GasLog Partners LP
Q2 2017 Earnings Call Transcript

Published: 27 Jul 2017

[Operator:]

Good morning. My name is Vince, and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Partners’ Second Quarter 2017 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. Today’s speakers are Andy Orekar, Chief Executive Officer; Alastair Maxwell, Chief Financial Officer; and to commence the call, Samaan Aziz, Investor Relations Manager. Mr. Aziz, you may begin your conference.

[Samaan Aziz:]

Good morning and thank you for joining GasLog Partners’ second quarter 2017 earnings conference call. For your convenience, this call, webcast and presentation are available on the Investor Relations section of our website, www.gaslogmlp.com, where a replay will also be available. Please now turn to slide two of the presentation. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our second quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the appendix of this presentation. I will now hand it over to Andy Orekar, CEO of GasLog Partners.

[Andy Orekar:]

Thank you, Samaan. Good morning, and thanks to everyone for joining GasLog Partners’ second quarter earnings call. I’ll begin today’s call with our highlights for the quarter, and an overview of our recent acquisitions. Our CFO, Alastair Maxwell, will follow with a review of our financial performance and dropdown pipeline, and I’ll conclude with an update on the LNG shipping market, and our distribution growth outlook. Following our presentation, we’d be very happy to take any questions you may have. Turning to slide three, you can see our highlights. In the second quarter, we delivered our highest ever results for revenues and EBITDA and we declared our third consecutive quarterly distribution increase. Our distribution today stands at $0.51 per unit or $2.04 on an annualized basis, which represents an increase of 2% from the first quarter and 7% from the second quarter of 2016. During the quarter, we completed the acquisition of the GasLog Greece. We also announced in post-quarter end completed the acquisition of the GasLog Geneva. Both of these strategically attractive vessels are under multi-year charters to a subsidiary of Royal Dutch Shell. In May, we successfully completed an offering of perpetual preferred equity, raising net proceeds of approximately $140 million. Finally, we commenced an at-the-market common equity offering program raising cumulative net proceeds of $11 million since inception. Turning now to slide four in more details on our recently announced dropdowns. We have completed few acquisitions in the past three months. We closed the GasLog Greece on May 3rd and the GasLog Geneva on July 3rd, both of which were built in 2016 and operated by our parent since delivery. The Greece is on charter Shell for approximately nine years and Shell has a five year extension option. The charter is expected to generate approximately $24 million of annual EBITDA which results in a purchase price multiple of 9.1 times. The acquisition was financed with proceeds from our January common equity offering and the assumption of the vessel’s existing debt. The Geneva is on charter to Shell for over six years after which period Shell has options to extend the charter by five years and then by a further three years. The charter is expected to generate approximately $23 million of annual EBITDA which also results in a purchase price multiple of 9.1 times. The acquisition was financed with proceeds from our May preferred equity offering and the assumption of vessel’s existing debt. These immediately accretive acquisitions expand the partnership’s fleet to 11 wholly owned LNG carriers, extend our average remaining charter duration and significantly increase our annual EBITDA and distributable cash flow. With that as introduction, I’ll now turn it over to Alastair to take you through our financials.

[Alastair Maxwell:]

Thanks, Andy and good morning to everyone. I’m pleased to report another strong quarter in terms of the financial performance of the partnership. Please turn to slide five. In the second quarter of 2017, we achieved our highest ever quarterly partnership performance results for revenues and EBITDA. Both metrics showed significant increases over Q1 2017 due to the acquisition of the GasLog Greece. Compared to the second quarter of 2016, our strong performance was due to the acquisitions of both the GasLog Seattle in November 2016 and the GasLog Greece in May 2017. We expect further growth in revenues and EBITDA resulting from the contributions of the GasLog Greece and the GasLog Geneva for our full quarter throughout Q3. Turning to slide six. Using our increased cash distribution of $0.51 per unit, our strong financial performance during Q2 resulted in a coverage ratio of 1.19 times, excluding the impacts of the accrual for the dividend on the preference units given that the contribution of the GasLog Geneva will only begin in Q3 2017. Even including the impacts of the preferred dividend, our coverage ratio was still a solid 1.12 times. And since IPO, our coverage ratio has averaged over 1.2 times. Turning to slide seven. The top panel of this slide shows the 12 vessels on multi-year charters owned by our parent GasLog Limited. The charter periods range from 2019 to 2029 and represent well over $200 million in total annual EBITDA. These vessels provide visible future growth opportunities to GasLog Partners and will contribute positively to the average charter length of our fleet. Turning to slide eight. Following our preferred equity offering, and after factoring in the backlog of GasLog Geneva, we have total liquidity of approximately $200 million. As you will recall, we have $30 million debt maturity relating to the outstanding amounts under the Junior Tranche of the five vessel refinancing facility which is due in April 2018. Following the full repayment of the Junior facility, all of our debt maturities through November 2019 will have been addressed. In addition, there are four planned dry-docking scheduled to take place over the next 18 months, which will reduce revenues and incur ordinary cost dry-docking costs. As a reminder and as previously disclosed, all of our vessels undertake regular dry-dockings for maintenance purposes. We are taking advantage of the dry-dockings in 2018 to undertake approximately $25 million of investments in certain of the vessels with the aim of enhancing their operational performance and improving their marketability to customers. Despite this investment, our strong liquidity position combined with the ongoing proceeds of our at-the-market program leaves us well positioned to fund future acquisitions. With that, I’ll turn it back to Andy.

[Andy Orekar:]

Thanks, Alastair. Turning to slide nine and the market for LNG shipping, which we believe looks attractive for the next several years to come. Significant expected increases in LNG supply should create additional demand for LNG carriers, and there has been strong and growing demand for LNG as a commodity in both new and existing market. We have seen limited new vessel orders which we believe will result in a shortfall of vessels relative to what the current order bunk will provide by 2020. In the shorter term shipping market, we continue to see a greater number of fixtures in 2017 compared to the same period in 2016, and increasing signs of seasonality, both of which point to a tightening market. Turning to slide 10. This slide shows the growth in LNG imports for the first half of the year over the same period in 2016. In the first half of 2017, global LNG trade continued to grow signifnatly with import of 11% to 141 million ton. China posted the largest year-on-year increase in absolute volumes, importing over 400 million tons more this year which represents an increase of over 30%. Japan and South Korea, two of the world’s largest consumers of LNG, were second and third respectively with increases of 10% and 18% respectively. Turning to slide 11 where we look at four liquefaction project in Qatar, Australia and the U.S., and the destinations of where their cargoes have been shipped. What is interesting is that with both Qatar and Australia since 2016, the average voyage length of laden passage is between 3,900 and 4,800 nautical miles. This compares to a market average of around 4,000 nautical miles, showing that some of the projects were just typically shorter such as QCLNG are contributing to higher average ton miles than in the past. Looking at the U.S. and the Sabine Pass cargoes delivered since the project start up last year, the data shows that the average distance have been approximately 7,500 nautical miles or almost double the long-term industry average. While it is too early to say whether this trend will continue as other U.S. projects come online, the diversity of destinations and demand for U.S. LNG is clearly positive to future shipping demand, as longer sailing businesses take available shipping capacity out of the market. Turning to slide 12, where we look at what the new LNG supply means for overall shipping demand. The red line shown on this chart is the vessel order book and the blue line is the number of vessels required for the LNG projects which has taken FID and are already under construction. For Australian projects, we have assumed one ship per million ton. For the Middle East and Russia, we have assumed 1.3 ship and for the U.S. projects, we have assumed 1.5 ship which could be conservative based on the data shown on the previous slide. Based on roughly 120 million tons of new LNG coming on-stream from the beginning of this year to 2020, we estimate that 140 ships are needed, or 40 ships in excess of the current order book. If you were to take the Sabine cargo ship-to-date which represents the multiplier of 1.7 times, and apply this multiplier to other U.S. facility which is expected to come online, the number of ships needed rises to approximately 60 over the current order book which is represented by the grey line on this chart. We believe this shortfall will continue to drop demand for LNG shipping for the next several years to come. Turning to slide 13 and a recap of the GasLog Partners investment proposition. This slide shows our distribution growth history and guidance through 2017. You can see on the far left hand panel, we have now grown our quarterly distribution of $0.51 per unit, or $2.04 annualized. This represents in 11% compound annual increase since our IPO and a 7% increase on a year-on-year basis. We have consistently targeted a 10% to 15% CAGR in distributions from our IPO and we’re proud to say that we have met our guidance in every quarter of our three years as a public partnership. We continue to expect to meet this guidance through the fourth quarter of 2017 which will result in an annualized distribution of greater than 209 by year-end. We look forward to providing 2018 guidance later this year. Now turning to slide 14, in summary, in the second quarter, GasLog Partners continue to execute its growth strategy. We delivered our highest ever quarterly results for revenue and EBITDA enabling us to increase our cash distribution while maintaining a solid coverage ratio. The partnership successful acquisitions of the GasLog Greece and the GasLog Geneva, support our cash distribution CAGR guidance of 10% to 15% from IPO through 2017. We have substantial liquidity to fund continued fleet growth and investments and vessel enhancements. And looking longer term, continued progress of new liquefaction volumes, chartering activity and a lack of our new vessel orders support our positive demand outlook for LNG shipping. That brings us to the end of today’s presentation. Vince, could you please now open the call for any questions?

[Operator:]

Yes sir. [Operator Instructions]. Our first question is from Chris Wetherbee of Citigroup. Your line is open.

[Unidentified Analyst:]

Hi good morning guys. This is Prashant on for Chris. Wanted to first ask you Andy, distribution, growing it regularly and consistently and it’s a great story. The cash was coming online this year seems to support an increase in coverage over that 209 bogey and I get that yields in the market may be doing a pretty – distribution increases two quarters ago. I just wanted to get a sense of your thinking as to the upside of the 209 annualized run rate at the end of the year as we exit. What sort of factors do you need to see in the market? What are your sort of markers for gauging how much upside there could be? On the flipside, what would you look for sort of think deferring out to 2018 in terms of distribution growth by a quarter or two maybe?

[Andy Orekar:]

Sure. Hi, Prashant. I think I’d say couple things firstly, we’re very proud of the track record we’ve had of increase in distribution not just recently, but over the past three years. And it does feel like we are starting to see some green shoots of MLPs who can grow their distribution by a reasonable amount, seeing some differentiation in their yields, the way they are being valued in the market. We are still just one quarter into owning our acquisition of the Greece here, so we’ll have the full quarter for that in Q3. We of course will have the full quarter – of the Geneva in Q3. So, we really want to see how the performance of those vessels comes together in the quarters before increasing any guidance for the end of this year. But I think we’re very happy to continue running at what we think is solid coverage with distribution growing at this point in the mid-to-high single digits year-on-year and it does seem that we are beginning to get some valuation differentiation as a result of that. But it’s been a very volatile market, I think the Alerian Index – go down for the year despite being up fairly significantly over the past month. So, it still seems fairly tentative but we’re happy to keep growing the distribution by a reasonable amount and feel it will continue to differentiate us over time.

[Unidentified Analyst:]

Okay, thanks. That’s really helpful. Another question on the at-the-market equity program, just sort of thinking about the dropdown pipeline and equity funding needs. Does this pretty much satisfy what you see near term, let’s say intermediate term in terms of equity issuances that you’ll need to fund your cash flow growth or I mean just wanted to get a sense of how we should think about, what the draw downs might be like on that as we sort of model this out?

[Andy Orekar:]

Sure. I think Alastair in his prepared remarks took you through some of the calls on our capital that we have over the next year or so, including our remaining debt maturity as well as some CapEx around the dry-docking that we have scheduled over the next, call it 18 months. I think having said that, we are pleased with the strong balance sheet and the liquidity that we have and we believe with continued responsible use of the ATM, i.e. not selling too heavily to disrupt the unit price, we would be able to fund further addition to our vessel fleet within the next six months.

[Unidentified Analyst:]

Okay, that’s great. And then just one quick modeling question and I’ll turn it over, small housekeeping thing. Some of your operating expenses seems like just a hair above where we would run rate it, given the vessel additions in the quarter. Is there one-timing in there to call out or is that sort of a good run rate going forward?

[Alastair Maxwell:]

Prashant, it’s Alastair here. The answer is mostly timing. There was some maintenance expenses which were not incurred in Q1, which were incurred in Q2 and some may spill into Q3. So it’s clearly a function of timing.

[Unidentified Analyst:]

Okay, great. Thank you very much guys and congrats on the quarter.

[Andy Orekar:]

Thanks, Prashant.

[Operator:]

Thank you. Our next question is from Fotis Giannakoulis, Morgan Stanley. Your line is open.

[Fotis Giannakoulis:]

Yes, hi gentlemen. I want to ask about the three vessel, they come off contract next year. If you have beginning talks with your customer for potential expansion, and if you can give us an idea of how do these vessels compare with a newly ordered vessels the LP-2S and XPS[ph] vessels that you have ordered in terms of fuel consumption and rate expectations?

[Andy Orekar:]

Sure. Hi, Fotis, it’s Andy. Just to take those in order. So, the short answer is yes, we’re in discussions with both the current charter as well as other potential customers for our three vessels that renew next year and just remind you that May, July, and September of next year. So, it is still a little bit early but we are beginning those discussions and I think we’re continuing to see a more active market for carriers in ‘18 and ‘19 as number of the U.S. projects that we’ve long been following are beginning to come online. So, I think that those ships can very well land up back with Shell or with a new customer. I think they also could trade for some period of time in a spot market if we feel that by – to put them away in term business in ‘19 would yield a better multi-year outcome. So, I think all of the options are on the table and as I said, very actively in discussions for those three vessels today. What I’d also point out however is, for better or worse with the fleet growth that we’ve had, those vessels today represent a relatively small amount of our fleet EBITDA. So just to give you one metric, if those three vessels to be put back on rates that were $10,000 a day higher or lower, that would only change our EBITDA by about 2% for the fleet. And of course, we expect to be doing more drop downs as we go. So, relatively small amount but again, something we’re very focused on given those renewals in about a year or so. And now, I’m sorry, your second question was?

[Fotis Giannakoulis:]

It was about the differential and how -- the fuel consumption differential with the new ships and what kind of rate expectations relative to the newer ships that you have ordered recently?

[Andy Orekar:]

Yes, the LP-2S and MEGI ships of course are the most modern propulsion and boil-off ships, so they are more fuel efficient. Having said that, there are very few of those ships that are available and not already under contract when they deliver in ‘18 and ’19, and in our case in ‘20. So I think it’s a bit of a theoretical question today in terms of can you actually get one of those two stroke ships in ‘18 versus the market, the market is really on the water vessels in ‘18 is really the TFDEs and of course the steams to a lesser extent. So I think we’re not expecting per se a rate discount for the ships that we have renewing in ‘18 relative to the two stroke ships. I think if it was for our new building, clearly we’re going to continue ordering new buildings with the most modern propulsion. But they are not really competing today in what I call the renewal market.

[Fotis Giannakoulis:]

Thank you, Andy. And I want to ask about the market overall, I mean the chartering activity particular for long-term charters. It seems that GAIL is going to be out or it is already out trying to secure some contracts. We’ve been reading that Bangladesh might be signing the well awaited off-take agreement with Qatar. Do you see more opportunities for long-term charters? And these opportunities are they for new building vessels or existing vessels or they do not have contracts?

[Andy Orekar:]

I think the trends that you really saw with our parent company beginning last year with some of the new business that they successfully wind up is really around a number of the U.S. off-takers arranging shipping for projects like Sabine, Corpus and Cove Point. So I wouldn’t want to go through them name by name because of the - confidential discussions, but we certainly see those conversations continuing as we get closer to U.S. projects producing in ‘18 and ‘19. And then of course there is other activity around, other ships that are renewing either by others providers are shipping or project ships that are going back to where they were originally intended. So there is an opportunity for – on the water ships that compete for that business as well. So I would say generally the market for tenders has been fairly active over the past year and it’s continuing to be so as we get closer to ‘18 and ‘19.

[Fotis Giannakoulis:]

Thank you, Andy. I want to ask about the reports about the least of destination clauses of existing contracts. How do you view that this will impact the market? And also if you can comment your view about or your company’s view about LNG prices, oil environment has not been really supportive but we all know that there is a lot of volume that is going to come in two, three years. How do you view that LNG prices impact the demand for ships?

[Alastair Maxwell:]

Fotis, Alastair here. Your first question, you’re obviously referring to the inaction by the Japanese and the - authorities in terms of prohibiting entering into the future destination – contracts with destination restrictions. And this is something which has been discussed for quite a long time. I think the market for a while for a number of different reasons has been moving away from those restrictions anyway. The market has been moving more towards FOB rather than DES contracts. And I think all of that is helpful because it is likely – people focusing more and more on cargo value optimization rather than only shipping efficiency and it’s not something that we’ve spoken about in the past as well. And so I think it’s not a new trend or new development, but it’s something that’s clearly been formalized in the context of Japanese off-takers in particular. My take on prices is, I think the best thing for LNG demands over the course of the last two or three years has been low prices. And I think a further period of low prices because of the strong supply growth that we’re seeing is very, very hopeful in terms of encouraging and cementing incremental demand in new markets and we’ve seen that on the slide that Andy presented earlier, both in existing mature markets but also in emerging markets, for LNG demand. And I think all of that is very, very helpful for long-term growth and clearly, the ability of demands to absorb the incremental supply that’s coming on will require incremental shipping. So I think generally we view all that as being positive in the short-term, clearly what we need over the medium to longer term is a pricing mechanism which also enables people to sanction new LNG projects going forward and I think that’s what’s been kind of explored by the market at the moment.

[Fotis Giannakoulis:]

Thank you very much, Alastair. Thank you, Andy.

[Andy Orekar:]

Thanks, Fotis.

[Operator:]

Thank you. Our next question is from Ben Nolan of Stifel. Your line is open.

[Ben Nolan:]

Thanks guys. I had [indiscernible] I think it was a comment that Alastair made that you guys as part of your dry-docking you’re doing $25 million of enhancements to some of the ships to improve their efficiencies next year. Just curious if maybe you could talk me through what that entails and what sort of efficiencies you’re targeting to -?

[Alastair Maxwell:]

Yeah, hi Ben. So, there’s a number of things that drive the operational performance of a vessel and it’s around propulsion, fuel efficiency, containment, size, etcetera, etcetera all these factors have an impact on unit freight cost and there’s a number of different things that you can do in order to improve the performance and to get the unit freight cost down -. And clearly the aim of the exercise here is to improve the marketability of those ships to [indiscernible] when they come off their initial chances. So, we’re looking and investing in a number of different things to improve the efficiency, make them more marketable and we’re taking advantage of the dry-docking when these vessels will be off the water anyway in order to do that.

[Ben Nolan:]

Okay. And just so specifically [indiscernible] which ships that you’re looking at there?

[Alastair Maxwell:]

No further details on which…

[Ben Nolan:]

Okay, that’s fine. And then back to sort of the capital questions [indiscernible] seen through your next dropdown having done the most recent was a little bit heavier weighting towards debt it seems like, how do you think through the equity debt split of the next drop as it relates to your balance sheet?

[Andy Orekar:]

Sure. Ben, it’s Andy here. I think, we typically target sort of a 60-40 debt to equity ratio on our dropdowns because we do have amortizing debt into that 60 naturally declines over time. In some cases, we’ve had some good fortune of inheriting very attractive debt terms that our Alastair and our parent put in place particularly on the 2016 ships with some of the lowest cost of capital on the debt side of our balance sheet. So we were happy to take a little more of that and continue to pay it down over time. But I think depending on the ships that we’re buying from our parents anywhere from 50-50 to 60-40 is typically how we’ll target it, and depending on the conditions for equity at the time, we always intend to run at a fairly lower level of leverage at the MLPs than our parent, simply so we line up well with the rest of the MLP sector. And so today we’re in the low-50s on our debt-to-cap basis and kind of low fours on our net-debt-to EBITDA basis and I think that’s why we don’t have any hard targets, that’s where we’re comfortable at the MLP.

[Ben Nolan:]

Okay, perfect. And then just sort of lastly on that, I guess is it fair to assume given how much capital you’ve raised to preferred and also through the ATM, the next dropdown could probably be done in terms of equity funding – of what’s already in the balance sheet?

[Andy Orekar:]

Yeah, I would say the combination of the liquidity we have on the balance sheet and I think as I mentioned continued responsible use of the ATM without overtaxing the volume in the market, we think would be sufficient to fund the next dropdown.

[Ben Nolan:]

Okay, perfect. That does it for me. Thanks a lot guys.

[Andy Orekar:]

Thanks, Ben.

[Operator:]

Thank you. Our next question is from Randy Giveans of Jefferies. Your line is open.

[Randy Giveans:]

Hey guys. Thank you so much and congrats on a solid quarter. Just one quick question, looking at the IDR splits, obviously increasing in distribution, getting closer and closer at 50% split, so what are your kind of current thoughts, plans on maybe resetting the – of GasLog, just kind of avoid an unmet 50% split, it looks like by mid-2018 at this case?

[Andy Orekar:]

Sure. Hi Randy, it’s Andy here. I think a couple things, we’ve said this before, but I’ll just repeat it. We think our cost of capital is very much a function of our growth rate and distribution and so accordingly we are always looking for anyway we can to reduce our cost of capital and you’ve seen us do that this year with our recent preferred equity offering which we thought was an attractive fixed cost of equity, the ATM which we think was a lower realized cash cost of equity. And the IDRs and the GPK clearly play a role in that cost and something that both GasLog Partners and our parent are very cognizant of and are in active discussion with that. Having said all that, I remind you that today IDR take is only 4% of our distribution. So the size of the price if you will, is relatively small in terms of any GP drag on LP growth and today it’s really quite small. But we’ll continue dropdown the growth that we imbedding over the next several years, that will change in the future. I would just say I’m confident that the two companies will find the appropriate solution so that GLOP can continue to have a competitive cost of capital and continue growing at distribution and recycling capital to our parent.

[Randy Giveans:]

Sure. Alright, I think that’s it for me. All the other questions are asked.

[Operator:]

Thank you. Our next question is from Gregory Lewis of Credit Suisse. Your line is open.

[Joe Nelson:]

Thank you. Good morning. This is Joe on for Greg today and thank you for taking the questions.

[Andy Orekar:]

Hi, Joe.

[Joe Nelson:]

Just, as we think about, I know Andy you mentioned in your prepared remarks having a little bit more guidance later this year on what the 2018 distribution might be. But I mean just as we think about it conceptually, are you guys within that 10% to 15% growth CAGR, maybe a little bit more refining around that number?

[Andy Orekar:]

Hi, Joe, it’s Andy here. I really wouldn’t want to comment much more, it’s still a little early for us to be talking about 2018. I think we went public in the middle of the year back in ‘14 and so we used it CAGR at the time, because we thought that would be more appropriate. I think now that we’re three plus years into this I think going to more of an annual growth target seems to be frankly simpler and probably easier for the market to understand. So I think we probably have that direction as we think about ‘18 and beyond, but I really wouldn’t want to comment and I would just really say we’ve had a nice track record of growth and we continue that here in ‘17 in a relatively volatile MLP market. And so, we’ll take - all that and provide more guidance on ‘18 little bit later this year.

[Joe Nelson:]

Okay, that’s helpful. Thank you. And then maybe just kind of one a little bit one here for the model, you guys called out about $25 million extra capital outlays for the three ships entering dry-docking. Should we expect any additional downtime associated with that?

[Alastair Maxwell:]

No, Joe, it’s Alastair here. No, we’re planning for the usual approximately 30 day dry-dock period, so nothing into that.

[Joe Nelson:]

Okay. And maybe just one follow up, I think this year you had one dry-docking scheduled, is that underway or is that maybe something later in the year?

[Alastair Maxwell:]

Later in the year, late fourth quarter is the current plan.

[Joe Nelson:]

Okay. Thank you very much guys. Appreciate the time today.

[Andy Orekar:]

Thanks, Joe.

[Operator:]

Thank you. [Operator Instructions]. I see no other questions in queue. I’ll turn to Mr. Orekar for closing remarks.

[Andy Orekar:]

Thank you, Vince. And thanks everyone today for listening and your continued interest in GasLog Partners. We certainly appreciate it and we look forward to speaking to you again next quarter. Thanks very much.

[Operator:]

Ladies and gentlemen, thank you for your participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.