Golar LNG Partners LP
Q3 2015 Earnings Call Transcript

Published: 30 Nov 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Q3 2015 Golar LNG Partners earnings conference call. For your information, today's conference is being recorded. At this time, I would turn the conference over to your host today Mr. Graham Robjohns. Please go ahead, sir.

[Graham Robjohns:]

Thank you, and good day to everyone. I am joined here today by our CFO, Brian Tienzo. We'll start the presentation on Slide 3 with the highlights for the third quarter of 2015. We're very pleased to report net income attributable to unitholders of $32.7 million and operating income of $71.7 million. We generated distributable cash flow of $51.8 million for the quarter with a coverage ratio of 1.34. We had another strong operational performance with 100% availability for the fleet for scheduled operations and 99.7% availability after taking into account the final three days of the Golar Freeze drydock. Subsequent to the quarter end, we successfully refinanced the $100 million loan outstanding to Golar LNG in relation to the Golar Eskimo, with a new $256 million Golar Eskimo facility. The Golar FSRU Golar Tundra was contracted by Golar LNG for five years during the quarter, and the Golar Tundra now becomes a 2016 acquisition opportunity for Golar Partners, and also during the quarter, the GoFLNG unit, Hilli, the Cameroonian project took FID and becomes a firm 2017 acquisition prospect. Turning over to Slide 4, we have the income statement. Revenues for the third quarter of 2015 increased from $105.7 million in the second quarter to $114.1 million in the third quarter, reflecting two main items. Firstly, the Golar Freeze incurred 51 days of offhire related to its drydock in Q2 as opposed to only three days in Q3. Secondly, the Golar Eskimo was charted back to Golar LNG Limited in Q2 at a pre-agreed rate and from July 1 Golar Partners now retain all revenues received from the Jordanian contracts, and this amount exceeds the quarterly revenue previously received from Golar. Operating expenses of $15.3 million were $1.9 million lower than the second quarter costs of $17.2 million. Repair costs across the fleet were high in the second quarter. And in particular, the Golar Freeze non-drydock related repairs were extremely high. Operating cost reductions were also noted in the third quarter, against the Golar Eskimo, Golar Spirit, and the Golar Grand. Net interest expense at $13.9 million for the third quarter was pretty much in line with the second quarter, but other financial items for the third quarter were a loss of $19 million compared to a $1.5 million loss in the second quarter. The main reason for this was that a second quarter non-cash mark-to-market valuation gain of $6 million became a $13.3 million non-cash loss in the third quarter as a result of a 24 basis point and 37 basis point decrease in three year and five year interest rate swap rates, respectively. As a result, net income after non-controlling interest was $32.7 million for Q3 2015 as opposed to $41 million for the second quarter. Turning over to Slide 5. There are not too many movements on the balance sheet assets between the second quarter and third quarter. The movement from the end of 2014 relates to the addition of the Golar Eskimo to the Golar Partners fleet. And turning over to Slide 6. At the end of the quarter, our net debt was $1.275 billion and net debt to EBITDA ratio calculated by using Q3 annualized EBITDA was 3.4x as at the quarter end. Our percentage of debt swapped to fixed rate stands at 95%, and as of September 30, our undrawn revolving facilities stood at $70 million. Distributable cash flow, on Slides 9, takes net income and also adjusting for non-cash items and deducting our estimated maintenance and replacement CapEx. As I mentioned earlier, our coverage ratio stood at 1.34x as of September 30, 2015 compared to 1.07x in last quarter. Last quarter's ratio was negatively impacted by the 51 days offhire related to the Golar Freeze drydock. Our average coverage ratio over the last two years has been 1.23x. Turning over to Slide 8. This slide shows the development of our distributions and coverage since IPO and shows the strong level of coverage that we've had since the third quarter of 2013 when we came out of a period of very heavy drydocking schedule, and as I've just said, our average coverage ratio since 2013 has been 1.23x. You can also see that we have maintained relatively conservative net debt to EBITDA ratio of on average less than 4x since IPO. And again, as I said earlier, we currently stand at 3.4x. Slide 9 is our usual asset and contract slide. Our revenue backlog as of September 30 was $2.5 billion, and our average remaining contract term was 5.2 years. On Slide 10, we have analyzed our revenue backlog a little bit further, in particular I think because we do have a couple of or three LNG carriers that come off contract at the end of 2017. What is important to note though is that these LNG carriers, particularly as one of them is only 60% owned, the Golar Mazo, have a less proportionate impact on our contracted revenue. As we’ve said on this slide, the average of our FSRUs' TCEs or time charter equivalent rates is 70% higher than our LNG carriers. Additionally, of course, we now have a clear visibility on acquisition targets currently owned by Golar LNG with a substantial amount of revenue backlog that would come with them. The Golar Tundra has a five year contract with an expected annual EBITDA of $44 million and the GoFLNG Hilli an eight year contract with a minimum expected EBITDA of $170 million. Turning over to Slide 11. It's pretty clear that Golar LNG has a significant number of assets that are potential dropdown targets for the MLP split between GoFLNG units, FSRUs and LNG carriers. They have three FLNG units, the Hilli, Gandria, and Gimi that are in varying stages of the conversion process. The Hilli, of course, has now been fully contracted and taken FID, and that has an eight year contract commencing in 2017. As I've said, with an expected EBITDA, a minimum expected EBITDA of $170 million a year. Golar have two FSRU. The Golar Tundra that was delivered recently, that again has its firm five year contract commencing 2016. And they also have currently one newbuild FSRU delivering in 2017. On the LNG carrier side, there are 10 new tri-fuel diesel electric LNG carriers built between 2013, 2014, that are currently operating in the spot and short-term market, which overtime we believe as we approach a more equilibrium status in the LNG carrier market, some of those assets will be contracted on a long-term basis indeed. It's Golar LNG's strategy to fix a significant majority of those vessels on a long-term basis. Turning now to Slide 12. This is a point we've made for several quarters now, but I think it's worth reiterating the fact that, as we approach this 2017-2018 time period, the balance of the LNG shipping market will swing back in. And I'll say that, there are a significant number of vessels on order, 137, but if you look at it in a relatively simple way by taking on the right-hand side of this slide, looking at the current situation of approximately 250 million tons of current production and 396 LNG carriers in the current fleet, that equates to 1.58 vessels per million tons. We anticipate in the region of 150 million tons of additional liquefaction capacity by the end of 2019. The vast majority of that is already under construction and there are 137 LNG carriers on the order book. And if you do the same math, you get to 0.91 vessels per million ton. Clearly, there is a question of vessel size and also trading patterns. But I think it's clear from that sort of simple calculation that we are certainly not overbuilt in terms of ships and quite possibly the contrary to that. Therefore, we still firmly believe that as we approach, as I said to 2017-2018 time period, the market will start tightening. For us that has two attractive aspects. Firstly, the LNG carriers, the Golar Grand, Maria and Golar Mazo, which come off the contract at the end of 2017, will be redelivering into a much better market. And secondly that the 11 modern LNG carriers that Golar LNG have within their fleet, that are currently trading spot and short-term, will have a much greater likelihood of securing long-term employment and therefore becoming acquisition targets for Golar LNG Partners. Moving over to Slide 13 and the FSRU story. This has been an extremely interesting story over the last few quarters. And what is most interesting I think is that, it's flourished in its low energy and certainly low gas, low LNG prices environment. And indeed, actually, enquiry and activity is actually increased because of the reduction in LNG and gas prices. For quite some time, probably dating back to our initial involvement in FSRUs, it's been not uncommon for FSRU projects to struggle because of the lack of availability of LNG as a reasonable price. Therefore, the current market dynamic is no surprise to us, led to an increase in demand and interest for FSRUs. You could liken it, I guess, a little bit to the current situation for oil tankers, where oil price is down significantly, but the demand for oil tankers is up significantly. We have six FSRUs currently operating. A seventh, that as I said earlier, is recently contracted out for five years, the Golar Tundra. And there have been five FSRUs contracted worldwide over the last 12 months, which I think is the most ever in a 12 month period, and we fully anticipate that there will be many more over the coming months and years. As you can see from the right-hand side of this graph, there are a significant number of potential and possible FSRU project adjusted all around the world. On Slide 14 is the most transformational possibilities for Golar LNG Partners, which is the dropdown of FLNG units. And similarly with FSRUs, I think what's particularly striking about the developments of this side of the business for Golar is the fact that it's being done in such a low energy price and certainly low gas and LNG price environment. The Hilli conversion is well on track. And if you have listened to the Golar LNG conference call just an hour or so ago, you would have heard a good update on that, she's well advanced. The complete supply chain is now contracted with Gazprom being officially named as the offtaker for the project. As I've said earlier, the expected annual EBITDA, minimum annual EBITDA is $170 million. The contractors don't have an oil-based index, so the cap maximum based on the 50% capacity that this project utilizes of the asset, the cap is at $300 million, but the minimum could however be -- the expected minimum would be $170 million. The Gandria conversion is also proceeding well. That's sort of at a pre-FID stage at the moment. FID is expected in sort of Q2, Q3 2016. But Ophir Energy Plc have made significant progress in the quarter with that project and just recently made some announcements about that project in terms of their offtake agreement. And Golar continues to work on other potential projects for its first asset [ph] trio of Moss carriers, that it currently owns the Golar Gimi, which is potentially a project for 2018, if not 2019. So in summary, we believe we're in a very strong position and very well placed for an exciting growth period moving forward. We have a solid contract base, demonstrated excellent operating performance and results, and a strong financial profile with a net to EBITDA ratio of 3.4x, and a good coverage ratio of average 1.23 over the last two years. We have near-term acquisition opportunity with the Golar Tundra, a medium-term acquisition opportunity with the GoFLNG units Hilli, which I use the word, transformational, earlier when you consider Golar LNG Partners' EBITDA is around -- well, this third quarter was around [ph] $270 million. This would add a $170 million, so it gives you kind of context of the size of that acquisition opportunity. We continue to operate in a fast growing LNG market. LNG natural gas is growing at a faster rate than other hydrocarbons. And the fact that prices have been low has actually been arguably beneficial to our business as opposed to detrimental. We have a large sponsor with a large pool of assets, two of which being contracted or fully contracted this quarter and more we believe will follow. And in GoFLNG or Golar's FLNG offering, we believe there is an extremely attractive and compelling case that we'll continue to gain market share in this segment as we move forward. So thank you. And with that, I'd like to pass back to the operator to open up for Q&A.

[Operator:]

[Operator Instructions] Your first question now is coming from Mr. Ben Nolan of Stifel.

[Ben Nolan:]

My first question relates to the contract renewal for the several carriers that you guys have that come off contract, I believe in 2017. And I know in the past, it has sort of been kicked around that possibly those who would be linked to the Cameroon project. Is there any update on the tender process there and how should we think about the employment of those? Obviously, it's still a little bit away, but I'm sure you're working on it presently?

[Graham Robjohns:]

No, that still is the case and that tender process is still ongoing with Gazprom. So there is not much more I can add than that other than it’s still ongoing and there are still possibilities to go into that business.

[Ben Nolan:]

And what is the normal -- or is there a normal length of how long a tender of this sort usually takes to conclude or are they all entirely bespoke?

[Graham Robjohns:]

No, it's a lot many other things in the LNG businesses. They can take a very long time and there is no set sort of timetable. Some things tend to move very quickly and others slowly. Not very helpful, I know, but --

[Ben Nolan:]

Well, that's all right. Another question I had is obviously, and you talked a good bit about it in your prepared remarks that the demand for FSRUs is pretty substantial and you have dropped [indiscernible] and potentially others in the pipeline. But one other thing that we've heard a lot about lately is owners of existing assets now looking again to do conversions of their assets into FSRUs similar to what Golar did years ago. Is that something that’s obviously between yourself and the sponsor, there are a number of assets that maybe could be candidates for that? Is that something that you guys at all are looking at as the potential way to sort of lever into that with a little bit of lower cost base?

[Graham Robjohns:]

Possibly, yes. I think it potentially works where you have a small capacity requirement, where a newbuild FSRU out of the yard with big capacity would be sort of over-killed for the particular project, and the other possibility is utilizing, I guess, existing carriers, where maybe demand of carriers isn't there, but demand for FSRUs and better margins is there, and I'm not wishing to integrate any of our potential competitors, but I wouldn't underestimate the job of converting a vessel into an FSRU. We, apart from one another project that was done by some large oil company that turned into a budget disaster, we're still the only company to convert to the vessel into an FSRU and that's not for good reason.

[Ben Nolan:]

And then lastly for me, just thinking about the Tundra, and you guys have said that you could do that dropdown entirely off of your existing balance sheet and not needing to access additional equity, can you maybe talk me through how you come to that? Are we talking about nearly 100% bank finance or how do you come to that financing? Is it refinancing other assets to access liquidity? Any color that you may have there?

[Graham Robjohns:]

I mean, we haven't landed specifically on how we would do that. I think we've shown an ability to access the debt capital markets. We did the Norwegian bond back in May. We're certainly not averse to coming to the U.S. debt capital markets should they be open for us, and we've shown our ability in refinancing assets in the bank debt market. We have and will also continue to look at other types of security, sort of between debt and equity and preferred securities and perpetual preferred securities. But I think the final form of financing will land on little bit nearer to the time, but the main point we were making is that we're not -- our gross opportunity is not sort of stymied by the equity price currently.

[Operator:]

We'll now go to Mr. Fotis Giannakoulis of Morgan Stanley.

[Fotis Giannakoulis:]

I want to ask about your, the stressed scenarios that you have ran. I understand that there is a lot of potential new business from the FLNGs and the FSRU business of Golar Limited. In the event that the MLP market continues to trade at this very high yields and with your chartering profile, how do you view your dividend and your liquidity? And until when the current dividend is, it can be supported by your current liquidity and your cash flows?

[Graham Robjohns:]

Just reiterating sort of the last question I answered, I mean we feel like we can acquire the Golar Tundra without accessing the equity market, and that's a significant amount of additional EBITDA that goes out for another eight years. As you see from Slide 10, there's no reduction in our expected revenue from contracted revenues until the end of 2017. And the drop in '18 when you take into the account, we're kind of talking about 2.6 vessels, because we only owned six until the Golar Mazo, even if you assume that they earn nothing, the drop isn't perhaps as big as you would expect. I think taking all that into account, whilst it's difficult to forecast to straight three years out, we don't have huge concerns about our distribution ability moving forward.

[Fotis Giannakoulis:]

Can you remind us about your debt profile, if I understand until the end of 2017, you do not have any debt maturities, is that correct?

[Graham Robjohns:]

We have Norwegian bond maturity in October 2017. I think other than that bank maturities are general amortization until, nothing there materially until 2018.

[Fotis Giannakoulis:]

And one last question, a little bit more strategic question. Regarding the MLP market, and I understand that the entire universe is trading at very depressed valuation, so in the other hand GMLP has a lot of very valuable assets, which are currently valued below their intrinsic value. Are there any thoughts from the parents that potentially this vehicle can rollover back to the parent?

[Graham Robjohns:]

Not at the current time, no. I mean, you can never rule anything out obviously, but at the minute, I think we all still believe in the vehicle and the structure of having a yield vehicle with all the long-term contract in it as a financing tool and value creator for the parent, a sound and solid structure. Obviously, we can't control the market, so we'll have to keep reviewing that as we go forward.

[Operator:]

And now, we'll go to Sunil Sibal of Seaport Global.

[Sunil Sibal:]

A couple of questions for me. When you look at your leverage as well as coverage, what's a good way to, first of all, think about distribution coverage through the next couple of years? It seems like you are pretty well set in terms of the contracts, and you've been running at 1.2-plus, so how should we'd be thinking about coverage over the next couple of years?

[Graham Robjohns:]

Assuming that we make further acquisitions or based on current business?

[Sunil Sibal:]

Yes, based on, I think, Golar Tundra is pretty much on the cards now, so if you think about that as part of the portfolio?

[Graham Robjohns:]

As I've said earlier, the fact that we have three vessels, if you just look at our sort of asset and contract slide that come off contract at the end of '17, the financial impact, as I've said, is less than you might otherwise think, just because of the relative earning power of the FSRUs versus LNG carriers. For quite some time now, obviously we have been aware of that 2017 date for a while, so we've been slowly building up coverage over time to sort of put something away to hedge out a little bit of that risk. So I think that will continue to a certain extent. So with Tundra acquisition and Hilli, we would be clearly looking to increase and grow distributions, but not at the expense of reducing our coverage, which I would expect to see sort of steadily increase I think as we get closer to the end of '17, subject, of course, to what happens with those vessels. If we contract them out and get more clarity and certainty, then we have a little bit more flexibility.

[Sunil Sibal:]

And then similarly on the leverage side, right, so if Golar Tundra is fully debt financed, let's just say, I think you will probably get closer to somewhere bit close to 4.5x on the leverage side?

[Graham Robjohns:]

I don't think that high. Sorry to interrupt you. I don't think -- I think we may be get to around 4x.

[Sunil Sibal:]

But you would be comfortable running at that leverage going forward, especially when you think about the FLNGs. It's a little bit of a different beast operationally also vis-à-vis LNG carrier of FSRU?

[Graham Robjohns:]

Yes, I think we've said for a while, and some of you, we've said to our bondholders for a while that we are comfortable going up to 4x net debt to EBITDA. We wouldn't particularly want to go much higher than that. And if you look at that track record of net debt to EBITDA, it is around sort of mid-3s to 4x, its being maintained. Obviously, if we went up to 4x or 4.1x or whatever it was with Tundra, then we're reducing that all the time as well, because we continue to amortize debt. So I don't know, but does that answer your question?

[Sunil Sibal:]

Yes. So basically what you're saying is 4x actually is a level where you feel comfortable at, but you won't feel running much above that, correct?

[Graham Robjohns:]

I don't think we would be willing to run significantly above that for any length of time. And it could be case that we had higher amounts of debt for short-term period with an eye to solving that with some other type of security, some sort of perpetual prefer or perhaps equity as well. The only caveat I would say to that, that if we had a, let's say, for argument sake, the Hilli contract got extended out for 15 years. And then in '19, we take on the Ophir, the Gandria project with 20 years, then you've got a significant chunk or a vast majority chunk of your EBITDA that's contracted for a very, very long period of time. So that may make us more comfortable with a slightly higher debt level because of the length of the term of those contracts.

[Sunil Sibal:]

And then lastly from me, there has been a lot of discussion around, as the market for LNG carrier comes back into balancing '16 or '17 that the day rates that we might see, there maybe somewhat a differentiation between the different technologies of LNG carriers, et cetera, some of the newer advances in technology versus DFDEs and other ships. I was just kind of curious, what's your thought on that? And as you think about re-contracting for your LNG carriers, realizing that you are still a couple of years away, has that come up in your discussions with your customers in terms of the technology of the carriers?

[Graham Robjohns:]

I think on average there is clearly going to be a differentiation in rate between the tri-fuel vessels and steam ships. I mean there is varying degrees of that. So if you are on a shortish trade, with no requirement to sort of full steam, and so you're kind of running off boil or a little bit faster than that, then the differential is much less than if you are on a very long voyage flat-out. And they're on a varying degrees as to how much that actually has an impact. But clearly that on average there will be a premium for the tri-fuel vessels. But then also the steam ships, so the Maria and the Grand, anyway the Mazo is a little bit older, and Maria and the Grand costs around $150 million and the tri-fuel ships costs $200 million. So you'd expect them to have a lower rate.

[Operator:]

We'll now go to Mr. Andy Gupta of HITE Hedge.

[Andy Gupta:]

My questions have been answered. Appreciated.

[Graham Robjohns:]

Good.

[Operator:]

We'll now go to Mr. [indiscernible].

[Unidentified Analyst:]

I had a very quick question on liquidity. Again, in terms of your short-term liabilities that you disclosed, in particular the current portion of the long-term debt, it's still quite large compared to the assets under cash that you guys hold. But how should we think about liquidity from a short-term point of view? You still see the markets quite open for refinancing and the objectives on the debt side? And then the second question, again, was on the older ships coming off contracts, is there anything that we have to think about in terms of putting those back on contracts or whether scrapping kind of a more likely scenario in that point in time?

[Graham Robjohns:]

So just on the current portion of long-term debt point, to star with, part of that is because as of the quarter end we drawn down around $30 million of our revolvers, which is -- although, we can roll that every month, it's actually for accounting purpose, it has to be shown as short-term. So it's kind of overstated, if you like. But we do amortize our debt, as I was saying earlier, and that's in practice. Effectively at the moment, what our replacement -- not maintenance CapEx, replacement CapEx, which is the fund that goes up to builds up a fund to acquire new assets at the end of our existing assets useful life. That's effectively what that reserve goes to pay the debt amortization. Certainly financing markets are open too. So as I mentioned, we successfully completed a $150 million bond financing back in May of this year. And we've just very recently refinanced the Golar Eskimo FSRU with $256 million bank financing facility. So we think we have good access and extremely good support from our banks. I'm not sure I got all of your second question, but I'll try answer it and you tell me whether I've missed anything. So on re-contracting the Maria and the Grand and the Mazo that conclude their long-term contracts at the end of 2017. As I said sort of during the presentation, we anticipate because of the amount of new NLG capacity coming to the market that the current surplus of ships will be soaked up. The new ships that are coming on stream out of the shipyard between now and 2017 will also be utilized, and therefore will be moving back towards, if not at a much more -- a market that's more in equilibrium and a point in time also that we think will be a much better position for contracting vessels out on a longer-term basis. So we think 2017 is not a bad point to have vessels to recontract, and I think we'll be reasonably confident about getting business forward. Now, as we said in relation to a question earlier, we're actually currently bidding those vessels into a piece of business right now. I'm not sure, whether that answered all of your second part of your question.

[Unidentified Analyst:]

Fairly close, I guess. I'm just trying to understand how should we be thinking in terms of the rates that those vessels would achieve two years down the line recognizing, of course, it's very hard to predict the future, but given the fact that they're older vessels, obviously there is some newbuilds coming on stream as well? Should we be thinking that the rates would be comparable to what they are currently on or would they be half of what they're currently achieving or just margin less?

[Brian Tienzo:]

I mean, it's very difficult to answer that question specifically, but I think we would expect to see a reduction in rates from where they're currently at. On average, they're earning around $80,000-ish a day and I don't think you could expect to see a 20% reduction from that maybe.

[Operator:]

As we have no further questions at this time, I'd like to turn the conference back over to Mr. Graham Robjohns for any additional or closing remarks. End of Q&A

[Graham Robjohns:]

Well, thank you everybody for listening and we look forward to speaking with you in three months time. Thank you.

[Operator:]

Ladies and gentlemen, that will conclude today's presentation. We thank you very much for your participation. You may now disconnect.