Golar LNG Partners LP
Q1 2019 Earnings Call Transcript

Published: 21 May 2019

[Operator:]

Good afternoon, ladies and gentlemen. Thanks for standing by. And welcome to the Golar LNG Partners First Quarter 2019 Results. At this time, participants are in a listen-only mode. There will be a presentation followed by question-and-answer session. [Operator Instructions] I must advice you that this conference is being recorded today Tuesday, 23 May, 2019. And with that, I’d like to hand the conference over to your speaker today Brian Tienzo. Please go ahead.

[Brian Tienzo:]

Thank you very much and good afternoon, and good morning to all of you. Welcome to Golar Partners' 1Q 2019 results presentation. My name is Brian Tienzo. I am joined here by our Head of Investor Relations, Stuart Buchanan. Without further-a-do let’s start the presentation and I would urge participants to read through Page 2 forward-looking statements in their own time and so with that done, let’s jump over to Slide 3 for the main highlights. We report operating income of $25.9 million for the first quarter of 2019. This result does not however include our interest in the operating result of Hilli Episeyo. Over the past few years, the first quarter of our financial year have traditionally being the weakest as this quarter experienced two months of contractual off-hire for the Golar Igloo and is therefore non-contributed to earnings. Nevertheless, the first quarter also saw Golar Freeze contributed cash flow from its former contract with DUSUP as well as earnings from its new contract with NFE. The combination of these two major events in the quarter resulted to distributable cash flow of $28.8 million, representing a distribution coverage ratio of 1.01 times. There were some further positive news for the quarter for the Partnership, as charterers of both Golar Igloo and Golar Grant formalized their options to extend the vessels employment for another year. As a result of the foregoing, the Partnership announced unit distribution of $40.40 for the quarter. Let’s now turn over to page to go through our income state highlights. Net results for the first quarter was a loss of approximately $15 million, as compared to a loss of $19 million in the last quarter, and this is mainly due to the following factors. The Golar Igloo whose contract was extended by one year was in its contractual off-regas reason up to 25 February. The Golar Mazo charter that commenced during the fourth quarter ended and this was subsequently followed by a short voyage at lower rates. The loss of earnings from the Golar Mazo and Golar Igloo was supplemented by earnings from the Freeze, which commenced commissioning during early January and consequently started to recruit its commissioning income. Earnings were also positively impacted by decrease in cost compared to level seen in the fourth quarter. While operating cost increased during the quarter to $16.8 million from $15.8 million, as we took advantage of the Golar Igloo off-regas seasons store up, decrease in cost from both voyage and administration expenses more than offset this, resulting to an overall cost decrease of approximately $2 million. Finally, net non-cash interest rates swap losses following a further decrease in 2 to 5 year interest rates contributed to $14 million and therefore the majority of the first quarter loss. Turning over to Page 5 for the balance sheet assets. Cash and cash equivalence as of the end of the quarter was at $74.4 million. During the quarter, there were CapEx payments in respect to the filing installment of the Methane Princess drydocking. Golar Igloo drydocking and modifications to increase its regas capacity, finalization of the Golar Freeze modifications and a one-off working capital settlement in respect of the Hilli drop-down. Such expenditures are not expected to materialize in the second quarter, and again these expenditures, we took the opportunity to draw-down in the remaining $25 million from our existing credit facilities. Going over Slide 6, balance sheet liabilities. At the end of the quarter, our net debt was $1.59 billion. This includes $447 million associated with Hilli Episeyo. As of the quarter end, the percentage of debt swap to fix rate was approximately 100%. The average fix interest rates of swaps related to our bank debt is approximately 2.2% and with that an average remaining periods maturity of approximately 4.4 years. So, it means the Partnership is pretty well protected from interest rate variability. Based on the above, our net debt to annualize EBITDA ratio was 5.9x, however, while we to include the cash earnings of Golar Freeze for the quarter, this ratio would be approximately 5.1x, and this is despite months of Igloo being essentially off-hire. Turning over to Slide 7, on distributable cash flow. While distribution coverage ratio was lower this quarter as compared to the last quarter, this was entirely expected and mainly due to the two months enrich the Golar Igloo was off-hire. With this distribution coverage remaining above one times during this period when financial results is at its weakest, is a testament that the given distribution test a couple of quarters ago is one which is sustainable. In contrast the distribution coverage in Q1, 2018 was 0.32x. Live to date distribution coverage at 1.12x remains pretty strong. We fully expect 2Q distributable coverage ratio to improve on the basis at one the Golar Igloo will be on for higher for the entire quarter and also the Golar Grand charter extension commences and it does so at increased higher, and of course, the Golar Freeze contributes earnings from its new 15-year charter with NFE and or a short period in the second quarter, it was also cash contribution from its old charter with DUSUP. Turning over to Slide 8 now which highlights the Partnership's revenue backlog as of the end of 1Q, this level was at $2.25 billion of the Partnership's fleet. The Golar Spirit is the only asset not to contribute earnings over the past few quarters. Of course when arriving at the new distribution level, no income had been assumed from this asset. Nevertheless, a potential use of this Episeyo in Brazil is developing positively and could be a source of organic growth. These opportunities being developed jointly with Golar Power who as you know has been successful in developing the Sergipe power project in Brazil. Days in a normalized quarter and only taking into account contracted revenue, the average remaining term of the contract backlog is approximately seven years with a variety of strong counterparties. And while today the promise remains exposed to LNG shipping, this is actually a very small portion of its revenue backlog as we will now see in Slide 9. So Slide 9 shows the revenue breakdown of the Partnership's earnings. Following the conclusion of the acquisition of 50% of equity interest in the contracted capacity of FLNG Episeyo in July 2018, the Partnership's revenue backlogs have improved materially. 61% of its income is contributed by Episeyo excluding charter options. These have an average contract term of approximately seven years. 32.5% of its income is from Hilli Episeyo whose contract runs for another seven years, and 6.5% of its income is from shipping. So this is represented mostly by the long-term contract, which the Methane Princess is currently servicing. Shipping revenue and therefore shipping exposure and associated volatility is therefore a small component of a stable and transparent revenue backlog from well establishes charters. These numbers have been arrived at without taking account of any potential options extension or earnings contributions from ships not currently in employment. So, our ambition is of course to improve in this already from strong revenue backlog. We have already said that organic growth possible through deployment of the Golar Spirit. And the next slide underlines the various acquisition possibilities available to the MLP. Turning over now to Slide 10 to look at the Partnership's acquisition possibilities, we previously mentioned Hillie whose contractual performance today has been flawless. The Partnership already owns 50% of the committed capacity. The other 50% therefore remains available as an acquisition target. It is also encouraging to learn that Golar LNG's discussions with Perenco which regards to utilization of the third and possibly for fourth train continues at pace and more so that these discussions could result in potentially, materially increasing the overall duration of the contract term. Investors were remembered in the event as both trains are for the utilized without accelerating production of the existing resource. Golar Partners will receive 5% of any additional earnings, reducing to 2.5% of additional earnings in the event that only train three is contracted. Additionally, we have 25-year cash flows from FSRU Golar Nanook and Sergipe power plant to come, both of these are expected to be cash generating from early 2020. GP's annual EBITDA share from these is approximately 99 million. The longevity of these contracts made these attractive potential acquisitions through the MLP. Of course whilst the acquisition targets remain, funding such acquisitions remains a question. We have already seen that organic growth can be achieved through the Golar Spirit and Hilli Episeyo. Furthermore as time lapses, the MLP’s tech capacity improves. This will provide partnership with the limited ammunition for acquisition for growth without materially negatively affecting its leverage ratios in covenant. Nevertheless, the ambition must be to be able to maintain a gross trajectory and for this an improved equity currency is required. So turning now to Slide 11 to summarize then despite a traditionally challenging quarter, the Partnership has been able to maintain a respectable distribution coverage ratio. This has been achieved through another quarter of flawless operations and testament to distribution level being sustainable. With improved financial results expected from Golar Igloo, Golar Grant and Golar Freeze, we anticipate coverage ratio to be materially better in the second quarter of 2019. With Sergipe power project due to become operation in a few months, we look forward to having another acquisition target option and whilst sustainable funding for such acquisition remain evasive, growth through the MLP’s existing assets remains a good alternative and possibility. That ladies and gentlemen concludes the presentation. I will now turn the call over to our moderator for the Q&A session.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Randy Giveans of Jefferies. Please go ahead.

[Randy Giveans:]

Yes, so biggest question out there is distribution sustainability. I look at the coverage 1.2 in 4Q ’18 obviously following for a few factors that still slightly about 1 times in 1Q ’19, and as you just stated four minutes ago will be materially higher in the coming quarters. So trying to think about distribution sustainability, can you give a vote of confidence around that? And even possible distribution increases in the future, what would it take maybe additional drop downs to get that distribution higher going forward?

[Brian Tienzo:]

Absolutely, so I think we mentioned previously that in taking and in presenting the new level of distribution, we took a very conservative approach particularly on the vessels that were in contracts that were in short term. And as we have said previously as well, the Q1 of any financial year for GMLP traditionally have been weakest, and in contrast to Q1 2018, we had 0.32 as the coverage ratio. We have one this time around. So, I think to me that shows that we chose the right level of distribution. And to that extent Q1 is always the challenge. Going forward, we see the earnings particularly in the Golar Igloo and now the Golar Freeze as affected that will allow the distribution ratio to materially increase. And therefore allow us to be able to sustain the dividend that we have set. Secondly, I think it’s encouraging from the Golar Cool that the discussion with the FLNG Hilli Episeyo is ongoing. Clearly, if we are looking at organic growth that as well as the Golar Spirit opportunity that’s been mentioned also is accentuated to that growth. Now, there is obviously a post to growth by acquisition, but as you can imagine a 13% yield dividend, dividend yield is not sustainable. And therefore the currency -- the equity currency vehicle is not available for that purpose. We can grow a little bit by a way of equity acquisition, but would only take you so far. We need that equity currency to become available to be able to sustain growth, and obviously having that and with the combination of a very long-dated contract backlog at the sponsor level allows us to then contemplating increase the dividend going forward.

[Randy Giveans:]

Sure. Okay. So just to clarify though, at this point distribution team is very stable rising coverage, no real issues around that.

[Brian Tienzo:]

No, as I said, Q1 is always the weakest spot. Q2 will be -- the coverage in Q2 will definitely be better and so Q3 we expect.

[Randy Giveans:]

Got it. Yes. I just want to clear that up. Now, common unit buyback obviously you won’t have the liquidity, but at the same time like you said, if the market is not giving you the credit, yielding 13%, 14%. You’ve repurchased think about 4.5 million in 4Q, looks like, no unit repurchases in 1Q. So, how do you balance that kind of taking advantage of the disconnection, I guess, dislocation between the yields of the units price at the same time of kind of maintaining cash for future project finance? Any additional units -- go ahead.

[Brian Tienzo:]

Sure. I mean, we're just going to be opportunistic about this, and so to some extent, we want to maintain certain level of cash in order to be able to be ready for those kind of opportunities. At the same time, we want to balance that a little bit because clearly there is an opportunity to maybe buyback a little bit of that ones that becomes operational towards the end of this year and next year. So, we just -- we want to make sure that we use it for the right purpose. I mean to me is an attractive acquisition if they tend to be done particularly is a very long dated contract. But it is something that we continue to consider, but as I said we just have to make sure it’s properly balance when we do something.

[Randy Giveans:]

Yes. That’s fair. And the second part of that question and the last question to how do you kind of rank those projects on Slide 10 in terms of future dropdown? Is it more ownership of the remaining interest in Hilli? Is it in the Nanook? Is the power project itself? Can you kind of rank those?

[Brian Tienzo:]

Well, in terms of ranking, my first would Nanook simply because it is a very long dated. I mean as we stand today without changes to any of those contracts that would be my preference, simply because it’s a very long dated contract. It mitigates the residual risk materially and some extent is to say, it’s a less chunky acquisition than the Hilli for example.

[Randy Giveans:]

Yes, absolutely, and it certainly would extend your average contract duration.

[Brian Tienzo:]

Absolutely.

[Operator:]

Thank you. Your next question comes from the line of John Chappell of Evercore. Please go ahead.

[John Chappell:]

If we can maybe extend a bit on the last line of question little bit and just talk about plan B. If there is -- I think you laid out pretty well a coverage ratio that should stay above 1 times all else equal, but the market sometimes I guess perception becomes reality. So, if you stay at this kind of 13 plus percent yield and equity -- common equity for drop downs becomes prohibitive. How do you think about the next kind of 1 to 3 years at GMLP? Is there another kind of plan, if growth just becomes prohibitive because the market doesn’t allow it?

[Brian Tienzo:]

Well, I guess, I think, so acquisition growth I mean obviously those at these kind of levels will be very difficult, but clearly we have pathway for organic growth and we’re not necessarily depending heavily on the Hilli for example, but that will be a fantastic way to grow the Company. The other thing of course is the positive development that we are seeing in respect of the Brazilian opportunity where Golar Sprit could be deployed. Now don’t forget that when we took the decision to reset the level of dividend, we had assumed that Golar Sprit is just earning nothing. So, it’s not contributive at all to GMLP’s earnings. So to the extent that we do find something at for the Golar Freeze, I think that's in itself is quite a big turnaround and certainly lend itself positively to potentially looking at increasing dividend at that point.

[John Chappell:]

And then, you've contracted the grant for short period of time and made comments about how it’s substantially above the initial first two year now even the Maria. Short term, I guess the biggest kind of near-term question mark then becomes the Igloo, and I understand that it’s in service for the next seven months or so. How soon or how much ahead of the end of this year do you think KNPC needs to lockdown its arrangement? I mean it's obviously very important part of the infrastructure. So do you think this is kind of something that goes all the way to the end or something maybe we can have an update on as soon as the next quarter?

[Brian Tienzo:]

Well, I think it's difficult. We can’t completely rely on the history of the events we’ve seen on the Igloo, but referring back to what happened last year, there was an intention for a competitive tender to come out during the summer of last year. That didn’t happen. We're now nearing same time line as previously. And of course, in the end KNPC just simply right out of time that we're not necessarily rely on that to happen again. So when we looked at what could potentially happen to the Igloo, we took a very conservative approach on its earnings potential, shipping earning potential in fact, much, much lesser than what is earning today for the dividend to its contribution to distributable cash flow. And of course what we have tried to do to try and mitigate and provide a much better offering for the Igloo is, we’ve modified the vessel to increase its output capacity. It makes it actually one of the possibly one and only two Episeyo in a word with that type of output. So, the very least, it widened its envelop of opportunity. And but in the event there is a tender, competitive tender going forward then we would certainly look to compete with that. We have a very good relationship with KMPC also that to the extent that adds to our ability to win it and obviously we would write in the back of that, but we’ll be very competitive.

[Operator:]

Thank you. Our final question comes from the line of Michael Webber of Wells Fargo. Please go ahead.

[Michael Webber:]

Brian, just a follow-up on the question of the Igloo, they ran out of time last year, you guys able to work on an extension, I think, the rig was roughly flat. Are they -- is there an actual -- is there an evergreen options series on that? Is that something you negotiated on a bespoke basis? You would need to negotiate another bespoke basis this year, if they were to get extended again for a year?

[Brian Tienzo:]

Yes. So, in the previous contract prior to them exercising their option, there was actually a contemplated option for them to exercise then. This time around there isn’t, so it will be properly negotiated. Having said that, it was a very amicable sit down negotiation, and in the end, it wasn’t -- the economic, we're probably slightly better than -- the expansion economics were actually, probably slightly better than the initial five years. As I said, there is -- whilst there was a delay in their ability to put together right a tender process last time, I think their intension this time is fully to go down in that root and we are in constant dialogues with those guys to make sure that we kept up to date. And we want to make sure that we’re the forefront of being able to compete where necessary. And of course, what we have, what they communicated to us previously was that, the idle position for that and would be to have an Episeyo that’s slightly greater in regas capacity than the Igloo at was, which is why we took the opportunity during the off-regas season in January and February to modify the vessel properly and allow and give the competitive edge. Now, we know that they are -- at some point, there will be quite reliable and land base facility, but we also know that in the interim they need an Episeyo. So, the combination of good operations and allowing a better what higher regas capacity hopefully puts us in the good shed.

[Michael Webber:]

And so, obviously, the tender is not out yet but you have a vague sense of, in a sense that it is providing bridge capacity. What kind of term or tenure you think there’ll be looking for? Are we talking something that’s particularly MLP family or something that’s more along -- more kind of 2 or 3 your deal?

[Brian Tienzo:]

It’s very difficult to know, it's very difficult to say, I should say. I mean clearly we would like to see another five year contract. Whilst, there is an ambition for them to use land base facility, I think it’s clearly also an ambition for them to have a contingency like we have seen in other places where there is an Episeyo available in case, if nothing else for negotiation of sort of emergency use. I can’t really comment and whether or not -- as we said, I’d like to see a longer tender as a contract, but my gut feel is it's probably in the range of 2 to 4 years rather than 5 years.

[Michael Webber:]

Okay. No, that’s helpful. And we can obviously get more color on that as it happens.

[Brian Tienzo:]

I think just one thing -- sorry just going back to that. I think whilst we will compete very competitively for the Igloo. We mustn't lose sight of the fact that when we again looking at the distribution sustainability and assuming what the Igloo could possibly do post the KNPC contract, we took a huge haircut on that, and so and that makes us very competitive bidder in the event that happens. Or alternatively as you all have heard from Golar LNG's remarks earlier I think our trends would be hopefully in a very good shipping market if it came to us.

[John Chappell:]

Now, that’s helpful. Just last one from me. Just around your IDRs obviously not a big driver, value driver one or the other here you’ve already adjust them once I believe it was 2016.

[Brian Tienzo:]

Yes.

[John Chappell:]

In October, but there’s still some IDRs that are hanging out there, is there any thought or conversation with kind of cleaning up the rest of those with Golar? It’s not going to be top of the stack in terms of priorities, but just curious in terms of thinking of ways, making of ways of rational for why the equity might not screen as well other than the equity cost of capital a little bit wider than maybe somewhat implied?

[Brian Tienzo:]

Sure, I think, if the IDRs as it became a point of discussion that means that we are hopefully getting closer to those thresholds. And if we came to it, we’d be very happy to discuss structure those and such that it doesn’t impact negatively on our investors.

[John Chappell:]

Okay. And I would like have one more. So, I think you've answered this in the past but just to refresh. The Golar Power in terms of the way this transaction that actually worked. Do you actually have right of first offer or right a first refusal on those Golar Power assets? And is that something the Golar panel will get to unilaterally decide? I believe its 50

[Brian Tienzo:]

Well, I mean first and foremost, GLNG themselves will not need approval from Stonepeak for GLNG shares, for example, but for the MLP -- sorry, for the entirety of it that wouldn't need to be discussions with the Stonepeak. And whilst we talk about the Golar Sprit, the Golar Sprit is being counted for this opportunity and real simply because it’s the right size and the right asset for in the project that’s being looked us.

[John Chappell:]

Okay but then in terms of the transactions doing from, I guess, does it literally matter there’s a third party involved I guess, but it’s technical difference in right of first refusal and the right of offer?

[Brian Tienzo:]

Correct, that’s right. There need to be an offer from the Power. It’s similar mechanism as the GLNG, but yes.

[Operator:]

Thank you. We do have a question from Ari Rosa of Bank of America. Please go ahead.

[Ari Rosa:]

Hey, good morning guys or I guess good afternoon at this point. But so, you've mentioned this point about equity capital being off the table as an opening source. Maybe if you can just touch quickly up on your views on your debt capacity and if you view that as having any room there towards the fund growth?

[Brian Tienzo:]

We do I think one of the things that we had highlighted previously is. The debt funding in some of our vessels are amortizing much more quickly than the tenure of some of the contracts there so what you’re seeing is that once that it’s coming out of very quickly the earnings capacity on the vessels -- sorry, the contracted earnings on those vessels are amortizing as quickly. So there’s a bit of a mismatch. One that that has being fully repaid to one, that remains some really good earning and some of those vessels. So, there is an opportunity to lever up against those. And obviously this increases as time progresses, which is why I mentioned they’re on about the improving that capacity as time passes.

[Ari Rosa:]

Great. That’s helpful color there. And then just quickly you mentioned in the press release some of the macro consideration that you’re seeing with China point forward some demand. Just maybe if you could touch quickly on, what you’re seeing in terms of microenvironment and the overall rate picture?

[Brian Tienzo:]

You mean on shipping side?

[Ari Rosa:]

Yes, correct.

[Brian Tienzo:]

Absolutely, so I mean we’ve seen how China could be a big factor in and a swinging factor of particularly in shipping. But what I wanted to point out is the sustainability of the MLP distribution on the basis that we have sufficient contractual sort of capacity and earnings to not be too heavily relying on the shipping income. So we do have some ships available to trade on the shipping side. But that contribution to the earnings is actually very small. Obviously as rates get better which we expect in the second half of this year we’ll do so. And for the most part of 2020 then clearly the contribution from those vessels will be a positive result for the MLP.

[Operator:]

Thank you. There are no further questions on the line, sir.

[Brian Tienzo:]

Brilliant, well, I'd just like me to say, thank you very much for your participation and hope we'll see in the next quarter. Thank you and good bye.

[Operator:]

Thank you. That does conclude our conference call for today. Thank you all for participating. You may all disconnect.