Golar LNG Partners LP
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good day, and welcome to the Q4 2016 Golar LNG Partners LP Earnings 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 to everybody. I am joined by our CFO, Brian Tienzo. We'll start today's conference moving forward of the forward-looking statements on Slide 2, Slide 3 and our recent highlights. Earnings were improved again this quarter with our net income attributable to unitholders of $71.4 million and operating income of $72.1 million for the fourth quarter of 2016. Distributable cash flow was also improved at $57.9 million for the fourth quarter with a distribution coverage ratio of 1.53 compared to $55.1 million and a ratio of 1.37 for the third quarter. During the quarter, we agreed we got a lot of LNG to reset intensive distribution runs in return for issuing Golar to new additional common units and general partner units as well as a new class of IBR. In December 2016, we received notice from Petrobras of their intent to exercise their contractual right to terminate the Golar Spirit in June 2017 around 14 months early upon the payment of the required termination fee, which represents approximately 62% of the remaining EBITDA under the contract and we are of course already remarketing the vessel particularly for smaller scale FSRU projects. Subsequent to the quarter end, we issued a new $250 million senior unsecured bond in the Nordic market principally to refinance existing bond indebtedness and of course we also issued 5.175 million new common units an overnight bought deal together with 95,000 general partner units raising gross proceeds of $119.4 million, which we anticipate will be principally used to acquire an interest in the FLNG Hilli Episeyo. Turning now to Slide 4 and the income statement, total operating revenues were slightly than the third quarter at $14.4 million. Vessel operating expenses at $13.4 million were in line with the third quarter, albeit that we had expected in a slight increase and we still expect operating cost to be slightly higher as a run rate for 2017. Other financial items were a gain of $19.4 million for the fourth quarter compared to $6.9 million for Q3. This was mainly driven by non-cash mark-to-market gains on interest rate swaps as long-term swap rates continue to increase during the quarter. This increased gain on valuation of interest rate swaps is primarily the reason that net income has increased from $59.5 million last quarter to $75.1 million for the fourth quarter. On Slide 5, we have balance sheet asset but there are not too many changes there, so let me over to Slide 6 and balance sheet liabilities. As at the quarter end, our net debt was $1.26 billion and our net debt to EBITDA ratio, calculated by using Q4 annualized EBITDA was 3.2. Percentage of net debt swap to fix rate was just over 100% as of December 31 although of course it will be less than 100% based on gross debt. Moving on to Slide 7 and our distributable cash flow, this was improved this quarter as I've mentioned that $57.9 million compared to $55.1 million last quarter. The improved distribution coverage ratio of 1.53 versus 1.37 last quarter is also helped by slightly lower distribution this quarter given that in Q3 the distribution showed a temporary increases resulting from timing of issuance of new units connected to the IDR reset transactions. On the Slide 8, we show a summary of our recent capital market transaction of which there have been two. At end of January, we of course launched a new Nordic market high yield bond and senior unsecured bond with at a coupon rate of LIBOR plus 6.25%. We have since swapped to that to an all-in fixed rate of 8.194% and obviously, the primary purpose to that bond to refinance our existing Norwegian Krone bond denominated bond that matures in October 2017. And if you convert that $1.3 billion NOK bond to U.S. dollars as of the year-end exchange rate, you get a U.S. dollar value of $150.5 million. The associated cost currency and interest rate swap associated with the bond has a liability to $81.5 million. So the gross bond amount and currency and swap liability approximate to $230 million with the original value of that bond, but as cash secured against the swap liability of $32.4 million so that the net outstanding is effectively $199.6 million. To date we bought back approximately 48% of the NOK bond of 48% that matures in [22] and terminated the equivalent demand of the swap and we will continue to buy back the bonds obviously until we bought back the full amount of the bond outstanding. Around a week, later in early February, we launched an equity offering. We ended up issuing 5,175,000 new common units included as 4.5 million base transactions with the exercise of sync issue and also the 94.7000 general partner units to Golar LNG in order for them to amend their 2% interest, General Partners' 2% interest. Proceeds of that $119 million which takes total unit number in issuance up to $70.7 million and of course that $119 million for general corporate purposes and including potential acquisition of the FLNG Hilli. Moving over to Slide 9, we’ve set out the progression since our IPO of our EBITDA net income distributions paid and replacements maintenance CapEx and approximately 75% of which is replacement CapEx. These highlights I think the good growth that we've had since our markdowns, but we should also highlight a few other things that give us a very solid financial footing. Firstly, the level of replacements and maintenance CapEx, which is running at approximately 50% of current distributions means that we are continually building funds to replace our assets as we going forward. Secondly, we have steadily increased distribution coverage ratio as we had approached the renewal of our contracts. The ratio now stands at 1.32 times the last 12 months and 1.53 as of Q4. And thirdly, whilst our last two FSRU acquisitions, there may be little debt because of the conservative positions we take on coverage and replacement CapEx. But we have been able to keep our debt ratios at a relatively conservative level, 3.4 for the year ended December 2016 and of course we continue to amortize that. Slide 10, just shows you the quarterly progression of distributions and coverage and then I think we'll turn over to Slide 11, which is our contract and asset slide. Revenue backlog as at December 31 was $3.2 billion and the average remaining term of our contract was approximately five years for FSRUs and 2.5 years for LNG carriers. One of our key priorities of course this year is the re-contracting of vessels that come off contract this year. The Golar Spirit is being actively marketed as I've mentioned with a particular focus on small scale opportunities given she is a smaller FSRU and seem to be a growing number of these small scale FSRU projects. We’ve indeed identified some specific opportunities for the Golar Spirit and we're developing those through further discussions. The three LNG carriers coming off contract at the end of 2017 only actually represent a small proportion of expected and new revenues, but regardless there are continuing signs of an LNG carrier market improvement as we move through 2017, which slightly improves re-contracting position. Again, we have some active discussions ongoing with regards to importance of these vessels to the extent that we're moving going Golar Grand from lay out position into drydock. On Slide 12, you may have seen these slides in the Golar LNG presentation, but I think they're a good representation of the integrated group structure that we now have with business partners supporting in the upstream and downstream and the Golar's core business competency. Together this creates a powerful dropdown story for Golar Partners moving forward, the first of which of course the FLNG Hilli Episeyo we are already in discussions with Golar. Turning to the market a little bit on Slide 13, we are clearly in a growth phase of the industry with growing LNG supply and demand, which will require additional infrastructure including ships and FSRUs. The top left chart shows BP's view from their most recent energy outlook, but the growth in LNG supply and demand, which they say, they expect to more than double over the next 10 to 15 years. In the near term the table in the bottom left shows the specific LNG projects coming on stream over the next few years, which includes approximately 30 million tons in 2017. We anticipate that the majority of this new supply in '17 will be in the back half of the year and hence the positive impact on the shipping market will get greater as we move through 2017. This place out in parts in view of the LNG carrier demand-supply balance over the next few years shown in the chart on the top right hand of the slide. Important line to focus on I think is the orange dotted line, which shows fleet utilization steadily improving, moving forward from 2016. Actually, I've said, this is very helpful given our requirement for re-contracting the three LNG carries from beginning of 2018. In the bottom right of the slide, we have some bullets with regard to the new LNG importing countries, the growth of which helps FSRUs always of course but it also helps shipping. LNG importing countries have grown from 14 in 2005 to 34 in 2016, representing a 9.3% compound annual growth rate and a significant majority of these new importing countries have used FSRUs to bring LNG into their country. I think the three key drivers for this growth in demand for new LNG imports are to reduce reliance on oil and power generation because indigenous production is in decline and for supply of both diversification or for security of supply. I think what is really interesting is that for those shipping and FSRUs is that Wood Mackenzie estimates that there could be up to an additional 60 new countries that will be importing LNG by 2025 and that will need a lot of infrastructure. Moving over to Slide 14, momentum is certainly building in the FLNG space within the Golar Group with the formation of OneLNG and the announcement of the joint venture between OneLNG and Ophir to develop the Fortuna FLNG Project. OneLNG is moving closer to FID on the project, which is expected in the first half of 2017. The Hilli Perenco project is also progressing well and is scheduled for startup in September 2017. The minimum expected EBITDA is approximately $170 million based on 50% capacity utilization but Golar has good expectation of expansion of this utilization, but beyond 50%. As we've discussed, we are continuing discussions with Golar with regard to the dropdown of an interest in the Hilli, which would represent a significant addition to the partnership's revenue backlog in the eight-year term of the contract. And of course, we now have the capital to complete the acquisition of an initial interest. So finally, on Slide 15, in summary we believe we are in a very good position. We have a solid contract base of $2.2 billion of contract backlog revenue with an average contract of five years for FSRUs and 2.5 years for LNG carriers. We continue to show excellent operating results. We have a strong financial profile with a net debt-to-EBITDA multiple of 3.2 times as at December 31 and an average coverage ratio of 1.33 over the last twelve months, which is after deducting maintenance and replacement CapEx, which is currently running close to 50% of current distributions. LNG is a fast-growing market with increasing demand for infrastructure and we have some extremely interesting acquisition opportunities from Golar with an interest in the Hilli FLNG FSRU very likely to be the first of them. Thank you. With that, I would like to hand back to the operator to open up for Q&A.

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question from Jon Chappell of Evercore. Please go ahead.

[Jon Chappell:]

Thanks. Good afternoon, Graham.

[Graham Robjohns:]

Hi Jon.

[Jon Chappell:]

So, I wanted just a little bit of clarification on the Spirit to make sure we're understanding it correctly, that 62% payment, that Petrobras is providing 52% of EBITDA, is that going to be accounted for over the duration of the remainder of the contract? So, as we think about revenue contribution for that, will it be 62% of the EBITDA from the Spirit and plus whatever you're able to re-contract that asset at?

[Graham Robjohns:]

Not correct. So, we'll a termination sum that will probably be recognizable as of June 2017, of 62% of the remaining EBITDA that would have been between June '17 and August '18. So, if you contract the Spirit early, we will be making double money.

[Jon Chappell:]

Okay. That’s what I wanted to be clear on to. You will make -- there is no kind of give back to Petrobras if you're able to get another contract, you're still keeping the 62% from them plus whatever you can earn with the new contract?

[Graham Robjohns:]

Correct, yes.

[Jon Chappell:]

Okay. Great. And then also there is a comment in the press release then about the Grand Maria and the Mazo as well that you said that you expect the contract rate to be significantly lower than the existing ones. So, we’re still kind of nine months away from those actually having to be re-chartered. You've laid out your view on the market and clearly it sounds like '18 much better than '17 and hopefully not putting words in your mouth, but '19 even better than '18. So, when you think about the duration then how do you weigh one being an MLP where you need to have a kind of visible long-term cash flows versus two, may be taking a short-term contract on those just to keep utilization and to bridge the gap for a stronger long-term charter environment maybe 12 to 24 months out.

[Graham Robjohns:]

I think that if we don't have long-term business and obviously, we’re going to try to trade the ships short term. I think our focus will always be on term as opposed to try to hold out for right as a general principle. So, I think it’s kind of -- we're probably not going to be looking to trade short term in the hope of securing a higher longer term rate in the future. And part of that is risk mitigation, but part of it is also because long term, rates don't fluctuate that much certainly in comparison to short term right. So, it’s more a question of the timing of short term market will bring more long-term opportunities.

[Jon Chappell:]

Right. So, then I agree like the long-term rates do not fluctuate as much as the short-term rates do, but then for you to say, you’re expecting significantly lower rates and yet still going for term on these. Is that more just a function of quitting that market?

[Graham Robjohns:]

No, I think it's a function of the fact that the rate of these ships are quite high and the market has moved over the last five years. So, and therefore I think it's not unreasonable to assume that the rates are going to be lower. But clearly, we've known that for a long time and that's as I said part of the reason why our coverage ratio has been building.

[Jon Chappell:]

Got it. All right. Thanks a lot Graham. I appreciate it.

[Operator:]

Thank you. We’ll take the next question from Ben Nolan of Stifel. Please go ahead.

[Ben Nolan:]

Yeah. Actually, I had a couple sort of similar to Jon's, but when thinking through the Spirit contract, assuming that -- assuming that you're able to find a smaller project to make it work, what's the timeframe between getting a contract in place and when something like that it might actually be able to generate some cash flow? Is this something that you would envision being a 2017 event or later?

[Graham Robjohns:]

It could be 2017, but probably more likely 2018.

[Ben Nolan:]

Okay. And then just also following on Jon's questions with respect to the Grand and the Mazo and while the vessel is coming off contract in general, I believe all three of those are steam powered ships, I was curious if -- obviously the rates are lower, but are you seeing an appetite from charters for long-term contracts on those steam powered ships? There has been a lot of talk about the [threshold] and sort of a bifurcated market but there's still plenty out here.

[Graham Robjohns:]

Yes. I think as I mentioned there is couple of specific opportunities that we've been talking to potential charters about for those ships. So, there is continuing interest. I think you see a lot of stuff written about the fact that some of these things will disappear out of the market. I think that's quite some away from the truth. I think the shorter trades and particular with the smaller part of requirement, there's still a market for these vessels.

[Ben Nolan:]

Okay. And along those same lines, I know that you guys and the sponsor have in the past talked about converting vessels, existing vessels into FSRUs. Is there any thought of maybe these would be the potential conversion candidate to any of you?

[Graham Robjohns:]

Yes. I think I alluded to that that is developed last several months, quite a few opportunities that are coming out of the small scale FSRUs where the big new builds have struggled to make the economics work. So, for smaller FSRUs like the Spirit, or kind of cheaper conversion of some of these thin chips we’ve actively looked at that possibility. So, that's certainly a possibility yes.

[Ben Nolan:]

Okay. All right. That's very helpful and just framing that. I appreciate it. That does it for my question. Thanks guys.

[Operator:]

Thank you. We’ll take the next question from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

[Ben:]

Hi, guys. This is actually Ben stepping in for Fotis. Thanks for the time this morning. So just one question surrounding the drop down of the Hilli. I understood that the recent equity offering is inclusive of potential acquisition for the vessel. But just, what sort of the lever, what sort of other levers need to be in place before to facilitate the dropdown and in addition, just on some incremental guidance on when you think this could possibly happen in terms of what time during 2017?

[Graham Robjohns:]

I think the main levers or the main things that we need to resolve is just the restructuring of the transaction and obviously, the pricing and the valuation. That, as Brian mentioned on the LNG call, it’s more of a competitive transaction than the straight LNG carrier but there are different elements to the heavy business. The existing approximate $170 million a year EBITDA, which represent EBITDA from two of the four trains. Then of course is the expansion capacity and there is also upside on the pricing of the contracts relative to go up if oil goes up above $60 a barrel. So just getting the structuring around that to make sure that the MLP is not taking on the sort of in terms of variability, but it doesn't really want just take very carefully thinking of that. In terms of timing up, I think it’s over the next few months.

[Fotis Giannakoulis:]

Okay. Thank you very much.

[Operator:]

[Operator Instructions] And we'll take the next question from [indiscernible] Capital. Please go ahead.

[Unidentified Analyst:]

Hi, thank you. So since on re-marketing of the Golar Spirit, what stage are you in or what sort of the soonest it could be redeployed and if you can provide some color on the interest in this kind of vessel versus a new build designed specifically for a given situation? Thank you.

[Graham Robjohns:]

Yeah. Sure. So, as I said, we have a couple of discussions plus opportunities ongoing that we're continuing to work through, I can't really give you any more details specifically about those. It is possible something could start up in 2017, but as I said earlier I think it's more likely in 2018. The small-scale point is simply one of capacity throughput. So, the several plays or many places in the world where we a small amount of re-gas capacity is required. So just in terms of the economics cost per unit of a new build is too expensive to make them work. So, if you got a smaller, cheaper FSRU, it makes that easier to swallow, but just to put that into context a little bit for you, if you take the new look FSRU that Golar Power will contract into supply, it's new cheaper power station, power station is 1.5 Gigawatt of power, which is I'm sure you appreciate, pretty big power station. It's operating at 100% capacity that only uses 35% of the throughput of the nook. So, you're able to power around 4.5 gigawatts of power with one FSRU, which is a lot of gas.

[Unidentified Analyst:]

Got it. And then certainly different question, I know the current strategy is that GMLP will be a significant financing vehicle for GLNG, but at the same time when you look at the valuation of GMLP's shares, it's extremely low compared to your comparable. We see 2017 around seven times EBITDA going down to maybe 6.5 or less in 2018. Is there any thought that what really should happen here is there should just be kind of a share for share exchange and bring GMLP back into the GLNG fold just given what kind of unique value this is in the LNG space?

[Graham Robjohns:]

That's not in our thought process, no.

[Unidentified Analyst:]

Okay. And any other thoughts on what it will take to get the valuation kind of back up to something more comparable to your peers?

[Graham Robjohns:]

So, you talked about '17 and '18, and I think of distribution yield is a little bit higher than some of our direct peers. I think that announcing some of the re-contracting of the vessels that come off contract in '17 together with successful execution of the heavy transaction, I expect will go quite a long way to improving that situation.

[Unidentified Analyst:]

Great. Thank you.

[Operator:]

Thank you. We'll take the next question from Espen Landmark of Fearnley. Please go ahead.

[Espen Landmark:]

Hi guys, just back on the Spirit, I was wondering I think in some of the SEC filings, there was mention of some cash collateral maybe being required on the Spirit if it was not on the new contract but in the 90 days of the early termination date? And to what amount would that -- what numbers are we talking there?

[Graham Robjohns:]

It would be kind of in the $40 million range, but that cash will then leak out to repay the debt under the facility. So, it's not effectively over time. It's not particularly a cash strain on us.

[Espen Landmark:]

Okay. And then on the LNG carriers, I know that the Mazo is unencumbered, but the two other ones within the same credit facility, is there risk that there will be some cash collateral required on those two?

[Graham Robjohns:]

No.

[Espen Landmark:]

Okay.

[Graham Robjohns:]

There is only -- if chances just mature naturally then there is no impact on the parts at all.

[Espen Landmark:]

All right. Perfect. Thank you.

[Operator:]

Thank you. [Operator instructions] And we'll take the next question from John Humphreys of Bank of America Merrill Lynch. Please go ahead. Please go ahead Mr. Humphreys. Your line is now open.

[John Humphreys:]

Sorry, can you hear me now? I just want to know how the impact with what went on with this Spirit is changing you how FSRU contracts might be structured going forward where weather seem to negate the need for this if termination fees these might change going forward, what you think the long-term impact of this might be?

[Graham Robjohns:]

I don't think the particularly there will be any long-term impact from this really and particular circumstance Petrobras had three FSRUs. They've always had periods when the FSRUs have been used less because they’ve had a lot of rain and have a lot of hydropower. It's always been a security of supply situation for Petrobras because the Spirit had a short time to run on its contract. And obviously given the macro backdrop Petrobras are in cost saving mode and there will be opportunities to save themselves a little bit of money. I suspect on a year or so time, when it doesn’t rain, they may regret their decision, but I don't think it really taken the impact of the things of the contractual arrangements going forward.

[John Humphreys:]

Great. Thank you. And the second being around the recent capital raise and capital markets activities you've done and related to the IDR reset, what's been the feedback from GMLP shareholders as far as how they view the IDR reset if you got pushed back from investors on how that -- how those transactions were done?

[Graham Robjohns:]

I think the receptions of the IDR reset was generally positive and so we did it back in October time and if I recall both GMLP and GLNG stop trading up in the next couple of days. So, I think the people thought it's a sensible thing to do for both companies.

[John Humphreys:]

Okay. Great. That's it for me. Thank you very much.

[Graham Robjohns:]

Thanks.

[Operator:]

Thank you. [Operator instructions] As there are no further questions at this point, I would like to turn the call back over to management for any additional or concluding remarks.

[Graham Robjohns:]

Thank you, operator and thank you to everybody who were listening today and we look forward to speaking with you again in three months' time. Thanks a lot. Bye, bye.

[Operator:]

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