Golar LNG Partners LP
Q1 2017 Earnings Call Transcript

Published: 31 May 2017

[Operator:]

Good day ladies and gentlemen. And welcome to the Q1, 2017 Golar LNG Partners LP Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Graham Robjohns. Please go ahead sir.

[Graham Robjohns:]

Thank you, operator and good day to everybody. I'm joined here today by our CFO, Brian Tienzo, and head of Investor Relations, Stuart Buchanan and also we also have Oscar Spieler on the line as well. So we start the presentation on Slide 3, and recent highlights. Our earnings were impacted this quarter by the usual Golar Igloo winter downtime period as well as the Golar Ground drydock which was in preparation for her new charter. Net income attributable to unitholders was $23.6 million and operating income was $54.9 million for the first quarter of 2017. Distributable cash flow was $36.4 million for the first quarter with the distribution coverage ratio of 0.89 which is also obviously negatively impacted by the downtime for the Golar Igloo and the Golar Ground drydock. We issued new $250 million senior secured bond in the Nordic market during the quarter, principally to refinance our existing bond indebtness. We also raised some money in the equity markets issuing 5.175 million common units in an overnight thought [ph] deal together with approximately 93,000 general partner units issued to Golar raising gross proceeds of approximately $119 million which we anticipate will principally used to acquire an interest in the FLNG vessel Hilli Episeyo. We also of course secured a new contract for the LNG carrier Golar Grand for 2 years bond and up to 9 years with option. Subsequent to the quarter end, in light of the somewhat limited progress on the project and the time to first cash flow, we executed a put option in respect of Episeyo Golar Thunder and entered into a purchase option agreement for up to 25% interest or effectively 50% of contracted capacity of FLNG Hilli Episeyo. Moving over to Slide 4 on the income statement. Total operating revenues were lower at $101.4 million compared to $114.9 million for the fourth quarter, mainly due to the scheduled downtime for the Golar Igloo and Golar Grand as I've already mentioned. Vessel operating expenses at $17.1 million were higher than the fourth quarter of $13.4 million mainly due to increased maintenance expenditure particularly in respect with the Golar Igloo during her scheduled downtime period as well as costs associated with the reactivation of Golar Grand in readiness for her new charter. Interest expenses were higher at $18.2 million for the quarter due to the extra costs of the new bond and other financial items were a loss of $6.9 million for Q1 as compared to a $20.6 million gain for Q4. This was mainly driven by non-cash mark-to-market gains on interest rate swaps as long-term swap interest rates rose strongly in Q4 and much less so in Q1 doing rise to gain of $23.4 million in Q4 and only 2.7 million in Q1. Other financial items in Q1 also included costs and accounting loss associated with the buyback of the 2017 maturing bonds and the developing cessation of hedge accounting for the related cross currency swap. As a result, net income decreased from 71.4 million last quarter to 23.6 million for the first quarter of 2017. Moving on to Slide 5 and the balance sheet on the asset side. Cash balance has increased from 65.7 million to 166.9 million. This is as a result of the receipt of the net proceeds from the new $250 million bond and approximately $119 million from equity issuances. Both of these were offset by the partial buyback to the 2017 maturing NOK bond and the temporary retirements of the 125 million of our revolving debt facilities. The reduction in restricted cash has risen because of the release of restricted cash in relation to the partial unwind of the cross-currency swap associated with the NOK bond buyback and other current assets have increased as a result of the 107 million due from Golar and respect of the Golar Tundra being reclassified from long-term to short-term. Moving over to Slide 6 and balance sheet liabilities. As at the end of the quarter, our net debt was 1.17 billion and our net debt to EBITDA ratio, calculated by using Q1 annualized EBITDA was 3.7. Percentage of debt swap-to-fix rate was just over 105% as of the March 31, although this is inflated by the temporary repayment of the 125 million of our revolving debt. Moving on to Slide 7, distributable cash flow was lower this quarter of 36.4 million, compared to 57.9 million last quarter with the distribution coverage ratio of 0.89. Reduction is largely due to the scheduled downtime for the Golar Igloo and Golar Grand as already mentioned and our coverage ratio is also impacted in Q1 by distributions paid on a new unit issued in February. On the Slide 8, and as I’ve already mentioned of course we have two capital market transactions in the quarter, the first with the U.S. dollar bond issued in the Nordic market and it was priced at LIBOR plus 6.25% and swapped with -- interest rate swapped to an all in fixed rate of 1.94%. As of March, we had repurchased and the principal bonds and related swap liability plus a premium paid on the bond of about 2.5% in a total amount of 175.7 million. The remaining principal bond and interest rate swap liability to settle as at the end of March 58.3 million and after conducting restricted cash against that’s what we have and net amount to repay as of the end of March was $53 million. And then bottom of that Slide 8, you can see some of the details of the equity offering which raised $119.4 million in gross proceeds. Turning over to Slide 9, we have set out the progression of our EBITDA, net income, distribution paid and replacement and maintenance CapEx since our IPO as well as a solid growth over that time. I think this also highlights the strong coverage ratio that we had over the last 3 years, amounting of course that Q1 is impacted as usual by the Golar Igloo seasonal downtime. We've also maintained around the conservative leverage ratio of less than 4 times net debt-to-EBITDA. Slide 10, just shows some quarterly progression of the same data, so I won't dual on that one. I'm going to turning over to Slide 11, we have our asset and contract slide. That has a few changes from last quarter, the Golar Grand has a new contract. We have removed of course Golar Thunder and we have the option over Hilli Episeyo. Our revenue backlog as at March 31 was $1.8 billion, but this would effectively increase to $2.6 billion with the proposed Hilli acquisition. In addition to our revenue backlog years would increase from 4.4 to 6.4 years. We are using this revenue backlog year as a metric as we believe it better reflects our average effective contract term given the variability of revenue between our vessels, i.e. some of our vessels have much higher revenue and longer contracts than others. We calculate revenue backlog years by dividing total revenue backlog by annualized turn quarter revenues. We have as I mentioned, recontracted to Golar Grand, and we now of course are very focused on recontracting opportunity for Golar Mazo, Golar Maria and Golar Spirits along with the Hilli transactions this is a clearly our number one priority. Golar Spirit is being actively marketed with the focused on small scale FSRU opportunities and they're seem to be a growing number of these. For Golar Mazo and Golar Maria there are continuing times of LNG carry market improvement as we move through 2017, and this should improve our recontracting position. We also have an identified opportunity, one of these vessels is in LNG carrier and continue to consider opportunities for conversion into FSRUs. Moving over to Slide 12, as I've already mentioned, we have entered into an agreement with Golar to effective swap the Thunder for an option to acquire up to 25% interest in Hilli Episeyo, which represents 50% of the capacity contracted to Perenco. The put option -- the put amount receivable is approximately $107 million, and this will be deferred until the closing of the Hilli acquisition or March 2018 and Golar Partners will receive a 5% fee on this deferred amount. Together with the $119 million proceeds for the February equity issue, we expect to have sufficient funding to conclude this acquisition without the further need for further capital. This cross [ph] transaction will clearly be a significant for Golar Partners and would effectively increase contracted revenue backlog by 44% to 2.6 billion and increase revenue backlog years as I’ve already mentioned from 4.4 to 6.4. We should also point out that is not intended that Golar Partners will be exposed to any commodity linked to pricing elements of the tariff with Perenco and nor well Golar Partners be paying for potential expansion capacity. Progress on the Hilli construction is going well, all equipment is installed, pre-commissioning work underway and departure from yard is expected in the coming week with transit to Cameroon following. In Cameroon Perenco is also on track with offshore and land based infrastructure works. Turning to Slide 13. In the market, we are clearly in a growth phase of the industry with growing LNG supply and demand, which will require additional infrastructure including ships and FSRUs. Significantly new volumes are coming over the next few years, 34 million tons approximately this year, which is more than 10% of total market supply to date. This will undoubtedly positively impact LNG shipping demands as [indiscernible] predicted the right-hand graph with the orange dotted utilization line moving upwards from 2016. We also expect these new volumes will continue to drive demand for FSRUs as this new LNG seeks new markets. Turning over to Slide 14. In summary, we believe, we have a solid contract based excellence operating results. We have a strong financial profile, we operate in a fast-growing market with increasing demand for infrastructure and we have some extremely interesting acquisition opportunities from Golar in the future. We have re-contracted [indiscernible] contract this year and we see opportunities for other vessels to be recontracted that have near-term contract expires. Importantly, assuming we execute on the Hilli acquisition option, we will add significantly to our effective revenue backlog and this will provide significant support for our distributions going forward. Thank you and with that operator, I’ll turn it over to you for Q&A.

[Operator:]

Thank you. [Operator Instructions]. And we’ll take the first question from Jon Chappell of Evercore ISI. Please go ahead.

[Jon Chappell:]

First question has to do with the potential Hilli dropdown, I'm just trying to understand economics of that and behind your comments about new additional equity. If we assume it’s the 25% of the total asset or I guess 50% of trades One and Two, that should be 85 million of EBITDA. Would the dropdown multiple be similar to the multiples at the currently FSRUs and carriers have been dropped down at?

[Graham Robjohns:]

Yes. Not dissimilar, I guess if you look back at our multiples they'd be I think in the sort of high 7 to 9 times and I would anticipate kind of within that range.

[Jon Chappell:]

Okay. And then the debt, correct me if I'm wrong, it was about 80% financing. So the 80% financing would therefore be dropped down as well? So your equity contribution would be roughly 20% of the 85 million times somewhere in that range?

[Graham Robjohns:]

Yeah, the debt at acceptance is $960 million.

[Jon Chappell:]

That's for the entire assets that you will take 25%?

[Graham Robjohns:]

Well I think we'd take effectively 50% of it, because the debt is on the initial periods of the cash flows from the Perenco contract will be fully servicing the debt. So that debt goes across the contract, not sort of the whole asset if you like.

[Jon Chappell:]

Okay, understood. And then just my second question then is on the Grand, and I'm just trying to match up comments from your press release and Golar LNG's press release. You said that the contract was roughly at cash breakeven levels, based on your press release, it says that the first options to extend or accepted it would be $10 million of annual operating income before depreciation. I'm trying to back into what rate that kind of assumes. Is that kind of a current market rates in the mid-to-high 30s or is there with you assuming the extension is a step up there?

[Graham Robjohns:]

Two things John, just the reference to mere cash breakeven was with reference I believe to the -- Golar LNG had another carried at its contracted out on a 12-month term, that with the one that was referenced to approximate cash, close to cash breakeven. The Golar Grand we're a bit restricted on what we can say around a rate because of confidentiality. We give the sort of the $10 million EBITDA number is blended number of the 2 firm years and 3 one year option periods sort of over the 5-year period.

[Jon Chappell:]

And so that try to assume then that there is a step up in that like the 2 years, it's one level that it can do the exercises as it moves up?

[Graham Robjohns:]

It does step up overtime, yes.

[Jon Chappell:]

Okay, great. I'll turn it over thanks a lot Graham.

[Operator:]

Thank you. We'll take the next question from Michael Weber of Wells Fargo Securities. Please go ahead.

[Michael Weber:]

I want to follow up on John's first question on valuation for the Hilli, if you just -- if you kind of come at it in a different angle and you take 50% in Phase [ph] 1 and 2 kind a back out the equity proceeds from a Tundra swaps. You more or less kind of arrived at the $119 million of equity you've raised in terms of remaining payment at about 8.5 times multiple which is kind of in the middle of the range you kind a spoke to here. So it seems like it kind of nets out, but I guess my question will be one, you've got that excess credit capacity. Could you think about even bumping the leverage on a Hilli drop. And then two, around you gave that multiple range kind a high 7s to 9s. That multiple range is associated with assets in the carrier space of even a regas space, so there is a bit of a better handle on where residual value risks really are. So I'm just curious how that will come into play in terms of comping an 8 year FLNG versus a like an 8-year carrier contract or an 8 year FSRU contract? Do think there is a material difference in terms of how you would look to kind of finding a value at the back end of that term?

[Graham Robjohns:]

Yes. I mean, clearly, answering your second part of the your question first, Mike. Clearly, residual value and coming to a view on what that residual value is, will be a key part of the process of arriving at the appropriate valuation. I think, I mean there are a number of the things, we need to take into account of that as you kind of alluded to it, in the shipping space you have more liquidity. On the other hand, sometimes scarcity can have value. So if you have an FLNG unit somewhere where there is gas and no other ways monetizing that gas and you have a pretty captive market. So it’s a tossup between number of things, but obviously something that we would be working through very carefully. And I didn’t quite catch the first part of your question. But I don’t think -- I think it was, would we be increasing the debt on the Hilli from sort of the 960 that we currently have, I don’t think there is any intention to do that at the minute.

[Michael Weber:]

Okay. All right. That’s helpful. On the Mazo, you mentioned the options and I guess, the step up. What’s the timing on the notification period for those options? And those options are held by the charter, correct?

[Graham Robjohns:]

That’s correct. The Grand, not the Mazo.

[Michael Weber:]

I’m sorry, the Grand.

[Graham Robjohns:]

I can’t remember the exact notice periods, Mike, but it’s usually six months before the end of the firm period, is the standard timeframe.

[Operator:]

Thank you. We’ll take the next question from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Graham, you mentioned about several opportunities, FSRU opportunities are in the market for smaller older units. Can you give us some examples and can you give us an idea of how the economics compare with the new building assets?

[Graham Robjohns:]

I can’t tell you where they are and what they are. The point is kind of in terms of economics, some of these projects and have limited initial throughput requirement. So we've done project before where the initial regas capacity requirement is being low, but at a very strong expectation of it growing overtime. Whereas some of the projects that we've been looking at have sort of less surety about growing overtime. So if you're looking at sort of 0.5 million tons to a 1 million tons of capacity throughput taking into consideration of a new build is got of around 4.5 million tons capacity and throughput ability. With the new build where you're only using it for the regas 0.5 million or 1 million tons that becomes very expensive per MMBC per unit. The Spirit is a small FSRU, only 2.5 million tons and its day rates have slightly been a little lower than kind of the bigger unit rates. And therefore, we can offer that vessel in at rates that make those projects economic.

[Fotis Giannakoulis:]

Is there a discount, a range that you can give us versus the new building unit? It is at $20,000, $30,000 lower rate? How -- is there something that you can give us more specific?

[Graham Robjohns:]

I'm not sure I want to, I think it would be kind of giving away our competitive advantage a little bit.

[Fotis Giannakoulis:]

Okay, that's clear. And then regarding the dropdown of a Hilli, you mentioned initially the 60% of the first two trains. What is the ultimate target, when the Hilli gets contracts for the remaining two trains? Are you planning to buy this asset in full or you always want to have minatory stake?

[Graham Robjohns:]

I don’t think they're -- there is not a particularly designed to retain a minority stake. I think it would, from MLP's point of view, it's certainly the ambition is there to buy the remaining parts of the first two trains. And then I think overtime we -- assuming trains will get contracted out, that the desire to acquire additional trains as well.

[Fotis Giannakoulis:]

Okay thank you very much Graham.

[Operator:]

Thank you. We'll take the next question from John Humphreys with Bank of America. Please go ahead.

[John Humphreys:]

I just wanted to ask about the put option with respect to the Thunder, and how it's effecting the dropdown of the Hilli sort of now that, that was expected, that now that put option has been exercised, sort of how post that exercise, what the dropdown of Hilli now looks like versus previously had that put option not been exercised?

[Graham Robjohns:]

I guess it doesn't really affected it too much other than the fact that we or GMLP has an increased amount of capital to deploying in acquiring a stake in the Hilli. So effectively all we're doing is the $107 million would have been due from Golar to sort of payback at the equity portion of the Thunder. That $107 million is being applied to acquire an additional part of the Hilli, in addition to the $119 million that we've raised back in February. So as far as the answer to your question is we're just buying a bigger share of Hilli's than we otherwise would have done.

[John Humphreys:]

Great. And then the next, sort of, onto the Grand and the Maria. You had mentioned the Grand was in layup, and that resulted in 46 days of off-hire during 1Q. Can you just explain how -- when in the layup the additional cost -- were those all related to drydock expense?

[Graham Robjohns:]

No, it was in layup. So the Golar Grand has been chartered to Golar LNG for about the last 19 months or so. And Golar LNG put the vessel into layup, and Jim Opie [ph] continues to be paid charter hire. Then we got this new contract that runs on, the firm pay runs on till kind of mid '19. So the vessel came out of layup and then proceeded to drydock. Now the point which it proceeded to drydock and it effectively becomes off hire for GMLP. So the 46 days off hire reference is to the drydocking period, not the layup period. And then it comes out as drydock, goes on to its new charter, but until the relations -- or the charter between Golar and Golar Partners for the Grand comes to the end of October and the vessel is in effect sub-charted to the new charter by Golar LNG. So until the end October GMLP will continue to receive what it always has done from Golar and Golar will receive the earnings from the new charter.

[Operator:]

[Operator Instructions]. And we take the next question from Randy Giveans of Jefferies. Please go ahead.

[Randy Giveans:]

So most of my questions have been asked and answered, but few quick-one. So looking at your re-chartering strategy for the Mazo and Maria, do you plan on operating them in the cool pool [ph] until you can lock in a 5 to 7-year time charter or you open to kind of looking for securing at 1 or 2-year time charter for 2018 and 2019?

[Graham Robjohns:]

So we are most definitely looking for as longer periods as we can. Definitely it won’t go into the cool pool, because the cool pool is for DFDE vessels only, not steam vessels.

[Randy Giveans:]

All right. And then for dropdown timing of the Hilli. I’m assuming there would be a distribution growth as well, would be subsequent quarter, two questions and then what kind of scale are you thinking for that?

[Graham Robjohns:]

I don’t think, we haven’t commented on whether there would be any distribution growth. I guess that will be just dependent on what happens with the re-contracting of the Mazo and Maria and the Spirit, as the Hilli.

[Randy Giveans:]

Okay. That’s fair. I guess in another way, what is your target distribution coverage ratio going forward?

[Graham Robjohns:]

Well, we’ve maintained a fairly healthy coverage ratio. We’ve been at around I think 1.25, 1.26 times over the last 12 months. And I think if you go back over last 3 years, it's been around less than 1.25 to 1.3 times. And I would expect that to come down a little bit as a result of the vessels that come off contract, but probably going to end up being recontracted at lower rates. And of course that's where the Hilli comes into play to put that gap.

[Randy Giveans:]

Got it, okay. Still wanting to keep it above 1.2 times.

[Graham Robjohns:]

Well I would say sort of the longer-term target would be to keep a good level of coverage above let's say 1.1 times. But over the net we have been building coverage on purpose and because of the recontracting risk that we have in 2017. So it's kind a difficult to predict where that coverage ratio will go until we know what the outcome of the recontracting of the vessels is, but that the key message is that with the Hilli dropdown for which we already have the funds for, we will have a significant addition to distributable cash flow sort of almost irrespective of what happens to those vessels. So we're looking -- the Hilli supports the current distribution going forward, and then growth is a matter of how successful we are at recontracting.

[Randy Giveans:]

Absolutely. Well, thanks again.

[Operator:]

Thank you. [Operator Instructions]. There are no further questions at this time.

[Graham Robjohns:]

Okay. Well thank you everybody for listening and we look forward to speaking to you again next quarter. Thank you, operator.

[Operator:]

Thank you. That will conclude today's conference call. Thank you for your participation ladies and gentlemen. You may now disconnect.