Golar LNG Partners LP
Q2 2018 Earnings Call Transcript

Published: 23 Aug 2018

[Brian Tienzo:]

Good day and welcome to the Golar LNG Partners LP Second Quarter 2018 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Tienzo. Please go ahead, sir.

[Brian Tienzo:]

Thank you, moderator. Good afternoon and good morning to all of you. Welcome to Golar Partners’ Q2, 2018 results presentation. My name is Brian Tienzo; I am joined here by our Head of Investor Relations, Stuart Buchanan. Let me start the presentation by jumping over to Slide 3 for the main highlights. We report net income attributable to unitholders of $28.4 million and operating income of $36.6 million for the quarter. As a result of full quarters earnings from Igloo and better than expected contributions from Maria, we generated distributable cash flow of $23 million for the quarter, with the distribution coverage of 0.56x. Both are obviously improvements against 1Q numbers. Golar LNG achieved another fantastic milestone in getting FLNG Hilli Episeyo accepted by charterers Perenco and SNH. We subsequently completed acquisition of initial equity interest of 50% of Hilli's common units on July 12. Following effective and efficient operation by Hilli, we in Golar LNG have resumed discussions regarding acquisition of additional common units in Golar Hilli. As expected, shipping market shows solid signs of improvement and is continuing. And in June, we secured a 10-month charter for Golar Maria. We have selected FSRU Golar Freeze to service our 15-year Atlantic project. The Freeze is now in Dubai Drydocks in readiness for the modifications. And during the quarter we declared unchanged distribution for 2Q of $0.577 per unit. Turning over to Page 4. As expected, net income for the quarter increased to $28.4 million, up by approximately $13.7 million from 1Q, 2018 of $14.8 million. The increase is mainly attributable to high utilization of our fleet up to 85.2% from 77% in 1Q, 2018. Operating income of $36.6 million increased by $10.5 million compared to $26.1 million from Q1, mainly due to increase in net revenue primarily due to Golar Igloo contributing a full quarter of revenue compared to only 35 days in Q1. Of course, we also saw better than expected utilization of Golar Maria and we experienced some contribution from Golar Mazo also. Contributions from these vessels were partially offset by slight increase in administration costs of $0.6 million. Net interest expense decreased by $0.8 million compared with the prior quarter of $16.8 million due to accelerated amortization and the remaining deferred finance charges for the NR Satu facility which we've refinanced in 1Q. Other financial state item is a positive $12.8 million, a $3.2 million increase compared to 1Q, 2018 gain of $9.6 million. This is mainly due to mark-to-market gain in relation to the valuation of the derivative associated with the earn-out units issued in connection with last year's IDR resets. Tax charges for the quarter of $4.5 million increased by appropriate $0.6 million compared to 1Q, 2018 of $3.9 million due to higher tax charges in Kuwait as a result of full quarter's revenue for the Golar Igloo during quarter. Turning over now to Page 5. Cash and cash equivalents decreased to $116 million by the end of the quarter mainly due to rescheduled debt repayments. However, in addition to our cash balance, we also have a $75 million undrawn credit facility available to us. Going over to Page 6. At the end of the quarter, our net debt was approximately $1.1 billion with Igloo back on hire for the entire quarter and better utilization in general across the fleet. This quarter's net debt to EBITDA ratio at 4.4x is an improvement against last year's high of 5.2x. At the end of the quarter, the percentage of debt swap to fixed rate was approximately 139%. We are over hedged during this period as we entered into interest rate swaps in anticipation of hedging 50% of the Hilli debt. Of course, the Hilli drop-down has since completed and our debt swap to fixed rate ratio is now closer to 100%. Turning over to Slide 7. The improvement in these quarters results compared to Q1 have also manifested itself in helping coverage to increase from last quarter's low 0.32x to this quarter's 0.56x . Looking ahead to 3Q, while Methane Princess is dry-docking, will have some negative impact towards earnings, The contribution of Hilli for most part of the quarter and some contribution from Maria's 10 months charter will more than offset this and will aid an improvement to distribution coverage compared to 2Q. We expect further improvements in 4Q as contributions for Hilli, Maria and Methane Princess will be for the full quarter. We also expect that Freeze's 15-year contract will have commenced. The only factor that could offset against these is the Charter for the Igloo electing not to use her in December. A positive conclusion to discussions relating to further investment in addition of common units. On the Hilli, will further improve coverage but the quantum and timing of this transaction is currently inconclusive. Our life today distribution coverage at 1.1x remains robust relative to our distribution. Nevertheless, we continue to monitor very closely the developments regarding Igloo, the shipping market for which the Mazo is immediately exposed to and the follow on Hilli transaction. All of which will have an impact towards our future coverage ratio. And we hope to have more clarity on these by the time of the next distribution announcements. Going over to Page 8. Looking at the MLP's backlog revenue. Backlog revenue remains materially consistent compared to previous quarter, and even more certain now that the Hilli drop-down has concluded. The Hilli of course contributes approximately $800 million of effective revenue and diversify our asset base. While time elapse has eaten away some of the backlog revenue, the 10-month firm contract achieved in the Golar Maria during 2Q has mitigated this somewhat. With revenue backlog currently set at $2.5 billion, our earnings potential remains robust. Going over to Page 9. So this slide clarifies the various shareholdings now on the Hilli now that the drop down has completed. And with the completion of that drop down, we now have rights to a proportionate share of Hilli Episeyo's annual contracted revenues less operating expenses under the liquefaction and tolling agreement. And this will be approximately $82 million per annum. To date, the Hilli have offloaded five cargos and the export of a six cargo is expected shortly. This is encouraging start to its operations which is continuing has prompted the decision to resume discussions on the potential acquisition of additional interest on the vessel. Going over to Page 10, on shipping activities. We continue to witness positive developments in shipping. A material amount of LNG production from both new facilities and existing facilities are expected to commence operations over the next 24 months. Current indications suggest 72 million tons per annum will be coming against this 66 LNG vessels are scheduled for delivery, which could translate to an under supply for the ships. Clearly, there is an understanding now in the market that whilst not all of this could crystallize in the same timeframe, there is nevertheless an admission that shipping will be tight over the next couple of years at least. As a result, charter is typically requiring tonnage coverage for the coming winter, are also no interested in multi month and even multi year charters. This is good news for a few of our ships. Maria has recently commenced a 10-months charter and we expect the ship will also come out of that charter into a buoyant market. Further, we're now looking at various opportunities for the Golar Mazo. Turning over to Page 11 on FSRU. So the FSRU market continued to positively move in the right direction. We are seeing a stream of new interest both for new build and mid-sized FSRU with interests currently showing more in favor of midsize FSRU. We are therefore well placed in these discussions. We're now preparing to service the upcoming 15 -year Atlantic FSRU project. To this end, we have nominated Golar Freeze to service this contract. Golar Freeze will require less modification and therefore cost less as compared to our other FSRU candidate, Golar Spirit. The Golar Freeze is currently being prepared for these modifications at Dubai drydocks. We remain positive and securing another FSRU contract for either Maria or Golar Mazo but progress on these opportunities is slow. We fully expect that the Charter for Golar Igloo will be returned at shortly with commencement in 2019. This contract that we will try very hard to secure and given the efficient operation so far of the Igloo, we believe that this will benefit our bid, but we remain cautiously optimistic. Nevertheless, the positive development in a shipping market as mentioned earlier provides a mitigant in the event we are not awarded this contract. Of course, the Golar Nanook represents 2020 acquisition potential with this 25 year $41 million EBITDA contract, Nanook is a compelling target that will augment distribution coverage materially. So to summarize then the Partnership continues to maintain a solid contract base. That is supported by continuing excellent of various operational functions. As part of the Golar Group, we also expect to reap the benefits of a fast-growing LNG market. We are in a transitionary phase as we navigate through lower than desirable coverage ratios. And we have certainly levers that can mitigate the full impact of the re-contracting risks that we face today. During a part of this transition phase, we have seen positive developments that support distribution coverage. We await further developments that will give --guide us in our decision-making, but we expect that --we expect to provide clarity and future distribution levels when three key distributions is declared in October. And on that note, I'll turn over now to John, the moderator for Q&A.

[Operator:]

[Operator Instructions] We will now take our first question from a Michael Webber of Wells Fargo. Please go ahead, sir.

[Michael Webber:]

Hey, good morning, guys. How are you? Brian just to zeroing on the Igloo and I know you touched on in your prepared remarks, but if I think about that business in Kuwait. Can you maybe speak to a realistic timeframe for them to put any asset on hire so say if you're going to let they're going to look at another third-party asset that rolls I believe at the end of February. What's the realistic timeframe maybe even just based on industry comp for when you'd expect that kind of decision or the kind of lead time that would be typical? And then any maybe asset specific, barrier to entry there, maybe if you can talk to how many --how many FSRU on the water or in the market would you be competing with there?

[Brian Tienzo:]

I think as it relates to Igloo, Mike, to some extent because of what we believe to be new technical requirements by KNPC, it limits very much the number of vessels FSRU actually could compete. So the way we understand it is that the bidding papers are just going through the motion of being approved. And we expect that those papers could be released publicly during the first half of September. Of course, that could slip. So these are the guidance that we are seeing. And then saying that I think on paper there are probably only three sort of potential competitors that could viably compete for this, with a starting position or with a position of being able to start up during the latter part of Q1, 2019. So to that extent we know very well who those people could be. And as I said, we're in a very good position as it relates to the operations of the vessel which is operated efficiently. So this is a contract that we would very much like to keep, and we will fight for it very hard, but at the same time cognizant of the fact that on the other side the Igloo has traded once or twice as a carrier. And of course the shipping space at the moment is very buoyant.

[Michael Webber:]

Okay, that's helpful. Within I guess the context of that market there's been an overhang of --a small overhang but for the size of the market I guessed on a relative basis significant overhang of necessary tonnage is weighted on the market to your point, it's something that's in the trading as carriers that asset generating a healthy amount of EBITDA. I know that's a focal point for you guys when you think about the distribution and what the long term cash flow picture looks like. Without maybe getting into too much detail can you give a sense of how far off the current market for FSRU --the current market for FSRU is relative to when you sign that contract? Is this something -- are we talking at 15%-20% or is it closer to the 30% -40%?

[Brian Tienzo:]

We can't really -- it's very difficult to comment on Mike simply because you've got different types of FSRU that attract different rates, but clearly the market has moved on since we signed this. And there is every evidence that we will expect a discount against the charter that we signed up to five years ago.

[Michael Webber:]

Yes, okay, yes I can appreciate, it's tough question especially in the middle of the process. Just one more for me and obviously the distribution has been a hot topic throughout the summer. I know there are bunch of variables that are still in the air, but if you guys come to a consensus or a thought process around how you think about a target forward coverage level and/or what sort of premium or emphasis you guys will place on distribution growth versus security? It certainly doesn't seem like visible growth is getting the kind of reward it was getting a few years ago. And which would imply a deeper cut to bake in some growth might not be the most prudent strategy. So I know there's a lot of nuance to that, but can you maybe talk to how your thought process has evolved over the summer when it comes to maybe valuing that security and then any sort of broad target number even if it's a range that we can think about over the long term?

[Brian Tienzo:]

I think first and foremost I mean if you rewind back to the last we made the quarterly announcement. it's clearly there were a few factors there that were outstanding. Now those --some of those have developed and developed positively. And as I said there are certain factors they're still outstanding which we really need to bottom out before we can make those decisions. I think the priority for us is to find a level of distribution that is sustainable. And that allows investors alike to be able to provide sufficient evaluation to the MLP. So that is priority; that is what we are trying to achieve during this transition period. And subsequent to that obviously certain amount of growth. And as you can gather from the responses Golar LNG's webcast earlier, there are certainly signs of that coming, but the priority for GMLP is to find that level of sustainable dividend that people can actually relate to and be confident on. As to the level of whatever that --what we do with the dividend is very difficult. And I wouldn't want to make sort of certain assumptions that simply because there are still certain materials factors out there that materially impact that decision. And so whilst there's been some positive developments. It's prudent to wait for these assumptions or sorry these factors to bed down and then we can make a sort of fully educated decision on the distribution then.

[Operator:]

We will now take our next question from a Ken Hoexter of Merrill Lynch. Please go ahead, sir.

[Ken Hoexter:]

Great, good afternoon. Brian can you talk about the --you talked about the potential for growth with the 50% of Hilli be that the next target or would it be any power options from the --I guess as Sergipe continues to progress with the parent any kind of potential drop down from that or would it be I know would you would you think more --you talk to on the earlier --I guess the parent company talked more about rates being sustainably higher on the carrier side. So just want to get your thought of where your focus would be?

[Brian Tienzo:]

Sure, Ken. So, clearly, there are two visible sorts of revenue streams that are attractive to us. One is the remaining 50% of common units of the Hilli and also of Nanook is slightly further along, but both of those pose quite material sort of improvement to coverage they crystallize. As alluded to, there are ongoing discussions now with regards the Hilli. The range of additional common units and the timing of being able to conclude in those discussions are at the moment uncertain simply because we have to go through in a certain process to be able to do that. And of course from Golar Power, there is the Nanook which is slightly further along but it is a very material contract to us as well. It's nice to see that the shipping market has improved materially. Of course, that helps the Golar Mazo which is currently in warm layup at the moment. There is an expectation that we will shortly take that vessel out of layup for trading because we feel that the contribution from that will clearly augment the coverage. But as of yet -- the Golar LNG Limited has --is looking to put, what it's looking to put some of those ships into long term charters. It isn't visible to us when that could happen and so our immediate attention must be to those contracts that are --they're already for the Hilli and then Nanook.

[Ken Hoexter:]

I guess you've kind of try to stay away from --when you were back in your prior job right of expanding the carrier side, but would the MLP looked, if they did sign, if we're talking about improving environment sounded like they on the earlier call talking about longer and higher or higher for longer at this point given the confidence what they were seeing in this --in what's going on in the market and given the demand would the MLP entertain adding more carrier capacity or is it just solely a focus on the FSRU and an FLNG drop down?

[Brian Tienzo:]

No, absolutely no. I think we have a very varied asset base now. And I think that's something that we will continue to grow. If there are accretive assets that have long enough a contract at the Golar LNG Limited level. I think that is something that would also be attractive to us. We -- under the omnibus agreement those are all included that and can be transacted on between ourselves and Golar LNG. So absolutely it's something that we would be open to and desire actually.

[Ken Hoexter:]

Just a clarification on the remaining 50% in Hilli discussions. Does that include the exposure to the crude up side as well or would it be solely for the fixed portion?

[Brian Tienzo:]

I think it would be remiss of me to put in --the commodity linked revenue of Golar of the Hilli is not something that we can take the risk on. From Golar LNG Partners perspective what we want to see is transparent cash flows. And so we would limit in for the time being we would limit our interest on the trains that are fixed and have continuing earnings.

[Operator:]

We will now take our next question from John Chappell of Evercore. Please go ahead.

[John Chappell:]

Thanks, good afternoon, Brian. First thing I want to try to figure out just want to kind of walk through liquidity. You have the $115 million of cash, $75 million of undrawn facilities. So that's $190 million. What are the dry-dock costs associated with Freeze and Methane Princess? I'd imagine that the Freeze might be a little bit larger than usual just given it's been about to go on a 15-year contract.

[Brian Tienzo:]

Yes. S the Freeze will be slightly larger. It's not just the dry-dock and there'll be sort of small amount of modifications in there as well. That's sort of $15 million to $20 million on the Methane Princess, not-- it's not-- also that's not also just a pure drydocking, there's a balance water treatment associated with that also. So that's around $5 million to $8 million.

[John Chappell:]

Okay, so if we take that out and you saw some debt amortization as well. I mean when we think about what capital you have at your disposal to invest in the potential drop down of train 2, is it a $100 million give or take? Is it significantly lower than that? Significantly higher? How do you think about how you'd finance that drop down?

[Brian Tienzo:]

Well, I guess it all depends on what we end up buying, John. I mean anywhere up to 50% of the common units. Obviously, at 50% of the common units, remaining common unit it's --we would have to raise certain amount of funding to be able to do that. So we need to be able to find the balance of buying an accretive cash flow from --on the Hilli. And there is ability to raise financing. And of course at the current level of the unit price at the moment, it's not --it's very difficult to justify raising sort of the funds through equity to fund that.

[John Chappell:]

Yes. Without a doubt, and that's what I'm trying to solve for me. If we just used the math on the first 50%, you needed about $187 million of capital, but $107 million of that was the Tundra foot. So I mean I'm not assuming you're going to buy all 50% but I'm trying to figure out if you had call it $90 million of liquidity today that you can spend after dry-dock cost, after debt amortization that would lead us to maybe 50% of that 50%. Is that a right way to think about it?

[Brian Tienzo:]

Yes, no, it will, I think to some extent that's the sort of the way of thinking but as I said that remains certain discussions and procedures we have to go through before we can finalize what that number will be.

[John Chappell:]

Okay, understood. Then just a couple quick ones on the current fleet. Can you disclose the rate you achieved on the Maria?

[Brian Tienzo:]

I'm afraid not. We're bound by confidentiality agreement with our charter. And we want to be in the good side of those guys.

[John Chappell:]

Okay I mean is it closer to long-term industry averages or maybe closer to a more recent spot rate levels?

[Brian Tienzo:]

Well, don't forget it it's a steam vessel; it's a ten year old steam vessel. It's not a TFD vessel, so we're-- let's put it this way, we're very, very happy with the rate that we've achieved on that vessel --on a ship.

[John Chappell:]

Okay, two more quick ones. Talking Mazo about warm layup means you're pretty confident in its employment opportunities. Are you looking at something similar to what you did with the Maria like a 10 month or is there even demand potentially for longer term contracts for that asset?

[Brian Tienzo:]

We're seeing a variety of interests now and so and I think we are sufficiently confident that's interest for these vessels are actually going to become even more as we go through this year and possibly into next year. So the longer the contract that we get the better for us I think.

[John Chappell:]

Okay. And then finally no conversation whatsoever about the Spirit. Obviously, the FSRU market, it's a little bit different. One, have you thought about taking that out of cold layup? And two, does that have the capabilities like the Tundra to trade as an LNG carrier so could you potentially pull that out of cold layup to employ in the LNG carrier market?

[Brian Tienzo:]

Yes. We can pull it out of cold layup. There'll be certain amount of capital cost to doing that. And we haven't really said so much about that. We are pursuing opportunities for the Golar Spirit but those opportunities are not sufficiently immediate and but those are continuing in the background.

[Operator:]

We will now take our next question from a Fotis Giannakoulis of Morgan Stanley. And please be advised to keep the questions up to two questions per participants. Your line is open, sir.

[Fotis Giannakoulis:]

Yes, hi, Brian. Can you give us some information? What is the free cash flow of the 50% of the Hilli and if there is any possibility that this free cash flow increases given through some refinancing of the debt which from what I understand it has a very steep amortization profile?

[Brian Tienzo:]

And so obviously the other EBITDA related to-- the other 50% of the Hilli is going to be around $80 million to $82 million, Fotis. Against that there'll be debt amortization in certain amount of interest. So the free cash flow on that vessel is going to be somewhere between $20 million to $25 million. You're absolutely right. The debt amortization on the Hilli whilst the financing in itself is good, it is somewhat at variance with the replacement capital that we would use to determine what the distributable cash flow is for that asset. And so we want to try and find a structure that allows us to get closer to the replacement CapEx which may mean restructuring of the vessel or other means necessary. But that is something that we're working on the sidelines.

[Fotis Giannakoulis:]

So are you talking about refinancing or some profit share with or some rearrangement of the cash flows between GMLP and GLNG that will allow you to have higher free cash flow than what the current debt service implies?

[Brian Tienzo:]

We are looking at various options for this. It's very difficult to give too much information on those until we are quite certain where we going. It's --but suffice to say we're trying to improve the distributable cash flow coming out of the Hilli.

[Fotis Giannakoulis:]

Thank you, Brian. And regarding the $800 million facility. It's --are there any covenants on this facility and given the fact that these assets they are not tradable? How do the banks view the value of this FSRU and especially the conversions for your covenant discussion?

[Brian Tienzo:]

There are covenants on these facilities. In fact, in most of our --all our facilities, but they're no different to one another. And so we are within covenants and have been so. As far as how the banks look at this. I think clearly while they look at it are the cash flows coming through the fleet rather than specific vessel. And of course the valuation on each of those vessels to make sure that they are sufficiently --to mention that the bank is sufficiently secure. So to that extend, we don't see any issues as far as the bank is concerned. And so that that facility will continue to run.

[Fotis Giannakoulis:]

Is there any room of easing some of the debt repayments and releasing some additional free cash flow from any of this from the $800 million facilities or any of the other facilities through some sale and leaseback or some different type of financing?

[Brian Tienzo:]

I mean you can do all sorts of stuff with this group. I mean you can break it up; you can enter into them into another facility. So it is a project that we're looking at and but as of today that the banks that we have in that facility have been very supportive. And the vessels are performing very well. So everyone's happy.

[Operator:]

We will now take our next question from David Boyle of Danske Bank. Your line is open, sir. Please go ahead.

[David Boyle:]

Hi, Brian. One question here. You comment in the report the 4.4x leverage leaves ample room for re-leveraging assets. If you take it down with Hilli debt then obviously the leverage is going to be a bit higher. Are you anticipating a higher leverage level or target going forward?

[Brian Tienzo:]

So, I mean, clearly, what we're saying here is that obviously as of the Q2 not all of the assets that we would like fully employed is sufficiently employed yet. What is --what we are trying to target is a-- it's sort of a stable leverage perhaps between the 4 and 4.5 kind of mark, that allows us to sustain that type of leverage. What we will be able to do hopefully with the vessels that are currently unemployed having got those employed, it allows us the ability to perhaps release some equity that isn't currently the position at the moment, but it is something that we can make decisions on as we progress on employment opportunities on those other vessels.

[David Boyle:]

Okay, thanks. Just one more question for me. Could you provide any insight on the timeline for a decision on conversion of Maria or Mazo?

[Brian Tienzo:]

It's very difficult to do that, David, unfortunately because whilst we are seeing some progress on being able to put the Maria into a long term FSRU contract to some extent were beholding to the charter of taking FID. Now we like the contract that we're seeing. But we won't be able to take a firm decision on when we will commence the conversion on the Maria until such time as the charter have taken FID because otherwise we expose ourselves to potential open project.

[Operator:]

We will now take our next question from Randy Giveans from Jefferies. Please go ahead, sir.

[Randy Giveans:]

Hey, thanks gentlemen. So I know you're in the discussions with respect for the potential drop down of additional common units Golar Hilli. As such are the 5% of units owned by Keppel and Black and Veatch also in discussion or only the 45% remaining at GLNG?

[Brian Tienzo:]

No, we're looking at the entire remaining 50% of the common units of the Hilli, Randy. So the Keppel and BV will also be involved in those discussions.

[Randy Giveans:]

Okay. Good for that. And then secondly, it looks like you repurchased about 1.5 million of common units during 2Q, 2018. And then on the other hand obviously you still have about I guess $115 million in the ATM authorization. So should we expect kind of more ATM offerings or more unit repurchases in the coming months?

[Brian Tienzo:]

I think these levels --well I mean at these levels it's very difficult to justify doing ATMs to some extent. They're there for two different purposes. One is for trying to reinvest in better yielding sort of vehicles and the other one to try and support the unit in itself. We have the ability to trigger both. I think the ATM clearly isn't really in the realms of being able to trigger at the moment. On the buy back side, I mean that is clearly that that's something that now we can look into.

[Randy Giveans:]

Sure, all right. Last question for me. Have you looked at opportunities outside of Golar Parent for dropdowns?

[Brian Tienzo:]

Yes. We have. But I think clearly wherever possible and being part of the Golar Group there is always merit and in keeping transactions within the group. But we're not limiting ourselves to opportunities just within the Golar Group.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the conference back to you for any additional or closing remarks.

[Brian Tienzo:]

Thank you. And thank you all for your participation and contribution. And so we look forward to speaking to you again in the next quarter. Thank you and goodbye.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.