Golar LNG Partners LP
Q1 2018 Earnings Call Transcript

Published: 31 May 2018

[Operator:]

Good day, everyone, and welcome to the Golar LNG Partners LP First Quarter 2018 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Brian Tienzo. Please go ahead.

[Brian Tienzo:]

Thank you, moderator. Good afternoon and good morning to all of you. Welcome to Golar Partners’ Q1 2018 results presentation. As the moderator said, my name is Brian Tienzo, CEO of Golar LNG Partners, and I am joined here today by our Head of Investor Relations, Stuart Buchanan. So let's start the presentation by jumping over to Slide 3 for the main highlights. We report net income attributable to unitholders of $14.8 million and operating income of $26.1 million for Q1. As expected and due to cessation of various charters in the previous quarter and lower earnings from those vessels in this quarter, our distributable cash flow of $13.3 million and distribution coverage ratio of 0.32 are lower than the previous quarter. However, we were able to secure a 15-year contract for one of our two available FSRUs. We also initiated buyback of common units under $25 million repurchase program. By the end of the quarter, we had utilized $8 million of this facility. As you all have heard from the previous call on Golar LNG Limited, FLNG Hilli Episeyo delivered its first cargo and currently completing the second cargo of LNG. Progression on commissioning is going well and commencement of acceptance testing with customers Perenco and SNH are also going well. We also declared unchanged distribution for Q1 of $0.5775 per unit. Let's now turn over to Page 4 to go through the income statement. As anticipated and previously flagged, total operating revenues decreased from $90.1 million in the fourth quarter to $74.2 million in the first quarter, mainly as a result of the following; the scheduled seasonal downtime for the FSRU Golar Igloo, which resulted in 55 days offline. Secondly, there were lower earnings for both Golar Maria and Golar Mazo, whose long-term charters expired on end of November and end of December, respectively. And finally having concluded its sub-charter with Golar LNG on November 1, the LNG carrier Golar Grand traded for a full quarter at her reduced daily rate. Operating costs was slightly higher this quarter, but the decrease in administration expenses is more than offset this. Depreciation and amortization at $25.6 million was approximately $1 million lower than fourth quarter and this reduction due to amortization in respect of the FSRUs Golar Freeze and Golar Spirit accounts for the most of the decrease. An increase in LIBOR rates and write off of deferred charges in connection with [indiscernible] refinancing contributed to higher net financial expenses. In other financial items, we recorded a gain of $9.6 million for the first quarter mainly as a result on non-cash interest rate swap gains following an increase in two-year, three-year swap rates. As a result of all these factors Golar Partners’ net income attributable to unitholders of $14.8 million and operating income of $26.1 million for the first quarter of 2018 are lower as compared to $25.4 million of net income and $40.5 million of operating income versus the fourth quarter of 2017. Let’s turn over to Page 5 for the balance sheet assets. There aren’t really many material movements here, and of course, the cash and cash equivalents decreased to $142 million by the end of the quarter following a repayment of $75 million against our revolving credit facility. This amount remains available for us for redrawing in the event that we needed it. And except for the ongoing debt repayments, there were no other material items that affected cash in the quarter. Going over to Page 6 on balance sheet liabilities. At the end of the quarter, our net debt was approximately $1.08 billion. This quarter’s net debt-to-EBITDA ratio at 5.2 is high. This is calculated using 1Q EBITDA as a basis for annualization, and of course, EBITDA this quarter was negatively affected by two months worth of no earnings of Igloo due to it’s regas season as well as lower earnings on the other vessels. You also note that at the end of the quarter, the percentage debt swap to fixed rate was at 132%. We are over-hedged during this period as we entered into interest rate swaps in anticipation of hedging 50% of the Hilli debt. As such, once train 1 of Hilli is dropped and consequently, we are exposed to half of its debt, we expect fixed growth ratio to revert to levels close to 100%. Turning over now to Slide 7 to go through the distributable cash flow. As expected, following the cessation of the Golar Mazo and Golar Maria charters, the end of the Golar Grand charter to Golar LNG Limited and one month of regas season for Golar Igloo, all happening during the fourth quarter, but most of it [full] impacting the first quarter, distributable cash flow was down to $13.3 million. This is also negatively impacted our distribution coverage, which was down to 0.32. However, we expect second quarter distributable cash flow and coverage to improve, particularly with four quarters earnings from the Igloo. Looking forward, whilst we expect distribution coverage for the rest of the year, which we expect will be better than first quarter, it is unlikely to exceed one. Of course, coverage levels in the run up to this transition phase were kept deliberately high in anticipation of this, such that the life to-date ratio of distribution coverage is currently sitting at 1.13, indicating that on average our distributable cash flow to-date remains above our distribution paid. You will note that the partnership has $218 million of cash and undrawn credit facilities available to invest in growth opportunities and to pay quarterly distributions. Sustainability of the current distribution will be contingent on a number of factors, including the accretive use of available cash, the timely closing of the Hilli Episeyo dropdown, commencement of the Atlantic FSRU charter, conclusion of a FSRU contract under discussion for the redeployment of our converted LNG carrier, the charter status and anticipated earnings from FSRU Igloo after first quarter 2019, and of course development in the shipping market. Further to that, we are also looking at debt restructuring to better match the remaining life of our asset. Achieving this will augment our liquidity and help our decision on the level of distributions going forward. Turning over now to Page 8. Looking at the revenue breakdown and backlog. So as you can see, our FSRU assets continue to contribute the most towards the backlog with $1.6 billion. Once dropped down, FLNG Hilli Episeyo's contribution will be approximately $800 million, and it also provides diversification in asset base for the partnerships fleet. Shipping contribution is currently approximately $200 million. So with revenue backlog currently set at $2.6 billion, our earnings potential remains robust. Turning over to Page 9. As you all have heard from the Golar LNG call, the Hilli Episeyo is now undergoing official acceptance testing with an expectation that full operations will commence in the coming days. Subsequent to successful acceptance testing, Golar intends to fully utilize the debt facility associated with Hilli Episeyo. This will contribute approximately $320 million of additional liquidity to Golar, and closing of the dropdown is expected to follow shortly thereafter. Just a quick reminder that the purchase price of our initial interest was $658 million, less than 50% of the net lease obligation, which is equivalent to about $480 million, and after applying the $107 million Tundra Put sale proceeds and the $70 million deposit paid to Golar in August, a balancing payment of approximately $1 million will be payable to Golar upon closing. Consequently to this acquisition, the partnership will benefit from approximately $82 million of EBITDA from Episeyo’s operations. Let's now go over to Slide 10 for shipping update. So we witnessed steady rates in good chartering activity into the New Year supported by strong underlying demand for LNG that helped sustain firm Asian prices and prolong arbitrage opportunities through to February. The high ton miles associated with these activities promoted rates up to $85,000 per day during January. However, as expected this was followed by the seasonal softening that commenced early March, such that by early April, carrier rates had declined to around $45,000 per day. Further delays to the start up of U.S. Cove Point facility and production interruptions at the Papua New Guinea facility further emphasize the negative impact of the seasonality. However, both those two facilities are now producing and along with scheduled start-ups at Wheatstone, Ichthys, trains 2 and 3 due to start by the end of the year. Rates have started to improve once again and the levels already an improvement year-on-year. Furthermore, consensus points to continued improvement in both rates and utilization. And in anticipation of this Mazo has been placed only in warm-layup, ready for [indiscernible] activation, whilst the Maria is currently engaged loading a cargo from Hilli. Therefore, we remain positive of the impact of shipping from the second half of this year onwards. Turning over to Slide 11 for an FSRU update. We continued to be positively surprised by this resilience of interest for mid-sized FSRUs. Projects requiring these vessels are now starting to crystallize and this is evidenced by the 15-year charter we recently secured for a Golar Freeze or Golar Spirit size FSRU. Progress in securing another FSRU contract is also developing well in the background. Of course, the Golar Nanook represents a 2020 acquisition potential and while it remains sometime in the future, its 25-year, $41 million EBITDA contract makes it a very compelling target. Turning over to Slide 12. So in summary then, the partnership continues to operate its assets efficiently, which is particularly important in LNG market that is fast growing. With a revenue backlog of $2.6 billion and potential future acquisitions targets in the near-term, Golar Partners remains a compelling investment story. However, investors should be aware that there are near-term transition. There is a near-term transition phase to navigate through. And conclusion of key events, already highlighted during this presentation will help us evaluate the optimum long-term distribution levels. And on that note, I’ll now hand back the presentation to the moderator for the Q&A session.

[Operator:]

[Operator Instructions] We’ll take our first question from John Chappell with Evercore.

[John Chappell:]

Thank you. Good afternoon, Brian.

[Brian Tienzo:]

Hi, John.

[John Chappell:]

So I think this commentary about the optimum long-term distribution level is relatively new, although quite understandable. Some of the things you layout is getting there seemingly slam dunks, the timely closing of the Hilli dropdown in June, the Hilli FSRU contract in the back half of this year and of course the market for the LNG ships is going to be the market. So I guess the question is, you're taking 50% of the Hilli, upon customer acceptance, there's 100% of trains 1 and 2. Is it realistic to think that you could take the other 50% of Hilli in the second half of this year and help bridge that distribution coverage ratio gap as soon as the beginning of next year?

[Brian Tienzo:]

So I think just to comment on your initial point, I think if you look back at previous announcements we’ve made, I think we've highlighted that these things were coming. And to some extent, they shouldn't necessarily be a surprise to investors. And to your question, I think certainly we have the funding – the requisite funding to buy part of Hilli 2 and certainly that's an attractive investment for us. Clearly the amount of efforts being put into making sure that the acceptance of Hilli, and getting that vessel operational has been where the most efforts are. And of course, once the Hilli is properly operational, certainly that is – the attention will be put to, to try and see what else we can do with regards the augmenting the coverage and help the earnings in the MLP.

[John Chappell:]

The $218 million – I think $218 million you said is what the money you have to invest in other assets. And if we look at the structure of the dropdown, the first 50% of Hilli, obviously you had the Tundra Put there, which is 107, but even if we added that back because it's not there anymore, $170 million plus it seems that you have that covered. So what would kind of be the hold up to preclude you from taking [down 50%] because it seems that that's the kind of the quick fix, although a very good long-term quick fix to getting you back to that one times.

[Brian Tienzo:]

I think the reason to hold up as such, I think clearly – as mentioned earlier, clearly everyone’s attention is making sure that Hilli is up and running before we started to put loads of effort in getting train 2 or a portion of train 2, whatever that might be. If you look at the press release, I mean clearly there is – we’ve sounded out that we have the funds to be able to deploy, and of course, train 2 in other investments and other projects that we have in the pipeline will be funded from that availability of cash.

[John Chappell:]

Okay. So just as we think about the pipeline train 1 in June, potentially train 2 at some point in the next six months to nine months, and obviously the Nanook starts-up in January 2020, is 2019 kind of a barren area or is there any thing such as train 3, where you could have another dropdown capability next year?

[Brian Tienzo:]

Well, if you listen to the discussions that we had earlier on Golar LNG, clearly train 3 is a benefit to all parties, and I'm sure that will be the same for Golar LNG Partners as well, it has a very positive bearing all around. If that materializes very soon then I think to some extent that helps the decision on what proportion if any of train 2 we go ahead with and clearly that also makes the decision from Golar LNG’s perspective given the earnings that a potential train 3 activation could help Golar LNG. Let's not forget there are other factors in play here. Of course, train 3 is a fantastic opportunity to get the distribution coverage back to some normality. There are other assets that we have, which we are watching carefully to the development and how we can make good use of those. We have with the Maria, the Golar Mazo carriers, which hopefully will start to contribute to earnings in the second half of this year when we start seeing the shipping market improve. The Golar Spirit and the Golar Freeze, medium size FSRUs as I said we’re seeing some very positive momentum for those kind of vessels and one of those will definitely go to service the Jamaican FSRU requirement. But we also have the Golar Igloo charter, which could potentially end by Q1 2019 and we expect that will become more of a [tender] competition, well of course the fact that we have record there and discussions with the current incumbent charter suggested a very good performance that give us hopefully a bit of a competitive edge, but it's still a risk nonetheless.

[John Chappell:]

Okay. Understand. Thanks a lot Brian.

[Operator:]

[Operator Instructions] We will take our next question from Hillary Cacanando with Wells Fargo.

[Hillary Cacanando:]

Hi, Brian. Thank you for taking my questions. I know Golar Maria listed the second cargo from the Hilli. Is Maria on a multi-month or multi-quarter charter to get some or was that just like a one-time spot charter?

[Brian Tienzo:]

So the Golar Maria is currently in spot charter, and of course, as far as where the vessel goes it's really dependent on the charter is, which is on that. I mean it's good that she's able to contribute again to another Golar asset, but it's not a long-term charter.

[Hillary Cacanando:]

Okay. Gotcha. And then what’s the status of – I know Maria was being considered to be converted to FSRU, what’s the status of that? And what are you factoring into to consider whether it should be FSRU carrier?

[Brian Tienzo:]

Well, I think we alluded to a progress being made as far as another FSRU conversion is concerned. That remains the case. We continue to develop that. And as far as the candidate for such a conversion that’s yet to be announced, but clearly it's an interesting proposition for the partnership.

[Hillary Cacanando:]

Okay. And why would it take for Golar Mazo to come out of temporary layup whether because there was just lack of opportunities out there in...?

[Brian Tienzo:]

So I mean to some extent, we expect – what we expected the seasonal downturn in shipping rates. And in preparation of that, we put the Mazo into warm-layup just to save some operating costs and also on fuel consumption. And what it does mean though, because the vessels in warm-layup as we can take her out of that layer very quickly in anticipation of a much better market during the second half of this year.

[Hillary Cacanando:]

Great. Well, thank you. Thank you so much. That’s it for me.

[Operator:]

We’ll go next to Randy Giveans with Jefferies.

[Randy Giveans:]

Hey, thanks operator. So yes, quick question there. I think Hillary touched on it. So looking at possible charters with the Maria or even the Mazo for that Hilli, is that something you’re in discussion with or is that solely kind of spot vessels for the foreseeable feature?

[Brian Tienzo:]

Randy, they're currently in spot. What I gather is that the long-term requirement of the off-taker from the Hilli was already set. I think that’s the charterings are the – the fixing of those vessels actually happened not very long after we signed [training] agreement with Perenco. So to some extent the two vessels, yes, they will have some opportunities to play in the spot market. We obviously want them to be in long-term charters, but I think the opportunity to put them into long-term charter that collects cargo from the Hilli is no longer there.

[Randy Giveans:]

Got it. Okay. And then, separately, it looks like you raised $14 million or so in 1Q via the ATM and then another or maybe – yes, $40 million so far today in the first quarter. So how much is remaining under that ATM authorization? Is it like $115 million? And what is the use of proceeds for those ATM offerings?

[Brian Tienzo:]

Yes, that's right. So we raised approximately $17 million of ATM. That was – to some extent, anticipate – well, a couple of things. One, to augment cash flow, but also in anticipation of the various projects that we see ahead of us. Of course, in the current price we are today, it's unlikely that we would tap that, but it's just that in the event we see a good opportunity not in the current share price of course, but in the event we see a good opportunity, it just allows us to very quickly move and help out in liquidity.

[Randy Giveans:]

Okay. And then at the same time, if I’m reading this right, you repurchased 439,000 units at a cost of $8 million. So why is that and should we expect more ATM offerings or more unit repurchases in the coming months?

[Brian Tienzo:]

Well, I think to some extent, this served two purposes. We initiated the repurchase program at the beginning of March. We believe the share price at the time was undervalued, and the Board approved a 25 million repurchase facility, eight of which is now been used. We continue to have the facility if you wanted to tap it. So we have the optionality to repurchase additional units if we wanted to the given price, but at same time the ATM is also there. It allows us to reissue some units, obviously at a much better pricing than where we are today.

[Randy Giveans:]

Got it. So it looks like after today’s sell off you’re below that price that your most recent repurchases were made at, so you could maybe infer additional repurchases?

[Brian Tienzo:]

We're not quite there yet, but we’re verging on – we’re not quite there yet.

[Randy Giveans:]

Got it. All right. That’s it for me. Thanks again.

[Brian Tienzo:]

Thanks Randy.

[Operator:]

We’ll go next to Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis:]

Yes. Hi, guys. I want to ask you about the potential opportunities for new FSRU contracts. Where do you think that – which projects right now they are out for tendering? And if you can tell us what is the utilization rates of different projects around the world at this point?

[Brian Tienzo:]

I mean Fotis, we know there are tendering in FSRU interest in Brazil, for example, Pakistan, Croatia, Bangladesh, Lebanon to name a few, so there is plenty of sort of FSRU interest out there. I think if you count them all together, you're probably talking more than 30. But I think clearly there's probably six or seven of those that are real and hopefully we will see crystallized in the near-term. As far as utilization is concerned, it is very difficult to know. I mean for our vessels, the vast majority of vessels are utilized well and operating well, close to 100% utilization. And of course, the uptime is very high as well. So it just depends. Some of those FSRUs are for security needs. They may not necessarily be operating at all for any given time, but they are there for security of supply.

[Fotis Giannakoulis:]

And Brian, can you give us an idea of what kind of durations are we talking? We remember that this project used to be 15-year, 20-year contracts. We saw this three-year contract today from HAWK. Has the duration changed in this six, seven projects that you think they are imminent?

[Brian Tienzo:]

No I don't think so. I think you will find that as more people want to be contributive to FSRUs. The length of – the tenure of the charters that we're seeing remain variation from three years to 15 years to 20 years in fact. So we – the vast majority of our contacts and we signed them up with sort of on average about 10 years. There some of those contracts are starting to become due for retendering or extension now, and it hasn’t really changed. I think we are seeing some very good sort of tender in terms of chartering out there. But there are also ones which we know are really fairly short. So I hasn’t really – I think the consensus is that there is more competition and as a result charters can be more picky with the tender that they're willing to sign up to.

[Fotis Giannakoulis:]

Thank you very much Brian.

[Brian Tienzo:]

Thanks, Fotis. End of Q&A

[Operator:]

And with no further questions in the queue, I would like to turn the call back over to management with any additional or closing remarks.

[Brian Tienzo:]

Thank you, moderator. And thank you to all the participants. I look forward to speaking to you again in the next quarter. Thank you and goodbye.

[Operator:]

And again, this does conclude today’s conference. We thank you for your participation. You may now disconnect.