GasLog Partners LP
Q3 2015 Earnings Call Transcript

Published: 31 Oct 2015

[Samaan Aziz:]

Good morning and thank you for joining GasLog Partners' Third Quarter 2015 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 cause actual results to differ materially from these forward-looking statements, please refer to our third quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the appendix of the presentation. I would 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' third quarter earnings call. I'll begin today's call with our highlights for the quarter and a review of our contract profile. Our CFO, Simon Crowe will follow with a review of our financial performance, and I'll conclude with an update on the LNG market and shipping demand and a summary of our 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 recent highlights. This quarter, we achieved record results for revenues, profit, EBITDA, and distributable cash flow. This performance was due to the successful execution of our recent dropdown acquisition, 100% utilization of our enlarged fleet, and outperformance of our operating cost relative to budget. As a result of this strong quarter, today, we're increasing our distribution by 10% to $0.478 per unit or just over $1.91 on an annualized basis. At this increased distribution level, our coverage ratio for the quarter was 1.37 times, well above our 1.125 times target. Turning to slide four, we provide more detail here of the significant growth we have achieved from the second quarter of 2015 as well as on a year-over-year basis. Adjusted EBITDA of 37 million was 58% higher than Q2 of 2015 and 136% higher than the third quarter of 2014. As you can see on the bottom row of this slide, we've grown our cash distribution per unit by 10% from last quarter and by 27.5% since this time last year. We believe this track record of growth distinguishes GasLog Partners as best-in-class relative to most of our MLP peers. In summary, we're proud of our performance this quarter and in our year and a half as a publicly traded partnership. We're outperforming the goals we set for you at IPO and are well-positioned to continue delivering distribution growth to our unitholders. Turning now to slide five, over the last few months, we've seen weakness in the equity and energy markets. And in light of this, I wanted to review our strong contract profile. As stated on previous calls, our charters are fixed-fee contracts with no commodity price or project-specific exposure. These contracts are all denominated in U.S. dollars and generate revenue under daily rates, regardless of volume or production levels. As such, GasLog Partners has highly predictable and stable cash flows, even during periods of low or range-bound commodity prices. And following our dropdown transaction that closed in July, our eight-vessel fleet is fully financed and 100% contracted through May of 2018. Turning now to slide six, you can see the stability of our charters and fully contracted business model generates predictable and growing EBITDA. Despite declining energy market, we've been able to deliver substantial cash flow growth through our dropdown acquisition strategy. With that, I will hand it over to our CFO Simon Crowe.

[Simon Crowe:]

Thanks, Andy. Good morning and afternoon to everyone. I'm really pleased that, today, we're reporting another good quarter for the partnership. On slide seven, you can see that, since our IPO, we have successfully executed two dropdown transactions and grown our cash distribution by 27.5%, which equates to a 21% CAGR. We're now exceeding our 10% to 15% target distribution CAGR set at IPO. Although we have committed to growing cash distributions to our unitholders, this outperformance allows us the flexibility to continue to perform in line or above our growth target for several more quarters without the need for another dropdown. On slide eight, you can see that we have also outperformed our target coverage ratio. For the third quarter, it was 1.37 times. And our cumulative coverage since IPO is 1.19 times. The outperformance in both periods is primarily due to operational efficiencies, cost savings, lower interest expense, and favorable foreign exchange rates. Turning now to slide nine, our high coverage ratio creates further flexibility going forward and puts us in a strong position when we consider further growth opportunities. Building some cash during a time of weaker markets is prudent and builds additional financial firepower. Of note, in the coming months, we plan to refinance the debt we assumed in our second dropdown transaction and these discussions are progressing well. Turning now to slide 10, we're very pleased that we're continuing to deliver against our distribution CAGR target of 10% to 15%. This continues to be our ongoing growth target for GasLog Partners. And this confidence is supported by a strong track record and our multiyear pipeline of vessel dropdowns from our GP sponsor GasLog Limited. While we've significantly grown our distribution in our short history as a listed partnership, we have simultaneously replenished our dropdown pipeline with five additional vessels added in 2015. The box on this slide provides a comparison of GasLog Partners today and our position at the time of last May's IPO. We now fully own eight vessels operating under long-term contracts, up from three at the IPO, and have the same number of 12 identifiable dropdown candidates. These 12 vessels represent well in excess of $200 million of annual EBITDA and have an average remaining charter length of 8.3 years. GasLog Partners will acquire these vessels over a multi-year period. Most importantly, I can tell you, as the CFO of both companies, that GasLog Limited is committed to supporting GasLog Partners' growth going forward. And with that, I'll now turn it back to Andy.

[Andy Orekar:]

Thank you, Simon. Please turn now to slide 11. I'd like to spend a moment on the LNG market and some recent momentum we have seen at a number of the advanced liquefaction projects in Australia and the U.S. Despite weak commodity prices, this quarter has seen a number of positive developments at the projects we've highlighted for you on this slide. The Santos-led Gladstone facility in Australia shipped its first gas earlier this month with COGAS taking the first commissioning cargo. BG's Curtis Train 2 also started up during the period, following the successful launch of its first train at the end of 2014. The Australia Pacific LNG project is also expected to come online by the end of this year. And although Chevron indicated first LNG from Gorgon may be delayed to early 2015, this is primarily due to labor-related issues and bad weather rather than a changing gas demand. In the U.S., those projects listed here that have taken final investment decision continue to make positive progress, with Sabine Pass expected to begin operation by the end of this year or early next year. And just this week, Cheniere announced the five-year contract to sell gas to Engie, one of the largest European LNG importers. And that's expected to be supplied by the Corpus Christi project listed here. We expected these liquefaction projects that are under construction, have firm offtake agreements and committed financing will continue to come online despite a lower oil and gas price environment. Such projects that have reached FID stage, but are yet to reach production represent over 100 million tons per annum of new LNG capacity. Turning now to slide 12, this new liquefaction supply continues to create demand for shipping under long-term charters. In the third quarter, Repsol tendered for one to two carriers, and Gail of India reinvited bids for nine to 11 vessels. Additionally, Yamal LNG began talks to secure up to seven or eight additional vessels. And earlier this month, Centrica indicated they will tender for three to four carriers under long-term contracts. In total, there have been roughly 25 new long-term charters awarded since July of 2014. And charterers have submitted firm requests for an additional 22 to 29 more vessels, as you can see on this slide. Looking ahead to 2016, we expect additional tenders for 20 to 30 vessels incremental to those shown here. There are numerous additional shipping requirements from other established market participants and projects that we strongly believe will get built and produce LNG. Turning to slide 13, four points to conclude today. Firstly, GasLog Partners keeps performing. We're pleased by our strong quarter and our outlook for growth remains positive. Today, we are increasing our cash distribution by 10%, while maintaining a very strong coverage ratio and we affirm our guidance for 10% to 15% distribution growth from IPO. Our 12 vessel dropdown pipeline provides strong visibility for continued growth. Liquefaction supply from high probability projects will continue to drive demand for our shipping under long-term charters. And our firm multi-year contracts provide stable cash flow despite a weak commodity price environment. That brings us to the end of our presentation. Operator, could you please open the call for any questions?

[Operator:]

[Operator Instructions] Our first question comes from the line of Chris Wetherbee with Citi. Your line is open. Please go ahead.

[Chris Wetherbee:]

Hey, thanks. Good morning, good afternoon, guys.

[Andy Orekar:]

Hi, Chris.

[Simon Crowe:]

Hey, Chris.

[Chris Wetherbee:]

Hey, I guess first question would just be on sort of how you're thinking about dropdown schedules. You have coverage ratio wiggle room I guess as you think about over the next several quarters, potentially increasing the distribution. Is this the kind of thing that we should be thinking about maybe sort of a 12 month timeframe in terms of future dropdowns, particularly given what's going on in the equity markets? But, I guess I just want to kind of get your sense. Any color you can give there would be great.

[Andy Orekar:]

Sure. Chris, this is Andy. I think, in the first instance, we're thrilled to have been in and out of the market when we were in June and therefore able to deliver 10% growth today. So, I think we feel great about having raised equity when we did. We have an incredibly valuable dropdown pipeline, as Simon mentioned, 12 vessels, over 200 million of EBITDA. And in the first instance, we want to be very good stewards of our investors' capital. So, as you say, today's equity price environment is not very compelling for us to be going out and issuing more to be growing more at this time. So, I think, while we'd much rather grow the distribution by growing assets, I think, as -- to use your term, we do have wiggle room in the coverage ratio that, if this environment continues for a protracted period, 12 months or so, we have the opportunity to further grow the distribution without needing new capital. But we're very happy with the 10% we've achieved today.

[Chris Wetherbee:]

Okay. That's helpful. I appreciate it. And then I just had sort of two bigger picture questions about the market. So, you highlighted new tenders in the market for 22 to 29 ships potentially, then beyond that, as we move into 2016. If you were to assume the 22 to 29 get down sort of in the next several months, when you look out into the first half of 2016, what do you think sort of the slack in the market is on a vessel basis, right? So, how many ships do we need to see get sort of chartered out to really tighten up the market, improve longer-term charter rates, and potentially provide a little bit more of a bid in the market?

[Andy Orekar:]

Sure. I think that the one point of clarification I'd make is that long-term charter rates have been consistently strong during this period. In fact, they've been fairly unchanged for a number of years now. So, unlike a spot rate that you can pull up every week on your screen, as you saw from our slides, there's a handful of charters that get done every month or a little bit more than that every quarter. So, those rates have actually been quite consistent. I think, in the spot market today, which is really not GasLog Partners business; you've got about 40 ships or so available depending on the week. And I think a big one to keep your eye on is Angola, which has been down for maintenance for some time and expected to come back online late this year early next year. There's seven ships there that are in the spot market. And in fact, the number could be higher if you think about where that gap is ultimately going to end up. So, I think that, in addition to the U.S. and Australia projects we highlighted could have a pretty significant effect on tightening the spot market. But, again, our business is really the term business. And that's been quite consistent. And I would expect these new charters to come in at levels very consistent with our existing charters.

[Chris Wetherbee:]

Sure. Yes, no, I think I was referencing more the spot market and potentially getting that moving in the right direction, providing a bid for the equities. But that certainly makes sense and I appreciate that color. I guess the last question I had it sort of touches a little bit on what you just said. When you think about sort of lower LNG prices, maybe over a sustained period going forward, and lower Asian prices as well, how do you think about sort of the change that might have with new demand centers opening on the length of pull? Simon, I think, in the past, you've given us some rough rules of some to think about from 1 million tons equals X amount of ships on a per year basis. I just want to get a rough sense. Does that dynamic changed materially over the course of the next couple years in this new low-price environment?

[Andy Orekar:]

Yes, I think it's hard to know exactly until we start seeing significant volumes moving from Australia and the U.S. The trade that nobody really expected that may emerge that would be quite positive for ton miles would, of course, be Australia to Europe, where a lot of gas feels like it's heading right now. So, that could be quite different than the originally envisioned Australia to the Far East trade. So, I think it's a little early for us to comment on it, other than to say, when we have the US really producing in scale, we're certain that will create more trading opportunities and make shipping inefficient, which would be a boon for us, of course.

[Simon Crowe:]

Yeah, Andy, I'll just add to that. I think you're right. The sort of what you see in other commodity markets and something that we've observed is that, as the traders come in, as the new demand centers open up, and as you say, Andy, the shipping becomes inefficient. And you can often see the traders slowing down the vessels, which is obviously very good for ton-miles. We were talking about it the other day and potentially 10% to 20% kind of impact on the fleet size as a result of going from sort of 19, 20 knots down to sort of 15 or less. Traders are not in a hurry necessarily to get to there -- get to where they're going because, often, they don't know where they're going. That works very, very well for shipping as we go forward. So, I think we see the demand centers opening up in Asia, the Chinese deals being done. India is on the map and putting out a tender there. We're seeing things happening in Poland. FSRUs I think is increasingly becoming a demand pull, if you like, for LNG. We're seeing those ships and those projects increasingly have interest for new markets, Bahrain, for example. We're seeing ships being converted into FSRUs, which I think is again good for the overall supply and demand in the LNG market. Of course, we've got some good candidates for conversion in the FSRU market. So, I think we see that demand picture as being very interesting and firming up. But, again, we're optimistic about ton miles going forward. But, there's no doubt its weak today. But you don't need much for that to change. You don't need a lot for that to flip over and utilization to improve. And then obviously, that would have an impact on pricing. And you'll hear more about that from Paul I'm sure next year on the GasLog Limited earnings call.

[Chris Wetherbee:]

That's great. I'll -- I appreciate the time, guys. Thanks so much.

[Operator:]

Thank you. And our next question comes from the line of Hilary Kakemendu with Wells Fargo. Your line is open. Please go ahead.

[Hilary Kakemendu:]

Hi. Thank you for taking my question. You spoke about the increasing demand in the FSRU market. And you just also mentioned that there's a couple of conversion candidates. I know you said that you're not looking to get into the market right now. I think you had said that last quarter. I was just wondering if that has kind of changed at all. Is there something that we can expect in the near-term, or is it still a very -- like, a longer term thing for you guys?

[Andy Orekar:]

Sure. Thanks, Hilary. It's Andy here. I think just to clarify I think what we probably said last quarter was that, for something we continue to study, we have five sister ships that are 145 that would make excellent FSRU candidates. And we're actively looking at their conversion. The first one of those does not end the firm period of its charter until about four years from today, it's October of 2019. So, we have the good portion of time to really study it and find the most economic and highest use of that vessel. And then if we convert one, we have the ability to replicate it for five others across the GasLog fleet. So, I would say it's something we're actively studying, but want to make sure we put the capital against the right opportunity when it appears.

[Hilary Kakemendu:]

Okay, great. Thank you. And one more question. I know you're very conservative in your supply outlook. And you've listed a couple of projects that you think will be likely to move on -- move forward. I was wondering if you also look at floating FLNGs and if you're including supplies coming -- expected supplies, like from Prelude and other FLNGs that are expected to come online as well.

[Andy Orekar:]

Yes, good question. That's obviously a very exciting area of the market and we're following it closely. We do include Prelude in our view of liquefaction capacity. And -- but, that's the only FLNG that we include, not because we don't believe the others will get done, but because we just are picking the highest probability, most visible projects to then form our vessel supply model. But, we're quite certain that a number of these smaller scale liquefaction solutions will be successful and will have incremental demand for shipping. So, we're very excited about them.

[Hilary Kakemendu:]

Okay. That's it from me. Thank you so much.

[Andy Orekar:]

Thank you.

[Operator:]

Thank you. And our next question comes from the line of Spiro Dounis with UBS. Your line is open. Please go ahead.

[Spiro Dounis:]

Hey, Andy and Simon. How are you?

[Andy Orekar:]

Hi, good morning.

[Spiro Dounis:]

So, just wanted to get back to the potential distribution increase I guess without equity, which I guess is also another way of saying without a dropdown. Looks like you can increase it by about -- my number's 10% and that's great. It's great to have that lever in your back pocket. Just wondering if that's how you're thinking about it. Is it really just the lever if the unit price doesn't respond, or unit price does come back, and you do do equity, you do a dropdown? Could we see 10% and then some? Are you willing to lower that coverage ratio in general, or is this an either or situation?

[Andy Orekar:]

Sure. Let me give you a few perspectives on that, Andy speaking. I think, in the first instance, we're -- as I said, we're delighted with delivering 10% growth in an otherwise weak MLP equity environment. So, we're thrilled to have had that done. Secondly, I think the coverage ratio is something -- from IPO, we have been outperforming and so, we continue to study it. I will caution you. We have not had a dry docking. And of course, a dry docking would reduce that coverage ratio slightly in any quarter where we have a ship out of the water for a month. And that's why, of course, we run at a coverage ratio that's been more than one, as an example. So, we need to be mindful of the timing of those. But, even accounting for that, we do feel like we have cushion in the ratio. And as I said a few moments ago to Chris, I'd rather grow the distribution by growing assets. But we're also very mindful of treating our dropdown pipeline very carefully. And we don't want to monetize it at levels where equity's too expensive. So, it's a balance. But I think we're very happy with our performance, how we've done on the operating cost side and the fact that we have this cushion and as you say an extra lever to pull if the equity market remains weak.

[Spiro Dounis:]

Okay. That makes sense. And then just switching to maybe some investor feedback we've been getting and obviously your investors hold a lot of midstream assets too outside of the shipping MLPs. And I guess, what they're seeing in that space is dropdown multiples coming down. And that's management I guess showing that the market isn't what it used to be. And you could argue until you're blue in the face that we've got contracts and we're stable and I totally get that. But it seems like there's a real push for GPs to lower multiples. And in a lot of cases, that's happening. So, I'm just wondering to what degree is that being discussed internally? Is that palatable? I realize, at this unit price that nothing's palatable maybe, but how are you thinking about dropdown multiples here?

[Andy Orekar:]

Well, I think I can say I'm very fortunate to have an incredibly supportive GP. We're not a company who's got several MLPs or this is one of a handful of strategies we're pursuing. This is the strategy. And the MLP is the funding vehicle for both GasLog Limited and GasLog Partners. And it only works if we're delivering the right amount of growth and the right amount of sustained cash flow to our unitholders. So, I think -- I can't speak, of course, for the prices that they would sell assets at. But I know they're thinking about this in a very constructive way if the market stays where it is for a prolonged period of time and so we're very grateful for that.

[Spiro Dounis:]

[indiscernible] I'm sorry, Simon, go ahead.

[Simon Crowe:]

Sorry. Just as I said in my remarks, we're very committed to supporting GasLog Partners. So, as Andy said, this is the financing vehicle for GasLog Limited. So, we're supportive and thinking about a lot of things at this point in time.

[Spiro Dounis:]

Okay. And then just one last housekeeping one from me. The six BG, I believe its six BG options; I think were set to expire by the end of 2015. But I know that I guess there was work being done to extend those options. Any update on that that you could provide?

[Andy Orekar:]

It's probably a good question for Paul next week. But I would say they obviously continue to have that option. And we are in weekly discussion with them around that as well as other parts of their shipping requirements. So, we're still in talks around that, but probably best for Paul to answer given it's an option up at GasLog Limited.

[Simon Crowe:]

Yes, I think that's right.

[Spiro Dounis:]

Great. All right. Great. So, that's it from me. Thanks for the color, guys.

[Simon Crowe:]

Thank you.

[Andy Orekar:]

Thank you. Are there any more questions?

[Operator:]

And I'm showing no further questions at this time.

[Simon Crowe:]

Okay. I think, for me, Simon -- and thank you for tuning into the call and over to you, Andy.

[Andy Orekar:]

No, thank you very much, all, for joining us today. Appreciate your continued interest in GasLog Partners. And we will speak to you next quarter. Thank you.