Golar LNG Partners LP
Q2 2013 Earnings Call Transcript

Published: 29 Aug 2013

[Operator:]

Good day, ladies and gentlemen. And welcome to today’s Golar LNG Partners LP Q2 2013 Results Conference Call. For your information, today's conference is being recorded. At this time, I would like to turn the call over to Mr. Graham Robjohns. Please go ahead, sir.

[Graham Robjohns:]

Thank you and good afternoon or good morning to everybody. And welcome to the Golar LNG Partners’ second quarter 2013 results presentation. If you turn past the forward-looking statement caveat on slide two and starting on slide three, we have the highlights and recent events of the second quarter. Net income attributable to unit holders of $28 million and operating income was $44.4 million for the quarter. We generated distributable cash flow of $26.4 million for the quarter. Net operating income and distributable cash flow were affected by the drydocks that commenced in fourth quarter the Golar Spirit and continued through Q1 and Q2 with the Golar Mazo, Methane Princess and the Golar Winter, all those are now completed. Right to the end of the quarter we refinanced the Golar Winter and Golar Grand leases with a new bank loan facility which is comprised of $225 million term loan and a $50 million revolver. The revolver is currently undrawn and provides us with some additional financial flexibility. And we declared the quarterly distribution unchanged at $0.515 for the quarter. Turning over to slide four, subsequent to the quarter end, we also completed the modification work in respect to the Golar Winter and delivered vessel to its new location in Brazil. And I’ve just mentioned, all of the 2013 drydocks are now complete, but [half of the fleet] that we’ve drydocked in Q4, one in Q2, and now no further drydockings scheduled prior to 2015. So we expect to pay significant improvement in operating results in Q3 and moving forward. Subsequent to the quarter, we also entered into an additional $100 million worth interest rate swaps and this takes total fixed percentage of debt and lease obligations to 99%. And of course, as you all think Golar LNG Limited secures two FSRU contracts on two FSRUs which represent attractive near and medium-term acquisition prospects for the partnership. Turning over to slide five, we have the income statement, the revenue for the quarter $78.3 million was somewhat in the first quarter $74.9 million that was due of course to increased drydocking days in respect of the Golar Winter and Princess in second quarter as oppose to the Golar Spirit drydock that occurred in first quarter. That was offset to some extent by a full quarter contribution from the Golar Maria that was delivered half way through the first quarter. Moving down the income statement, interest expense is somewhat higher in the first quarter and tax expenses as you see is somewhat lower, much as a result of some allocation of and with holding tax between the tax line and the interest expense line. So that brings us down to net income attributable to Golar LNG Partners Owners of $27 point -- or $28 million versus $30.3 million for Q1 of 2013. Moving over to slide six, balance sheet assets, we have $61 million in cash and cash equivalents as of the end of the quarter. And in addition, adding on to what I was saying earlier, we have $70 million worth of undrawn revolver. Moving over to slide seven, balance sheet, liabilities, you will notice that from the balance sheet at the end of 2012 long-term debt has gone up quite considerably and lease obligations has gone down and that is basically as a result of the refinancing of the Winter and Grand leases with bank debt facility. Total debt and capital lease obligations net of restricted cash was $1 billion at the end of the second quarter. At the end of second quarter 90% of that was swapped and as I have said, with the additional $100 were virtually 100% swapped to a fixed rate. Turning over to slide eight, we have the reconciliation of net income to distributable cash flow, which as you can see is below one-time coverage. Our target coverage ratio is 1.075 and this is of course is a result of the drydockings that have occurred in the quarter. So we turn over to slide nine, here we have summary of the historical development and distributions, distributable cash flow since our IPO in April 2011, dividends have increased to $2.06 per annum from the IPO [MTD] level of $1.54 that’s 34% increase. And other than the second quarter 2012, we’ve had a healthy level of coverage above 1.075 times target. Second quarter of 2012 was slightly below one-time coverage and the reason for that is that we issued approximately 7 million units in respect of the acquisition of the NR Satu plays distribution on that in the second quarter because had no earnings from the NR Satu in the second quarter. So as I said, in that quarter, we’ve had a coverage well above our target of 1.075 times and the reason for that is because we -- and on an ongoing basis reserved for drydocking time offhire and procure every five year. So we just spread that cycle over a five-year cycle. So when we come to the fourth quarter where we drydock the Golar Spirit in the first quarter and second quarter. We had the Methane Princess, the Winter and the Mazo revenue for the Golar Spirit, obviously distributable cash is fully below distributions. But as I said earlier, all those stockings are out of the way. We don’t have any further dockings until 2015 and therefore Q3 results. Distributable cash results are expected to be much improved. This will be aided by an increase in the charter rights on the Golar Spirits and the Golar Winter. And it contracts are escalated every two years by inflationary index. So we’d expect to see an approximate 4% increase in their rights. And adding to that, there is some addition of revenue that we receive as a result of the modification work we done on the Golar Winter which will add another approximately 4.5% increase on the Golar Winter right. Turning over to slide 10, we have current passage and contracts of Golar LNG partners. And note since the changes since the first quarter, $2.5 billion in contracted revenue, an average contract term was 7.1 years over of course -- since the past quarter. We do have now to identify both additional acquisition targets which I’ll come on to talk about. Now, if we turn over to slide 11. First of those is the FSRU that Golar Igloo that Golar recently announced. Golar LNG recently announced the contract award for five-year contract with the Kuwait National Petroleum company and that has -- revenues of $213 million over the five year period. It’s actually seasonal contract, so $230 million is for the nine months work of re-gassification. So that there is then potential for either the nine-moth period expanded or the vessel could trade as an LNG carrier for the three months period, mostly being excited in the Middle East. It’s a fairly god position to be in terms of picking up car gas-type filling for that three months periods. Project start-up is in March 2014 but the vessel gets delivered in December 2013. We try to do LNG carrier from December ‘13. So this is a near-term acquisition target and a very good one. Turning over to slide 12, the second opportunity that we have a little bit further out. Longer contracts 10 year, FSRU contract for the Golar Eskimo that Golar Energy recently announced was concluded with the Jordanians. You can see the metrics there in terms of eight EBITDA contribution. This project start-up is expected in the fourth quarter 2014 or first quarter 2015. And the vessel will be going -- undergoing somewhat of a discussion what may deliver shortly before that. This is of course, the Golar Igloo and the Golar Eskimo are very attractive acquisition targets for the MLP. Solid growth opportunities are still there. Golar Winter has further ten newbuild LNG carriers delivering ‘13, ‘14 or ‘15 and one further newbuild FSRU that was recently announced, had converted one of its LNG carriers, from an LNG carrier newbuilding to an FSRU newbuilding. FSRU space is obviously one that -- Golar is the right dominant player and our market leader and it’s a fast growing market. Other possible growth areas are plus liquefaction which is being gathering some steam recently. The FEED Study that Golar has been taking with Keppel in connection with its conversion of kerosene into FLNG units. It has being going exceptionally well and we are expecting that to confirm the economic viability of that solution, and there are some specific projects, would be one. In terms of our public place that you’ve got to schedule project than there are also in the Americas and West Africa. These projects could be attractive MLP in terms of the shipping requirements given which are obviously -- obvious kind of the dropdown in MLP but also potentially also the actual FLNG assets. So, in summary on slide 14, Golar LNG Partners has a solid contract basis of $2.5 billion in revenue backlogs and good 7.1 year average contract terms. We have got three of our drydock program for 2013 off the fleets being drydock. No further drydocks till 2015. So operating results we expect to see a significant improvement. We also now clearly identified the acquisition targets the Golar Igloo and Eskimo with good solid long-term contracts with good account policies. We still operate them in extremely strong market and growth outlook for demand and supply in LNG is very good, and that means that demand for related infrastructure be that carriers, FSRU’s or FLNG units will increase. And we have a truly strong sponsor in Golar LNG that has a fleet of 11 remaining un-contracted newbuilds that provide substantial additional dropdowns growth potential for the future. Thank you very much. And with that I will hand back to the operator for questions and answers.

[Operator:]

(Operator Instructions) We will take our first question from Jon Chappell of Evercore Partners. Please go ahead.

[Jon Chappell:]

Thank you. Good afternoon, Graham.

[Graham Robjohns:]

Hi, Jon.

[Jon Chappell:]

Just two quick ones for you today. The Igloo and Eskimo are obviously relatively recent deals. So you probably haven’t had a long time to think about potential financing for that or certainly discussions with banks, but given your current liquidity it doesn’t seem like its nearly enough to take down an FSRU with a contract to that duration. How do you think about the capital structure and how are you going to finance that, and I guess most importantly what do you think the commitments would be as percentage basis of an asset acquisition price from artificial bank financing?

[Graham Robjohns:]

Yeah. Sure. I think in terms of acquisition price, we have a sort of in some of the (inaudible) we will be looking at around 50% debt, 50% equity on an average basis for the some. Some assets will be [more] some assets will be left debt. And so, in terms of the financing some of that would be bank debt, will be transparent to some of the portions of that that Golar LNG is secured and on the newbuildings from the Korean export agency. And we could add some bond to that and of course, we certainly sort of get some level of equity financing for the acquisition both of those assets.

[Jon Chappell:]

Okay. And then especially with the Igloo, we think about the price you are going to pay for it and we have a little bit of the background from what previous drop down has come with, but this one is a little bit more of a unique contract with that kind of nine months definitely fixed and the three months floating. How is that three-month period of potential spot market or potential commercial waiting time going to factor into the price that’s ultimately get for the Igloo?

[Graham Robjohns:]

Well, I think, we approach this in a consistent way over timing and looking at the valuation on the basis primarily and we look at number of metrics, but primarily we look at on this kind of cash flow basis using the partnerships weighted average cost to capital as a discount factor. And obviously, we got a very long contract but easy to model out and the residual value becomes very negligible. For the short-term contract it becomes little bit more sensitive and we try to be conservative with our assumptions over residual value. And I would say this three months window is a little bit like making assumption on the residue value that you’ve got to make an estimate as of what is if anything you’re going to earn in those three months, very conservative views well on anything, so it’s just going to be the DCS of the firm contracts. And the aggressive view is we’ll trade for the majority of those three months as a carrier and probably, I think, the answer is somewhere in between.

[Jon Chappell:]

Okay. That makes sense. Thanks a lot Graham.

[Graham Robjohns:]

Okay.

[Operator:]

Our next question comes from Mike Webber of Wells Fargo. Please go ahead.

[Mike Webber:]

Hey, Graham. How are you?

[Graham Robjohns:]

Hi. Hi Mike. Yeah. Good.

[Mike Webber:]

Hey. I just wanted to follow up actually you’ve use really top up the Golar ball and I was trying to think a bit longer term and hope the conversation there is centered around liquid fraction and they’re spinning out a separate entity there kind of how is that unit and we just did bit about this on an earlier call? But can you maybe give some color in terms of how any sort of omnibus agreement might be struck between GMLP and the second daughter in terms of any further liquid fraction asset over the little long-term contract maybe out there, would it be similar relationships to GMLP, and maybe some color on how the MLP will factor into that just from a contract and from a co-relationship standpoint?

[Graham Robjohns:]

Yeah. I think very simply you should think about this that any asset that has the right characteristics to go into the MLP that is long-term contracts, firm visible earnings and separately financeable and transferable and whether it’s being Golar parent or Golar production, or Golar something else will inevitably end up in the MLP because that is the best place as a group for long-term assets to be placed.

[Mike Webber:]

Sure. I mean, I guess, in terms of providing visibility for the MLP and actually being able to utilize the MLP to lower the cost of capital for the group as a whole, would there be a second omnibus agreement struck between the new equity or would the current agreement with GLNG hold for this liquid fraction now.

[Graham Robjohns:]

Well, I mean, as I say, our group understanding is absolutely crystal clear, so I’m not sure that we’ve got as far as writing up in the omnibus agreement, although, I can’t say as long as Golar remains in control of a Golar production company then…

[Mike Webber:]

Yeah.

[Graham Robjohns:]

… the exiting omnibus would carried anyway.

[Mike Webber:]

Sure. No. I mean, the intent obviously, I was just curious around the…

[Graham Robjohns:]

The only time that the -- we would discuss the existing omnibus agreement is if the, any new entity became independent of Golar.

[Mike Webber:]

Got it. Okay. Now that’s helpful. Again, the intent is obviously still there, it creates about the technical relationship. Around the next half way drop down, you talk on this around the Igloo and FRSUs? Would any of things that have Igloo to deliver and actually raise the carrier voyage basis once prior to actually beginning of contract? How does that impact your ability and the MLP’s ability to give visibility distribution growth, would you wait for that actually to begin FRSU contract or you said this already in line, but could you see that start talking about your distribution costs kind of prior to that technical FRSU contract beginning?

[Graham Robjohns:]

So you are breaking up a little bit there Mike. I think that there were two points. One is, when we’ll be look to acquire it and as I think that does into debt in the Golar LNG pool, but that vessel delivered in December.

[Mike Webber:]

Yeah.

[Graham Robjohns:]

It can trade as an LNG carrier hopefully from December to March whether it’s independent to projects or whether it’s carrying a cargo through the project. So the possibility is there to acquire it early and have some, and acquire with firm income strength. And in terms of the distributions, I mean, obviously, we are not going to be wanting to buy assets unless they are accretive and they are going to correct distribution growth quiet how that growth will span out specifically between Q4 and Q1, Q2, I mean, earnings -- for the earnings for as to say.

[Mike Webber:]

Got you. Okay. No. That’s fair. I appreciate your time. Thanks Graham.

[Graham Robjohns:]

Thanks.

[Operator:]

We take our next question from Ken Hoexter of Bank of America. Please go ahead.

[Ken Hoexter:]

Great. Good afternoon. And Graham, are you talking -- just going back to earlier question, are you detailing your targets in terms of the residual values and the primers you have put on your estimates for the vessel?

[Graham Robjohns:]

We haven’t given that detail of, precisely our calculation and how we are -- arrive at valuations. Now, I guess, what I’m saying, we take a -- we think it is reasonably conservative view on the residual values.

[Ken Hoexter:]

Yeah. I guess I’m just trying to figure out how to think about in broader context of that growth of the distribution based on your assumptions as you’ve put into it?

[Graham Robjohns:]

Say that again, Ken?

[Ken Hoexter:]

I will follow up with you offline on in terms of some of the assumptions, just want to kind of put parameters around how you are thinking about the valuation for the vessels in terms of your what you are purchasing for?

[Graham Robjohns:]

I mean, just, I mean, quickly, how we think about residual value and there are two ways, two main ways looking at. One is, what we think not that we want to sell it, but what do we think somebody might purchase that asset four and five-year time or ten years’ time. And the other way is put more tune to how we do the valuation generally is by saying what we think the contract terms that asset may be able to see at the end of its -- and its first contract term for the remainder of its life and just DCS that cash flow to come up with the residual value.

[Ken Hoexter:]

Certainly. And then just bigger picture, can you just talk about your views on how you see the market shaping up right now in terms of that those shorter term charters. So if we do it that three-month window what your thoughts on, how that stands out?

[Graham Robjohns:]

You mean in terms of earnings?

[Ken Hoexter:]

Yes.

[Graham Robjohns:]

I mean it is obviously difficult to say, I mean, the spot rate for a carrier of that size is around sort of $100,000 a day at the moment I think. And generally our expectation would be -- and in the Winter we might see some improvement and from that and yeah, that’s just -- really just a guide.

[Ken Hoexter:]

So just saying that’s general area, are you seeing -- as you still have many vessels coming on line at Canada. Are you seeing any tightening or increased demand from carriers driving the rates in any direction?

[Graham Robjohns:]

We’ve seen a little bit of an improvement in short-term risks recently that’s linked to some additional -- well, not additional good production coming back on the market after some downturn and downturn in Nigeria and government project is commencing start up. So I don’t think any vessels are out operating in the spot market. And of course, we’re approaching winter time which is traditionally stronger training period.

[Ken Hoexter:]

Thanks guys. I appreciate that.

[Graham Robjohns:]

Okay.

[Operator:]

(Operator Instructions) And the next question comes from Urs Dur from Clarkson Capital Markets. Please go ahead.

[Urs Dur:]

Hi Graham.

[Graham Robjohns:]

Hi Urs.

[Urs Dur:]

Everything has really, really been covered. Thanks again for the insight on the really Douglas Channel and Omnibus agreement commentary that was helpful but everything has been covered for me. Thank you very much.

[Graham Robjohns:]

Okay.

[Operator:]

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

[Graham Robjohns:]

Okay. Well, thank you everybody for taking time to listen to our call this quarter and we look forward to speaking with you again next quarter. Thank you very much. Operator?

[Operator:]

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