Teekay LNG Partners L.P.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Welcome to the Teekay LNG Partners Fourth Quarter and Fiscal 2020 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session. As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to the company. Please go ahead.

[Scott Gayton:]

Good morning. I would like to direct all participants to our website at www.teekaylng.com, where you will find a copy of the fourth quarter and fiscal 2020 earnings presentation. We will review this presentation during today's conference call.

[Mark Kremin:]

Thank you Scott. Good morning everyone and thank you for joining us on our fourth quarter and fiscal 2020 earnings call for Teekay LNG Partners. We hope that you and your families are all safe and healthy. I'm joined today by Scott Gayton, Teekay Gas Group's, CFO. Before getting into our results, we will take a moment to thank all our seafarers and shore-based staff for their continued dedication to maintain business continuity. We are truly proud of how our onshore colleagues and especially our seafarers have continued to respond to COVID restrictions while maintaining consistently safe and efficient operations for our customers. Turning to slide 3 of the presentation. We will review some of Teekay LNG's recent highlights. The fourth quarter of 2020 was a solid quarter for TGP's earnings with $60 million of adjusted net income or EPU of $0.61. This caps off a record year for Teekay LNG. Our adjusted net income of $234 million and total adjusted EBITDA of $758 million were the best in our 16-year history, reflecting the multiyear newbuild program, which we completed in early 2020. Towards the end of 2020, we fixed the 52%-owned Methane Spirit on a two-plus year contract, which helped to increase our fixed contract percentage of our LNG fleet to 97% for this year and nearly 90% for next year. In late 2020 and early 2021, the LNG shipping market experienced volatility that we have never before witnessed. But for those who have invested with us for a while know this really doesn't impact us given our focus on fixed-rate contracts. We have structured our business for the long-term and the long-term prospects for LNG are attractive as the world and China in particular transitions away from dirtier forms of fuel such as coal towards cleaner-burning LNG. This has been a well-noted trend for many years and we expect, it will continue for the next two decades or more, benefiting our relatively young modern fleet. Based on the stability of our earnings, the strength of our contracted portfolio, the positive long-term outlook for LNG and our desire to provide our investors with a well-covered distribution, we are announcing another increase to Teekay LNG's distributions, the third double-digit increase in as many years. We intend to increase the first quarter's distribution by 15% to $1.15 per common unit per year, starting with the first quarter's distribution to be paid in May.

[Scott Gayton:]

Thank you, Mark. On slide 9, as Mark mentioned earlier, this was a record year for Teekay LNG in terms of annual adjusted net income and total adjusted EBITDA, looking at the two charts on the left of this slide. Our earnings and cash flow have grown, as our $3.5 billion growth program has delivered and have resulted in EBITDA and earnings CAGRs of 21% and 63% respectively over the past two years. And because we did not issue any common units to fund this growth, our debt balance grew as can be seen in the top right chart. But we have made significant progress this year, lowering net debt by nearly $560 million, which includes proceeds received on the sale of two LNG carriers in early 2020. And the combination of increased cash flow and lower debt has resulted in drastic deleveraging, as can be seen on the chart to the bottom right. Our leverage peaked in 2018, as we were taking delivery of vessels and due to the timing mismatch between debt and cash flow being recognized. But in 2019 and 2020, our leverage decreased quickly, as debt was amortized and cash generated. We finished the year with net debt-to-EBITDA of 5.8 times on a proportionate consolidation basis, which is still above our targeted range of 4.5 to 5.5. However, I'm hopeful we can get down to the top end of our range later this year.

[Mark Kremin:]

Thank you Scott. It's been a while since our last earnings call and we're happy to report strong operating and financial performance through 2020 despite the challenging challenges resulting from COVID which we have been able to successfully work through. We're glad to see that vaccines are being rolled out and we are optimistic that this will soon have a positive impact on the world economy and demand for LNG. Looking forward, we believe TGP's unique portfolio of long-term fixed-price contracts will continue to allow us to generate consistent cash flows, further reduce our leverage, and return capital to our shareholders.

[Operator:]

Yes sir. Thank you. And we'll now take our first question from Randy Giveans from Jefferies.

[Chris Robertson:]

This is Chris Robertson on for Randy. Thanks for taking our call.

[Mark Kremin:]

Good morning Chris.

[Chris Robertson:]

Good morning. So, the first question is just around the distribution increase. I just wanted to get a little bit more color on how the 15% number was decided.

[Mark Kremin:]

Scott for yourself or myself?

[Scott Gayton:]

Sure. Maybe I'll take a stab. Yes. Thanks Chris. I think the first place that we start when we look at our distributions is what do we think is sustainable. And based on the cash flow portfolio that we have and also the income that we're expecting over the next number of years it was just sort of determined us an amount that we thought we could comfortably do comfortably afford and would hopefully allow investors to give us another look and say here's a company that's increased distributions by double-digits over the last three years and has got a good profile. And so that will hopefully get us noticed and maybe picked up this year after a couple of years of maybe some frustrations.

[Chris Robertson:]

Yes, that makes sense. And certainly good luck with that. Moving towards I guess the industry. So, with BlackRock taking Gaslog private Golar possibly spinning off its LNG fleet later this year or maybe next year what's TGP's appetite for industry consolidation?

[Mark Kremin:]

Well, let's just start with a couple of those transactions. I think it's pretty exciting. We see an investor like BlackRock coming in we BlackRock has a very good reputation for ESG. And so the fact that they value the shipping as part of the infrastructure of LNG is a real validation for our business. The specific question you asked I'm sorry Chris what was around it?

[Chris Robertson:]

Just in terms of your appetite for consolidation.

[Mark Kremin:]

Yes. So, we'll have to see. We typically -- I mean we're not obviously going to comment on any specifics or -- but I think that the market is -- does have consolidation opportunities. Obviously, we've seen two companies go private or will be going private this year. There's more smaller ship owners around than there were certainly five years ago. And so I assume, we don't know whether it'd be us, but I think some of these smaller ship owners has room for consolidation.

[Chris Robertson:]

Okay. I guess, last question for me. Regarding the NOK 147 million bond due in October I know you mentioned that it could be repaid in cash. But, I guess, if you could ascribe some type of likelihood to that are you leaning more towards just repaying it in cash, or is it likely that it will be refied in some way?

[Scott Gayton:]

Yes. We do monitor that market very closely and we do think that we've got pretty decent access to it. And I think it's going to depend on what opportunities really we see towards the maturity date to actually deploy that capital and -- versus the rates we think we can get. So I think, we're still in a wait-and-see. I know that's not an answer to your question, but we're very much in a wait-and-see mode to see if there's a way for us to actually go and do something with the proceeds. I think it was good that we were able to go in May when we paid off the Norwegian bond that we had and because that market was not attractive at that time. And then we wait for the window will open up at the end of the summer and we saw that the rates were significantly lower. And so that was a great time for us to go and add some cash to the balance sheet for potential opportunities. But then, I think, since that time in some ways the world has kind of calmed down and there seems to be a more orderly future. And so maybe having that extra cash or call it insurance if you will on the balance sheet is maybe not something that we would need by the time we get to October. So, I think, we have to just wait and see the world continues to develop and what opportunities we see and then versus the pricing that we think we can achieve. So there's a bunch of different things going to it.

[Chris Robertson:]

Yes. Appreciate the details around your though process there. I think that’s it for our questions. Thanks for the time.

[Scott Gayton:]

Thanks, Chris.

[Operator:]

We'll now take our next question from Ben Nolan with Stifel.

[Ben Nolan:]

Hi, guys. I want to come back to the distributions a little bit and maybe less, sort of, around the math of how you got to the number that you got to and more maybe about the cadence of it. Third year in a row now that you've made a pretty meaningful increase in your distributions. And as you said Scott, I mean, hopefully later this year you'll be at the top end of your target leverage range. As you, sort of, look out going forward do you think this is -- let's say the distribution increase here by 15%. Do you think this is just, sort of, another one of what could be a multiyear process even going forward of distribution increases? Or are you getting to kind of a level where you can say, okay this is a good plateau and incremental dollars can be allocated to growth because our leverage is down to where we want it to be? Just trying to get a sense of, sort of, how from a capital allocation standpoint you feel about the distributions in terms of the, sort of, the process and the life cycle of it.

[Scott Gayton:]

Sure. So you're right. It is three years in a row now of double-digit increases. But I think we also have to remember that that's off of a relatively small base. And so the dollar value increases are not as sizable as the headline percentage rates would be. And I think that that's important because really we do look at this on a free cash flow on a cash flow basis is what are we generating? What's the net income? And how do we ensure that our distributions are going to be well-covered not just by DCF, which is sort of the old school MLP-type economics but really whether that's going to be covered by net income and cash flow? So I don't really want to get drawn on what the future looks like. I think we do like to look back of having increased the distribution year-over-year and getting people to really evaluate and understand the cash flow that we have. So maybe with that I'll see if Mark has any other comments.

[Mark Kremin:]

Not really Scott. As you've mentioned and we've mentioned quarter-over-quarter it's part of a balanced capital allocation program. So as we see the unit price hopefully go up, as we look at fleet renewal opportunities that haven't been coming along with the FIDs taking its toll, if we look at all these different opportunities when we look at the distributions next time, we'll take it course by course. So as Scott said, we can't really say exactly where we're going to go because we do have other things for other opportunities, we're always weighing against now.

[Scott Gayton:]

And maybe just following on again. I think the other thing we have to always remember as part of that balanced capital allocation plan is that, our primary objective is to continue to delever the balance sheet. And we will do that naturally with around $300 million of amortization which includes our joint venture debt on a percentage basis. And that still has to be our number one. We did lever up in order to take on that growth. And so that's the other part of the equation is that, we can't have a distribution that is at such a level that will not allow us to continuing our delevering efforts.

[Ben Nolan:]

Okay. Appreciate that. And then secondly just sort of as it relates to growth and maybe getting a little bit closer to that. It's sort of been reported that there's been new building contracts on vessels for the Mozambique project. I assume that you guys looked at that. I'm just curious as to sort of how you see returns in the market now and incremental opportunities. Are they up to your threshold, or did you choose to pass on them, or it was just too early, or any color there?

[Mark Kremin:]

We took a pass on the Mozambique project and there are 2 obviously Mozambique projects. The first one being Total which is what you're referring to. We took a pass for a couple of different reasons, but one of which is exactly what Scott just said is they were expected at the time that the tender came out to come a little closer to our delevering path. Now things have been delayed in Mozambique as we know for various reasons and not just COVID. But the -- when the first tender has come out, it wasn't lining up as well with our priority to delever. It does have some hair on it as you know and I've just kind of alluded to. The returns for that one are -- they should be double-digit on the equity and single on the return for an unlevered -- sorry a levered basis. But I'm not sure that when we look at a project like that, I'm not sure the risk reward is there. So we're always looking at a risk-adjusted return and it will have to be seen. But fortunately as the project gets delayed, I'm not sure that the shipowners are necessarily on the hook for those delays, but there is always a little bit of risk with a project like that. I think that we're more interested frankly if you look at the big probably the tender that's going to come out is probably Qatar and obviously the returns would be a little lower, but the risks are all obviously should be correlated lower too. So when we look at a big portfolio we have African business now we have Angola, we have Yamal business we have infrastructure projects. We've got the risk side of it all. And I think we're a little bit more leaning right now this year towards later deliveries which are a little bit less risk.

[Ben Nolan:]

Okay. That's helpful. And then last, I want to come back around to one of the questions that you answered earlier not really about consolidation, but on that theme. Obviously you have an infrastructure fund that's buying infrastructure sort of assets. Maybe not as a buyer, but is a potential I don't know seller. Is that at all something that you guys have given any consideration to, or do you think there would be any appetite for?

[Scott Gayton:]

Mark? Will you take that one Mark?

[Mark Kremin:]

Sorry. Yes sorry. I thought I was on mute. But we're always -- Ben we're always obviously assessing opportunities to increase shareholder value, but we don't comment on things like that at any event. As I said to you, it is interesting that we see infrastructure. It's a validation for our business and we'd like what's happening with infrastructure coming on especially like the likes of a BlackRock. So I think it can only be good for the industry.

[Ben Nolan:]

Okay. All right. Thanks guys.

[Operator:]

And we'll take our next question from Omar Nokta with Clarksons Platou Securities.

[Omar Nokta:]

Thank you. Hi Mark. Hi Scott. Good morning.

[Mark Kremin:]

Hi Omar.

[Omar Nokta:]

Hi. I wanted to just maybe -- I think you've -- and I think Scott may have already answered this in the last call -- last question from Ben. But wanted to ask kind of how you guys are thinking about things now with the deep backlog you have, the leverages is approaching the target. You boosted the payout. And in terms of key priorities going forward is it still the most important thing number one right now is to delever and get within that range?

[Scott Gayton:]

Yeah. Hey, Omar, it's Scott. Yeah, I think that that is still the number one priority. As I said earlier, we did take on a fair amount of debt. And even though the debt is completely manageable because of the fixed-rate contracts we have and that we feel very confident, and have seen over the last number of years that all of them perform as expected. I think that none of us want to get back into that position, because it just really limits your flexibility to add value going forward. And so I think that we would want to see ourselves at least have a trajectory to get into that -- into our target leverage range before we start to look at ways of adding to our leverage portfolio. So I think it still is the number one. So Mark, I don't know if you have any other comments, but that's what I have.

[Mark Kremin:]

No. Fully agree Scott.

[Omar Nokta:]

Okay. And then, Mark you mentioned the Qatargas tenders. And with them taking FID on the North Field expansion recently, do have you gotten any sense of timing or any information regarding those tenders or what they would consist of, or any sort of update on that front?

[Mark Kremin:]

No. The industry hasn't yet as far as I know received an updated time line. Maybe the shipbuilders are having some dialogue as a result of the FID. But we don't have as ship owners a clear deadline or time line yet. It was initially expected not to be until June or so. And I don't think that's changed at least. So it's going to be a little while. And then, the ships actually when they are awarded our understanding, is they'll stagger out. So even if they order -- sorry award a stack of ships this year those deliveries might be staggered out to 2025, 2026, 2027 or so in years. So we don't have a great update for you. But we are still expecting this year it's probably the most profitable. And the thing I really like about it is the carbon capture aspect on the liquefaction side. So it's just another I think good thing for the industry that if we have a liquefaction project like that it's becoming increasingly clean. And it can really compete for decades as we've said, over other fuel sources.

[Omar Nokta:]

Thanks Mark. That's interesting. Yeah. I guess we'll stay tuned. One sort of general question I have. And I know you don't have really that much exposure to spot rates. But I wanted to just ask this spot rates started to gradually move higher this past fall. And even as they are moving up, we really didn't see that 2021 and 2022 will probably be relatively weak is how we and I think most charters view it. So even if -- so they saw the run up I think they also saw this coming down, which it now has. As we look into the winter, I think there'll be another seasonal peak in the winter, but I think we have another dip in 2022. I think we share that with our charters. So -- but as you look to 2023, 2024, 2025, again, I think the charters share our view or vice versa. And I think you'll see more time charters starting around that period of time. So for us, the Creole Spirit, we're actually as we said in the prepared remarks, we're not eager to get a time charter on a fixed-rate basis at least right now, because we think that the time charters are available that limit -- they're just not that favorable. We have a big enough portfolio that we can actually let the Creole Spirit I think ride on a rate basis a little bit this year and hopefully be able to get one of those time charters I mentioned later. And so we just have these two ships. Basically we're looking at this year the Oak and the Creole, both of which have been redelivered from Cheniere. And that will be our focus this year.

[Omar Nokta:]

Got it. Okay. Thanks everyone for the color. I appreciate it. That’s it for me.

[Operator:]

Our next question will come from Chris Tsung with Webber Research.

[Chris Tsung:]

Hey, good afternoon guys. How are you? I wanted to kind of -- well, congrats on the record you built and great job fixing that in really all 2021 and most of 2022. And I guess I wanted to just delve in a little bit more on -- with your strong outlook for LNG, could you guys see yourself chartering in more vessels, time chartering in vessels to participate in -- like I guess lever your opportunities to capture what you guys are talking about like a stronger uplift in 2023, 2024?

[Mark Kremin:]

We haven't been looking at insurers right now. I think the line is a little bit hard for me to hear, sorry. But I think you talked about how the rates we'll expect it to be improving in 2023 and 2024? And would we be in chartering to take advantage of that? Is that what I heard?

[Chris Tsung:]

Yeah. Sorry. Is this better?

[Mark Kremin:]

Yeah. So if that's what I heard fine. We have done that in the past very successfully. We have one charter that we have on to Petrobras, which is a sub-charter. We've been chartered essentially from the JV and we were able to lock in those returns almost in advance of doing the charter. And so that's been exciting. If we see that opportunity again we're there to do it for sure. We haven't seen other -- any other owners yet looking for charters out to -- or sub-charter for that matter to other owners. It's been not -- it's not a typical thing that happens in LNG. Maybe that's changed just like the rest of the industry has been changing more towards a crude setting. But no right now, you don't see a lot of in-chartering opportunities from owner to owner. But if it comes up, it's something we would certainly look at.

[Chris Tsung:]

Okay, good. That makes sense. And I guess on capital allocation priorities, I know the priority right now is to delever. But I guess I needed to ask if are there any appetite or desire for secondhand vessels perhaps, or is all of the cash flow from operations going to delever and possibly looking at the Qatar tender? Is that the right way to look at it?

[Mark Kremin:]

I think our -- yeah, I think you're right. I think our preference is for newbuilds for a couple of reasons. Number one as Scott mentioned, our number one priority is delevering. And with a newbuild we can order today theoretically, and we won't take delivery until we are delevered. So we've met both goals. If we were to buy secondhand today or next year or whatever certainly this year, we run into that have we sidetracked our delevering more. That's one. The other thing is the ships that are our bread-and-butter, our real goal, although we're going to let the Creole float if that's better, we prefer a portfolio by and large of fixed-term contracts. That's our hallmark. And the secondhand opportunities that we've been seeing and we'll probably see in the future if they come with any contracts, they're not that long. So our hope is that when a tender comes out, we'll just use Qatar as an example, that we can bid for relatively long-term contracts that are delivering later and our competitors hopefully, won't be as competitive as they've maybe been in the past, because they do have a lot of these ships that are delivering now. And they’re having to deal with that whereas we have nothing on the order books. We haven't ordered a vessel in over five years. And so we're just building our powder up.

[Chris Tsung:]

Yes. Thanks. And just one last question. I guess touching on your comment earlier on risk and reward. I think I read some reports earlier this year about the damage to one of your Arc7s the Nikolay Yevgenov while traveling the Northern Sea route. Can you provide some color here? And is there any impact to TGP when a ship is damaged? Because I understand that it is going for repairs, but I wasn't able to understand the extent of it. Thanks.

[Mark Kremin:]

Yeah. In that case, it looks like we've got some damage. We've had it on one of the pods, which we use instead of propulsion -- for propulsion instead of propellers, normal propellers. So the ship will be in the drydock starting tomorrow, and we'll get it fixed and we'll put it back up in Sabetta. We don't expect there to be any -- it's insured. And as far as deductibles go, we actually are currently not expecting that there'd be any liability for the owners. So, I think that -- I think it should be a non-issue is how we see it, although we do have to get the damage done -- repaired, I should say over the next couple of weeks.

[Chris Tsung:]

All right. Okay, great. That’s it for me. I’ll turn over. Thanks guys.

[Operator:]

Our next question will come from Liam Burke with B. Riley.

[Liam Burke:]

…we've discussed earlier on the newbuilds. Is there anything adjacent to the industry that has the types of returns that meet your discipline like in the FSRU space?

[Mark Kremin:]

We may have missed -- I may have missed most of your question. I'm not sure if there was a mute or something, but I did pick up at the end. You talked about what adjacent opportunities and gains, or -- okay?

[Liam Burke:]

Right. I'm sorry. Go ahead.

[Mark Kremin:]

The answer is yes. Yeah. So we're looking -- we look at a number of things. For instance, if we look at very large ethane carriers, that might be a possibility someday. It's in the nascent stages and we have that type of expertise. And if there's a good tender that comes out that would be of interest to us. The FSRU is an adjacency. It's relatively easy to -- in fact we're doing it right now, we do re-gasification of the Bahrain terminal. So that would be something we could do. The issue we have with FSRUs at the moment in our opinion is that they're over ordered or I should say even on the sea. So -- but that's something we would definitely take a look at. The LPG business is something we really like in our Exmar side and the fully refrigerated. It's somewhat limited on how much growth we could have, because we're already relatively dominant through that JV in the midsize space. But that has adjacencies too. As you know we also carry ammonia on that. And as ammonia becomes a bigger part of the energy mix, we could be carrying a lot more ammonia for instance. And then, we talked today about how we think hydrogen is a relatively small part of the energy mix going forward or in the near term. And that's true. But to the extent things like that come up, different types of liquefied gas and sort of the capture of liquefied the carriage of captured gases, et cetera, we've got a pretty good team to -- now a real good team, I think to take a look at that and take advantage of these liquefied gas adjacencies wherever they may come. But in the near term and this year, I think the opportunities we're most likely to take a look at are simply our LNG carriers.

[Liam Burke:]

Great. Thank you.

[Operator:]

And that does conclude our question-and-answer session. I would like to turn the conference back over to Mr. Kremin for any additional or closing remarks.

[Mark Kremin:]

We just like to thank everyone for their support and look forward to catching up with you next quarter, if not sooner. So thank you very much.

[Operator:]

And once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.