Golar LNG Partners LP
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Good day. And welcome to the Golar LNG Partners LP 4Q 2017 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, and good day everybody. As the operator just said, my name is Graham Robjohns, I am joined here today by our CFO, Brian Tienzo; and our Head of Investor Relations, Stuart Buchanan. Starting on slide two with our forward looking statement, I won’t go through that. In details I’ll move on to slide three and our recent highlights. Our net income attributable to common unit holders for the fourth quarter of 2017 was $25.4 million and our operating income was $40.5 million. We generated distributable cash flow in Q4 of $26 million with the distribution coverage of $0.63, which as expected, was very low due to no earnings from the Golar Spirit and extended dry dock of the Golar Winter and reduced earnings for Golar Maria and Golar Grand following the conclusion of their long term contract. We recently closed an 8.75% Series A Preferred Unit offering, raising net proceeds of approximately $133 million, and used our ATM facility around the year end, which raised an additional $17.5 million. Both of these capital raises were with a view to future acquisitions. We made some good progress on re-contracting existing assets, securing 15 year contract starting Q4 2018 for one of the Partnership’s two available FSRUs and active discussions with regard to some of our other vessels continue. And finally, we declared an unchanged distribution for 4Q of $0.5775 per unit. Moving on to slide four and the income statement. Our total operating revenues were lower in Q4, $90.1 million compared to $105.6 million for Q3. Revenues for the fourth quarter were lower due to, as I said, no earnings from the Golar Spirit and extended drydock for the Golar Winter, which stretched to 52 days in Q4, which -- and reduced earnings from Golar Maria and Golar Grand, both of which have concluded charters during the quarter. Vessel operating expenses of $15.4 million were lower than the third quarter, mainly due to lower costs for the Golar Spirit as it entered layup pending new employment. Administrative costs were again at normally high in Q4 caused by Hilli acquisition transaction costs and higher than normal management fees. I would anticipate that admin costs on average -- quarterly average run rate going forward to be close to $3.5 million per quarter. Net interest expense were at similar levels for Q3 and other financial items were a gain of $9 million in the fourth quarter compared to a net loss last quarter largely due to non-cash to valuation movements. And as a result of all the above, our net income was $29.7 million in Q4 as compared to $30 million in Q3. Turning over to the balance sheet. Our cash and cash equivalents increased $247 million at year end from $207 million at the end of September. Aside from the extended drydock for Golar Winter, other large items were the repayment of $54 million in respect of the remaining balance of the October 2017 maturing NOK bond and the receipts of the $130 million from the preferred offering. Moving over to slide six, balance sheet liabilities. As of the end of the quarter, our net debt was $1.07 billion and our net debt to EBITDA ratio, calculated by using Q4 annualized EBITDA, was 4 times. Our percentage of debt swaps to fixed rate 99% as of December 31 and our average swap rate exclusive bank margins were approximately 1.7%. Moving to slide seven, distributable cash flow was down from last quarter’s $41 million at $26 million as a result of again no earnings from the Spirit, the extended went to drydock and reduced earnings on Grand and Maria. Our distribution coverage was therefore as expected reduced to $0.63. As discussed last quarter and referenced in the earnings release, our coverage ratio will also be significantly below one in Q1 2018. From Q2 onwards, however, the contribution from the Hilli acquisition will underpin a significant improvement in distributable cash flow. Further improvement will then be dependent upon new contracts for existing assets in combination with further acquisitions and investments in organic projects using the Partnership’s $250 million cash balance. Our aim of course is to restore our coverage ratio to above one. On slide eight, we have set out the progression of our EBITDA net income distributions and replacement and maintenance CapEx since IPO. I think there’s two things on this slide that are important to note; firstly that we've maintained a relatively low leverage, even in 2017, our EBIT -- when our EBITDA has a dip so the net-debt-to-EBITDA ratio for the whole of 2017 was only 3.1 times; and secondly that's a positive cushion for the DCF reduction as a results of some of our vessels come up contract in 2017, is the coverage that we have built-up overtime to 1.33 in 2016, which equated $50 million cash coverage. Turning to slide nine, our asset in contract slide, effective revenue backlog as of the end of the year was $2.6 billion. It has improved from last quarter as a result of the new 15 year FSRU contract, which one of the Golar Spirit or the Golar Freeze will serve it. And we continue to be confident on the outlook for midsize 1 million to 2 million ton FSRU market where the cost of unutilized capacity on larger and more expensed FSRUs can undermine the economics of a switch to get. We are therefore confident about the employment prospects of both of the Golar Spirit and the Golar Freeze. We’re also of course continuing to work on re-contracting opportunity for LNG carriers Golar Mazo and Golar Maria. Chartering opportunities have significantly improved as a function of the improvement in the LNG shipping market. And indeed both vessels haven't taken spot contract since the end of their long-term contracts. Additionally, we have continued to actively discuss specific, eight specific FSRU project with Golar Power, which would utilize the Golar Maria as a converted FSRU. Of course Golar’s conversion expertise is a significant advantage for this project. Turning over to slide 10, the Hilli. The Hilli, it arrived in Cameroon in late November 2017 and completed it’s its mooring hookup connection to rise in umbilicals and then took on crude and cargo from the Golar Bear. Notice of readiness was tended in near December and we started occurring higher from January 4, 2018 and as that reduced all the commissioning tariffs. As we are pre-acquisition closing, this revenue accrues to Golar. Feed gas was introduced from the onshore processing plant and full commissioning of the re-gas treatment systems is substantially complete. Commissioning of the refrigerant trains is still ongoing and Golar anticipates commercial production of LNG in the next few days. Whilst there are being some minor delays here and there, nevertheless Golar’s technical team remains focused on choosing commercial acceptance in mid-April 2017. However, with safety always paramount, we won’t rush and if things do take, the main message is if things do take a little longer then we’re talking about days or weeks and not months. Moving over to slide 11, LNG shipping. After the significant improvement in the short-term market over the winter, we announced approaching the [shoulder] season before summer. And as expected rates have gotten soften. This is not helped by the number of new vessels delivering into the market. However, most of these new vessels are due within the next six months and then quarterly deliveries tail-off whilst new supply particularly from the U.S. which will have tons mile growth continue. We therefore remain confident that the trend remains upwards, which is positive for the term contract prospects of Golar Mazo and Golar Maria. Having said that, I think the most likely long term contract for the Golar Maria is actually now as it converts the FSRU losses in LNG carrier. Turning over to slide 12, FSRUs. As I’ve already mentioned, there is active interest to midsize FSRU projects with the economics of large scale new build FSRUs mean the re-gas projects struggle to make economic sense. The recently announced 15 year FSRU contract for what will be either the Golar Freeze or the Golar Spirit is a clear demonstration of this, and our view is that both of these vessels will successfully find employment in this midsize market. Finally, the Golar Nanook represents an interesting 2020 acquisition target and good progress has been made on the Sergipe project that this FSRU will serve it. The Nanook, as you will recall, has a 25 year contract with approximate EBITDA of $40 million per annum. So in summary, we have a solid contract base with an effective backlog of $2.6 billion, which is equivalent to 7.3 revenue backlog years. We continue to have excellent operating results. We also have a strong financial profile with a net debt to EBITDA ratio of 4 times for the quarter and an average distribution coverage ratio of 1.2 over the last three years, which puts us in a strong position to manage our transitionary phase so the commencement of Hilli operations. We of course operate in a fast growing LNG market and we have some very interesting future acquisition and/or organic growth projects for existing assets moving forward. Thank you. And with that, I will hand back to the operator to open up for Q&A.

[Operator:]

Thank you [Operator Instructions]. And we will now take our first question from John Chappell with Evercore ISI.

[John Chappell:]

I certainly don’t want to put the cart before the horse here. It seems like knock on wood, all on track with Hilli and the execution of the drop down of the 50%, should take place within the next two months or so. Regarding the drop down of the remaining 50% trains one or two, which it seems that given the current coverage ratio, it’s probably necessary to get you sustainably above the one times coverage ratio, again. How quickly can that transpire? And post the preferred securities and given the ATM, how do you feel today about your liquidity to be able to take that second 50% drop down at some point in 2018?

[Graham Robjohns:]

In theory in terms of space, it could happen pretty quickly. And obviously as I think you alluded to, we are wholly focused on getting the first transaction acquisition up and running and going. And I think after that of course we need to put our capital to work. In terms of Quantum of course the way we structured the Hilli transaction, it doesn’t -- wouldn’t actually have to buy 50% it could be 40% or 30%. So it could be solid as we see fit. And also as I've eluted to there are some interesting lower organic growth projects that we have on the table as well, which will involve for example converting an LNG carry into an FSRU. So once we got Hilli 1 done then we’ll be turning to look where we invest. They’re also using that $250 million of cash part. The way I look at it, I think we do need to invest those funds clearly to get above that one time. But if you look at our -- you look at the DCF that we've lost from the Spirit, Mazo and Maria pre-interest, because the interest cost unless you sell the vessels and pay that down proceeds, you let with the interest go. So pre-interest is about $77 million. And if you look at our average coverage over the last three years, that's about $42 million and approximately DCF contribution from the Hilli is about $46 million. And then we've got some additional distribution from the equity we raised to Hilli, so and that's about $12 million a year, I think. So that nets out to slightly below zero but not much -- it's pretty much nets out. So that puts us around one times, maybe slightly below one time. So mainly it’s a question of how do we redeploy those assets and where do we invest $250 million worth of cash to put us back on track or the coverage ratio above one times.

[John Chappell:]

I think sometimes people get pretty focused on the short-term, so clearly 0.63 is eye opening very little change to that in the first quarter. And I know this is more of a board question, probably but to the extent you can answer I think it could go a long way and if you are easing some fears, which are clearly in the market today. How do you think about the sustainability of the current distribution run rate? You clearly have liquidity for more growth, there is obviously a tremendous pipeline, which tends to be a bit more backend loaded into the 2020 if we look at Sergipe and maybe Fortuna and other FLNG projects. And how do you bridge that gap with comfort with the current run rate clearly no one is looking for growth, but just maintaining the current run rate knowing that there is a big backlog but still doing it within this well below one times coverage ratios.

[Graham Robjohns:]

Well, I think I still revert to part of my answer on the first question, that's if you look at what we’re losing and what we’re gaining from Hilli 1. We’re get getting back close to onetime and then with the investment of the cash that we have, I'm assuming we get some contract coverage on those four vessels. Then there is a good pathway through this that clearly we can't guarantee anything and there are lots of variables that we feel like we've known for sometime this is going to be a transitionary phase to coverage, it’s been pretty ugly in Q4 and Q1 we said that on the last call. Obviously since last call, we fixed Golar Freeze, so that’s a good step in the right direction there and we raised some capital, which we can use to invest. So I think we’re in a really good position to achieve the maintenance of that distribution but it is all a little bit dependent on a few things happening over the next three months.

[Operator:]

And we’ll now take our next question from Ken Hoexter with Merrill Lynch.

[Ken Hoexter:]

When do you determine which vessel you need to put into place for the FSRU contract? And then I guess just want to talk about the vessel market as well just given so many vessels coming online. Your thoughts on what happens to rates from the current 65,000 or so spot level?

[Graham Robjohns:]

So in terms of which vessel goes into the new 15 year project we won, that decision will probably be nice. I think we’ve got a reasonable idea of which one is going to be but the finding decision would be relatively shortly. And then in terms of your second question, I think we have been reasonably consistent with this message that we see rates certainly improving from middle of last year getting steadily better and better until we get to 2019. I think the wins of this year was above our expectations, so that’s a positive. And we always suspected that there will be some ups and downs along the way and this is a classic period. But the trends we are still absolutely convinced is upwards. So rates will come off and then they will rise again towards the end of ’18 and then I think things will be even better in 2019.

[Ken Hoexter:]

If I can just follow up on that, it seemed like the Golar parent this morning talked a bit about getting out -- potentially getting out of the carrier business, so maybe a lot of questions to them, we’re on that thought process. What’s your thoughts on that or that process given I guess you are increasing now exposure to the spot market and what should be more a fixed coverage. Would you also follow suit and want to get rid of that carrier exposure given the contract fluctuations in that market?

[Graham Robjohns:]

We certainly don’t want to be in the LNG spot market, no. We’ve got four carriers one is on contract till 2024, one is on contract till 2019 and my bet will be that this gotten a whole bunch of options, potential options and my bet will be that that will get extended. We’ve got one more the Golar Maria, which again I think that it is decent chance that’s going to get converted into an FSRU. So then we just left with the Golar Mazo, which is also interesting candidate for conversion, because she is a mass carrier. So with the existing fleet, I don’t think we’re going to have too much LNG carrier exposure left within also in the next 12 months.

[Operator:]

And we’ll now take our next question from Fotis Giannakoulis with Morgan Stanley.

[Fotis Giannakoulis:]

The chartering of the new FSRU contracts of a converted unit was definitely a positive surprise. I am wondering how many opportunities that are out there for FSRU projects and particularly for this type of smaller conversion vessels?

[Graham Robjohns:]

I think there are probably if you look at title project that are 40 plus. So I think if we look at the midsize projects, there are probably three or four that are significantly on our radar and so more projects than we have vessels within the MLP anyway. So as I said in the prepared remarks and as we said in the earnings release, we’re quite positive about this dagger at the working with Golar Power and their integrated projects is interesting for us as well.

[Fotis Giannakoulis:]

And in terms of useful life of these assets, I know that you are depreciating this asset at 20 years since the original conversion. But I am wondering how long can these assets operate provided of course at various commercial opportunity?

[Graham Robjohns:]

I mean, as long as you do work on the whole structure and the control systems necessarily and make it go on for another 20 years, so it's particularly because and I say that largely because the vast majority of FSRU tend to be in benign water condition. So in theory the life can be 50-60 years plus from when it originally...

[Fotis Giannakoulis:]

And I want to ask in regards to the opportunities that Golar Power is looking in FSRU space. I wonder if you have discussed with Golar Power and the partners of Golar who don’t speak about drop downs from Golar Power directly to Golar MLP.

[Graham Robjohns:]

Have we discuss it, did you say?

[Fotis Giannakoulis:]

Yes, if you don’t think its willing dropdown…

[Graham Robjohns:]

Well, we haven’t about the agreement with Golar Power this follows pretty much the same terms as we do with Golar LNG that covers FSRUs and LNG carriers. So yes absolutely definitely. I think I personally actually really discussing pricing, but I think one of the really interesting things for the MLPs is acquiring parts of the Power session.

[Operator:]

And we’ll now take our next question from Randy Giveans with Jefferies.

[Randy Giveans:]

So looking at the ’18 analysis, it looks like you raised about $3.3 million in 4Q ’17 and then another $14.5 million in 1Q ’18. How much is remaining under that ATM authorization?

[Graham Robjohns:]

Well, quite a lot. We put it in place back in September just so we have the ATM on the shelf and it was $450 million. So we’re not saying we’re going to raise $150 million we just put there, so we have it to draw down at appropriate moment.

[Randy Giveans:]

And then for the Mazo and Maria, press release states that the spot rates for these essentials have improved to levels close to $40,000 per day. So I guess two questions. Is that discount to headline rates for the $160,000 cubic meter carriers or fair run rate discount going forward? And then secondly, is there even a three to five year charter market for vessels of this class?

[Graham Robjohns:]

Yes. I mean, there are all term contracts out there for steam vessels. I mean we struck a deal for two years plus, about seven years worth of options for the Golar Grand, which ship for the Golar Maria and around about this time last year, so yes. And can you just repeat your first question? You said steam vessels headline rates of $40,000 a day. I didn’t quite catch what the point was?

[Randy Giveans:]

The press release said something to the effect of although rates have recovered to, $40,000 per day. When you look at for these so these headline numbers of $70,000 a day, 80 what have you. I know those are $160,000 plus cubic meter vessels, so is that discount of 40% fair for a run rate going forward, same on the time charter market?

[Graham Robjohns:]

I mean it varies but yes 30% to 40%, yes. And it’s not just the capacity it’s the propulsion system in addition on the vessels. Just one point to clarification relating back to thoughts of this question about the age of FSRUs, when I said 50-60 years that will be the most carries, so the Golar Freeze and the Golar Spirit, for example, that’s a must, the slight difference for the membrane carriage is you’ve got more of a challenge of longevity of the tank life whereas most tank will go on for 100 years plus.

[Operator:]

And we’ll now take our next question from Sunil Sibal, Seaport Global.

[Sunil Sibal:]

So couple of ones for me, just trying to get better understanding of the midsized FSRU market. So I think in the press release you said that if you go with the Freeze then it's a $15 million cost whereas to the Golar Spirit t might be access of that. So can you give us a sense of how much access should we be looking at?

[Graham Robjohns:]

Difficult to say, I guess you could read into that but we may be made our choice of which vessel we’re going to go with.

[Sunil Sibal:]

And then when you think about the market and I think the contract that you guys fixed fairly EBITDA range of $18 million to $22 million depending on utilization. So is that a good construct for us to think about that market that and it's a contract that you will sign on that and be with similar construct of variable rates et cetera based on the utilization or how do you think of that market from a long-term cash flow perspective stability perspective?

[Graham Robjohns:]

I think it's certainly possible for that price of structure to be repeated, yes. And the reason being that along these smaller projects, there is potential demand. So what tends to happen is you have an anchor demand, which is maybe a power station or in some industrial facility that usually the small amount of the capacity. But as soon as once you’ve got there for in there then you’re able to build up greater demand. So in order to make the economics work it's a significant benefit to have a low start and then the payments increase as the throughput increases. And I can't I mean there I can’t think of too many examples of FSRUs other than the security of supply and Brazilian ones and the one in Lithuania, but all the other ones are income rising. And that tends to be once it's there it gets used more and more and more and more.

[Sunil Sibal:]

And then I think you talked about one of the LNG carrier conversions to FSRU. And I was wondering if you can give us a sense of the conversion cost? I think there have been some numbers put out previously on some of the conversions. I was just wondering how is that moved up or down more recently?

[Graham Robjohns:]

Well, I don’t think -- we haven't talked -- I think we may have talked generically of how much it might cost. We haven't talked publicly in relation to this specific vessel. And of course it does depend a little bit on exactly what is required for the specific project, but there haven't been any lower cost increases from what people have talked about.

[Sunil Sibal:]

And one last one from me. When you think about interest rate cost moving up, and I understand that your debt is pretty well covered from protected for any changes in the interest rates. I was wondering if you think about that a little bit longer term. How does it impacts the cost of capital and then old rates for LNG carrier market in your view. Does is make a big difference in terms of where the longer term contracts on the LNG carrier get fixed?

[Graham Robjohns:]

Well, longer term, higher interest rates will push rates up. I mean you have within well over two, three year time frame, you could have -- it might not impact depending -- that's more dependent on the supply-demand balance. But over a long period of time, if interest rates are high then that’s going to impact the cost of an asset and therefore must impact rates, otherwise nobody is going to build them.

[Sunil Sibal:]

I was just wondering is that in your view starting to come into discussions, or is it a little bit further out there?

[Graham Robjohns:]

No.

[Operator:]

And there are no further questions in the queue at this time.

[Graham Robjohns:]

I think we’ll wrap it up then, operator. That’s okay. Thank you everybody for joining and we look forward to speaking with you again in three month time.

[Operator:]

And ladies and gentlemen, that concludes today’s call. We thank you for your participation.