tons in 2015, so almost no change year-on-year. Turning now to slide 11 and shipping supply. In the past 14 months there have only been five new orders for LNG vessels including the recent GasLog vessel ordered for Centrica. We believe new vessel ordering will largely be done against long-term contracts for customers with the future offtake volumes. We don’t expect away the speculative orders, mainly due to the limited availability of capital to fund orders with no contracts. Please turn to slide 12, we showed Wood Mackenzie’s analysis on the future shipping requirements of LNG projects that have taken FID. The table shows they are number of projects are offtakers still need to secure some or all of shipping for these volumes, including projects such as Cameroon, Freeport and Corpus Christi. Based on the expected new FID volumes, the market should tighten significantly and more than absorb the current fleet. Turning now to slide 13. This interesting slide uses Poten data and shows the destination of all Sabine Pass loadings, since the facilities started production. The column on the far right, shows how many ships per year would be required to transport 1 million tonnes from Sabine Pass to each of the discharged destinations based on the number of days per voyage. Applying the average of 1.75 ships per million metric tonnes to the 62 million tonnes of U.S. volumes gives a total requirement of around 110 ships or 90% of the current total order book. What is interesting with Sabine Pass exports to-date is not just some of the significant distances travelled on some of the routes, but also the time taken for many of voyages. For example, we have seen charters slow steaming to maintain destination flexibility which increases Ton time. The increases both in ton miles and ton time ultimately lead to greater shipping requirement, which is positive for owners like GasLog. Please now turn to slide 14. The LNG shipping spot market continues to expand. By the end of September, they have been approximately 200 spot fixtures, an increase of around 60% in 2015. Our last activity has increased, headline rates have come down slightly from recent highs. We reached 40,000 a day in Q3; rates as reported by Clarksons are now in the mid-30s. This is mainly as a result of a number of facilities being down for maintenance leading to fewer spot cargos for trading. Ship broker consensus is that rates will start to move higher into the winter months as seasonal demands for LNG increases. GasLog has all five of its spot vessels in the Cool Pool. The pool added further three customers in recent weeks bringing the total set to 16. Customers increasingly choose the pool for the flexibility it provides with 18 vessels available to trading The new LNG volumes coming into the market will increase the availability of spot LNG, whereas as the number of ships available to transport this spot volumes is expected to come down overtime, resulting in a much tighter spot rate environment. Every $10,000 increase in sport rates, would result in an EBITDA uplift for each of our spot vessels of approximately $3.5 million per annum. If spot rate returns to mid cycle rates of 75,000 per day, this equates to around $50 million of additional EBITDA per annum. Applying a 10 times multiple, creates an additional $150 million of value per vessel. Just to remind you, we presently have five ships trading in the spot market. Turning now to slide 15. For the summary of what has been a very strong quarter for the company. We continue to execute on our strategy of winning long-term charters with high quality new customers. We have delivered all of our 2016 new buildings on time and on budget, highlighting the quality of our operational platform. We’ve completed our refinancing on attractive terms at the resumed dropdown activity with the MLP, both of which provide liquidity for the company to deliver all for future growth. And all of this is being done at the time, when we are seeing an improvement in the LNG markets where we are operationally geared to the upside. With that I would like to hand back to the operator for Q&A.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Aspen [Indiscernible].

[Unidentified Analyst:]

Hey, good afternoon, gentlemen. Just two quick ones for me. There has been an uptick in the term activity both I guess in new built the also on the existing fleet, just wondering if you add any comments regarding the other steamed vessels that we saw with fixed think with last Friday?

[Paul Wogan:]

Hi, Aspen. It’s Paul here. Are you are referring to the [Indiscernible] gas vessel

[Unidentified Analyst:]

Yes, just kind of thinking on the rates there, I mean, it was down approximately $25,000 versus kind of contract it had, I mean you have also some turbines within the GasLog systems and kind of the risk that you see considerable lower of this on the roll off your existing contracts?

[Paul Wogan:]

Yes, I mean I think as we talked about in the presentation, we think that we're moving into a much tighter market going forward, which I think will have an effect both on the rates in the spot market and the rates in the prompt to longer terms market. We're in a great position that we don't have any of our steam vessels coming off until the back end of 2019 and I think we think that we'll be in a much stronger market at the time. So, I think individual owners do what they feel they need to do at a given point in the cycle, but we're in a good position with our steam ships in terms of when they will be -- looking to be recontracted. And of course, we do have extensions on some of those steam ships as well.

[Unidentified Analyst:]

All right. And then kind of when we looked at -- there's probably a 15 to 20 vessels rolling off each year going forward and then majority of these are the turbines, do you see any implications for the rates on the modern vessel?

[Paul Wogan:]

Well, I think as we were saying, one of the slides we used at the Investor Day in June was showing how we saw the market tightening over the sort of period between now and 2018 and in fact, the market going into actual deficit of ships in 2018. That can't be changed now. No, newbuildings coming, so even if you get these ships coming off-charter, we believe those ships are still going to be needed to move the actual volumes, so that could be coming into the market. So, I don't see pricing pressure downwards, but I see given -- how we see supply and demand at the moment, upward pressure on the pricing.

[Unidentified Analyst:]

All right. That's it from me. Thank you.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Christian Wetherbee of Citi.

[Prashant Rao:]

Good morning gentlemen. This is Prashant in for Chris. How are you?

[Paul Wogan:]

Hi Prashant.

[Simon Crowe:]

Hi, we're fine.

[Prashant Rao:]

Hi. Congrats on the Total and Centrica charters. I wanted to ask a little bit more about the -- your initiatives in diversifying the customer base. If I'm counting right here, it looks like the number of counterparties in the Cool Pool increased by at least three or four from last quarter, which is great to see. I guess could you provide maybe some color on the pipeline from the Cool Pool, I'm assuming that work with both Total and Centrica that has sort of conversion opportunity was there long-term charters there. Maybe walk through how many spot fixtures you're seeing and then sort of how that's evolving as you use that as a resource for diversifying the customer base on the long-term side?

[Paul Wogan:]

Yes. I mean I think, one of the -- for a while, we've been saying one of the advantage we see of having some of our ships in the spot market is our ability to showcase our capabilities to other customers. And I think the ability to do that give us then the opportunity to turn most customers into longer term customers. So, you're absolutely right the more customers we can service in the Cool Pool and give a service to, I think, the better it is for us as we look to long-term. I think also the number of customers that are using the Cool Pool shows the advantage of that structure. What the Cool Pool is able to do is for example, allow people to fixed forward, because we know there are going to be ships more or less in position at various stages. We can offer the customer fixed forward now which as individual parties we wouldn’t be able to do. So, I think Cool Pool has a number of advantages, but they are showcasing that you talked about it the first part of your question is absolutely correct.

[Prashant Rao:]

Okay, great. In terms of then just the activity that they are -- I know it's hard to compare directly in terms of what rate you're receiving on the vessels and I suppose explicitly, but maybe if we could talk relatively in terms of utilization versus vessels that are not Cool Pool, right -- just on the right way to spot market. How is the Cool Pool comparing? And then to what degree do you have leverage there to may flex up or down on the rate utilization you offer in charter maybe as on trade to conversion to long-term counterparty?

[Paul Wogan:]

Yes, I mean I think we do track utilization in the pool, we've been pleased with the utilization that we've been getting compared to what we see reported in the market. So, that's good. And I think part of that is the fact that we're able to offer sort of COA-type arrangements which allow our customers to call off ships as and when they require it, but gives us first call on that cargos. And so that kind of arrangement allows us to have improvements on utilization. We do -- it is flexible within the pool, the parties do have the ability to pull ships out for longer term contracts if they so desire. But I think given how that pool is working at the moment, I think both -- all three parties in that pool are feeling pretty happy with the returns they are getting in spot market compared to how others are doing and compared to how we would have done individually.

[Prashant Rao:]

All right. One just one quick and I'm sorry if I missed this, the SSRU update identifying project, should we -- I don't know if you mentioned, but should we expect an announcement by the year end still, or where could that possibly be pushed?

[Paul Wogan:]

Yes, we said that we -- at our Investor Day that we would look to be very well-placed a couple of projects by the end of the year. We're still maintaining that view. We haven’t said a lot about the FSI use in this presentation because I think we talked about what we want to do and now we're basically going out and delivering and we will update as and when. The one thing I would say though as you know, if I -- at the start of this year, I'd look at the progress that I hoped we would make on the FSI use. And I could have said looking at this point; I would be very pleased with where we've reached so far. Its exceeded my expectations.

[Prashant Rao:]

That's great color. Thanks very much. I'll turn it over.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. Our next question comes from Michael of Wells Fargo.

[Michael Webber:]

Hi, good morning guys. How are you?

[Paul Wogan:]

Hi Mike.

[Simon Crowe:]

Hi Mike.

[Michael Webber:]

I just wanted to circle back onto in the earlier question on the recent term contract we saw for an older steam asset, maybe just kind of come at from a different angle, just given the fact that the implied long-term rate for that asset has effectively been zero, so that fact that you can secure a rate for an eight year rate on a steam asset is somewhat encouraging I guess in our view. I guess my question around that though is do you think -- do you view as a one-off and I know that's -- you're talking about two of your competitors involved in either side of that transaction, right, but do you think that's set a template for longer term employment for kind of middle aged steam assets maybe in and around West Africa, specifically? Or whether you just think it’s a bit of a one-off as a project tends today, so just curious around that end?

[Paul Wogan:]

To be honest, it didn’t surprise me at all. We -- mu view for long time is that we need to over ships in the fleet to move all the cargo that's coming and that that's not going to away. People decide for whatever reason that they didn’t want to take steam ships, the market would be structurally massively shorter ships. So, the people to be -- I think people are taking a view of this market, looking and seeing that they expect tightness in the market. We haven't seen a lot of newbuildings ordered, expect to continue tightness there. People are happy to use the existing ships in the fleet and especially they feel that they are getting them at attractive rates.

[Michael Webber:]

That's helpful. Just to circle back also on Regas, the -- first and foremost, it seems like the most likely scenario is kind of an organic build out of your Regas here and as opposed to M&A, there's some higher profile of fleets that have been kicked around the market for a while or kind of bent around. Is that still the most likely scenario -- let me just ask that and I'll also kind of dig into some other questions.

[Paul Wogan:]

I mean we've been busy developing our own organic capabilities. We've taken on a team with commercial and technical capabilities and we are as I said from looking where I was 12 months ago very pleased with where we've achieved so far. I think we'll continue with those organic efforts at this point.

[Michael Webber:]

Okay. That makes sense. And then in terms of that process net organic buildout, you guys are making progress for a while, but as kind of kept it and been kind of limited and what you guys really had dealt into. Just curious can you give some color around how that project list is narrowed either by geography or by may be high level spec around the project and assuming it’s a that kind of one-off kind of normalized tender kind of out of box type business. So may be any set of color in terms of where you guys have focused and may be even how those project returns with compared to template kind of -- we would see it’s a Egypt or Kuwait or what have you?

[Paul Wogan:]

Yes, I mean it’s probably hard for me Mike to give you a view on geographical areas because with that the tight down quite a lot but as you quite rather say we are sort of -- we have a number of -- a large number of potential opportunities but those were we are owning in on opportunities where we feel it's not just an open tender where we had something also significantly and have if you like a advantageous position. I can't really -- mostly I like to -- I can't really say much more than that at this point without kind of giving a way too much but watch this pace.

[Michael Webber:]

Fair enough. One more for you and I'll turn it over, but along those lines and we think about forward capital deployment at the parent level, are you just going to just the complex -- broader complex. How would you foresee that split between traditional kind of mid-stream carrier business versus the Regas opportunities you are looking at now, just on a nominal basis if we look at say the next -- next two to three years whatever we take Regas to get kind of over the line and get the delivery on a Regas project. You think that's about even of what you'll be spending probably on the traditional businesses are away or do you think it's still going to going to be more heavily flatted towards being the carriers?

[Simon Crowe:]

Michael, Simon here. Yes, I mean I think we are opportunistically looking at expanding our carrier fleet and as we -- as you've seen we've done that with Total, Centrica with lot to build for business out with those guys, so that can come along and there could be a couple. We'll also as you know started at the Investor Day that we love to be talking two projects by the end of the year. So this is sort of even split but I think the timing is still a little bit uncertain. What we want to do is how capital and dry powder to deploy on projects with good returns that make sense with good counterparties going forward. So it's difficult to be very definitive but we're going to do is get dry powder in and make sure we're ready to take the opportunities that we see increasingly before us.

[Michael Webber:]

Fair enough. Great. Thanks for time guys. I appreciate it.

[Paul Wogan:]

Thanks Mike.

[Operator:]

Our next question comes from the line of Jon of Evercore.

[Jon Chappell:]

Thank you definitely guys.

[Paul Wogan:]

Hi Jon

[Simon Crowe:]

Hey Jon.

[Jon Chappell:]

Just two for me. So Paul in the press release you mentioned that you are seeing a number of tender for multi-year charters obviously that's proven with the Total and the Centrica charters, but just curious how specific those are two projects we have to do newbuilds specifically built for those projects as opposed to existing charters? And the reason I asked it is you obviously laid out some pretty significant operational leveraged to upside and spot rates that you talked about 10K improvements in spot rates, $3.5 million in EBITDA for ship and five ships you have on spot. But historically that seems like a pretty elevated number of ships on spot based on your strategy. So just trying to think about your ability to put some of those away and lessen your spot market exposure and the ability to do so based on the current tender environment?

[Paul Wogan:]

Yes. I think if you took the tenders that we are seeing at the moment, you probably something like a 50-50 split around those who want to take new buildings and those who are willing to look at either newbuildings or existing vessels. And I do think that some of these tenders will take existing vessels partly because they have not moved quickly enough to be able to take new building. So a newbuilding now is going to come in 2019. Some of these guys have got offtakes in 2018 and will have to take existing vessels. So I do think there will be opportunities for us to place some of our open ships on to longer-term contracts at the right time. I would -- idea will like to keep couple of our ships trading in the shorter-term market because I think that gives us the ability to showcase them. I think the ability being part of the Cool Pool is very advantageous to us. But we have a long-term strategy allowing our ships on long-term contracts with good counterparties and so we will look to do that through this likely set of opportunities.

[Jon Chappell:]

Right. And that's consistent with what you said in the past. Just wondering there is a Cool Pool which I guess they are on for a year now. And the fact that we are bouncing along kind of the bottom of the cycle up a little bit from trough, does that change your view of maybe I guess you use to say may be pre-October last year, you like to have one or may be one or two ships in the spot market that because of the Cool Pool and the ramp in the spot that you are seeing is that may be 3 or 4 now?

[Paul Wogan:]

I think we are again -- I think it depends on how we see that market coming out. I mean I definitely would like to keep one or two ships in that market. But it depends if we saw good opportunities to push ships away then I wouldn't necessarily hold out more ships in the spot market.

[Jon Chappell:]

All right. My second one may be just little bit difficult to answer but obviously there is been a lot of talk about and excitement about FSI use but what you've been able to do with your core LNG fleet especially with this last Centrica deal and the new deal with the Samsung. Also has pretty good returns without the inherent risk I guess or the type of leverage associated with FSI use. So capital is obviously not too abundant. You've done a great job with your balance sheet. But how do you kind of playoff entering this new market where you really haven't had an exposure in the past with continuing to chip along in a core business at a time when the cycle is seems to be set up pretty well based on your own views?

[Paul Wogan:]

Yes I mean I think fundamentally what we will do Jon is look at the risk-adjusted returns on projects and we're putting our ships on long-term charters to very good creditworthy counterparties at good returns is very attractive business for us. As we look at the FSI use base some of those opportunities are not selling with the counterparties that are strong. So therefore you need to have a better return to take account of the additional risk that you take there.

[Simon Crowe:]

Yes and Jon I think we -- on the financing side focus as we're looking into break some of the multilateral agencies to support their low risk profile there. But as Paul said we are looking for superior returns on those FSI use projects and despite carefully managing our capital.

[Jon Chappell:]

Great. I'm sorry just one real quick follow-up to Paul to answer then. If you take the Centrica deal as example of LNG contract and then obviously doesn't mean anything which is project X on FSI use any kind of risk adjust those two right now? Are they pretty equal? Do the FSI use still have far greater risk/reward potential?

[Paul Wogan:]

I think FSI use give you a higher return but then I think you have to say well actually we're taking some risk for that as well. So we would -- we certainly wouldn't do some of this FSI use business at the same returns that we're getting on our l LNG carriers.

[Jon Chappell:]

Right. Okay. Okay. Thanks Paul. Thanks Simon.

[Paul Wogan:]

Thank you.

[Simon Crowe:]

Thank you.

[Operator:]

Our next question comes from the line of Noah from JP Morgan.

[Noah Parquette:]

Thanks. I wanted to ask about the Cool Pool and the spot fleet thinking of the past, I know you can't give specific numbers, but you mentioned something like 50%, maybe a little above that utilization rates and move higher. Can you give color, is it still more like 50% or should we look at maybe 60% or above at this point?

[Paul Wogan:]

Yes. I mean I think along with the rights we're saying the rights have been sort of -- start of Q3 at 30,000, went up to 40,000 probably back down to 35,000 now. And we're seeing I think in the recent some tightness in the market. I think you see a similar thing with the utilization rate, but just generally trending higher. So, if you took somewhere 50% to 60% kind of utilization at the moment, it will be probably be a fair view of the market.

[Noah Parquette:]

Okay. Thanks. And the new -- it looks like it has XTF propulsion. Can you talk a little bit about what that is and how its compared to year TFT?

[Paul Wogan:]

Yes, I mean the XTF is like the [Indiscernible] is a slow speed engine, very tried and trusted engine that's being used for many years. The difference between this -- the XTF and the mega is that is how you inject the gas into the engine. On the mega, you inject it in a very high pressure. The XTF works at low pressure which is one of the reasons that we prefer it. However, I think it's great that there are two new technologies in the market because it's good for ship owners to have competing technologies, competing companies for their business and ultimately I think both will prove to be successful.

[Noah Parquette:]

Okay. So, it's not material increase in in fuel consumption or decrease?

[Paul Wogan:]

No, I think if you take the XTF and the mega, they are very, very similar in fuel consumptions.

[Noah Parquette:]

Okay, great. And then I just want to ask lastly, you lay out the cargo From the U.S. and part have gone to South America and Europe. And what do we need to see in the [indiscernible] more vessels going to Japan or to the Far East.

[Paul Wogan:]

I mean that’s a difficult question for someone in shipping – rather than in trading, but what interesting I think over the recent days we’ve seen Henry Hub falling on the back of warm weather in the U.S. and we’ve seen a gradual increase based on demand increasing in Asia. We’ve seen some cargos going there already. I’ll be very surprised not to see knock out that was going in this winter season into Northern Asia.

[Noah Parquette:]

Okay. Thanks. That’s all I have.

[Paul Wogan:]

Thank you.

[Operator:]

Your next question comes from Fotis of Morgan Stanley.

[Fotis Giannakoulis:]

Yes. Hi, gentlemen. And congratulations for turning up profit again.

[Paul Wogan:]

Hi, Fotis.

[Fotis Giannakoulis:]

Paul, I want to ask you about your latest comment about the increase in prices, in LNG prices both in Asia and Europe and what drove this increase and how sustainable it is? There are a lot of concerns about oil prices, has the LNG market finally decoupled from oil at least partially and even if oil is weaker, can we still see this prices $7 per MMBTU holding?

[Paul Wogan:]

Yes, I think the gas price is decoupling from oil price, but I would definitely not say that it has decoupled as yet, a lot of the contracts are still priced around oil, but increasingly especially with the trade of volumes it’s pricing the hub pricing in Europe to U.S., in Asia. I think, it’s basically just on the back of demand. One of the things that we talked about a few quarters ago was the fact that low prices stimulate demand and that’s exactly what we’re seeing, we’ve talked about the increases that we’ve see in China and in India, which has been significant, that’s what I believe is driving the pricing right now. In Asia, obviously, pricing is stronger during the winter months whether it stays that way for the whole year, that I can’t make a forecast on. But certainly I think the demand that we are seeing into the price sensitive market and into new market is responsible for the pricing we’re seeing right now.

[Fotis Giannakoulis:]

And can you give us an idea of what it means to be a low prices, is $7 still a low price and given the oil price is around $50 what would we consider a price which is attractive, so that the demand will keep growing at the same rate that we have seen so far this year?

[Paul Wogan:]

Yes. To be honest, Fotis, I can’t give you an exact answer in terms of that pricing. I think that it’s interesting that although we have the oil price index most of the gases doesn’t compete necessarily directly with oil. At this type of pricing, we have seen I think I used an example before power station in India coming out mothballs starting up again, because the electricity price that comes -- that’s driven if you like from $6, $7 pricing is very competitive and so suddenly it becomes competitive for power generation. So, with the amount of LNG that we see coming online over the next few years, there isn’t a -- no one I think is forecasting return to sort of $13, $15 or $20 for MMBTU pricing, I think if we see pricing as we are at the moment around as you said that around $7 mark, I think that continues to stimulate demand.

[Fotis Giannakoulis:]

Thank you, Paul. And I want to follow-up on FSRU and try to understand, are these projects that you are looking at power plant projects, are they related with new power plant? And also how you order any of the lead items and if not, from the time that you order your first long-lead items, how long will it take until you make the conversion of vessels for FSRU?

[Paul Wogan:]

Just taking your first -- your second question first, Fotis. We order long-lead items, we are probably looking at something like 12 months, as clock stops ticking down from 12 months from ordering those long-lead items. And then, we are probably looking at somewhere between sort of eight and nine months for the conversion work itself, so right now, if we go and order them, we are probably looking at something like 20 month lead time which will then start to tick down. Sorry Fotis, can you repeat your first question?

[Fotis Giannakoulis:]

No, that was my question if you have ordered any of the long-lead items?

[Paul Wogan:]

And you are also asking about power plants, I think…

[Fotis Giannakoulis:]

Yes.

[Paul Wogan:]

The easy answer to that is some of the things we are looking are at, to include power optics and some of them don’t. For us, it’s around putting the FSRU into the place at moment, rather than getting involved in the power at this stage.

[Fotis Giannakoulis:]

Thank you, Paul. And one last question about Cool Pool? There have been some report and some discussions that you might have done some contract of affreightment. Can you talk a little bit more about that and what is contract of affreightment and how it works so the market to be more familiar of the chartering alternative that you can offer to your customers?

[Paul Wogan:]

Yes, we have and I think it’s one of the great advantage. I can’t speak about things in detail or whatever, but what I can give is broad view of it, Fotis. It’s one of the great advantage I think of the pool. For example, what we have done is, customer has come along and said rather than taking ships on a case-by-case basis, they would like to have the ability to take X number of days from us over the year and from a basis of that, they would give us first call on all that cargo. So, provided we have a ship in position, we are able to put that ship in and that’s on the floating rate basis if you like against broker reports of the market. What that does is that it gives them comfort that they are going to have the ability to take ships as and when they need to trade and for us what it does is it gives first call on a very good customer with improved utilization of our fleets. And that’s a great example of, you can’t just do that if you have three, four, five ships trading in the market, you can only do that if you got 18 ships such as the pool has and so it’s doing is, its allowing some of the new entrants in the market to trade effectively around that portfolio and its creating shipping demand for the pool. So it’s being very, very good to see that happening.

[Fotis Giannakoulis:]

Thank you very much, Paul. That’s was very helpful.

[Paul Wogan:]

Thank you.

[Operator:]

Our next question comes from Ben of Stifel.

[Ben Nolan:]

Yes. Hi, guys. So I have a couple of quick ones. First on the just for the record keeping purposes, they OpEx was pretty good this quarter relative to sort of where it had been, is that cost just a little bit lower, I mean is the dollar helping, how should we think about that going forward?

[Simon Crowe:]

Yes. Ben, this is Simon here. We have made a lot of progress on the OpEx and it speaks to the operational platforms. We’ve been driving led by our COO, Graham Westgarth and driving cost out of the system if you like. We have grown the fleet, we have got economy to scale if you like, we’ve got efficiencies in purchasing and we are continuing to try to drive that down. So I think that sort of level is reflective of what you can think about going forward.

[Ben Nolan:]

Okay, helpful. And then secondly, on the tenders obviously, you guys have one, two new contracts by the way which is good. I am curious, especially it relates to new builds or when you are going into the process and trying to win new business on new buildings like this one, is the number of phases that you are competing against has that changed it all? Are you really seeing a lack of capital giving you kind of a little bit of better competitive position with respect to wining the business or the players that are there kind of healthy and have been healthy?

[Paul Wogan:]

I think, we’re actually being helped at the moment, because some of the people who historically, we have competed against are not able to either access capital or do it in cost effective way, in the way that we are. So we still have plenty of competition in our tenders, but certainly less than that was couple of years ago.

[Ben Nolan:]

Okay. And then just a quick follow-up is there -- obviously there has been few words lately is there -- what’s the pipeline look like over the next three to six months or so?

[Paul Wogan:]

Yes, I mean there is still lot of vessels needed to take the U.S. volumes which have been built out. So we are seeing a number of active tenders at the moment. So we do expect to see more vessels. As I was saying earlier, I think you will see some of those done on new buildings and I think you will see some of those taken out by existing ships.

[Ben Nolan:]

Okay. And then last one for me just on the FSI use, I know you mentioned first about through the conversions. Could you maybe just stepping back a little bit talk about, what you are thinking about new builds versus the conversions and specifically on conversion, are you targeting some of those older steam ships or something more modern, what’s the approach at this moment in terms the right assets to deploy from your perspective?

[Paul Wogan:]

Yes. I think it’s on a case-by-case basis, and some of the projects new building would be right solution and some of them though conversion especially given the speed to market and sometimes the size of the market as well doesn’t actually need a larger new building. So I think that capital market there we said that we would look at both conversions and new buildings and in our case, some of the stuff we are looking at could use either of those. And in terms of the ships, that we used for that again little bit depended on the actual opportunity, so it could either our existing TFTs or essential our steam vessels.

[Ben Nolan:]

Okay. Great. That was for me. Thanks, guys.

[Paul Wogan:]

Thank you.

[Simon Crowe:]

Thanks Ben.

[Operator:]

And our next question comes from Herman of Clarksons.

[Herman Hildan:]

Good afternoon, guys.

[Paul Wogan:]

Hi, Herman.

[Herman Hildan:]

So just -- if I remember correctly, I think you said in the Capital Markets Day that you aim to tie-down two FSI use projects before the end of the year and based on kind of what you -- the conversation we made today, it seems that things are going well ahead of schedule based on expectation you have back them. And then, I'm wondering the projects that you are looking exclusive on both, I mean [Indiscernible] I think for FSI use conversion and they are modern call it, FSI use newbuildings available in market in 2017, so I'm just trying to understand your, call it, competitive advantage if you are in competition with [optional players].

[Paul Wogan:]

Yes, I think as we said we like to be in an advantageous position on a couple of contracts -- couple of piece of business by the end of the year. We still think that’s correct. And by advertise we meant either bidding it on a sole basis or bidding it on an advantageous position. But difficult to go on too much detail on that, but yes, I mean in this market there is a lot of things happening that the markets growing very quickly. I think because of that there is opportunities for new entrants such as ourselves to get into good position and not necessarily just have to go in for open tenders.

[Herman Hildan:]

Yes. That’s very good. And also on interesting comments you’ve made on the COA structure with the space and in particular for the VLGC won the largest space [indiscernible] established structure that sector they had to give kind of a discount to the rate is that – I mean is this something that’s driven by call it your clients and consequently you will have the same rates as brokers or is it something that you kind of would have to do in order to create a market?

[Paul Wogan:]

No. It is in the discounted rate.

[Herman Hildan:]

Okay. That’s good. And kind of on the topical rates, talking today by the brokers that L&G [indiscernible] rates have moved up to the mid-40s and obviously [indiscernible] coming back and – but do you think that they call it strengths in the market now with something more than just the seasonal factor and then particular [indiscernible] the key call it demand drivers in the in the short term for a cargos.

[Paul Wogan:]

Yes. I think couple of things back of that. I think we see a gradual timing in the market. We were predicting capital markets considerably by the third quarter 2017. [indiscernible] is going to be a linear straight forward march up. So as we see near the market went up to 40,000 today. Came off a little bit, as you say quite rightly over the last few days see tightening. We’ve heard talk of right in the mid-40s although. We tend to use your figure -- so we’re waiting for your latest ones to come out before we talk too much about the rates. But yes, we do see that continuing out will be continued tightening in the winter probably, could that come up a little bit in the summer, yes. But will it go back down the lows we’ve seen before probably not in my opinion. So it’s that gradual tightening overtime. And I think there will – we call it the inflection point of the capital markets day where the market really does get very tight and we see the rates going up quite considerably quite quickly and also at that point I think staying at the higher levels.

[Herman Hildan:]

And also on the comment, you’ve been asked this question multiple ways, but – we agree with you that there is a need for an e-commerce beyond what’s available on the [indiscernible] in the market today and kind of a bit on the topic of the capital allocation question. How do you weigh starting a side capital for very profitable after few projects versus securing long term contracts on some of your [indiscernible] versus ordering new bills? How do you make that allocation?

[Paul Wogan:]

It literally does come back to a risk adjusted view on it. We think that’s huge potential in the [indiscernible] we’d like to enter that space. But I think as you’ve seen this before what we don’t want to grow do is grow just for the sake of it and in terms of our returns of LNG vessels. We have fast when some of the other competitors were going for lower rates et cetera not getting the same kind of returns that we felt were needed. So we don’t want to grow just for the sake of it. We do see huge opportunities in the carrier space, but those returns have to be on the risk adjusted basis or better than we’re seeing on the LNG space, if it’s not, then we wouldn’t perceive. And I don’t think our board will allow us to perceive them even if we have management wanted.

[Herman Hildan:]

That’s very good. And then final question that I know you’ve probably can’t comment too much about but obviously [indiscernible] talking lot about GasLog aggressively pursuing accelerate business. And could you say that’s passed or whether it’s something that build on table depending on the terms or what can you really say about those rumors in trail wins.

[Paul Wogan:]

We understand that there is pretty much market knowledge that accelerates up for sale. Number of people are looking at it, but we rather not to talk about that sales process right now, but earlier say that was very pleased with how we’re progressing organically and now moves into [indiscernible].

[Herman Hildan:]

Okay. Thank you very much guys.

[Paul Wogan:]

Thank you.

[Operator:]

Thank you. And this does conclude the question and answer session. I would now like to turn the call back to Paul Wogan for closing remarks.

[Paul Wogan:]

Thank you very much to everybody for your time for joining us today and look forward to speaking to you in the near future. Thank you very much. Bye bye. Thank you.