Höegh LNG Partners LP
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Good morning, and welcome to Höegh LNG Partners LP Fourth Quarter 2020 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Sveinung Stifle or Støhle, I'm sorry; CEO. Please go ahead.

[Sveinung Støhle:]

Thank you, Emily. Good morning, ladies and gentlemen, and welcome to Höegh LNG Partners' earnings call for the fourth quarter 2020. For your convenience, this webcast and presentation is available on our website. With me today, I have Mr. Havard Furu, the CFO of the Partnership.

[Havard Furu:]

Thank you, Sveinung, and good morning, everyone. Turning to Page 8; we have the key figures for the quarter, which are showing an operating performance in line with the same quarter of 2019, although with an improved distributable cash flow. The segment EBITDA of $34.9 million in the quarter was nearly the same as in the fourth quarter of 2019. The operating result led to a distributable cash flow of $18.1 million and as already mentioned by Sveinung, a solid coverage ratio in the quarter. I would like to thank all our seafarers and onshore staff enabling the Partnership to deliver stable results and operations during these unprecedented times.

[Sveinung Støhle:]

Thank you, Havard. So turning to Page 13 and the view of the market; global LNG trade rose with 1.5% year-on-year in 2020, despite the negative demand effects owing to the COVID-19 pandemic. This clearly shows the resilience in global LNG demand and underpins the role of LNG in the energy transition by replacing more polluting fuels such as coal and oil products. Asia was the only continent with noteworthy growth in LNG imports in 2020. And China accounted for around two-thirds of the aggregated Asian input growth, despite a negative year-on-year development in the first quarter, of course by the COVID-19 pandemic. After acting as the sink for the LNG spot market in the first half of the year, European LNG imports declined in the second half of the year, compared to 2019. And for the year, European imports ended slightly down compared to the year before. Turning to Page 14; we have a graph illustrating the expected development in the global energy markets. As you can see global demand growth for LNG is expected to continue for the long term. Even as a slight down following the COVID-19 pandemic, estimate the demand is still expected to grow by roughly 50% in the period 2020 to 2030. This again will drive demand for new regasification with capacity of which some will materialize in the form of FSRUs. The final investment decision made by Qatar Petroleum for the North Field East project shows that sophisticated market participants are continuing to invest, to expand the LNG trade. Turning to Page 15; which gives an overview of the competitive situation in the FSRU market. This picture looks more or less as presented over the last couple of years that since the last quarterly presentation the FSRU Jawa Satu, which was built for a project in Indonesia has been delivered from the yard. In January this year, New Fortress announced the acquisition of Golar LNG Partners and Hygo Energy Transition. These transactions will make New Fortress Energy, the new owner of seven out of the eight FSRUs owned by the Golar LNG Group. The FSRU LNG Croatia, which was previously named Golar Viking, has now been sold from Golar to LNG Hrvatska in Croatia. Turning to Page 16; regarding our parent. All vessels in Höegh LNG's fleet are on contract and business development activities for new long-term FSRU contracts are high. Since the last quarterly presentation, this slide has been updated with the new long-term FSRU contract secured by the parents with H-energy in India, which will be served by the Höegh Giant. The contract is for 10 years with annual break options for the client after year five. The potential pipeline of modern acquisition candidates with the parent remains the same as in previous quarters. Also worth mentioning, Höegh LNG Holding has initiated a new Clean Energy initiative with the goal of providing infrastructure solutions for the transportation, storage, and distribution of green hydrogen and ammonia, as well as developing floating carbon capture and storage solutions. This will support that Höegh LNG's leading industrial platform and high-quality modern assets we continue to drive forward the energy transition well into the future.

[Operator:]

We will now begin the question-and-answer session. This first question comes from Chris Wetherbee from Citigroup. Please go ahead.

[Chris Wetherbee:]

Yes. Great, thanks for taking the question. Maybe we could start with the Gallant and if you could give us an update on what the potential opportunities are for employment there? So, I think there is a couple of potential opportunities happening right now. Can you just give us a sense of kind of where we stand and maybe where that - might go and - what maybe the timing is around potentially getting something locked in there?

[Sveinung Støhle:]

Right, right. Okay, thanks for that question. So, as we just mentioned, currently, the Gallant is on an LNGC entering charter and will continue on a new one with Trafigura starting from March. That's for 12 months, and then for the FSRU projects that we are currently in either in the tender or in negotiations, the timing for these - they actually all have a start-up except for H-Energy in 2022, so next year. Gallant is offered in on two of these projects at the moment. So, obviously that's on top of our list. We do believe that we have a strong - there is a strong pipeline of projects, since we have several more than we'll actually need. And obviously, the main focus now is also to secure the long-term contract for the Gallant and that's the objective for the next few months.

[Chris Wetherbee:]

Okay. Okay, that's helpful. So something over the course of the next couple of months, we might have some more clarity for the end of the traffic year deal?

[Sveinung Støhle:]

Yes, correct.

[Chris Wetherbee:]

Okay. Okay, fantastic. All right, that's helpful. I appreciate it. And then, maybe one sort of conceptual question as you think about this pipeline of potential vessels with contracts, obviously we're kind of working through some of this tender process right now. What would be the environment that you would need to see, to potentially think about a dropdown into the MLP? So, I don't know if it's - sort of more attractive financing opportunity for something like that, but what are sort of the conditions that you would be looking for to kind of think about resuming the growth profile of the company?

[Sveinung Støhle:]

Well, I mean first in terms of timing, obviously, the way we have done this and we'll continue to do this is that the drop-downs will happen when the asset is on contract and in operation, not before. And of course, also the second point, which is probably more important is there needs to be the financial conditions available, both from the MLP side and the parent side in order to - for the numbers to work, so to speak. And with the pipeline that we have, clearly, we do see that the length of the contracts and also the expected revenues from the contracts - there is fundament for doing a transaction and that is something that we will evaluate very closely when the contracts have been completed and the assets had been confirmed on the contracts, during the course of this year.

[Chris Wetherbee:]

Okay. I think, yes, I was getting kind of towards that financial conditions was maybe sort of the heart of the questions. So, thinking about that, maybe a bit more specifically.

[Sveinung Støhle:]

Yes, okay.

[Chris Wetherbee:]

Is the current environment something that would be supportive if the other pieces were to line up as the current environment as you see it from a financing perspective, attractive enough to be able to sort of execute on a deal? Do we need to see the stock price at a better place? I just want to kind of - get a sense of maybe some of the parameters on the financial conditions that you need to see?

[Sveinung Støhle:]

Havard, you want to answer it?

[Havard Furu:]

Yes, I think fundamentally, the share price of the MLP would probably have to be at least at this level or preferably - a touch higher than current. At the same time, of course, you need to have a depth of the market that is - there to pick up a transaction like this. And of course, we haven't seen those transactions in the MLP market for quite a while. So, because there is a question mark to that when we get there. So, it's a little bit premature, but it's always something that is - that we need to consider carefully when we sit .

[Chris Wetherbee:]

Okay. Yes.

[Havard Furu:]

I mean that we follow very closely of course, but we have - we have the agreement between the parent and the MLP and that we fully stand behind on both sides. So, we'll deal with that when we get to that crossroad.

[Chris Wetherbee:]

Okay. Yes, that's it given the fact that we haven't seen those types of transactions, but maybe a potentially sort of firming market kind of curious to see about the timing, but that's super helpful. I appreciate your time. Thank you very much.

[Sveinung Støhle:]

Thank you.

[Operator:]

Our next question comes from Ben Nolan from Stifel. Please go ahead.

[Ben Nolan:]

Yes, thanks. So, I have two questions. First, maybe just to sort of follow on to what Chris was just asking about. As you think about sort of, if - let's say, the capital were available and whatnot. How do you think about the appropriate multiple of EBITDA to pay for a fixed contract asset like - would you be looking at here or - relative to maybe how you thought of that in the past, any changes or differences there?

[Sveinung Støhle:]

It's again a little bit premature to have a firm view on that. I think we would be looking at - the multiple stuff that we have seen in the past - as a starting point and then also offers look into other valuation metrics for potential dropdown transactions. But I think the historical multiples will be at least as starting point.

[Ben Nolan:]

Okay. And then, well - forgive me, I guess I have two, but sort of related, but there - you've mentioned in the release that you're in the process of refinancing the Lampung later in the year. Is the idea there to simply refinance the existing balance or would you anticipate maybe being able to get a little cash out of that or conversely paying a little bit more principal onto it?

[Sveinung Støhle:]

Yes. So we - as you pointed out, we are in discussions with the banks on this. It looks like we will be able to upsize the facility a bit. It's too early to get into the details of that. So now, that is our aim to do that. So, we will of course get back home on the details as we proceed.

[Ben Nolan:]

Right, okay. So, and then this sort of bring it full circle a little bit. The - hopefully or it will see, but if you are able to get some cash out of that and then you have the proceeds from the ATM that you - it sounds like you've been active with; any sense as to sort of what is your available liquidity for things like potential dropdowns from an equity perspective, how much, because the question is how much firepower do you think you have without needing to access the capital markets?

[Sveinung Støhle:]

Well, I think essentially, we would need to finance the most part of the transaction price with addressing new equity.

[Ben Nolan:]

Okay.

[Sveinung Støhle:]

So might - from the sources, but the lion's share will have to come from raising new equity.

[Ben Nolan:]

Right, okay.

[Havard Furu:]

Yes, I think to add to that. I think also as we've done before, Ben. I mean, we have normally split transaction, at least in two, right? So, I think when we look at this, and clearly, that is something that we would probably be looking to do for any future transaction also.

[Ben Nolan:]

Right and that was sort of my thinking as you don't have to do the whole thing, but if you - you could even do a quarter of it or - effectively just acquiring cash flows, right? So - all right, well, that's very helpful. Thank you.

[Sveinung Støhle:]

Thank you.

[Operator:]

Our next question comes from Ken Hoexter from Bank of America. Please go ahead.

[Ken Hoexter:]

Hey, Sveinung and Havard. Just - you mentioned in the release and in your discussion the investments you're making in hydrogen and looking at ammonia potential, I presume that, is that at the parent level and you're waiting to see how that flows or is that going to be at the partner level?

[Sveinung Støhle:]

No, the initiative at the moment is at the parent level because it's basically at the moment, business development and technical development focusing on mainly two areas, green hydrogen and ammonia and the infrastructure needed in order to bring that to market. We're - we also have a case where we are looking at using our existing FSRUs for that purpose, which would mean that we could store ammonia, convert it to hydrogen on the FSRU, and basically blend the hydrogen into the re-gasified gas stream and send it to shore with that. This is something that is already being done; I mean the mixing of hydrogen into existing pipeline networks is already being done in Europe on a very small scale, same in Australia. So, that of course would be when we have proved and tested that solution that could be applied to all of our existing FSRUs. So, that's just one example. We have several other initiatives that goes with that. And clearly, we will be looking at applying that although solutions across the fleet, which of course would also involve the Partnership.

[Ken Hoexter:]

And then, just - follow-up would be, just - your thoughts on, in rising interest rate period, which we seem to be entering. What are your thoughts? Is that something you have - you feel the Partnership would have to counter with a rising distribution to sustain levels? Maybe just your general thoughts on rising interest rate environment? Thanks.

[Sveinung Støhle:]

So, I think first of all, on that point, when it comes to the - managing the interest costs of the Partnership, what we are - following the hedging policy to hedge the interest rates at least till the end of the existing debt facilities and we have locked-in interest rates for quite some period going forward and we are looking to do that also when we refinance the Lampung facility this year. So on that side, we're trying to lock in the interest rate exposure on the cost side. Although when it comes to the distribution, there is no plan to make changes to that in response to changes in the interest rate environment.

[Ken Hoexter:]

Great. Appreciate the quick thoughts. Thanks guys.

[Sveinung Støhle:]

Thank you.

[Operator:]

Our next question comes from Ken Khan from Co-operative Holding Corporation. Please go ahead.

[Unidentified Analyst:]

Thank you so much, gentlemen. Very simple question, is there anything that you believe will increase the distributions being made within the next year or two, in terms of distribution to the holders of the units?

[Sveinung Støhle:]

Havard, do you want to?

[Havard Furu:]

No, there's - we don't see any reasons for changing - whether that's up or down.

[Unidentified Analyst:]

All right, thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Sveinung Støhle for closing remarks. Please go ahead.

[Sveinung Støhle:]

Yes. Thank you, Emily. So, thank you very much, everybody, for calling in. We appreciate your attention and we look forward to having you on the call again at the next quarter. Thank you very much, and goodbye.

[Operator:]

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.