Golar LNG Partners LP
Q4 2014 Earnings Call Transcript

Published: 26 Feb 2015

[Operator:]

Good day, and welcome to the Q4 2014 Golar LNG Partners LP earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Graham Robjohns. Please go ahead, sir.

[Graham Robjohns:]

Thank you, and good day to everybody. I am joined here today by our CFO, Brian Tienzo; and Head of Investor Relations, Stuart Buchanan. So if we start on Page 2 of the presentation, the forward-looking statements. I don't intend you to read through that. But we'll move on to Slide 3 and the highlights for the quarter. We are pleased to report a solid operational performance for the fourth quarter of 2014 with net income attributable to unitholders of $36.7 million and operating income of $63.2 million. We generated distributable cash flow of $48.3 million for the quarter, with another solid coverage ratio of 1.29. Our strong operational performance was underpinned by 100% utilization for the fleet. And in December 2014, we entered into an agreement to acquire the FSRU Golar Eskimo for $390 million from Golar LNG and the purchase was subsequently completed on January 20, 2015. We declared a 3% increase in unit distributions to $0.5625 per unit for the fourth quarter. The increase relates of course to the acquisition of the Golar Eskimo, and comes earlier than originally anticipated, given the strong earnings result for the fourth quarter. Management had originally recommended an increase in unit distribution to between $0.5750 and $0.58 per quarter. The additional increase from $0.5625 to between the $0.5750 and $0.58 will be considered by the Board for the first quarter 2015. Moving over to Slide 4, on the income statement. Revenues net of voyage expenses at $101.4 million was slightly lower in the fourth quarter as compared to the third quarter's $102 million. The fourth quarter benefited from an extension of Golar Igloo operating period for the whole of December. The Igloo charter is structured, so that higher is paid for nine months period from March to the end of November, although this can be extended as in the case this year of course. And then during the three month winter season, which is then December, normally December, January and February, the vessel does not get paid higher. Operating expenses and administrative expenses and interest expenses were in line with the third quarter. Other financial items for the fourth quarter were a loss of $8.1 million compared to a gain of $0.1 million for the third quarter. However, this loss included non-cash mark-to-market valuation losses on interest rate swaps of $5 million in the fourth quarter, as a result of decrease in long-term interest rates and this compared to a $4.2 million gain in the third quarter, so a fairly large swing. Tax expense of $4.7 million normalized during the fourth quarter, following the substantial $15.1 million tax credit recorded in the third quarter. This third quarter credit reflected the recognition of a deferred tax asset that will be used over time, largely related to our Indonesian operations. Approximately $2.3 million of the $4.7 million fourth quarter charge was usage of this deferred tax asset, with a $2.4 million balance representing the underlying cash expense, which is within our expected normalized range. Net income therefore reduced from $66.9 million to $36.7 million, but this is primarily driven by the quarter-on-quarter movement in interest rate swap valuations and the tax credit arising in the third quarter. Moving over to Slide 5 and balance sheet assets. These have not changed significantly quarter-on-quarter other than an increase in cash balance, driven largely by a drawdown on our revolvers leading into yearend. On Slide 6, we have balance sheet liabilities. And again, there is not too much movement other than some movement between short-term and long-term debt, as certain of our facilities near their maturity. As we referred to in our results release, we have been considering a refinancing in the U.S. debt capital markets. However, current pricing, including pricing related to the market for Term Loan B is not currently that attractive, and so we'll probably buy at our time. In the meantime, however, we are discussing with our commercial bank lenders offers to refinance the facility that mature in 2015, rates related specifically to the vessels Golar Freeze and Golar Maria, as well the $20 million revolver that Golar provided at the time of the IPO. At 3

[Operator:]

[Operator Instructions] We can now take our first question from Jon Chappell from Evercore ISI.

[Jon Chappell:]

Just a couple of quick questions mostly around financing. So you mentioned that the Maria, you had the 12 month extension, it seems into December 2015. In the same paragraph in the press release, you said there is up to $143 million of refinancing for 2015 that you are looking at. Does that including that $79.5 million from the Maria or is that in addition to another --

[Graham Robjohns:]

Yes, it does. That is the Maria, an element of the Golar Freeze and $20 million revolver.

[Jon Chappell:]

And then a couple of other things, so the Mazo had a little bit of an impact from this OpEx issue, and then the Winter and Spirit because of the Brazilian currency. Are there any impact from those going forward or is that kind of ring-fenced into the third and fourth quarters of this year?

[Graham Robjohns:]

For the Mazo in Q1 there probably shouldn't be. No, I mean, the Mazo, really it's more of an accounting movement in effect, because the operating cost and drydocking cost for the Mazo are paid by the charter on a pass-through basis, which is sort of budgeted and then paid and then adjusted, depending on how much of the actual expense is. So you get a little bit of chopping and changing between quarters from an accounting perspective. But as long as we're on budget with OpEx in Q1, we shouldn't see that. And with the Brazilian vessels, obviously, it's a bit difficult to tell. It really depends on what the relative movement of the FX rates. Although, I should say, while as you see, there's a bit more fluctuation from quarter-to-quarter, our operating element of the charter, which is effected by this, and because the capital element is paid in U.S. dollars is adjusted on an annual basis, and some of that adjustment has an adjustment for FX. So in the long run, we have some protection against it.

[Jon Chappell:]

One last quick one, you gave a little bit of a sneak peak of the distribution increase for the fourth quarter. As you think about hitting that target range post-Eskimo, would it make sense to think that maybe you might push that back to the second quarter, just given the timing of like the Igloo being off for two full months in February and March or are you comfortable maybe being right around 1x coverage ratio or even a little bit below, as things normalize going in 2Q.

[Graham Robjohns:]

I mean, obviously, that's sort of the general recommendation at the time of the acquisition. I can't guess what exactly the decision process will be when that decision is made on Q1 distributions. But in terms of the Igloo, I mean the contract is structured so its nine months on, three months off, and we knew that at the start. And we sort of build that into all our models and cash flows. So that of itself shouldn't impact really our decision making.

[Operator:]

We will now take our next question from Fotis Giannakoulis from Morgan Stanley.

[Fotis Giannakoulis:]

I want to ask you about the state of the market and where are the discussions about long-term contracts. We obviously know that there were a lot of vessels and they were the delivered last year ahead of liquefaction project. How many of that projects that they come online in the next 12 months do not have vessels attached? And when do you think that we will start seeing discussions for long-term contracts?

[Graham Robjohns:]

I mean, we as in Golar Group are continually having discussions and looking at potential opportunities. I mean one important thing to bear in mind here is that there are two types, if I can put it like that, of term contracts. There are those that are specifically related to a project. For example, the Yamal LNG project, and there are term deals with major LNG players. And the former is obviously, more easy, a little bit more transparent, because you can see where the projects are and what the requirements might be. And that is a bit more difficult, because it's difficult to see where those major LNG players, when they will need vessels and how many they will need, I mean to some extent I suppose you can predict it, but it's not that term and straightforward. So I think certainly, the Golar Group is mindful of the fact that fixing long-term deals on carriers provides acquisition material for the MLP, and that's important to both companies. But it's also mindful of the fact that fixing long-term deals today is probably not the best market to be doing it. And not to say in any way, shape or form that we are not looking at them. I'm just making the point that it's sort of a fine and balancing act. So it's not the simplest question to answer, but I think during '15/'16 we could potentially see some long-ish term fixtures by Golar, although that is difficult to predict.

[Fotis Giannakoulis:]

Obviously, nobody has a crystal ball here, but we know that in the current market, which is oversupplied and before all this projects come online, we see that there is a very big discrepancy between brand new tri-fuel vessels and the old steam turbine vessels. But looking a little bit forward, a couple of years from now, and given all this project that they come online are expected to absorb the existing vessels that they don't have contracts yet. Where do you think that the gap between steam turbine vessel and tri-fuel vessels is going to be? And I am asking, particularly, given the fact the Maria and the Grand, they will be looking for redeployment at that point.

[Graham Robjohns:]

I mean it's difficult to say, and it really depends on a bit on the market at the time you're fixing them, but I think it sort of leaves me well on Grand that the differential technically can sort of be between around $20,000 to $25,000 a day. But the actual charter rate differentials maybe less than that and maybe more than that. What I don't think is particularly given the number. As I said early, there are 390 vessels in the fleet and a significant majority of those is steam vessels. This is certainly not the case where I think vessels are going to start disappearing out and the modern steam vessel are going to start disappearing out to the market, that just doesn't make any economic sense. And as I said, it depends -- if we get to a point in 2017, for example, when the markets starts tightening then the right differential will start to diminish.

[Fotis Giannakoulis:]

In your presentation, you point out that there are 32 vessels, which are over 30-year old, and do you have a view of what is the state of these vessels, for these vessels operating right now, serving existing contracts? And how many of these vessels in next two to three years are coming off contracts. And do you think that we are going to see quite a few of these vessels being scrapped, given all this newbuildings and the higher technology vessels that they are coming?

[Graham Robjohns:]

I think the vast majority those are coming off contract within the next year or two.

[Fotis Giannakoulis:]

And I assume that many of them they will go straight to scrapping, is that correct?

[Graham Robjohns:]

I think that would be our assumption, yes, because we talked about the differential between the DFDE vessels and modern steam vessels, but there is a differential again between modern steam vessels and old steam vessels.

[Brian Tienzo:]

You've also seen a dynamic where uses of these vessels have started to replace them with steam oil or the DFDE vessels. For example, the two Nigerian LNG carriers that Golar LNG Limited signed up to. The project in the Nigeria was for five vessels. They have retracted back. And there was a potential for that to come back to the market. But we have a big belief that that pattern will continue happening in the next couple of years.

[Fotis Giannakoulis:]

And I want to ask also you have this $220 million seller's credit financing that you just got from your parent. What are the thoughts about the timing of the potential repayment of this loan? And I saw that the dividend increase from the Eskimo -- can I say that that was a little bit on the conservative side. And what was the distributable cash flow that you were generating from these vessels? And how shall we start thinking about the dividend growth of future dropdowns?

[Graham Robjohns:]

Fotis, sorry, I've now forgotten what your first part of that question was.

[Fotis Giannakoulis:]

It was related to the timing of the repayment of the seller's credit to the parent.

[Graham Robjohns:]

So the $220 million debt on the Eskimo is fully in our minds and plans with regard to sort of a more complete refinancing that we've said we've been looking at in the U.S. debt capital markets, probably term loans, but potentially bonds as well. But that market is not really there at the moment. So as we said, we'll by that time refinance the obligation that we have maturing in 2015. And wait until a more opportune time in that market. So that $220 million comes into that sort of plan of refinancing. On the distribution, at the time we did the Eskimo dropdown, we said that management was going to recommend to the board an increase of quarterly distributions up to an annualized amount of between $2.30 and $2.31, and that was increased up from $2.19. And we said that would come into play in the first quarter of 2015. So I think when the Board sat down and considered the increase for the distribution for the fourth quarter of 2015, we obviously had a very strong operational quarter, really solid coverage. So they approved the early, if you like, a partial amount of distribution increase, but it's all related to the Eskimo. So we've gone from on annualized basis $2.19 to $2.25, and then the balance from $2.25 up to between $2.30 and $2.32 will be considered for the first quarter.

[Operator:]

We can now take the next question from Mr. Michael Webber from Wells Fargo.

[Michael Webber:]

I just wanted to jump in and touch on the refinancing, just once again. And I don't want to parse into details of the release I guess too closely, but just specifically around the Freeze, unless I missed it. Has there been an extension offer on that parcel, I guess of the $143 million of debt. I guess, I'll stop there before I go to the next question.

[Brian Tienzo:]

Now, the offers that we have take into account the refinancing obligations we have on the Freeze, on the Maria. And I would also take into account the $20 million revolver.

[Michael Webber:]

The $220 million associated with the shareholder loan to finance the Eskimo. I'm just curious in terms of your ability here to refi that with additional debt, I mean now take the leverage on that particular asset pretty high. I'm just curious how much of that you think you'll actually be able to repay with debt versus cash and/or new equity whenever you're doing extra.

[Graham Robjohns:]

We look at it on a fleet basis, so the fact that we've taken on a lot of debt to finance that one vessel is by the fact that the Igloo, for example, we heavily equity financed. So when you balance the two together there is [indiscernible]. With a net debt to EBITDA ratio of 3

[Michael Webber:]

I was thinking more just along the lines from the bank's perspective, if it's an individual vessel mortgage, how high would they be willing to go. I guess, on a full fleet basis, the leverage is considerably lower. I'm just curious that how much financing your banks will be willing to give you on that asset specifically, because it could be pretty high.

[Graham Robjohns:]

Well, just to reiterate on the first point, we'd be putting this into a package that wouldn't be so relevant. But commercial bank with a long-term contract, I guess, would be up to 80% maybe.

[Michael Webber:]

The Eskimo and the termination fee associated with that after five years, if they give it back. I'm just curious, how material is that fee? And if you can't give maybe the dollar amount, I mean maybe in terms of just annual EBITDA. I mean, in terms of how material, I guess would that termination fee be?

[Graham Robjohns:]

I can't be specific, there are obviously restrictions. And I can say it's a serious amount of money. Certainly, they would not look at lightly and would provide a significant amount of cover for us, while we look for an alternative employment.

[Operator:]

We can now take our next question from Mr. Shawn Collins from Merrill Lynch.

[Shawn Collins:]

Just thinking about the Golar Tundra FSRU, I know there are current talks and a partnership with Ghana, but can you comment on other locations and geographies that may potentially be interested in an FSRU of this type and also talk about any of the new increase for the FSRU that you have received?

[Graham Robjohns:]

As we alluded to in the result release and in the presentation, and we've seen this before back in 2007, when we originally contracted the Brazilian FSRUs, when the Qatar LNG trains were starting up and all the gas were scheduled to go to the U.S. And then, of course, Shell gas came along and a lot it was diverted. All of a sudden, you had a lot of supply available, which a lot of commentators thought that might be disastrous. And with [indiscernible] of course we can see what happened that opened up an awful lot of new markets for LNG to the whole of Latin America, arguably, and came back as a result of that increase in available supply. And we've got a little bit, the same sort of thing happening here, and there are twofold empathies, if that's the word. One is a ramp up of supply in 2015, and we haven't really had much new supplies for several years now, under the significant ramp up starting in '15, and then going out towards the end of the decade, so additional supply is there. And of course, we're now operating in a much lower energy price environment, so the cost of importing LNG has come down significantly. So we think that has led to and what we've seen is a significant increase in inquiries, and those have come from Latin America, specifically Brazil, Africa and West Africa we've talked about, South Africa as well, in the sort of Mediterranean area, and Lebanon and Indonesia, and one or two other places as well. So I think, again, as I said in the call, it's a relatively small sector at the moment, but it's growing very quickly. And we think that growth will continue at a descent pace.

[Shawn Collins:]

And then, I know there are six new FSRUs on the order book, and I know it's hard to predict the future. But have you heard of any chatter or industry talk about anymore FSRUs being built?

[Graham Robjohns:]

Not that I am aware of. No.

[Shawn Collins:]

And then just switching to your latest acquisition like the Golar Eskimo in the fourth quarter, which you purchased for $390 million, which represents about a 9x EBITDA multiple. Can you just talk about the methodology that you used to come up with this purchase price?

[Graham Robjohns:]

I think around about 8.5x multiple, but based on sort of estimates of EBITDA. But anyway, I mean the first thing to say is, we will use an external financial advisor to help and advice the complex committee on the fairness of the valuation. And they go through that process. We probably produce our own internal valuations. And we look a number of metrics and the EBITDA multiple is one of them. But I would say we put more emphasis on a discounted cash flow model of the known contract cash flows. And then using sort of various sensitized estimates of what the residual value would be. And calculating that used by using an estimate of the day rates for the asset post its contract period. And of course, we're also running accretion model to make sure that the value we come up with is accretive as well.

[Shawn Collins:]

I don't know if you have disclosed this, but can you say who the external advisor is that you used on the transaction?

[Graham Robjohns:]

Yes. So that one was Global Hunter Securities.

[Ken Hoexter:]

It's Ken Hoexter, if I can just jump in quickly. I'm sorry I came on a bit late to join Shawn here. But just a quick question would be, did you talk about future growth in terms of where, now that you've got all the vessels or Golar has received all their vessels, except the Tundra. What comes next or up until maybe the FLNG is potentially dropdown in a few years? What the path is or is it the LNG vessels and the interim?

[Graham Robjohns:]

Well, I think, we have [indiscernible] from saying, we have got in comparison to where or how we've been grown over the last few years and what we hope for with FLNG a little bit of a gap. We've got some distribution increase, and hopefully the balance of the increase related to the estimate for 2015. The most obvious next target would be the Tundra, as you mentioned, and that will be sort of end of '15 early '16. And then beyond that between now and FLNG, it's really the possibility of FLNG carriers, which go a little bit back to Fotis' question is, already those are going to materialize and now it's difficult to say, and we hope so over the next two years, but also we can't promise.

[Operator:]

We can now take the next question from Mr. Chris Karger from Huber Capital.

[Chris Karger:]

Just curious with what's going on with Petrobras over the [ph] MA last month or so. And any concerns related to the Golar Spirit and Golar Winter from a counterparty risk standpoint? And if there is any options for Petrobras to try and potentially exit either of those contracts early?

[Graham Robjohns:]

I guess, it would be [indiscernible], so we have no concerns, when one of your big customers is going through some turmoil. I would say that those efforts are used were at the time when we were going through the sort of tendering process and the awards made in 2007 strategically important for Brazil, in terms of their need to provide security of energy supply in the event of reduction in hydro capacity. That is I would say more extreme today. The FSRUs initially were used periodically. And they're now used on a regular basis and at times, particularly with the winter, it sort of flat-out. And there are also a number of potential projects arising in the rest of Brazil as well. So this is an energy security asset, which I think you could argue a little bit different from a drilling rig, for example. So that gives us some comfort. There are termination provisions in both of those contracts, but in the same way as the Jordanian project they come with significant fees. Again, that we can't disclose the values, but there are a very significant and not something that will be entered into by them lightly. But I think our biggest confidence level comes from my first point really.

[Chris Karger:]

And then just maybe quickly with the Igloo with nine months on, three months off contract structure, I know you said it worked in December. On a go-forward basis, should I sort of expect it to not have any work for those three months or sort of maybe 50% on 50% off, depending on what the market looks like?

[Graham Robjohns:]

It's extremely difficult to say, my suspicion is, because our experience with all FSRUs is they start off being partially used and with a ratio of expected time are fully utilized. My suspicion is that you may see similar things occurring in future years, but again we can't be sure about that. In our minds, when we entered into the contract, we always -- because the most FSRUs cannot operate happily an LNG carrier as well. We always had in our mind that we would make some earnings from operating the vessel as an LNG carrier, maybe doing one or two voyages during that three months period, which would act to this supplement to the main contract income.

[Operator:]

At this time, as we have no more questions, I'd like to pass it back over to Mr. Graham Robjohns. End of Q&A.

[Graham Robjohns:]

Thank you very much. And thank you to everybody to listening today. And we look forward to speaking with you again in three months time. And thank you and good day.

[Operator:]

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