Golar LNG Partners LP
Q1 2016 Earnings Call Transcript

Published: 1 Jun 2016

[Operator:]

Good day and welcome to the Q1 2016 Golar LNG Partners LP Earnings Conference Call. Today's conference is being recorded. At this time I'd like to turn the conference over to Graham Robjohns. Please go ahead, sir.

[Graham Robjohns:]

Thank you and good day to everybody. I'm joined here today with our CFO, Brian Tienzo, and our Head of Investor Relations, Stuart Buchanan. Leading through the presentation past page 2 our forward looking statement slide, we'll start on slide 3 which covers the Q1 2016 highlights. Our net income attributable to unit holders was $16.8 million and operating income $56.1 million for the first quarter of 2016. We generated distributable cash flow at $43.6 million for the quarter with a distribution coverage ratio of 1.14. We agreed, of course, to acquire the FSRU Golar Tundra for $330 million and we also received commitments on a five new five year $800 million seven vessel refinancing, which we subsequently closed and drew down upon on May 23 and concurrent with that financial closing, we also closed the acquisition of the Golar Tundra. The Golar Maria entered dry dock during the quarter and completed shortly after the quarter ahead of schedule. Moving over to Slide 4 and the income statement, our revenues decreased from $115 million in the fourth quarter to $101.1 million in the first quarter of 2016, principally due to reduced revenue in respect to Golar Igloo as a result of its scheduled winter downtime period during January and February. Additionally, Golar Maria incurred 21 days off hire time during the first quarter in connection with the scheduled five yearly dry docking. Vessel operating expenses at $16.2 million were point $0.8 million lower than the fourth quarter cost of $17 million, the overall decrease mainly due to reduced operating expenses for the Golar Grand, which Golar, as its charter, has put into layup awaiting recovery of the shipping market. Net interest expense at $11.1 million for the first quarter was lower than the fourth quarter cost of $13.8 million as a result of a $1.9 million credit to lease interest expense as a result of a reduction in the UK Lessors tax rate and also a receipt of $1.1 million related to an incentive interest income received in return for our early repayment of the Golar Eskimo vendor loan to Golar. Partly offsetting this is an increased charge in respect of the new sale and lease back financing for the Golar Eskimo that was entered into in the fourth quarter. Other financial items, loss of $21.8 million in the first quarter compared to a $7.4 million gain in the fourth quarter. During the first quarter, $17.3 million noncash mark to market loss on interest rate swaps reverse what was at $13.9 million fourth-quarter gain following a decrease in interest rate swap rates during the first quarter and as a result of all this, net income after non controlling interest was $16.7 million for the quarter. Moving over to Slide 5 and balance sheet assets, there are not too many changes there, so we will move straight over to balance sheet liabilities. You can see at the bottom of this slide that, at the end of the quarter, our net debt was $1.252 billion and our net debt to EBITDA ratio calculated by using Q1 annualized EBITDA was 3.9 times as of the quarter end. This is increased of course as a result of the lower EBITDA due to the Golar Igloo lower revenue in Q1 and the Golar Maria dry dock. Our percentage of debt swapped to a fixed rate, again at that March 31 was 87%. Moving over to Slide 7, as a result of our recent refinancing that I mentioned amongst the highlights, we have moved approximately $380 million debt maturities from 2018 to 2021. So you can now see from the slide that the lighter blue bars are our regular annual debt amortization, the darker blue bars are the balloon payments on various facilities, and the yellow bars are bond maturities, the 2017 annual rate in current bonds and the 2020 on the way to market US dollar denominated bond. For the 2017 bond maturity, we will be continually reviewing refinancing opportunities as we move forward. Turning over to Slide 8 and distributable cash flow, which you can see that after adjusting our net income for non-cash items, and deducting estimated maintenance replacement CapEx coverage ratio so that 1.14 for the first quarter compared to 1.39 last quarter. This quarter's ratio obviously being negatively impacted by the 21 days off-hire related to the Golar Mario dry-dock and the Golar Igloo winter downtime period during January and February. Moving over to Slide 9, this slide shows the development of our distributions in coverage since IPO and it shows the strong level of coverage we've had in recent years. Our average coverage ratio over the last 12 months was 1.24 and we expect this to increase as a result of the contribution from the Golar Tundra. We could also say that we've maintained a relatively conservative debt to EBITDA ratio with an average of less than 4 since our IPO. Moving over to Slide 10 and our asset and contracts slide, again as you can see, our revenue backlog as at March 31 was $2.5 billion and our average remaining contract term was 4.7 years. We reiterated this last quarter, but I think it's important to note, that the three LNG carriers coming off contract at the end of 2017 only represent approximately 17% of expected annual revenues and therefore whilst we firmly believe that the carrier market will be in a significantly improved position when we come to re-contract these vessels at the end of '17, the significance of those contract terms is limited relative to our overall business. Then turning over to Slide 11 and these just shows a summary of the Golar Tundra acquisition, it will operate in Ghana for West African Gas Limited. It was a joint venture between the Nigerian National Petroleum Corporation and Sahara Energy. And the vessel is due to arrive offshore Ghana imminently, having completed some of its minor modifications to make it suitable for its purposing in Ghana. The purchase price of that venture was $330 million. That was financed by cash deposit paid in Q1 of $30 million, debt assumed of $222.7 million and cash that was released from the refinancing of the new facility that closed on May 23. Contract term is for five years. There is, as part of the terms of the acquisition, a payment that will commence from May 23 until the commencement of operations under the contract that will be paid by Golar to Golar Energy Partners at approximately $2.6 million a month. The expected estimated annually EBITDA from the Tundra contract once up and running is $44 million per annum and the approximate annualized distributable cash flow is expected to be around $24 million per annum. Moving over to Slide 12, and look at LNG carriers, as I'm sure you all well know, the carrier market is not in the best position currently. But we all here at Golar believe that that will improve significantly over the coming year. You can see in the top chart the amounts of new liquefaction capacity coming into the market in '16, '17 and '18. That's in addition to projects such as the first trade of Gorgon which started up late last year, earlier this year, that have had some problems but are now re-starting, and also Angola, which has been down for in excess of a year and is now re-starting operations which will absorb further capacity. No LNG carriers have been ordered so far in 2016 and based on current trade patterns and ton miles, the order book of approximately 126 standard sized ships will be insufficient to meet the new capacity that we have coming on-stream. And I think all that leads us to feel confident about the re-contracting position of the Golar Grand, Maria and the Golar Mazo by the time we get to the latter part of 2017. And on Slide 13, in terms of FSRU development, we now of course have seven FSRUs within GMLP and Golar LNG has one new build FSRU and is very seriously considering converting LNG carriers to FSRUs on the back of what feels like and looks like a significant demand for FSRUs going forward. The charts on this Slide 13, is from Fearnley's, but it shows based on the new liquefaction capacity coming to market shown by the bars, where the view on where that LNG will end up going. They come up with a kind of low case, mid case, and high case number of FSRUs that will be required over the next four to five years. And a great deal of this FSRU demand is being driven by a combination of the low energy prices and low gas prices and also, perhaps more importantly an increasing availability of LNG. Moving over to Slides 14, of course, capital is expensive at the moment, but notwithstanding that, there is significant dropdown growth potential picking up at Golar LNG limited in the form of the Hilli, which has an eight year contract as an FLNG unit commencing 2017 and other Golar FLNG projects that Golar are working on. As I mentioned, they have one new build FSRU with potentially converting LNG carriers into additional FSRUs. And of course, the LNG carries themselves, 10 of which are very modern tri-fuel vessels, which overtime, with an improving carry market, we expect at least some of which to be contracted out on a long term basis. So, in summary, on Slide 15, we have a solid contract base, revenue backlog $2.5 billion, average remaining term 4.7 years. We continue to have our excellent operating results, strong financial profile, with maintaining our net debt-to-EBITDA ratio below four and average coverage ratio of 1.24 over the last 12 months. And our new refinancing facility reduces our refinancing risk, moving $380 million worth of debt maturity from 2018 to 2021. We operate, of course, in a fast growing market with significant new capacity coming on stream which will require new infrastructure. And we have future opportunities to require assets from Golar LNG Limited, although, as I've said, capital remains expensive with GMLPs yield at around 13.7%. However, regardless of our ability to acquire new assets, with the growing market and a good revenue backlog, strong financial position, and the recent acquisition to Golar Tundra, we feel that we have a very solid basis with which to support our current distribution going forward. Thank you, and with that, I will turn back to the operator for questions and answers.

[Operator:]

Thanks you. [Operator Instructions] We will now take our first question today from Michael Webber of Wells Fargo. Please go ahead, your line is open.

[Michael Webber:]

Graham, just a handful of questions, two or more thematic and just one around I guess the Tundra and I'll start there. On the earlier call for Golar, I think you mentioned that the infrastructure was not yet in place in and around Ghana. And forgive me if you mentioned it earlier in your prepared remarks and I missed it, but any impact whatsoever for the data which that first goes cash flow positive?

[Graham Robjohns:]

No. We are very shortly, due to issue notice of readiness, and contractually 30 days from the issuance of notice of readiness, come what may payments become due under the contract.

[Michael Webber:]

I guess outside the bounds of the contract, just in terms of incremental color, is there any scale of 1 to 10 around I guess the concern around the infrastructure being in place? Is it just a slight timing mismatch or is there anything to this or is there, are we reading too much into this, the infrastructure not being complete?

[Graham Robjohns:]

Well, it would appear that there are some delays on the infrastructure, but that's not unusual. I think we've probably faced that on every other FSRU project we've got into. It's not an unusual situation.

[Michael Webber:]

Nothing outside of the ordinary, I guess the other two questions are I guess more higher level more thematic, but I guess one is around your cost of capital and the other is around potential growth. I mean FLNG, at the parent, gets a ton of attention and rightly so. But you've got the potential spend at the end of Q3, or beginning of Q4, I guess, of the downstream business, and/or any conversions or power projects for Golar. When you look at the potential sources of growth for GMLP, specifically in 2017 and I guess specifically 2017, 2018, do you think it's more likely that we actually see growth coming from that kind of downstream ahead of FLNG almost as a bridge, depending on the timing there could match up in any way? And maybe longer term, how would you weight, where you think the potential growth is going to come from by the downstream business versus FLNG? FLNG is a lot larger, but there seems to be a lot of opportunity within the power business as well, so it seems to be kind of in GMLPs wheelhouse.

[Graham Robjohns:]

I think, in terms of GMLP, we're basically talking about FSRUs being utilized in the power business or FLNG units, so the heavy starting up sort of Q3 2017. Could we have an FSRU contracted up and running prior to that? Possibly, I guess, which is more likely on, difficult to say.

[Michael Webber:]

Too early to tell, okay. Finally, we've seen one of your competitors with a liquidity gap at the pref market, or looked to pref to tech, tech to pref market, and GP issue common contingent on that. And we've actually seen a container ship company go into the pref market as well at a pretty attractive level. I'm just curious as to how you think about utilizing that market, or kind of alternative markets, and whether or not that's something you guys would look to do to provide cushion, just as you have, the parent lying up an asset that they're chartering in from the daughter and just as you see kind of the last remnants of pressure here from the LNG air pocket.

[Graham Robjohns:]

I mean certainly we've well noted the pref deals that are being done out there. We've certainly had people come to talk to us about it. I mean, obviously, right now, we don't immediately need the capital. But it's depending on how unit price develops moving towards the point in time that we've got assets to, further assets who require from Golar will depend on whether we look at that space or not.

[Michael Webber:]

If I think about it conceptually or specifically around the cost of capital with those prefs, is it fair to assume that that's viable if you're acquiring an FSRU that's got just a lower entry multiple and a bit more wiggle room in terms of the hurdle rate versus a carrier where you really need a cost of equity that's pretty low to support a 10X or 10.5X entry dropdown multiples.

[Graham Robjohns:]

Obviously, the economics of what you're buying are going to, whether that's doable or not, will depend on the cost of capital. I mean I think, as you rightly say, the margins tend to be higher on FSRUs and FLNG units and they do on LNG carriers.

[Michael Webber:]

I guess a better way to phrase it as the pricing indications implied that it would work for a carrier as opposed to just a re-gas asset in terms of a pref.

[Graham Robjohns:]

Well it would work for a carrier. You'd just have to sell it at a fairly cheap price.

[Michael Webber:]

Right. Okay. All right. I can follow up off-line. Thanks for the time, Graham, appreciate it.

[Operator:]

We will take our next question today from Sherif Elmaghrabi of Morgan Stanley. Please go ahead your line is open.

[Sherif Elmaghrabi:]

Hello, gentlemen. Thanks for taking my call. Most of my questions have been asked, but for the three LNG carriers coming off contract next year, what kind of tendering activity are you seeing? In terms of its reflect to expect a stronger market. I know you talked about the shortfall vessels and what kind of long term rates are you guys seeing?

[Graham Robjohns:]

So there's one or two things that we are looking at with regard to those vessels, but now is not the best time to be looking at term contracting just because of the state of the short term market. Once we reach a point where there's strong consensus that the market is tightening, then you'll see more people coming into the space and taking vessels on a term basis, where as now, they don't need to do that. I mean there are some things that are kind of known longer term requirements that are out there, but there aren't that many. But as I say, we expect that situation to improve as we go, move towards 2017.

[Sherif Elmaghrabi:]

So generally speaking, there's no real bifurcation between the short and long term markets from what you're seeing?

[Graham Robjohns:]

They're significant. One says we need bifurcation. If you contract a ship today for a month, you're going to get a much, much lower rate than if you contract it for five years commencing the end of 2017.

[Sherif Elmaghrabi:]

Okay. I think I got that. I'll turn it over, thanks.

[Operator:]

We will now take our next question today from Ken Hoexter of Merrill Lynch. Please go ahead your line is open.

[Ken Hoexter:]

Sorry about that. I was on mute. Just wanted to follow-up on the FSRU conversion discussion, so if you, there's a renewed focus it sounds like, by Golar by, by some others in converting vessels and some new builds. If this is the start to race to build and away from operating the current LNG vessels, which you just described the market as not that great. But how long until that market becomes saturated based on -- maybe give some thoughts on the order book today, the fleet size and demand as you see it going forward.

[Graham Robjohns:]

The FSRU space, you mean?

[Ken Hoexter:]

Yes.

[Graham Robjohns:]

Difficult one to answer, there's certainly, as you would have seen from the presentations, slowly increasing demand. These projects do take time to sort of come to fruition and get delivered. As we stand, there are only, I think, three uncommitted new buildings out there. One is ours. And there are probably five, maybe more, FSRU required start up in the next couple years or so. So there is a shortfall. So there's certainly an opportunity for converted LNG carriers that will take maybe 18 months from sort of start to delivery and to actually convert, because it would take you sort of 30 to 34 months, something between that, to deliver a new build, so there's certainly an opportunity of a conversion. Clearly, if other people start coming into this space and converting LNG carriers and we end up with numerous FSRUs, then we're going potentially suffer with some level of saturation. But I think it remains to be seen how that develops and it has been. I think, kind of proven out that it's tough to win business when you don't have the operational track record and expertise, but that's not sort of totally insurmountable, as we've seen with BW Gas, but it's kind of challenging. So is not an insignificant investment to convert a carrier and it's not an insignificant risk if you've never done it before. I mean, bearing in mind, we're the only company who has successfully converted an LNG carrier into an FSRU within a reasonable time and at a reasonable cost. So, whether the opportunity is big enough and attractive enough for those that are not in the industry currently, I guess remains to be seen.

[Ken Hoexter:]

That's helpful and I appreciate that. Just going back to your commentary during the presentation, Graham, did you suggest that the market -- the LNG carrier market, would be better in the second half? And if so, maybe walk us through that. Are you looking at some additional terminals that are opening that's going to true up capacity or is there something that we should look forward to in the back half the year in terms of causing that increased price?

[Graham Robjohns:]

I don't think I referred to the second half of 2016 specifically. I think for some time, we've had the view, strong view, that the market will, over the period between kind of the end of 2015 to the end of 2017, the market will improve significantly because of the additional capacity coming and because of things and Golar restarting and because of increasing demand for LNG. The thing that's sort of slightly more difficult to predict is exactly how it moves over that time period. So I think we've had, as you will have seen, a pretty poor Q1, which is not totally unusual. March and April are usually seasonally fairly kind of poor months. I think as Golar covenanted the number of fixtures in Q2 is certainly up on Q1 and of course the winter period of any year is usually the strongest period. So on balance, I would expect to see a reasonable improvement in the market by the end of 2016, and most certainly by the end of 2017.

[Ken Hoexter:]

Great. And just a last one, you mentioned the leverage. When you think about additional dropdowns, what leverage level are you comfortable with before you'd say we need to balance this with additional equity or it's just not worth it at these prices and rates? Maybe Maybe talk about your leverage ratios.

[Graham Robjohns:]

Well, generally, we've targeted around four times net debt-to-EBITDA. Now, that's not for a specific acquisition. We might go a bit over that, but we would be looking to sort of come down over time. So the acquisition of the Tundra will take us a little bit over four times, but we're not increasing distributions as a result of the Tundra acquisition. So the excess cash flow from the Tundra will go to reduce our net debt position. So within a year's time, we'd have some debt capacity to put towards in acquisition, but I think it's, at some point, probably the next acquisition, we would need some other form of capital, possibly perhaps, as Mark mentioned, or equity to make it work. I mean, obviously, we can't just keep buying assets for debt. Well, I say that, we could do slowly over time, and we are obviously, we retained around between 60 million and 70 million in replacement CapEx every year. So we can use that as our equity check, if you like, but that's kind of like a LNG carrier, so it's not a sort of super fast rate of growth.

[Operator:]

We will now take our next question today from Andy Gupta of HITE Hedge. Please go ahead, your line is open.

[Andy Gupta:]

Graham, on the three LNG carriers, is there an opportunity on contracting any of these with the Perenco Project, perhaps with Gazprom?

[Graham Robjohns:]

Potentially, yes. Yes. Nothing firm on that. It's just yes, it's possible. It's been discussed with Gazprom, but there's, nothing anyway firm.

[Andy Gupta:]

Any indication of timing as to when that may get decided?

[Graham Robjohns:]

No. No.

[Operator:]

[Operator Instructions] We will now take our next question from John Humphreys of Bank of America. Please go ahead, your line is open.

[John Humphreys:]

Thank you, Gentlemen. Ken covered my questions. I'm all set.

[Operator:]

[Operator Instructions] We will now take the question from Espen Landmark of Fearnley. Please go ahead, your line is open.

[Espen Landmark:]

Yes, hello, Graham. Just wondering, we're seeing at the parent level, you're able to draw some additional liquidity from the existing fleet. I know there's some unencumbered assets within the GMLP fleet as well. What's the potential you can get out of that, you think?

[Graham Robjohns:]

How much GMLP could increase debt by?

[Espen Landmark:]

Yes, on the vessels that you have today, I think at least the Mazo is unencumbered, if I'm not correct.

[Graham Robjohns:]

The Golar Mazo is unencumbered and there's relatively low leverage given its contract on the new Nusantara Regas vessel. So there's certainly some scope there, but as I said in answer to the question with regard to the debt ratio, we'd only be looking to do that if it was some kind of refinancing transaction to pay debt down with. So I don't know whether this is where you're going with this, but we do have some bank debt capacity that we could use to repay a portion of our bond that matures at the end of '17 for example.

[Operator:]

There are no further questions in the queue at this time.

[Graham Robjohns:]

Okay, well thank you, everybody for dialing in this quarter and we'll look forward to speaking with you again in three month's time. Thank you and goodbye.

[Operator:]

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.