Golar LNG Partners LP
Q2 2017 Earnings Call Transcript

Published: 30 Aug 2017

[Operator:]

Good day. And welcome to the Golar LNG Partners LP Second Quarter 2017 Results 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 am joined here today by our CFO, Brian Tienzo; the CEO of Golar LNG Ltd., Oscar Spieler; and Head of Investor Relations, Stuart Buchanan. Moving to the presentation. On slide two, we have our comments around forward-looking statements, which I recommend that you’ll read. And then starting the presentation on slide 3 at recent highlights. Net income attributable to unitholders of $53.8 million and operating income of $87.4 were significantly improved from Q1, mainly as a result of increased revenues. Distributable cash flow was similarly improved from Q1, $72.1 million for second quarter with the distribution coverage ratio of 1.77. We exercised the put option during the quarter in respect of the FSRU Golar Tundra and entered into a purchase option agreement for up to 25% interest or 50% of the initial contracted capacity of the FLNG vessel Hilli Episeyo, and subsequently announced terms for the acquisition of an interest in the Hilli. The FSRU Golar Spirit completed a charter with Petrobras, and departed Brazil at the end of June, for temporary lay-up in Greece. We also announced some amendments to the Golar Freeze charter, which although reduced revenue backlog by one year, it does puts us in a much better position to re-contract the vessel. The charter DUSUP has forgone termination for convenience rights, as well as extension option rights, which were at significantly lower rates. Removal of the extension option gives the Partnership absolute clarity on the vessel’s availability and greatly aids remarketing efforts, as I said. Also, in the event that the FSRU is re-deployed on new business ahead of April 2019, which is the new charter end-date, Golar Partners has secured the right to terminate its obligations under the charter with DUSUP, while continuing to receive the capital elements of the charter until April 2019. And finally, we declared an unchanged distribution for the second quarter of $0.5775 per unit. Turning over to slide four and income statement. Total operating revenues were significantly increased to $136 million for the quarter compared to $101 million for Q1. Revenues for the second quarter of 2017 were positively impacted by three main events when compared to the first quarter. Firstly, the Golar Igloo was on hire for the whole quarter as compared to only one month last quarter as a result of winter downtime period. Secondly, the Golar Grand came after drydock in early Q2, and so we only had a few days off hire as opposed to 46 days in Q1. And thirdly, we received a one-off early termination fee as a result of Petrobras opting to end the charter of the Golar Spirit in June 2017 as opposed to the original end date of August 2018. Vessel operating expenses up $18.6 million were higher than the first quarter at $17.1 million, mainly due to increased maintenance expense, particularly in respect of costs associated with the reactivation of the Golar Grand and readiness for her new charter. And for the NR Satu, FSRU is five-yearly maintenance program. Interest expense and other financial items were the similar level to Q1. And as a result of all of these items, our net income increased from $23.5 million last quarter to $53.8 million for the second quarter of 2017. Turning over to slide five and our balance sheet assets. Cash has increased from $166.9 million at the end of last quarter to $301.5 million in the quarter as we drew down, or mainly as we drew down on $125 million from our revolving credit facility before the end of the quarter. The liquidity fell since year-end is of course as a result of the receipt of the net proceeds from our two new $250 million bond and approximately $119 million from the February 2017 equity issuance. Offset by the partial buyback of the 2017 maturing NOK bond, of which, there is approximately $53 million in U.S. dollar terms remaining outstanding. Turning over to slide six and balance sheet liabilities. As at the end of the quarter, our net debt was $1.14 billion and our net debt to EBITDA ratio calculated by using Q1 annualized EBITDA was $2.5; although, if we exclude the termination fee for the Golar Spirit, the ratio was 3.1. Our percentage of debt swap-to-fix rate is 97% as at June 30 with average swap rates exclusive of the credit spread or margin to the banks of 1.69%. On slide seven, we have our distributable cash flow, which was much increased this quarter, up $72.1 million compared to $36.4 million last quarter for the same reasons. That’s a significant increase in revenues that I’ve already discussed. With our distributions at the same level as last quarter at $40.8 million, our distribution coverage ratio was a very healthy 1.77. On slide eight, we have set out the progression of our EBITDA, net income, distribution paid and replacements and maintenance CapEx since our IPO, as well as a solid growth. I think this also highlights the strong coverage ratio that we’ve had over the last three years. We’ve also maintained a relatively conservative leverage ratio of less than 4 times net debt to EBITDA. And as I’ve just mentioned, it's excluding the Spirit termination fee 3.1 times as at June 30. As slide nine shows, there’s similar progression with a few more details on which I will leave you to look free. And so I will turn over to slide 10, and our asset and contract slide. Our effective revenue backlog as at June 30 was $2.4 billion. Within this number, we assume our pro-rata share of revenue in our acquisition of an interest in Hilli Episeyo. Although, for accounting purposes as we noted in the press release, this will be shown as equity and net earnings of affiliates in our income statement as we will not initially consolidate Golar Hilli. And our revenue backlog years now stands at 5.3 years and similarly we have used our pro-rata revenue share of Hilli when we calculate revenue backlog years by dividing revenue backlog by annualized current quarter revenues, excluding one-off termination receipts. And again, as I mentioned on June 23, the Golar Spirit completed its charter with Petrobras, and sales to Greece for temporary layup. We’ve seen an increasing level of interest over recent months in the emerging markets for mid-size 1 million to 2 million ton FSRUs where the cost of unutilized capacity on larger and more expensive FSRUs can undermine the economics of a switch to gas. We are a dominant player in this mid-sized market with the Golar Spirit and Golar Freeze availability. And given some quite encouraging discussions we’ve had with potential customers over recent months, we are reasonably confident of at least one new FSRU award in the coming months. We’re also, of course, continuing to work on re-contracting opportunities for the LNG carriers Golar Mazo, in which we own 60% interest and Golar Maria. Chartering opportunities are improving as a function of the improvement in the LNG shipping market. However, seeing this transition to new chart is unlikely and new charter rate should be expected to be lower than existing rates. The Partnership has also and we will continue to look at FSRU opportunities for the Golar Maria as a conversion candidate. However, having said that, we should not lose sight of the fact that our share of EBITDA from the Hilli acquisition of approximately $82 million a year is more than the EBITDA of our share of the Golar Mazo and the Spirit and the Maria put together. Turning over to slide 11. We’ve set an overview of the Hilli acquisition. Golar Partners has acquired an interest in the common units of Golar Hilli LLC, the entity that will be the sub-holding company of Hilli Episeyo. We have not acquired any of the Series A securities, which will receive cash flows from the oil price linked elements of the contracted rates or/and any of the Series B securities, which will receive 95% of the incremental cash flow with the expansion of contracted capacity beyond the first 50%. The Common Units, which Golar Partners has acquired 50% of, will receive cash flows from the first 50% of contracted capacity at all times, as I’ve said. And this will be after the deduction of the operating costs incurred in production of $1.2 million tons of LNG, which should not, by the way, increase very much at all in order to produce 2.4 million tons. It’s share of taxes, the debt service costs for the full Hilli financing facility secured by the vessel and the pro-rate share of underperformance costs. The Common Units will also receive 5% share of incremental cash flows associated with the expansion capacity beyond the first 50%. Common Units will not receive any incremental cash flow, as I said, in respect of the oil price linked element to the Perenco contract as that cash flow was accretive to the Series A security holders. And the Common Units will also not receive any incremental cash flow associated with the expansion of contracted capacity beyond the first 50% other than the 5% I mentioned. The expansion cash flows will of course approved to the Series B security holders. In the second table, the line on same slides, you can see the breakdown of the purchase price based on two final debt scenarios, which is really just dependent on what the final percentage -- or what the final cost of the vessel is that is based on a percentage of costs; and of course the share of EBITDA occurring to Golar Partners of 82 million per annum. And again, as I’ve mentioned earlier and as we said in our results release, under U.S. GAAP rules the Hilli will not initially be consolidated and where that will show as equity and net earnings of affiliates in our income statement. Turning over to slide 12 and we’ll update on shipping. And as you can see from the chart on the left hand side, demand growth from LNG carriers is expected to exceed supply growth strongly in 2017, but also in 2019 and 2020 as well. This is driven mainly by additional LNG trade from increasing supply volumes, but also ton mile increases as U.S. volumes continue to deliver. This obviously leads to an expected significant improvement in fleet utilization, which will of course have a positive impact on rates. As you can see from the green line in the Clarkson's chart on the left hand side, utilization is expect to be getting close to 85% by the end of 2017, a level at which rate should start to improve materially. This is of course all positive for the re-contracting prospect for the Golar Mazo, Golar Maria. Having said that, investors should not expect a seamless transition to new charters for the Mazo and the Maria, and sometimes spend operating in the spot market is likely. Turning to slide 13, and FSRU, so it has been and I think we noted in the last quarter's report, an increasing interest in small into midsize 0.5 to 2 million ton FSRU project for which the economics of larger newbuild FSRUs mean that we get projects struggling to make economic sense. With the Golar Spirit and Golar Freeze now available, the Partnership dominates this market segment and we’re working on number of opportunities, which again as I said, leaves us confident that at least one of these FSRUs will be re-contracted in the coming months. We’ve also been working on FSRU opportunities that would suit to convert to Golar Maria as an FSRU, as this would also provide a cheaper solution to a newbuild FSRU, particularly where the storage is not so much of an issue. And finally, the Golar represents an interesting 2020 acquisition target, and good progress has been made on the [indiscernible] project that this FSRU will service. Turning over to slide 14. And finally in summary, we have a solid contract base with an effective revenue backlog of $2.4 billion, which is equivalent to 5.3 revenue backlog years if we include our interest in Hilli Episeyo. Expected EBITDA contribution of $82 million from the Hilli Episeyo acquisition is greater than our share of the current EBITDA of Spirit, Mazo and Maria put together. We continue to have excellent operating results, operating 99% of its utilization over the last three years. And we also have a strong financial profile with a net-debt-to-EBITDA ratio of 2.5x as at June to 3.1x if you exclude the one-off termination receipt, and an average distribution coverage ratio of 1.39 times over the last 12-months. After, that is after the deduction of $67 million of maintenance and replacement CapEx, which represents about 42% of distributions paid. We operate in a fast growing LNG market. We have some interesting future acquisition opportunities, including the remaining common units of Golar Hilli, the Golar Power 25 years of [indiscernible] project and one LNG 15 to 20 year project for Tundra project. So we are in a good position, and we have a lot to look forward to. Thank you. And with that, I would like to turn it back to the operator to open up for Q&A.

[Operator:]

Thank you [Operator Instructions]. And we’ll take our first question from the line of Ben Nolan from Stifel. Please go ahead.

[Ben Nolan:]

I have a couple of questions related to the Spirit and to the Freeze. The first is, obviously, it sound helpful to have at least one of those re-contracted. What is the timeframe and maybe also the cost associated with maybe any retrofitting that might need to be done between the time, which you contract and when it is actually able to begin to generate revenue?

[Graham Robjohns:]

So in terms of the timeframe, you mean in between now and when we think we might announce something or at the time…

[Ben Nolan:]

From when you do announce something until we could actually begin to work. Is that a long lead time that requires infrastructure, or anything or is it…

[Graham Robjohns:]

So from now to commencement of earnings could be at least a year.

[Ben Nolan:]

Okay, and…

[Graham Robjohns:]

Obviously, with the Golar Freeze, we’re continuing to be paid anyway. So that doesn’t really mess up, but we have always, for a while, we’ve assumed that the Golar Spirit would spend a little bit of time and not earnings; and why we’ve build up such a strong coverage ratio.

[Ben Nolan:]

But then I guess with the second part of that question, for either situation. Is there -- are these projects relatively homogenous or is there more CapEx that would need to spend on the equipment in order to make compliant with whatever the new employment would be?

[Graham Robjohns:]

It depends a little bit from projects-to-projects and vessels-to-vessels, so probably a little bit more on the Golar Spirit in terms of CapEx, I mean, limited CapEx on the Freeze.

[Ben Nolan:]

And then just lastly following up on that. Obviously, you’re marketing both of them. As you said, the Spirit would be immediately available to Freeze as it still has some time to work. Any thoughts on just handicapping based on the projects that you’re looking out, which we should assume goes first?

[Graham Robjohns:]

No, I’d rather not say. But I mean just to reiterate though on the Golar Freeze. After the end of this year, although the capital payments continue until April 2019 on the Golar Freeze come what may. We have the ability to terminate the charter taking it to a new charter, and still receive those payments.

[Operator:]

Our next question comes from the line of John Chappell from Evercore. Please go ahead.

[John Chappell:]

Just one quick follow-up to Ben’s question on The FSRUs. Obviously, you can’t really put out a rate in which you’re tendering for. But just to have general idea, because it's not a very liquid market or one where we can see the rates very clearly. What broad -- and maybe just a step down I guess from the current rates. But how much lower should we be looking at re-contracted rate in the FSRU today on a three to five year contract versus some of the legacy contracts that the Freeze and the Spirit were signed at?

[Graham Robjohns:]

I’m trying to think about ways to guide you without giving commercially too much away. In terms of the rates of the Golar Spirit and the Golar Freeze have been we’re contracted at, they would be lower and reasonable amount lower. But having said that -- so the Golar Spirit was relatively slower FSRU, so its CapEx rate was significantly lower from where newbuild bigger FSRUs were at the time anyway. So I don’t know how much that helps really, but I don’t want to give you numbers that’s the problem. I think in our model -- we assume that that as vessels get over, the rates will likely reduce and that’s partly why we have replacing CapEx. So it's probably why we run higher levels of coverage. And it’s why we’ve been able to acquire vessels, the Eskimo and now the Hilli where we raised little bit of equity for the Hilli, but being raised out of cash that we have from back over the Tundra. So just putting in context since our IPO, our cumulative coverage is $165 million and our cumulative replacement CapEx, excluding maintenance CapEx, just replacing CapEx, is $272 million. So that’s how we manage and why we can manage vessels coming up, running up contracts. And not once sometimes depending on market conditions we may end up with vessels going back on high rates, but how we manage vessels coming up and coming back on contract to lower rates. But because of that because we’ve added to Hilli what’s important to us is getting some term business at a reasonable economic rate relative to depreciating cost if you like of Freeze and Spirit versus newbuilds and get some good term, and then we ship in good shape.

[John Chappell:]

Yes, that makes sense. That leads to my next question too. I know that Petrobras payment isn’t until July. Can you give us that number? And then second as part of that, obviously the coverage ratio was tremendous in the second quarter, which was one-time because of Petrobras payment. So are you using -- when you think about the bridge between the end of the second quarter and when the Hilli drop down closes and EBITDA associated with that. Will you use that Petrobras payment and maintenance reserve that you just talked about as the buffer for the third quarter and the fourth quarter, and may be in the first quarter of next year to be able to sustain the dividend?

[Graham Robjohns:]

Yes, effectively yes. Just going back to your first point, so the cash receipt, if that’s what you meant for the Spirit, was post June. But accounting wise, we’ve booked the earning of it, if you like, in June; hence why the distribution coverage was so high. I can't tell you what the number is, that is uncovered confidentiality under the time charter, which are continuing. But if you look at the coverage, the distributable cash flow that we achieve relative to prior quarter and then maybe not the first quarter, because that's got the Igloo in it but fourth and third quarter, you can roughly figure out what it is. We think so giving you a hint by giving you to net-debt-to-EBITDA ratio is one with and one without if you look it up by that as well.

[John Chappell:]

But just to be clear so that was obviously included in the distributable cash flow number and the coverage ratio. But it didn’t run through the cash flow statement yet. So your cash balance does not include that payment yet.

[Graham Robjohns:]

The only other guidance I can give you, when we the -- the payment approximately equaled 60% of the remaining EBITDA.

[Operator:]

Your next question comes from the line of Sunil Sibal from Seaport Global. Please go ahead.

[Sunil Sibal:]

Couple of questions from me, first of all, on the small to midsized FSRU market that you are targeting. I was wondering if you could guys give us a little bit of a sense of how deep that market is in terms of how many contracts and just range in terms of that you guys are bidding on, and what does the competitive landscape looks like.

[Graham Robjohns:]

So I mean in terms of numbers of projects that we are working on looking at that would fit that small size of FSRU. I guess, you’re probably talking about 9 or 10. But that and in the same way as you hear people talk about 30 to 40 FSRU opportunities, there aren’t 30 to 40 FSRU opportunities that could get contracted every year. So also there is nine there are some that are more remote, some of those are reasonable possibilities and some part leads, which is why it fits the latter of course, which leads us to some meaningful level of confidence that we’re going to land one in the not too distant future.

[Sunil Sibal:]

And then just going back to Hilli drop-down, I'm not sure if you guys talked about this earlier. But it seems like you will declare a readiness the vessel sometime in November. I was just curious from their onwards what are the next steps you need to complete the drop down? I’d presume you need the charter confirmation on performance and also some other contractual requirements before the drop-down is completed?

[Graham Robjohns:]

There are number of CPs to the transaction such as consensus and things that you usually expect to see that. But the key one is the acceptance of the vessel, which we’re expecting will happen March-ish time 2018; sections of the vessel by the customer under the contract.

[Sunil Sibal:]

And then in terms of -- so you acquired 50% of the common unit of the new entity. The Keppel and Black and Veatch, they also own some percentage of the remaining 50% common?

[Graham Robjohns:]

Well, Black and Veatch is a very small percentage. Where Keppel will own approximately just short of 5% of the remaining 50% and Golar will own just short of 45% of the remaining 50%.

[Sunil Sibal:]

So the remaining drop down when we think about that, so it could be a little bit smaller in size from that perspective, right? Plus drop down, I mean.

[Graham Robjohns:]

No, the first drop down will depends how much we acquire, so the MLP acquired 50%, 45% from Golar, 5% from Keppel, and a tiny bit from Black and Beatch. And if we did the same again then it would be the same size transaction.

[Sunil Sibal:]

And in terms of the Class B and Class C units of the new entity. In future, is there any intent to have those into the MLP or the plan is to have them all separate out, because of the variabilities involved?

[Graham Robjohns:]

So not -- the Class A is linked to the price of Brent crude. So I can’t see any eventuality where that will be dropped down. Class B related to the expansion capacity, so the other 50% capacity of the vessel. So if that got contracted out in the long-term basis then that would become a drop down of all assets as well.

[Sunil Sibal:]

And then lastly, I think previously you talked about some visibility on at least or train three being contracted. Could you update us on that in terms of how that process is going with the charter?

[Graham Robjohns:]

I think you may not be on the Golar LNG call earlier, but Oscar pointed the fact that there was positive discussions between our sales, Perenco, Cameroon government, that seem to be very positive willingness amongst all parties for that to happen, but probably nothing is going to happen until the vessel has started up and being accepted. And then I think we’ll get down to discussions on that.

[Operator:]

[Operator Instructions] And we’ll take our next question from Jerry Chu from Citi. Please go ahead.

[Jerry Chu:]

Just trying to get some more further clarification on the contracts rolling off over the next three years for a few year charters. I think you mentioned that in your earnings release that there is a seamless transition to new charter that should not be expected, but I also think you guys mentioned that you’re close or least confident in your conversations in terms of how they’re going. Can you just provide a little more color around that, or maybe if you can get a little more visibility as to what the timing of that might be.

[Graham Robjohns:]

So I think you’re mixing comments around two different asset classes. So if I deal with the FSRUs first. So effectively the Golar Freeze is not off contract until April 2019, albeit post year end we have the ability to use the vessel in another contract, if you like. And the Golar Spirit has finished the contract since she has gone into temporary layup. And what we said was we’re pretty confident, more reasonable level of confidence in landing an FSRU contract in the next few months. That will then take a number of months, a year before commencement. So you’ll expect you should see, you will see some idle time for the Spirit. And Golar Freeze continues to get paid anyway regardless. When we talked about they’re not seeing this transition, we refer it to the LNG carriers, the Golar Maria and the Golar Mazo. We own 60% of the Golar Mazo, those two charters at the end of 2017. We’ve seen little bit of increased activity/ interest in term charters. But as we stand now, we’re just being honest with the unit holders in pointed out that they shouldn’t expect that both of those vessels start a long-term charter. In January 2018, there will be quite likely be some time where they’re trying to get working that in the spot market.

[Operator:]

Our next question comes from Espen Landmark from Fearnley Securities.

[Espen Landmark:]

I just have a question on the Hilli contribution. I know we have the EBITDA number. But are you able to give us a bit more details on what actually think through the P&L as the income from associates? If you just take the interest and the amort, what the financing is, the real cash flow should be $25 million, may be 30 million. Does that sound about right?

[Graham Robjohns:]

Yes, that is probably about right, yes. I mean, basically, the net earnings in the affiliates will be the EBITDA number less amortization, as you say, of that interest expense.

[Operator:]

[Operator Instructions] It appears there are no further questions at this time. Mr. Robjohns, I would like to turn the conference back to you for any additional or closing remarks.

[Graham Robjohns:]

Thank you, Operator. And thank everybody for tuning in today and we look forward to talking to you again in three months time. Thank you, Operator.

[Operator:]

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