Golar LNG Partners LP
Q3 2017 Earnings Call Transcript

Published: 30 Nov 2017

[Operator:]

Good day. And welcome to the Golar LNG Partners LP 3Q 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Graham Robjohns. Please go ahead sir.

[Graham Robjohns:]

Thank you and good day everybody. I'm joined here today by our CFO, Brian Tienzo; Golar LNG new CEO, Iain Ross; and our Head of Investor Relations, Stuart Buchanan. So if we start the presentation on slide Three and recent highlights, I think I'm attributable to unit holders for the third quarter of 2017 with $26.5 million and operating income of $53.3 million. We generated distributable cash flow in Q3 41 million with a distribution coverage ratio of just about 1, which was lower this quarter due to no earnings from the Golar Sprit during Q3 as she finished her contract with Petrobras. As we announced last quarter, we made some amendments to the Golar fleet charter, which although reduces our revenue backlog by one year, it puts us in a much better position to re-contract the vessel. The vessel’s current charter desets have begun their termination for convenience rights, as well as their extension option rights, which gives the partnership clarity on the vessel's availability, and greatly aids re-marketing efforts. We of course reacquired an interest in the FLNG vessel, Hilli Episeyo during the quarter, representing the equivalent of 50% of the first two out of four liquefaction zones. Hilli is now routing Cameroon and is in the process of morning hookup. The next vessel is loading LNG and commencing the full commissioning process with first LNG production expected around the end of the year. We recently closed an 8.75% Series A Preferred Unit offering, raising net proceeds of 134 million and this was with a view to future acquisitions. And finally, we declared an unchanged distribution for the third quarter at $0.5775 per unit. Moving over to slide four and the income statement. Our total operating revenues were lower in Q3 at $106 million compared to $136 million for Q2. Revenues for the third quarter were lower almost entirely due to the Golar Spirit termination fee, which was received in second quarter, as well as the fact that the Golar Spirit had no earnings in Q3 as I’ve just mentioned. Vessel operating expenses were lower, mainly due to maintenance expenditure and fixture in relation to the NR Satu FSRU five-yearly maintenance program that completed at the end of Q2. Administrative costs were up normally high in Q3; although, approximately $1.5 million of this increase should be considered as non-recurring costs. Interest expenses were about similar level to Q2 and other financial items were lower due to derivative net gains in the second quarter, in the third quarter rather, as compared to a net loss last quarter. As a result of all of these items, net income was down from $26.5 million for the first quarter 2017. Turning over to slide five and the asset side of the balance sheet. Cash and cash equivalents were down from $306 million to $207 million, mainly as a result of the payments of $17 million deposits for the acquisition of the interest in Hilli during Q3. Post quarter and cash will be reduced by the payment of approximately $54 million in respect of the remaining balance of the October 2017 maturing NOK bond, but increased as a result of the recent $134 million preferred offering. Turning over to slide six and balance sheet liabilities, as at the end of Q3, our net debt was $1.17 billion and our net debt to EBITDA ratio, calculated by using Q3 annualized EBITDA was 3.6. Our percentage of debt swap-to-fix rate was around 100% in September 30; although, this will -- the expense will effectively will be reduced with the completion of the Hilli acquisition and the result in debt relating to Hilli. Our average swap rates, exclusive event margin, we’re running at around 1.69%. On slide seven, we have our distributable cash flow statements. Distributable cash flow is down from last quarter’s high of $72.1 million at $41 million this quarter, last year as a result of the Golar Spirit termination fee that was received in Q2 and also the fact that the Spirit was known in June Q3 as I’ve already mentioned. With our distributions the same is the previous quarter of $40.8 million, our distribution coverage ratio was at one-times. On slide eight, we have set out, as unusual, the progression of our EBITDA, net income distributions paid and replacement and maintenance CapEx since here, which highlights strong coverage ratio that we've maintained over the last three to four years as well as the relatively conservative leverage ratio of less than 4 times net debt to EBITDA. Slide nine has information, but that’s on a quarterly basis. So we’ll then turn over to slide 10, our asset and contract size. Our effective revenue backlog as of September 30 was $2.3 billion. Within this number, we assume our pro-rata share of revenue in the acquisition of interest in the Hilli sales; although, for accounting purposes, this will actually be shown as equity and net earnings of affiliates in our income statements. Our revenue backlogs years or effective revenue backlog in years, including the Hilli’s now stands at 5.5 years. And following the conclusion of the Petrobras EBITDA year ago versus now and temporary layup in Greece. We are, however, quite confident on the outlook for mid-sized 1 million to 2 million ton FSRU market where the cost of unutilized capacity on larger more expensed FSRUs can undermine the economics of a switch to gas. We're a dominant player in this mid-sized market with the Golar Spirit and Golar Freeze availability, and we are very encouraged by ongoing negotiations with customers, which leave us very confident of a new FSRU contract award in the near future. We're also of course continuing to work to re-contract the [maximum] Golar Spirit and Golar Maria chartering opportunities of it significantly improved as a function of the improvements in the LNG shipping market where short term rates have increased dramatically and we are pretty confident about some short term work for the Golar Maria commencing in December. Having said that, a seamless transition to new longer term charter is unlikely and new charter rates should be expected to be at a lower rate than existing long term contract rates. The Partnership has also continued to look for potential FSRU opportunities for Golar Maria as a conversion candidate and continues to do so. Moving on to slide 11. On this slide, we've tried to set out the comparative impact of the contracts that we have that are ending at the end of 2017 versus the commencement of Hilli cash flows. We have the Golar Spirit that has finished its contract with Petrobras at the end of Q2. The Golar Maria that concludes its charter at the beginning of December and the Golar Mazo, which we own 60% of due to conclude its charter at the end of this year. However, our share of effective EBITDA from the Hilly acquisition of approximately $82 million a year is more than the last 12 month’s EBITDA of our share of the Mazo, Spirit and Maria put together. As you can see from the slide, if we take our overall last 12 month’s adjusted EBITDA, excluding the Spirit termination fee and then deduct the last 12 month’s EBITDA for Golar Spirit, again excluding the termination fee, Golar Mazo and Golar Maria and then add on the expected effective EBITDA for the Hilli, we end up pretty much in the same position. If we don’t assume those three vessels making contribution of at least 50% of their previous EBITDA, that becomes incremental EBITDA when compared on overall basis for the last 12 months. So right to the chart, we’re making the point that if we acquire second interest in Hilli, which could cross-funded by preferred offering proceeds then we actually start seeing some EBITDA growth. This is a transition we face at the Golar LNG Partners as the first vessel come up charter post IPO. But we believe we are putting ourselves in a good position to move the next phase where there should be some extremely interesting new acquisition opportunities. Turning over to slide 12 on the Hilli acquisition, the vessel is now in Cameroon and is commencing more in an hiccup process, as I mentioned earlier. The next steps will be to load an LNG cargo, commence full commissioning with the first production of LNG expected around the year-end. Golar Partners has acquired an interest in the common units of Golar Hilli LLC, the entity, which will be sub-holding company of Hilli Episeyo. We’ve not acquired any Series A securities, which will receive the cash flows from the oil pricing element of the contract rates or any of the Series B securities, which will receive 95% of the incremental cash flow for the expansion of contracted capacity beyond the first 50% i. e. trends, moving forward. And the common units that we have acquired, 50% off will receive cash flows from the first 50% contracted capacity that we own, and this will be after the deduction of operating costs incurred in producing that first 50% contracted capacity. The share of tax is debt to service cost for the full Hilli financing facility and approach normal share of underperformance cost. The common units will also receive 5% share of incremental cash flows associated with the expansion of contracted capacity beyond the first 50%. In the second table, you can see the breakdown of the purchase price based on two final debt scenarios, depending on where the actual final cost of the vessel ends up, and the share of the EBITDA occurring to Golar Partners of $82 million per annum. As mentioned in our results releases, results from Hilli will not initially be consolidated and will show as equity in net earnings of affiliates in our income statement. Turning over to slide 13, after almost three years of relative paying in the LNG shipping market, it’s finally starting to move upwards and move up significantly. Rates started moving in the summer of this year and spot rates have gone from below $30,000 a day six months ago to around $70,000 per day now. This has been expected for some time and we’ve talked about it sometime, but it’s a nice to actually see it start to happen in reality. The improvement is driven by additional LNG trade from increased supply volumes and rising GAAP prices, but also ton mile increases as U.S. volumes continue to deliver. This is of course all positive for the re-contracting prospects at Golar Mazo and Golar Maria. And as I’ve mentioned earlier, the Golar Maria already looks like she has some short-term work commencing December. Turning over to slide 14 and FSRUs. As already mentioned, there is active and small size 0.5 million to 2 million ton FSRU projects for which the economics have a larger newbuild FSRU, means the regas projects struggle to make economic sense. With the Golar Spirit and Freeze now available, the Partnership dominates this market segment and we are getting increasingly confident that at least one of these FSRUs will be re-contracted in the near future. We have also been working on FSRU opportunities that would suit -- convert to Golar Maria as an FSRU as this would also provide a cheaper solution to newbuild FSRU, particularly where the storage is not so much of an issue. And finally, the Golar and then look the Golar Power FSRU that’s going to serve the Sergipe projects, both an interesting 2020 acquisition target for GMLP. So moving onto slide 15 and in summary, we have a solid contract base with an effective revenue backlog of $2.3 billion, which is equivalent to 5.5 revenue backlog years, including interest in Hilli Episeyo. We continue to have excellent operating results with greater than 99% average utilization for the last three years. We have a strong financial profile with a net-debt-to-EBITDA ratio of 3.6 and an average distribution coverage ratio of 1.3 over the last 12 months after the deduction of $65 million of annual maintenance replacement CapEx. We also have the funds raise from the recent preferred offering, which could be put towards future acquisitions. And we operate in fast growing LNG market, and we have some interesting future acquisition opportunities, including the remaining common units in Golar Hilli LLC with respect to which we’ve already started discussions with Golar, the Golar Power 25 years Sergipe projects and one LNG 15 to 20 year for Tundra project. We already now at I’d say transitioning phase, but we really now do believe that we put ourselves in a good position to take an excess. Thank you, Operator. With that, we turn it over to Q&A.

[Operator:]

Thank you, sir [Operator Instructions]. We will now take your first question John Chappell from Evercore. Please go ahead.

[John Chappell:]

So lot of the commentary around the Spirit and the Freeze very similar to three months ago and I’m sure that with something like you don’t want to make any announcement until the Is are dotted and the Ts are crossed. But if you can characterize where you are today relative to three months ago, is something incredibly imminent or are you still in the middle innings of negotiating something for one or both of those FSRUs?

[Graham Robjohns:]

We have much further progressed than we were three months ago. But as with everything in LNG, things take time. So we are feeling good as we said in the presentation. But as you say, we don't want to get ahead ourselves and start announcing things before we know exactly where we are.

[John Chappell:]

And with the Spirit being laid up in Greece, how does that work? I mean, should we think that Freeze is maybe the first ship being marketed most likely because it’s cooled down and still working right now and you have the opportunity given the renegotiation of the contract there, or is the Spirit just as likely and the fact that it’s lay up relatively quickly?

[Graham Robjohns:]

I mean, it will be one or the other and I mean -- which doesn't really, at the end of the day capturing to one of our assets whether it's the Spirit or the Freeze, I guess slightly academic.

[John Chappell:]

But you're still getting cash from the Freeze until early next year?

[Graham Robjohns:]

Correct, yes. But under the terms of the revised agreement that we have with the Golar Freeze current charter that continues whether we have new business for the Golar Freeze or not.

[John Chappell:]

And then I think the chart that lays out the potential lost EBITDA from the Spirit as on Maria versus the Hilli makes a 100% sense. But there's the possibility that the Hilli maybe doesn't get dropped on until April, I guess, April 30th is kind of the dropped at peak there. So how do you think about the first quarter? It’s pretty clear that the Hilli is going to be dropped down in April, but there's like this timing disconnect where maybe the Maria, the Spirit and Mazo aren't generating much EBITDA in the first quarter in the likelihood of the coverage ratio dropping significantly below 1, is pretty high. I mean, do you still think longer term subsidize the distribution for one and two quarters just to kind of bridge that gap between the Hilli?

[Graham Robjohns:]

I think, we look at it longer term. As you say, we're probably not going to have the best quarter we've ever had in the first quarter but we have a very clear pathway to where we're going. So we would look long term not short term.

[John Chappell:]

And then finally and hope this is quick. We don't want to look ahead to potential second drop down of the Hilli before the first one is completed. But post this perpetual equity raise, how do you think about your liquidity today in the comfort and financing second potential drop down?

[Graham Robjohns:]

Well, we feel a lot we're in a pretty good position with $134 million that we've raised from the -- additional $134 million we've raised from preferred that goes a long way to the purchase of the second 50%.

[John Chappell:]

I guess, the better way to ask it is, if we look at what you're paying for the first drop down, obviously, there's the Tundra proceeds, which you would have for second one, but it’s 170 to 190, you have the 134 there. As you think with cash on hand or cash generation, you're there on the second one or do you need to do something else, maybe plug the gap a little bit with a little bit more equity and ATM, et cetera.

[Graham Robjohns:]

I think that we have enough cash on hand. I think over time, we might look to plug that a little bit, whether that’s done with bit of extra debt or bit of extra something else, we’ll have to see.

[Operator:]

We will now take our next question from Ben Nolan from Stifel. Please go ahead.

[Ben Nolan:]

I have handful, but just rolling up on John’s last question there -- and again not putting the cart ahead of the horse, but with respect to the potential for a second dropdown utilizing your cash. Is it something that you’ve contemplated about maybe doing less than the whole second half? I mean, is it maybe something where you could overtime just gradually dropdown smaller portions of what’s left for the Hilli?

[Graham Robjohns:]

Well, we could do. I think, we’ve kind of take those decisions as the thought process and discussion develop. It’s perfectly feasible, it’s what you’re getting at. Again, we only bought 40% instead of 50% and obviously that’s a smaller check.

[Ben Nolan:]

And then with respect to the Maria and the potential conversion, obviously, have to get a contract first. But how long it would -- it take do you think or how long should we think about modeling that vessel not contributing to the extent that you’re able to get a contract and it does go into conversion?

[Graham Robjohns:]

So it would probably from some its commitment to deliveries probably 16 months to 18 months. But I mean we’ve kind of mentioned it because it is something we’re looking at and we don’t want to -- it's come as a total surprise for the market. But I think you’d be a little bit careful about modeling in something we haven’t actually...

[Ben Nolan:]

Right and I appreciate that. I guess what I was asking well -- so is that 16 to 18 months between the beginning of signing a contract until it’s up and running, or is that how long it actually takes to convert....

[Graham Robjohns:]

No that’s what you said initially that could be actual in your conversion process. It's probably only six-seven months.

[Ben Nolan:]

And then on the -- something that didn’t really come up and wasn’t in the presentation is the potential for a new contract on the Tundra and I appreciate that that’s held at a parent company. But is that anywhere in your thinking in terms of the potential for that unit to get a long-term contract. And if so, I mean, how far down the line do you think that might be before it would become the ligament candidate for acquisition?

[Graham Robjohns:]

Yes, it is in our thinking. And the call of activity going into developing new FSRU contracts and projects and the Tundra is definitely involved in part of that. So it could well be a future dropdown, I guess, that’s such a bad press maybe a cycle of using what I mentioned.

[Ben Nolan:]

And then lastly I’ll it turn it over, just with respect to the Freeze and Spirit. And obviously, we’re still working on getting contracts. You still get some revenue from the previous for a while. But if you handicap given the pace that things are going now if you are able to get a contract in the not too distant future either of the two. What is the start-up window of something like that from a cash flow generation perspective?

[Graham Robjohns:]

It's properly kind of 9 to 12 months away.

[Operator:]

We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Please make sure your mute function is turned off to allow your signal to reach our equipment.

[Fotis Giannakoulis:]

I want to ask about the two LNG carriers the Mazo and the Maria. After earnings call over the parent earlier, they mentioned that the steam turbine LNG carriers have here right now around $40,000. What does this mean in terms of opportunities to charter these vessels through a period contract and how long do you think that you can achieve and what kind of raise do you expect?

[Graham Robjohns:]

So I mean, certainly, as you alluded to the short-term market for same carriers, as well as the more modern tri-fuel vessels is proved significantly. As I mentioned, we are being reasonably comfortable about some short-term work for Golar Maria as an LNG carrier commencing December. We’ve had number of discussions we think with about both vessels, which is really positive and I think back to the 12 to 18 months ago, there was no discussions at all but of course the tightening in the short-term market has brought people to the table to think about medium and longer term and chartering in the vessel so that they don’t get caught short. But some of those discussions have gone on and continue to go on. It’s difficult for me to tell you what those might look like right now, but there is certainly activity.

[Fotis Giannakoulis:]

And a little bit longer term, I mean for Tundra FID might be around the corner, but it seems that the target is first quarter of ’18. Given the fact that this project is a joint venture project and Golar has only at this smaller piece of it. How would you think the potential dropdown would work? Or have you discussed with other partners what your free rents numbers. What would be the mechanism for a potential dropdown over this or it’s too early?

[Graham Robjohns:]

It’s too early. The mechanism that some of the Hilli with complications and that’s the Fortuna project is quite complicated. I mean, what I could say in parting, in course of conversation, the prospect has been mentioned and is generally kind of positive response. So there's no sentiment that a drop is certainly off the table, but we're way away from figuring out how that might work.

[Fotis Giannakoulis:]

I understand but just want to clarify that there is no restriction for Golar at any time to do drop down, its own investment and then I would assume that it's a matter of negotiation if the other partners they would like to do something as well. Is that correct?

[Graham Robjohns:]

Not if it's shared, but I would think, no. But it's kind of a question of what you're actually dropping down, are you dropping down the mid stream assets or the interest in the entire project.

[Fotis Giannakoulis:]

Okay, that's very clear. Thank you so much Graham.

[Operator:]

[Operator Instructions] We will now take our next question from Randy Giveans - Jefferies. Please go ahead.

[Fotis Giannakoulis:]

So most of my questions have already been asked and answered, so just a few quick ones, starting with a modeling question. So G&A increased to I guess 4.9 million for 3Q and the restates at 1.5 million to be non-recurring. So are you guiding for a run rate of about 3.4 million in subsequent quarters.

[Graham Robjohns:]

No, I think the quarter was generally high. So I would say that the 3.4 is still high, I think somewhere in the 10 to 12 is probably per annum is probably a reasonable guesstimate.

[Fotis Giannakoulis:]

And then last question, now looking out the distribution coverage ratio. So obviously with all the aforementioned layouts, re-chartering uncertainty is what is your expected coverage ratio for the next two quarters and then longer term what is your targeted distribution coverage ratio for the back half of 2018 and beyond?

[Graham Robjohns:]

We don't generally give out a forecasted coverage ratio for quarters, moving forward. We've given some guidance in the outlook of the results presentation on operating impact that we expect to see in Q4. Long term, we have as I’ve alluded to in the presentation, we have been building up coverage ratio up to 3.4 that’s 1.3 plus times because we knew we had investments coming off the contract at the end of 2017, which may well end up getting contracted at low rate, so that was on purpose. Long-term -- coverage ratio once we've taken this next transitionary step into a new phase, I guess, our target ratios are in the 1.1 to 1.2 times. But it really does depend on -- it does depends a little bit on the average contract term and the backlog coverage that we have. Obviously, in a few years time, drop down that have got 20 plus year contracts and that makes it easier to drop the coverage down a little bit. But if you have shorter term then you probably want to keep it up a bit.

[Operator:]

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

[Ken Hoexter:]

Just on the, I just want to understand the Hilli, there is no – I just want to clarify, there is no benefit if, oil change -- oil prices change, right. Does that all flow to the parent on the upside or depend? I guess, is there any upside on the Hilli ownership or is that just off fix flows?

[Graham Robjohns:]

There is no -- no the oil upside all flows to GLNG as they are 100% owner of the Series A securities. The only I wasn’t sure what is the second part of the questions is the Series B securities, which own the expansion capacity that train three and four, if you like. So the common units of what GMLP has acquired, and get 5% share of that expansion capacity revenue or EBITDA, not revenue.

[Ken Hoexter:]

So, we say turn-on three and four you get 5% of those flows?

[Graham Robjohns:]

Yes.

[Ken Hoexter:]

With the contracts. So, it dropdown of the – of any locking contract would be already exclusion of those – of that portion, because you already own 5% of the flows?

[Graham Robjohns:]

Yes. Well it would be – if the security we’ve – the ownership is really common units Series A securities and Series B securities. So it would be an acquisition of the Series B securities. And yes, kind of that as you said define Series B securities own 95% of that expansion capacity revenues.

[Ken Hoexter:]

Thanks for that clarification. And then just lastly and again you, you hit on most of the larger picture stuff. But the Maria and Mazo, I know you were asked about this before. Do you have a target on before, you’d want to fix for long-term charters and is that decision fully on you is that -- who is doing that chartering. Would that be the parent, with the resources or is that up to the MLP to contract?

[Graham Robjohns:]

No, I mean the MLPs effectively managed by Golar Management. We will work for Golar management, and we have a second charter in group and as FSRU group and Golar management works effectively works for both companies.

[Ken Hoexter:]

So back to the target then. Is there a target for the Maria and Mazo that you have that you would want to see before you set long-term charters. Is it getting back to 20,000 a day is there rate, is there a rate per day?

[Graham Robjohns:]

No, I mean that’s difficult to say. It kind of depends on -- it depends on the term, it depends on counterparty, it depends on the market environment. I mean, I don’t want to give you a target right. All I can say is that expectations of improved the last six months.

[Ken Hoexter:]

So you don’t have a target, you’re waiting for a mine where once the market hits there you want to just go lock them in?

[Graham Robjohns:]

I mean, we have a view is to what we think is achievable and reasonable and what isn’t. But I’m not sure we’re going to share that with you now.

[Operator:]

[Operator Instructions] We will now take your next question from, Sunil Sibal from Seaport Global Securities. Please go ahead.

[Sunil Sibal:]

Thanks for all the clarification, and most of my questions have been hit. I just had a book keeping question with regard to the interest expense. So seems like, your reported interest expense was 19.9 million. And then you also had a gain embedded in there of 4.3. So based on that you have cash interest expense is that running at closer 22 million, 24 million kind of range?

[Graham Robjohns:]

The interest expense of 19.8, that is the cash number. The derivative movements are all in the line item, other financial items, which were a loss of 2 million.

[Sunil Sibal:]

In your reconciliation to the DCF, you have 4.3 million unrealized gain from industry rate derivatives, right?

[Graham Robjohns:]

That’s in other financial items, they’re not in interest expense.

[Sunil Sibal:]

So what’s kind of good cash interest expense, that’s 19.9 million, you said?

[Graham Robjohns:]

I guess, if you take 19.9 plus the 2 million of other financial items, and then just for the three items on the big different, which is umbrella loss on the IDR unrealized FX loss and anticipation of deferred charges.

[Sunil Sibal:]

Look, I can follow up with the exact numbers and get until, but I just want to go get a sense. Moving on, I was curious about the valuation on the remaining 50% of the Hilli Episeyo. Considering that at the time you get down to doing that probably the risk profile will be a little bit different versus when you announced the first 50% on dropdown. I was wondering, is that an important consideration when you think about valuation of that vessel?

[Graham Robjohns:]

I think, it’s something you have to take into consideration, yes.

[Sunil Sibal:]

So your multiple could be adjusted based on the fact that you had much less risky or from an operational perspective and proven this of that LNG at the actual field. Correct?

[Graham Robjohns:]

It could be, yes. I can’t know it's a bit to what that multiple may or may not be.

[Operator:]

There are no further questions in the queue. So I’d like to turn the call back yourselves for any additional and closing remarks.

[Graham Robjohns:]

Thank you, Operator. And thank you everybody for listening today. We look forward to speaking to you again next quarter. Thank you.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.