Golar LNG Partners LP
Q2 2016 Earnings Call Transcript

Published: 31 Aug 2016

[Operator:]

Good day, and welcome to the Golar LNG Partners' Q2 Earnings Call. Today's call is being recorded. And at this time I would like to turn the conference over to Mr. Robjohns. Please go ahead, sir.

[Graham Robjohns:]

Thank you, and good day to everybody. As the operator just said, my name is Graham Robjohns. And I'm joined here today with our Chief Financial Officer, Brian Tienzo. Turning past page two, which I would suggest you to read which refers to our forward-looking statements, to slide three. We'll start the presentation with Q2 2016 highlights. Earnings were improved this quarter with our net income attributable to unit holders at $28 million and operating income at $66.9 million. Distributable cash flow was also improved at $47.9 million for the quarter, with a distribution coverage ratio of 1.25. The Golar Maria completed her dry-dock on schedule with just five days off-hire in Q2, and we drew down on our new 800 million secured credit facility and completed the acquisition of the Golar Tundra. Heading over to slide five and the income statements, you should note that in reviewing our financials for the quarter that until Golar Tundra commences operations and the arrangements with Golar LNG, including the partnership's right to require that Golar repurchase the Tundra, the put option that is effective in May, 2017. Until that ends, Golar LNG will continue to consolidate the Tundra. And therefore during this time, the earnings on net assets of Golar Tundra will not be reflected in the partnership's financial statement. Our total operating revenues increased from $101 million in the first quarter to $111.8 million in the second quarter, principally due to additional revenue respective to Golar Igloo, which was operational for the duration of Q2, but with on its scheduled winter downtime period during January and February in Q1. Additionally, the Golar Maria, which incurred 21 days of a scheduled five-yearly dry-docking in Q1 but only five days in Q2. Vessel operating expenses were slightly higher at $16.9 million. The increase was due to additional repairs and maintenance costs in respect to the NR Satu, which completed its annual maintenance window during the quarter. And this was partly offset by cost reductions in repairs and maintenance generally for other vessels. Interest expense at $14.6 million, was up from $12.6 million in the first quarter, which -- and this was mainly due to a first quarter non-recurring $1.9 million credit to leased interest expense as a result of a reduction in the U.K. lessor's tax rate. Additionally, higher interest charges were incurred in the second quarter in respect to the new $800 million refinancing facility. Other financial items resulted in a loss of $15.6 million for Q2 compared to $21.8 million for Q1. The non-cash mark-to-market losses on interest rate swap valuations which follows continuing declines in long-term interest rates contributed $7.1 million of the Q2 loss, with the balance primarily being related to deferred financing costs that were written off in respect to the full debt facilities that were refinanced by the new $800 million facility during Q2. A higher tax charge in Q2 of $6 million compared with $3.5 million in Q1 is due to a higher current tax charge in Indonesia in Q2. Moving up to slide four, on balance sheet assets, the one point I think should note here in terms of the balance assets is the increase in other long-term assets. This is due to the approximate net $100 million paid to Golar in respect to the Golar Tundra, which is the purchase price net of the asset-specific debt, which is effectively being shown as a deposit until we start to consolidate Golar Tundra. On slide six we have the balance sheet liabilities. And similarly, net debt has increased as a result of this approximate $100 million net payment in respect of the Tundra. As already noted though, the balance sheet does not reflect the Golar Tundra asset-specific debt of approximately $220 million. As of the end of the quarter, net debt was therefore $1.32 billion and net debt to EBITDA ratio calculated by using Q2 annualized EBITDA was 3.6 times as at quarter end. This ratio will increase when we commence to consolidate Golar Tundra. Our percentage of net debt swapped to a fixed rate was 105% as at June 30, and obviously 105% looks slightly odd, but that will fall as a result of the Golar Tundra debt coming on to the balance sheet. Turning over to slide seven, we set out the debt profile of our existing bank debt and bond debt. As a result of our recent financing we've moved approximately $380 million of bank debt maturities from 2018 to 2021. As you can see from the slide, the lighter blue bars are regular annual debt amortization and the yellow bars are our bond maturities. For the 2017 bond maturity, we will continue to review refinancing opportunities as we move forward. It seems like sentiments in the not [ph] bond market is improving, and as I say, we will continue to monitor that with a view to refinancing opportunities. On slid eight we set out the reconciliation of our distributable cash flow. After adjusting our net income for non-cash items and deducting estimated maintenance and replacement CapEx, our coverage ratio stood at 1.25 for Q2, as compared to 1.14 last quarter; this quarter's ratio being positively impacted by a full quarter's earnings from the Golar Igloo [ph] after its winter downtime period in Q1. Slide nine is our usual slide showing the elements of our distributions and coverage since the IPO, which shows that coverage ratio has been at a healthy level of 1.28 on average over the last 12 months. On slide 10 is our asset and contract slide. Revenue backlog as of June 30 was $2.4 billion and average remaining contract term was 4.5 years. You'll note that the three LNG carriers coming off contract at the end of 2017 represent a small proportion of expected annual revenues, but in any event there seems to be definite signs in the carrier market that indicate an expected improvement as we approach the end of 2017 has actually now started, which of course that significantly mitigates the re-contracting risk for these vessels. Slide 11 sets out the details of the Golar Tundra acquisition as discussed in our earnings announcement and a little bit on the Golar LNG call for those of you who listened. There have been some delays on our counterparty's side, but together with Golar, we are continuing to work through this with them to find a mutually agreeable way forward. Slide 12 is actually taken from a Golar LNG presentation, but I think neatly sets out the new Golar structure with the joint venture with Schlumberger, ONELNG, and Golar Power, a joint venture with Stonepeak. It also I think shows that there's been, in my view anyway, a strengthening of the drop-down story for Golar LNG Partners as we go forward. So on 13, turning a little bit to the market, and starting with LNG carriers, we've been presenting slide showing an improving LNG shipping market for some time now, not dissimilar to this slide 13, what is different in this quarter from the last several is that we are finally seeing some improvement in the short-term carrier market, as well as increased enquiries and discussions around long-term charters. So after many quarters of not having much evidence to support our position, it's nice that finally the thesis might be playing out. That thesis being that we have significant new LNG volume coming, which we believe will more than absorb the current order book of vessels. We have Gorgan and Golar restarting, and only four LNG carriers have been ordered thus far in 2016. All this and the improving spot market will point towards an improving market-to-conditions as we go forward, which again bodes well for re-contracting position for our free vessels that come off contract at the end of '17. Turning to FSRUs on slide 14, this sector continues to also be an encouraging growth story. Total number of FSRUs has grown significantly over the last 10 years. And they now represent a significant percentage of total worldwide regas capacity. This growth span is expected to continue as the flexible and cost-effective floating regas solutions combines with the combination of low energy prices, increased availability of gas, and demand for power. And Golar's position in the market has been added to, in our view, with the Golar Power JV with Stonepeak that will specifically target gas-to-power opportunities. Turning to slide 15, momentum is also building, I think, in FLNG. The Hilli Perenco project is progressing very well and is scheduled for start-up in the latter part of 2017. The minimum expected EBITDA is approximately $170 million based on 50% utilization. Golar are now discussing the cost of expansion of this utilization beyond 50%. And there Hilli certainly represents an interesting drop-down opportunity for the partnership. The Ophir project is also continuing to make good progress, and of course, Golar now have the exciting development of one LNG, the FLNG JV with Schlumberger. So finally on slide 16, and in summary, we believe we are on a very good position. We have a solid contract base, and a 4.5-year average contract term. We continue to share our excellent operating results. We have a strong financial profile, with a net-debt-to-EBITDA multiple of 3.6 as at June 30, and an average coverage ratio of 1.28 over the last two months. LNG is a growing market with increasing demand for infrastructure, and we have some very interesting acquisition opportunities from Golar. We also there have a very solid existing business with which to support existing level of distribution. Okay, operator, thank you, and can I pass it back to open up for Q&A, please.

[Operator:]

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

[Michael Webber:]

Hi, good morning guys. How are you?

[Graham Robjohns:]

Good morning, Michael.

[Michael Webber:]

Okay. Just a couple of questions, and if this first one I'll start off with the Tundra. Obviously some contract issues there and some delays around port infrastructure that seem like they could act for a while. Graham and I guess Brian, how long do you reasonably think that Golar Partners will be willing to carry the Tundra even if you were to kind of approach and potentially kind of pass that one-year anniversary when the put option would kick in? I guess, what with the asset be there to carry that and be supportive of the parent? And then maybe as kind of a secondary or kind of tertiary question to that, when would you actually start marketing that asset elsewhere if it doesn't look like the situation is going to be resolved?

[Graham Robjohns:]

I mean, you know, in some senses I guess, Michael, it's a little bit of an academic question, because we're in a constructive dialog. We believe that there is a need for an FSRU in Ghana, the government support for an FSRU project in Ghana, and we have an FSRU sitting off the coast of Ghana. So there have been some issues obviously, which everybody's aware of, but we're working through that. And therefore it's not really on our minds at the minute any kinds of thoughts of exercising or not for exercising the put option there in May 2017, I don't think it's in either GMLP or GLNG's best interest to be thinking about doing that. So plan A and B is we think there is -- we're reasonably confident that we'll be able to work through this Ghana situation, and obviously we're not in a position to market the vessel right now.

[Michael Webber:]

Right, right.

[Graham Robjohns:]

But clearly the FSRU market is fairly warm, if not hot at the minute. So that there are other opportunities out there should everything not work out as we expect, but at the minute that's not our plan A.

[Michael Webber:]

And that's fair. Brian, kind of along those lines, say in a scenario in which, you know, you will list the put option date. Is there a viable scenario in which if you've got a market that asset elsewhere that the asset would transition to the downstream JV and that process would be completed there in terms of maybe warehousing the asset somewhere else, besides the yield-oriented vehicle like GMLP?

[Brian Tienzo:]

I think as far as -- well, I mean as Graham said, whilst there is obviously delays in the start of the FSRU we haven't contemplated sort of the potential put to call out limited. I mean, and your next question of the downstream JV, it's not -- the sort of contract arrangement between Golar LNG and Stonepeak do not currently envisage the Tundra. It could do, but that contract is never going to be with Golar LNG, but with Golar LNG Partners since that sort of -- whilst accounting-wise is still at Golar LANGUAGE, but contractually it's Golar LNG Partners that has it, but you know, we're very far from thinking along those lines, I think.

[Michael Webber:]

Right, I know. Just given the moving pieces and kind of the liquidity profile, and kind of the debt work, I'm just trying to figure out what the kind of mosaic of future options might look like in that scenario, but it just seems like it's a bit too early. Actually, kind of along those lines, and along kind of those -- the liquidity leverage that you get that as a parent, an IDR reset in fact ticking around for a while and obviously it came up, Brian, on the parent call just a little while ago, either a reset or a potential sale or collateralizing those, I'm just curious, Graham, from GMLP's perspective, is -- how fully baked would any of those options be at this point? And is there a scenario in which you guys could potentially look to say the prep market or some other form of capital potentially bring in those IDRs that would amount that pretty [ph] at the same time?

[Graham Robjohns:]

So, Mike, could you just repeat the first piece of that question?

[Michael Webber:]

Just that the idea kind around kind of an IDR -- as being liquidity lever for the complex as a whole, and how fully baked is that…

[Graham Robjohns:]

Yes, sorry, that was the bit I didn't catch.

[Michael Webber:]

[Indiscernible]

[Graham Robjohns:]

Yes. Listen, we've had some open discussions around the various possibilities, I think as Brian [ph] mentioned on the GLNG call, and the simplest one is that I've kind of set out in the partnership agreement which is sort of simple reset, which is you know, and it's an interesting solution that Golar is obviously growing business and got lots of things to do with the potential liquidity. Reset of the IDRs would make distribution great for the MLP during the future which benefits both GMLP and GLNG. And I think unitholders retains the incentive distribution even though it's reset, which I think is helpful as well. So it's a potentially very mutually beneficial thing for both parties.

[Michael Webber:]

So again, I guess what I'm asking is, you know, there are a number of different forms I could say -- they would all require some form of capital from GMLP. So I'm curious as to whether or not it's a degree that would require a prep or some outside capital versus maybe operating cash flow; lots of different forms it could take, I'm just curious how you guys think about it?

[Graham Robjohns:]

Yes. We haven't finalized the sort of details of how it would be financed and exactly how it would end up. And we will communicate that in June quarter.

[Michael Webber:]

Okay. That's fair. All right, I'll turn it over. Thanks for your time, guys.

[Graham Robjohns:]

[Indiscernible]

[Operator:]

Thank you. We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead. Your line is open.

[Fotis Giannakoulis:]

Yes, hi guys and thank you. Graham, Brian, I want to ask about the Tundra charter if you can describe as what kind of securities do you have towards this time charter if the delay and they are not able to perform according to the contract, what kind of compensation can you get from West Africa Gas Limited?

[Graham Robjohns:]

When you say securities, you mean in terms of guarantees?

[Fotis Giannakoulis:]

Product, yes.

[Graham Robjohns:]

So, West African Gas Limited Company jointly owned by NNPC and Sahara. So we have guarantees for our contract. I'm saying we feel sort of in a recently good position with regard to that.

[Fotis Giannakoulis:]

Okay, that's very helpful. Thank you. And in the previous presentation of Golar, they mentioned about a number of FSRU projects that the Group is working on. They talked about India, Pakistan, Indonesia, Brazil, and Egypt. I was wondering if any of these projects involve vessels that they are currently owned, FSRUs that are currently owned by the partnership, and if you have started any discussion about the extension of the Golar Spirit with Petrobras, and what is the status of this unit since this is the first that expires in 2018 [ph]?

[Graham Robjohns:]

So firstly, the answer will be yes, I guess, in terms of some of the MLP FSRUs that are coming up contract. First, they kind of are involved in some of the discussions around various opportunities depending on the timing and the requirement. And then in terms of Petrobras, I mean, obviously we have got a bit of time until sort of latter part of 2018 when the vessel comes off contract. We have had some kind of initial exploratory discussions around the extension, but that's kind of as far as it's got thus far.

[Fotis Giannakoulis:]

For you, Graham, and my last question is about the drop-down -- the potential drop-down of the Hilli FLNG, if you can give us an idea how are you thinking about it? I know it's very early at this point, but trying to look forward, given the fact that this FLNG has a secure contract for half of its capacity and also has some upside above $60 oil, how do you view the price that the mechanism that will set the drop-down price and how are you going to work with the remaining two trains that they have not been contracted yet and the oil link upside that this contract has?

[Graham Robjohns:]

Well, obviously this is not a detailed -- could be a lot of detail in answer to that question, which it's difficult for me going to. Couple of things that I can and should say is firstly that we have always contemplated that we would set up these FLNG projects such that the MLP could buy portions of a project, and clearly sort of 100% capacity FLNG unit is an extremely large transaction for the MLP to you know, being able to buy 20% or 30% of whatever is a kind of neat way of packaging the transactions in a manageable size. The second thing is as you rightly pointed out, the Hilli and potentially other projects as well, have a variable element in with the EBITDA as a flow at certain oil price and the capita higher oil price. And in general, it's not sort of in the partnerships remit if you like to take on that sort of variable risks. I think we would be looking to not only structure something that made the transaction manageable size, but also structured. So the variability for the cash flow is going to generally pay off that project where it's limited as well.

[Fotis Giannakoulis:]

Thank you, Graham.

[Graham Robjohns:]

Thanks, Fotis.

[Operator:]

Thank you. We will now take our next question from John Humphreys, Bank of America Merrill Lynch. Please go ahead. Your line is open.

[John Humphreys:]

Good morning, gentlemen. Thank you for taking my question. I just wanted to get a read on your opinion of the FSRU market with the strengthening in LNG carrier rates. It's been reported that some FSRU projects that have been discussed in some of your competition that they may pull some of those projects if they see LNG rates continue to improve, what is your take and if the strength would actually materially reduce competition in the FSRU market?

[Graham Robjohns:]

Well, you said pull some of the projects, I assume you mean get back from converting vessels?

[John Humphreys:]

Yes, yes, exactly.

[Graham Robjohns:]

Yes, yes okay. So two things I will say, the first one is I think yes, I think the appetite and enthusiasm for converting LNG carriers into FSRUs will diminish as a function of continuing improvement in the shipping market. That's for sure. The second thing I would say is I'm sure not necessarily by our competitors, but I think it's often underestimated within the investment community what is involved in converting an LNG carrier into an FSRU [technical difficulty] built. It's a project that's not for the fainthearted, and it's not going to be taken on very lightly. So, even if with the poor LNG carrier market I'm personally not totally convinced that there will be potential conversion opportunity that we talked about would actually ever come to fruition.

[John Humphreys:]

Great, thank you. And that gets me to my second, it looks to me that there's about eight or nine FSRUs in the order book right now, if you could give me an idea of the number of open FSRU opportunities that exist in '16 to '17 and '18, just to get an idea of where sort of supply and demand sits with that FSRU market?

[Graham Robjohns:]

When you say eight or nine FSRUs in the order book, you mean being built?

[John Humphreys:]

Yes. Well, that you know, from the -- yes, under construction in the yard, the latest figures I have are eight right now, but do you have other figures, I just want to get your read on what you see in the order book coming and what the opportunity is for contractor?

[Graham Robjohns:]

The thing, it's a little bit hard to me, but anyways it's certainly a handful. I think in terms of opportunity, I think on the GLNG Co that talked about sort of number of eight or nine, I could reading off the list of projects that are kind of up there for management within Golar for discussion, it's sort of over a dozen of the -- you know, question around sort of how quickly all those come to fruition and all of them do come to fruition but that's just one sort of maybe discussions right now. There are others that are out there that maybe we are not in discussions with.

[John Humphreys:]

I had a little difficult time hearing you; did you say about 12 projects that are potential opportunities?

[Graham Robjohns:]

It's around a dozen that are sort of live discussions as far as we are concerned.

[John Humphreys:]

Okay. And then what's the number of FSRUs you see in the order book coming online? What number are you operating with?

[Graham Robjohns:]

Well, it is might round about eight, yes.

[John Humphreys:]

Around eight?

[Brian Tienzo:]

Around eight, John, I think just in addition to what Graham was saying, I think it's fair to say that some owners have ordered it on the back of what we sort of publicly see as FSRU opportunities. What's sometimes difficult to determine as well is that there are also some sort of bilateral discussions that's happening and those may not necessarily be public. So the sentiment of FSRU being hot has driven some new ordering on FSRUs and certainly as well as the intention to convert ships into FSRUs. I think that remains today. So as far as opportunity is concerned, to all this probably then a firm that we can see as minimum but there may be others which are being pursued bilaterally.

[John Humphreys:]

Great, thank you very much, appreciate it.

[Operator:]

Thank you. We would now take our next question from Nick Raza from Citi. Please go ahead. Your line is open.

[Nick Raza:]

Thank you, guys. Just a couple of quick follow-up questions, you mentioned that not [ph] market, the bond market is actually improving, would you be able to go out before year end and complete the refinancing of I think about the 200 million due next year?

[Graham Robjohns:]

Possibly.

[Nick Raza:]

Possibly? And should we look to…

[Graham Robjohns:]

It's difficult to sort of look into the future, you know, what I was saying was that there has been some positive movements in that market.

[Nick Raza:]

Okay, good enough. And then I think the next question is related to the three vessels that are, the LNG vessels that are coming off contract next year. Assuming that spot prices increased, but charter prices sort of don't increase as much, have you sort of had a discussion with your -- the existing contractor or the charterers excluding GLNG in terms of what price they are willing to pay is it somewhat similar, is it lower? Could you sort of give us a sense of that?

[Graham Robjohns:]

For the GLNG players -- contracts in the end of '17.

[Nick Raza:]

Yes.

[Graham Robjohns:]

Yes, well, not particularly, I mean one of them for example, the Golar Mazo is on a trade out of Bontang to Taiwan and not trying to going to come to an end, so the extension often is pretty on monthly, but I think it's fair to assume that's the rates the vessels re-contract at will be lower than current rates. We will cover all these units.

[Nick Raza:]

Okay, fair enough. And my last question really is regarding the Tundra, I know you guys have covered a lot and I certainly appreciate that, but the news this morning was that Nigeria was in recession and it could be largely due to reduction on spending on energy projects. How does that relate to the Tundra?

[Graham Robjohns:]

I am not sure it has any relation at all.

[Nick Raza:]

Fair enough. And assuming that what you mentioned earlier that IE that the contract is guaranteed, is there any risk that a guarantee could sort of be pushed back or renegotiated or the deal need renegotiated?

[Graham Robjohns:]

Well, I am not sure we would renegotiate I guarantee. I mean as I said we are in discussions with WAGL to find kind of mutually best way forward for this project which would suit us both. But I am not sure what the relation of Nigeria recession has particularly, I mean from a sort of commercial point of view, the point that you made was that the Ghana are burning light crude oil in power station they build additional gas power stations and they don't have any gas. It's an obvious need for them to get what is currently plentiful and cheap hydrocarbon.

[Nick Raza:]

Fair enough, Thanks guys, that's all I had.

[Graham Robjohns:]

Okay.

[Operator:]

Thank you. We will now take our next question from Ben Brownlow from Raymond James. Please go ahead.

[Ben Brownlow:]

Hey, Graham, just to follow up on one of the last questions. You had previously mentioned in the past an expectation for those three vessels, renewing late 2017, you had mentioned an expectation of around a 20% rate cut. Is that still a fair way to think about it, given the trends in rates right now?

[Graham Robjohns:]

It is very difficult to say. I don't want to put a number on it. As I said you know they will re-contract undoubtedly at lower rates.

[Ben Brownlow:]

Okay. And just on the demand outlook, I just curious on your outlook in terms of increasing ton mile demand, and what you're seeing there, just thoughts over the next 12 months from ton mileage standpoint.

[Graham Robjohns:]

Well, ton mileage is kind of difficult to predict and it depends on number of things and obviously not least of which where the gaps is going to go. So, some of those in that will include where U.S. gas ends up going to the far East, it goes to Europe which will be reduction in ton miles since some of the Australian gas go and into Europe which will be an increase in ton mile, quite what it is going to be, I don't know. I think the from the macro level though, the simple point is that there is lots of new products coming and although there are ships delivering as well and if you look at the amount of product divided by the number of ships. It doesn't look to us like we are going to have structural over supplies to go forward.

[Ben Brownlow:]

Okay. All right, and just one last one just housekeeping on that -- how should we think about the tax rate going forward?

[Graham Robjohns:]

I think that this quarter's tax charge was kind of abnormally high, so probably sort of somewhere closer to the Q2 tax charge, maybe a bit high, probably more than normal level, Ben.

[Ben Brownlow:]

Great, thank you.

[Graham Robjohns:]

Okay.

[Operator:]

Thank you. [Operator instructions] We will take our next question from Espen Landmark from Fearnley. Please go ahead your line is open.

[Espen Landmark:]

Good evening. I was just wondering if you could walk us through the accounting on Tundra, and I understand that it definitely is not consolidated but is there any deferred revenue recognition from the 2.6 that you received from the parent company?

[Graham Robjohns:]

No, so effectively what happens is they kind of 68 plus OpEx that we receive is netted off against the actual OpEx expense and debt service, and the net which is kind of like a small margin is shown in interest income effectively as interest on the deposit.

[Espen Landmark:]

All right, that was just the one from me. Thanks.

[Graham Robjohns:]

Okay, thanks.

[Operator:]

Thank you. [Operator instructions] There are currently no more questions in the queue. I will turn the call back to our host for any additional or closing remarks.

[Graham Robjohns:]

Thank you, operator, and thank you everybody for listening today, and we look forward to speaking to you in three months time. Thanks a lot, bye-bye.

[Operator:]

Thank you, ladies and gentlemen. That will conclude today's call, and you may now all disconnect.