Golar LNG Partners LP
Q4 2012 Earnings Call Transcript

Published: 1 Mar 2013

[Operator:]

Good day and welcome to the Golar LNG Partners LP Q4 2012 Results Presentation. 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 very much and good afternoon or good morning to everyone. As the operator just said my name is Graham Robjohns. I am joined here today by our Chief Financial Officer, Brian Tienzo. Welcome to the Q4 2012 results presentation. Turning over part of the quarter to statements slide on slide two to slide three where we will start with highlights of the quarter and recent events. Net income attributable to unit holders for the quarter was $27.3 million and operating income to the $46 million for the quarter. We had an improved performance over the same period last year largely as a result of the fact that the (inaudible) was not operating in the same period last year, should be still undergoing a conversion process. We have had some impact in the quarter and we will continue have some impact in 2013 in relation to periodic drydockings is of course have already been planned for. The Golar drydocking did take a little longer than anticipated, but it is not affected to be indicative of the length of time of drydockings moving forward. We took some time to do some additional work on the Golar Spirit while she was in the yard. Distributable cash flow generation for the fourth quarter $22.3 million. We completed our second follow on equity offering raising net proceeds of approximately $180 million in November 2012. And also of course the acquired the interest in the companies that operate the LNG carry Golar Grand for purchase price of $265 million. The quarterly distribution declared for the fourth quarter 2012 paid in February 2013 with increase to $0.50 per unit which represents 5.3% increase from the rate prior to the Golar Grand acquisition. Turning over to slide four, as we previously reported in the Q3 presentation, we completed a $0.13 billion bond issued in Norwegian market, which was swapped to an approximate dollar amount of $227 million, the development that proceed we used to repay the $220 million vendor loan form Golar LNG Limited in respect of the Golar Freeze acquisition. Towards the end of the fourth quarter, we also entered into a new $175 million bank loan facility that secured on the NR Satu, that facility has two tranches $155 million term loan and $20 million revolving tranche. The $155 million term loan was drawn and used to repay the $155 million vendor loan from Golar LNG Limited in respect of the Nusantara Regas Satu. The $20 million revolving tranche is currently un-drawn. Moving over to slide five, subsequent to the quarter end, we completed our third follow on equity offering raising net proceeds of approximately $130 million and then also acquired the company that owns and operates the LNG Carrier Golar Maria who at purchase of $215 million. As a result of that acquisition, management has recommended to increase quarterly distributions by between $1.25 and $1.75 per quarter which would increase annualized distributions by between $0.05 and $0.07 per annum representing a 2.5% to 3.5% increase on $0.50 distribution that I mentioned earlier. Moving over to slide five, we come to the income statements. The first things that I should point out and probably you are now familiar with US GAAP requires upon acquisition of an asset from common control party to restate our historical financials as if that asset has always been institute, and therefore if you look at the results for the fourth quarter 2012 and historically they include the results of the Golar Grand for the full period. Operating revenues were slightly down $77.2 million as against $79.7 for the third quarter of 2012, and that was primarily as a result of the Golar Spirit 21 days off hire as a result of a churn time to and drydocking thereof. Additionally, few costs are paid for by us during that off-hire time which is why voyage expenses have increased to $2.2 million for the quarter as opposed to $1.2 million in the same period in the first -- for the third quarter. Operating cost have also been particularly high this quarter across a number of the vessels at $13 million as against just under $11 million for the third quarter. That high level of operating expenses is not however expected to continue moving forward. As a result of that operating income is down from the third quarter $46 million as opposed to $52 million for the third quarter of 2012. Moving down the income statement to the tax line that is up slightly this quarter, the bulk of that tax related to tax paid in Brazil and in Indonesia in relation to our FSRU project, the reason for the increase is primarily as a result of the fact that the NR Satu vessel was bought half way through the third quarter, so the third quarter 2012 did not reflect the full tax charge. And that brings us down to net income attributable to Golar LNG Partners to $27.3 million fourth quarter. Turning over to slide seven, the balance sheet assets. As of the year end we're $66.3 million in cash and cash equivalents, and we also has $40 million of undrawn revolving credit facilities. Turning over to slide 7, balance sheet liability. You can see there at the bottom of that section of the balance sheet that total debt in capital lease obligations net of restricted short term and long term restricted cash balances, total $930 million. And if you take our annualized adjusted EBITDA from the fourth quarter, which equals $241 million. That gives us a net debt to EBITDA ratio of approximately 3.9 times. We have also continued to swap our interest exposure to fix rates, and the percentage swap as of the year-end was 82% of total debt including bank debt and bond debt. In fact, we mentioned in the press release we fixed a further $122 million of interest rate swaps close to year end and taking that additional $122 million into account based on our debt at the end of year will be 95% fixed. The average interest rate that we pay on our bank debt related swaps is 2.5% exclusive with the bank margins, and the all-in rate, interest rate plus the spreads on our bond is fixed 6.485%. Really moving on to slide nine, we have distributable cash flow and you will note of course that in previous quarters we've been running a fairly high coverage ratio, whereas this quarter the distributions declared for the fourth quarter paid in February 2013 were actually higher than distributable cash flow, and there are of course a number of reasons for that. Firstly, as I mentioned, the Golar Spirit has off-higher during fourth quarter as a result of drydocking, and that off-higher effectively has been planned full and is effectively reserved for in coverage as we go through the years, since the IPO and continuing on. We also have slightly abnormally high OpEx this quarter. And then there is a line that I would draw your attention to three quarters the way down the table which is LIBOR net income attributable to drop down predecessor, so that extracts the distributable cash flow earnings of the Golar Grand for the fourth quarter prior to the Satu acquisition. And for the third quarter the earnings of the Golar Grand and NR Satu control its acquisition in the third quarter. Additionally the quarter we issued in total an additional 5.9 million units in the fourth quarter and of course the distribution that we declared and paid in February, 2013 was also paid on the additional 5.9 million units. So taking that all into account is the reason why we have distribution shown higher than our distributable cash flow number. Moving on to slide 10, we have a slide probably fairly familiar with now that assets and contracts. And the list of course has increased with the Golar Maria added now down to the bottom, the average contract term, remaining contract term is now 7.4 years, and the total revenue backlog comes to $2.7 billion. In fact, we mentioned in the third quarter result presentation that the Golar Grand has a contract until the end of the first quarter 2015 to BG, BG then has an option to extend, it should not extend or exercise that option, the partnership has the right to put the vessel to Golar LNG on charter until the end of 2017. Moving over to slide 11 and we have a summary here, and on the next slide we have a summary of the Golar Maria. This is summary of the Golar Grand acquisition, purchase price $265 million, that was financed $175 million of the equity that we raised in the fourth quarter and the assumption of $90 million lease finance. Net cash from operations before interest costs or another way EBITDA is estimated to be $36 to $38 million per annum. The initial contract term is five year inclusive of the put to Golar, and the annualized distribution increase as a result of that acquisition was $0.10, which increased our distributions per unit to $2 or $0.50 a quarter and that represents an increase of 29.9% since the IPO in April 2011. Turning to slide 12, (inaudible) for the Golar Maria which we purchased in February for $215 million, financed $126 million as of the equity issuance and $89 million by our assumption of debt. That has an expected EBITDA of $22 to $24 million over the initial contract term ending in December 2017. Management recommendation for annualized distribution increases between $0.05 and $0.07 on an annual basis which would increase annualized distribution between $2.05 and $2.07 per annum which based on the mid-point would give us a 33.8% increase since the IPO. We have of course to the amount of further growth opportunities, having already got down four vessels to the partnership since IPO. And they represented I guess primarily by the Golar LNG fleet which numbers 11 newbuild LNG carriers which you can see here slide 11 and two FSRU. Four of those carriers deliver towards in the second half of 2013, and also one FSRU delivered in 2013. And Golar also has an existing modern operating LNG Carrier the Golar Viking that is coming to the end of its current short term contract. So and of course any of those vessels that secure contract of five years or more will be offered to the partnership to acquire. Moving now to slide 14 and summary of the market situation. For LNG carriers, the estimated LNG production capacity growth between to the end of 2012 and 2019 is expected to grow by 44. And whereas the LNG newbuilding fleet newbuilding currently an order which titled 86 at the moment, and deliver between 2013 and 2017 is only at 24.5% increase by number of vessels. So I think we probably accept that there is some potential for shipping supply some level of shipping supply surplus in 2014 as vessels are delivered perhaps slightly before some of the production that's coming in that period '13 to '18. And that we believe will be short lived and the balance will move back into deficit as we get closer to the 2017-2018 period. Of the newbuilds currently on order about 57% committed to term contract already, with the current fleet is 251, and another an important fact is that the relatively with current fleet the number of vessels that are 30 years or older, numbers 40, and 19 of those are older than 35 years. On the FSRUs side, current fleet cost is much smaller so 14 existing. There are eight newbuildings under construction, and one conversion that has been ongoing for a while now that is the LNG Tascana which is for the Laguna project in Italy. Those vessels are delivering between 2013 to 2015. Five of the new FSRU user already committed projects. Of the uncommitted FSRU, Golar LNG Limited has two, both of which delivered prior to 2015, which is quite significant fact because most of the projects that are much active at the moment require deliveries of FSRUs either prior to or early in 2015. Golar LNG is being selected as the preferred bidder for the Jordanian FSRU project, and there are expected to be two or three awards in the first half of 2013 for which there is still limited competition, really only three others in all likelihood. And as I mentioned earlier, start-up requirements either prior to or early in 2015. There is also significant other development activity and the areas in particular that to going on or in the Middle East, India and South America. So in summary, turning to over to slide 15, we have further increased distribution to $0.50 per unit per quarter for the fourth quarter of 2012 following the acquisition of the Golar Grand. And the Golar Maria acquisition increases our revenue backlog further to $2.7 billion, and following the acquisition of the Golar Maria and as I mentioned the management have recommended a further increase to distribution to between $51.25 or $51.75 per quarter. And as from (inaudible) in the demand and supply of LNG and of course therefore for also for infrastructure including LNG Carrier and FSRUs. And the Golar LNG fleet including newbuildings of course provide a substantial dropdown growth and potential for us. We therefore believe that we can continue our high grade growth and to continue growth of, and an increase of distribution over the long term. Thank you very much, and operator I would like to pass it over to question-and- answers.

[Operator:]

Thank you, sir. (Operator Instructions). We will take our first question from Jon Chappell of Evercore Partners. Please go ahead. Your line is open.

[Jon Chappell:]

I want to ask you market question first, and then follow up as it relates to GNLP specifically but so there has been slowdown in spot charter activity, and it seems that the rates have come off other than asset really been much activity to confirm that. Just wondering what kind of an impact that's having on the ability to garner rate, I am sorry contracts at the duration that GNLP needs for potential dropdown so five plus your contract. And also what's meaning to the rate associated with those duration contracts.

[Graham Robjohns:]

I think first thing to say is that there has been dropdown in rate, that's the across trade, I mean that's driven by couple of things. Firstly, the fact that seasonally if you look at where rent go safely this is always a weak time of the year, period moving from winter in to summer. And also of course we feel, so doesn't say suffering another way suffering is really not (inaudible) this is pretty growing market, but we still being impacted by the Angola LNG project not having started up although I understand I mean news out today that startup is expected in second quarter of 2013 which will help. In terms of longer term contract, I don't think the government call that we said that you know historically previously that having a very hot stock market may be give you a little bit of additional leverage when it comes to long term, longer term contract negotiation in a sort of slightly weak market could give a little bit less leverage, but at the end of the day, once you get past of sort of three year contract term, it really is slightly different discussion to net sort of purely demand and supply. So I don't think in particularly going to have much of the impact on longer term right, and I think the strongest driver for Golar LNG Limited securing longer-term contract is going to be the wider supply situation of supply LNG of course in supply vessels.

[Jon Chappell:]

Right. And relate to that and GNLG, GNLP relationship, you mentioned the Jordanian preferred better, I don't think that would start for couple of years and then the actual carriers also don't get delivered until late 2013. So do you think about the development GNLP's growth, are we also at the point where third party acquisitions need to be considered assuming may be Golar Kent fine contracts for the five years that meet the return criteria enable to -- in order to enable GNLP to continue add asset in added the distribution.

[Graham Robjohns:]

I think we certainly always considered third party acquisitions, I am not sure what part where we has to do that, and as I mentioned the Golar Viking is a free contracting in the nearest future, I see no guarantee of that will get a long term contract, and then are some, as you said the newbuilds don't start delivering so it will until the sort of latter half Q3, Q4, 2013. And (inaudible) we have already completed on acquisition this year. And the Jordanian, if go well, I mean I see doesn't impact that same but if just for information if Golar was successful hopeful end of the July project we start up within 2014.

[Jon Chappell:]

Okay. But I think clearly I think as we have said all along emphasizing and recall today our focus is on maintaining a high level of both growth in distribution and that's absolutely necessary.

[Jon Chappell:]

Just have three super quick questions for Brian on the modeling side. The first one is, you did a great job of laying out the off air time associated with drydocks in 2013. What's the budget for the cost associated with those drydocks?

[Brian Tienzo:]

So the Golar Spirit costs was increased by $18 million, Golar Winter drydocking cost is going to be slightly greater than that, but that's – that would include the modification required for, as required by Petrobras and of course as result of those modification our earnings will also increase. And then it was major drydocking expecting quarter of 2013 when we pass through (inaudible) that's on assuming this cost, and as long as we don't come within 31 days off which we have never done, and that's again we don't incur any deduction in revenue. As far as the Methane Princess drydocking that is expected possibly $4.5 million and again that's sometime during December

[Jon Chappell:]

Okay. And now that you have take both the Grand and the Maria, what's the run rate maintenance CapEx you should be using for the distributable cash flow calculation?

[Brian Tienzo:]

Well, as far as the Maria's drydocking is can be very similar to the Princess, so that is about $4 million, okay. In fact, both and Maria and Grand, and they are expected to drydock every five years.

[Jon Chappell:]

Okay. And then finally just the taxes. Graham mentioned the Brazil and the Indonesia impacted that in a big spike, little bit higher than fourth quarter seeing how the (inaudible) kind of the run rate going forward?

[Brian Tienzo:]

No. We don't think so. I mean to some extent it is impacted by, also by revenue decrease, as you mentioned the revenues for the Brazilian FASI and Indonesian FASI is reflect that potential tax that we will incur in those countries. So they have restructured out (inaudible) FASI revenue on this quarter they will be higher as a result of that because we had for the full quarter, but its result are, the results are (inaudible) of taxation already in that revenue. So we are mitigating someone by that. And Jon, we saying what's the tax number in the fourth quarter roughly sort of run rate to expect moving forward.

[Jon Chappell:]

Yes.

[Brian Tienzo:]

To some extent yes.

[Operator:]

We will now take our next question from Darren Howitt (ph) of Raymond James. Please go ahead. Your line is open.

[Unidentified Analyst:]

Good afternoon, Graham. I just had one question with regard to FSRU market. As you laid on slide 14, plus those three contract awards that you expect in the first half of this year. How much incremental demand do you expect as the Middle East and Indian, South American market development? I am just trying to get a sense for how you see the overall demand versus incremental supply beyond those newbuild actually, do they coming into the market? Does it effectively balance? Do you think it could be nonlinear to the extent that you might have appeared of shorter term softness similar to what we are seeing in the LNG Carrier market.

[Graham Robjohns:]

Yeah, in terms of the number of other projects, I think these things do take a long time to develop. So and depending on your view or how will listed project are on or not can going in addition, so in addition to those three, the number could be anything between 10 and 20 and 25 other project that are in various stages of development. I think that number of projects sort of has thing roughly at same time, so I wouldn't expect the three projects being awarded in six month period, is to be expected to continue the next sort of couple of years. And but I think you probably expect to see may be sort of three awards a year. And excluding the one that we have confirmed already on the horizon I guess as an estimate of that of an average. In terms of newbuild I think in the LNG industry and LNG Carrier industry I mean there are some expected orders of course but not to the same extent that you see in another shipping sector, but I think yes FRSU market is probably even less, also even more conservative. There are one two expected orders but I don't expect to see people piling and ordering more and more expected FRSU, we of course have taken that risk, taking the risk of one vessel that put us in, put Golar in a very good position in relation to project that coming but don't want early delivery. As I estimated in my comments that there are some demand of the (inaudible) sort of entering the fray as well, but there are very limited number of competitor in this space which effectively asking help LNG and accelerate and of course you know (inaudible) have been making some lead, and as I said BW Gas as well but it is relatively limited space in that point of view. So I don't expect you are going to see lots and lots of surplus that FRSU knocking around the world.

[Operator:]

We will now take our next question from Ken Hoexter of Bank of America. Please go ahead sir. Your line is open.

[Unidentified Analyst:]

Hi, good morning, gentlemen, it is actually Wilson saying in for Ken. I just want quite of bit my question clarify, and one of the comments that Brian made before that the contract put on 31 days.

[Brian Tienzo:]

That was in respect to the drydocking and this one of the drydock season has this year is gone to is because of (inaudible) and so the time charter as you expect is longer drydock doesn't last more than 31 day then we don't incur any off hire. And today we've incurred much less than that.

[Unidentified Analyst:]

True, thank you for that. And just two kind of quick follow-up questions on in regard to the Golar Grand. Just want to clarify the option to put the contract back to Golar LNG would charter rate on that be part of the same as it is on the current charter.

[Brian Tienzo:]

No. I think it is approximately 25% less.

[Unidentified Analyst:]

Got you. And I guess my second question was more kind of broad based, if I look at kind of the $150 million of the debt financing we got for the NR Satu, you mentioned a LIBOR or plus margin on that loan facility. I mean given kind of the long-term nature of your contracts, and I assume that these financial institutions are kind of more comparable than NR Satu, but are you able to kind of give a sense for what their margin is just sort of get sense for the kind of lending environment for the LNG.

[Graham Robjohns:]

Yeah. That margin is in the sort of mid 3% range, around 250 basis points, market today generally for long term LNG FRSU depending on where it is. I would say sort of read of 275 to 300 basis points. The Indonesian moment was slightly more expensive just because it's in Indonesian domestic (inaudible)

[Operator:]

Our next question comes from Oyvind Berle of DnB Markets. Please go ahead. Your line is open.

[Oyvind Berle:]

Good afternoon, gentlemen. I would like to ask you bit on FRSU, how big an issue is gas supply for your FRSU project. For instance we see in Indonesia that the Central Java Fotis and awarded gas, do you think that's going to speed up the award?

[Graham Robjohns:]

I think certainly I mean that bid has been going for a while. And as you know, we are sort short listed for that, and that's another milestone that voyage get a [cheese] and we would help now that just going to give more traction because over the past few months, we have continue to have indication with the charter or more clarification of our bid as opposed to the compression of the actual project itself. Two demonstration actually in (inaudible)

[Oyvind Berle:]

And in general terms, given that your take on high gas price was seen, and is expensive gas or lack of available LNG going to be constrain for further FRSU project.

[Graham Robjohns:]

I think an almost all cases FRSU to build normal all credit, a lot of credit FRSU to build the strategic purposes and bring gas over the long term, and in the same way the Petrobras ordered two FRSU with no long term committed LNG supply, and actually pretty short LNG supply situation at the time. It permitted to the FRSU because they believe that supply would come, and when it just go back to little bit to what I said in earlier (inaudible) a little bit of supply led industry at the moment, and of course it certainly one drives the other so just a more, the more people can see demand increasing and price rises then the more emphasis is there to get LNG project up moving and going. And so I don't honestly see the tension difficulty in getting LNG supply will per se and stop and FRSU projects. Might cause some delays I suppose but -

[Oyvind Berle:]

Okay, one more question. How do you see margins evolving in the FRSU space? And really you can clear heard this thing (inaudible) multiples for as new project going forward, do you think that -

[Graham Robjohns:]

I am sorry we didn't catch up last thing.

[Oyvind Berle:]

How do you see the margins in the after the new space going forward? Will margin decline or -

[Graham Robjohns:]

There hasn't been any particular evidence of that today that being probably one or two projects done at slightly lower margin than average. But it is, as I said it is, those in huge amount of competition as lot of experts and require to do this, there is a bit of extra risk that you are taking over the both running an LNG Carrier, and that will I think certainly for next few years, we would expect to continue to see a premium on FRSU margin over LNG Carrier.

[Operator:]

(Operator Instructions). Our next question comes from PJ of RBC Capital. Please go ahead. Your line is open.

[Unidentified Analyst:]

Hey guys just one thing on the drydocks, can you just give me a little more color on the Spirit drydock extension? I mean was this your decision to keep it longer to do additional work, or is there something else occurring kind of keeping off hire longer they came to us first drydock as an FRSU, and I guess I am just also after your comfort level that the winner would be kept to kind of that six week timeframe for that offer.

[Graham Robjohns:]

I mean I think the Golar Spirit, there was a lot of work that was planned to do, and there was an burning pressure from Petrobras to get the vessel back, so we had a little bit leeway there so I guess it is more efficient to do work in the yard when it is sailing all back load so we took and spend a little bit more time and finish that work off. But as I said, that's not that (inaudible) time is not expected to be indicative of the time moving forward. It is also depend whether (inaudible) so LNG Carrier is tend to have much shorter time, I mean we reported to three to four weeks for the Methane Princess, and that's essentially because the vessel goes off hire and once it goes sort of [degas] it goes towards the yard, and typically work really out with the charter wherein you can sort of be close by or if you choose the I am going to be close by way you are going to go off hire, so you are suffering as the yard time and no transit time. The kind of winter six weeks that's kind of more normal time for Brazilian FRSU which coming from Brazil to Europe and to dock, and of course the bulk of the I mean the winter is drydocking to having normal drydock down as both is working than modification of these newbuildings, so it is traditional move when it get back to Petrobras. Of course the Golar Freeze also as FRSU without that one fix runs next to Dubai dockyard, so that's virtually no transit time either, so that will be relatively, relatively speaking it short drydock time. And the new entire vessel is not that designed not to drydock for (inaudible) so there won't be any drydock for pipeline (inaudible)

[Operator:]

Our next question comes from Erik (inaudible) Please go ahead. Your line is open.

[Unidentified Analyst:]

Yes, hi, gentlemen. I joined the call a bit late, so please forgive me if you already answered this. But your OpEx was relatively high this quarter. Any particular reason for that?

[Graham Robjohns:]

No, I think I mean it's just one of those operating cost you don’t' up down a bit quarter-to-quarter. Of course happens to be one of those quarters where number of vessels were over, I think in previous quarter we had just short of the $11 million this quarter, for the whole quarter it exclude Maria of course, you should bear in mind. But risk also grew just over $13 million I would say sort of $12 million for the vessel that's Maria is goodish run rate.

[Unidentified Analyst:]

Okay. So we should expect sort of excluding the Maria increase we should expect sort of a slight reduction from this quarter and going forward? Yes

[Unidentified Analyst:]

And how do you see that developing on a longer term basis? Do you see any sort of inflationary --

[Graham Robjohns:]

No sure I mean there in inflationary impacting operating expenses but then all of our contract have escalators, and so in fact the Spirit in the winter, most contract escalate only the operating cost element of the contracts where the Spirit in the winter escalate the entire contract rate. And that is capital element that is played every two years. And that is too for up less in April 2013.

[Operator:]

(Operator Instructions). There are no more questions at this time.

[Graham Robjohns:]

Okay. Well thank you everybody for participating today. And we look forward to speaking to you next quarter. Thank you and good bye.

[Operator:]

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