Teekay LNG Partners L.P.
Q3 2018 Earnings Call Transcript

Published: 15 Nov 2018

[Operator:]

Welcome to the Teekay LNG Partners Third Quarter 2018 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode, afterwards, that you will be invited to participate in the question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Mark Kremin, Teekay Gas Group's President and Chief Executive Officer. Please go ahead, sir.

[Scott Gayton:]

Before Mr. Kremin begins, I would like to direct all participants to our website at www.teekaylng.com, where you'll find a copy of the third quarter of 2018 earnings presentation. We will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from results projected by those forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the third quarter 2018 earnings release and earnings presentation available on our website. I'll now turn the call over to Mark to begin.

[Mark Kremin:]

Thank you, Scott. Good morning, everyone, and thank you for joining us on the third quarter 2018 investor call for Teekay LNG Partners. I'm joined today by Scott Gayton, Teekay Gas Group's CFO. Turning to Slide 3 of the presentation, we will review some of Teekay LNG's recent highlights. This quarter's results were significantly stronger than last quarter. We generated cash flow from vessel operations, or CFVO, of $132.6 million, which was up 15% over the last quarter. Adjusted net income of $19.5 million, up 44%, and adjusted EPU of $0.16 per unit, up 78%. Our third quarter results were up primarily due to the delivery of 5 LNG carriers during the second quarter and probably through the third quarter. And we expect our fourth quarter results will be even higher as the earnings from new building deliveries are realized. In addition, as we will detail on the next slide, we have increased our exposure to the currently very strong spot LNG carrier market and the cash flow from the strong charters secured in the early October will have a positive impact on our earnings for the next few quarters. We have been speaking for the past few quarters about implementing a balanced capital allocation plan. Yesterday, we announced our intention to increase distributions to our unitholders by 36% starting next year. This level of payout will still allow us to delever our balance sheet into our target range within the next couple of years, which will position us to both return additional capital to unitholders in the form of increased distributions and or buybacks, and to continue growing our LNG fleet at the time when we expect significant demand for our LNG shipping services. As we also announced yesterday, we intent to amend the partnerships tax status to that of a 1099 filer from our current status as a K-1 filer. This change, if approved by unitholders, will not impact the taxes paid by Teekay LNG. And lastly, we made good progress with our financings this quarter. We enhanced our $190 million 364-day facility by upsizing it to $225 million and extending it to a 2-year facility. And we expect to close the last of our renewable financings, the Yamal Spirit facility in the next couple weeks. Looking at Slide 4, as you will hear later in today's presentation when we speak about the LNG markets, the spot LNG shipping market has been incredibly strong, and we have recently taken steps to participate directly in this upturn. In addition, similar to our last ARC7 LNG carrier, the Yamal LNG requested early delivery of the remaining four vessels in our 50% owned joint venture with China LNG. Even the Sean Spirit and FSU Bahrain Spirit move into an unexpected spot exposure prior to the intended delivery dates of their long-term charters. Due to these two factors, being strong rates and early deliveries, and based on just -- based just on charter secure, we expect our cash flow and earnings will be approximately $80 million higher at a minimum over the period of these charters when compared against the long-term LNG shipping average rate. Looking at the bar chart, we fixed the Torben Spirit on a multiyear contract at over $100,000 per day. In September, we in-charter Magellan Spirit from our 52%-owned Marib Joint Venture for two years at an opportunity time this fall. We were able to out-charter the ship from early October on a 3-week voyage for nearly $100,000 per day, and then on a 5-months charter at a rate over $100,000 per day. Also we will book an additional income of approximately $8 million on only 1/4th of the in-charter period. We look forward to reporting back to you once this vessel exits it’s scheduled dry-dock in the springtime. The 52%-owned Methane Spirit renewed its charter at a higher rate and the 52%-owned Arwa Spirit and Marib Spirit LNG carriers are expected to be available for spot cargos starting Q1 and Q2 of 2019. Looking at the table at the bottom of the slide, the Yamal LNG project has asked for our four remaining 50%-owned ARC7 icebreaking LNG carriers to be delivered between three and five months early, as indicated in the table. We have worked with the shipyard and our lenders and we believe we should be able to meet these earlier delivery days. And just yesterday, we were informed that the Sean Spirit, which is on charter to BP, will now deliver on December 10 of this year, nearly one month ahead of schedule, which will add meaningful upside to our Q4 results. We are pleased with the steps we have taken to benefit from the strong spot market, and we are proud of our technical teams for responding to our customers’ requests for early delivery. And the resulting significant upside, this will bring to our results over the next number of quarters. Turning to Slide 5. Over the past number of years, since we embarked on completing what was the world's largest LNG newbuild order book, we have now taken delivery of 11 vessels with another seven, plus Bahrain regas facility expected to deliver throughout 2019. These seven vessels include Sean spirit, which we now know will deliver early in December 2018. We've invested over $3 billion in these projects. And along the way we secured over $2.2 billion of debt and lease funding for these vessels. Importantly, the majority of the equity funding for our newbuildings was sourced through routine cash flow. We did not and we do not expect to issue any common equity in order to take delivery of our remaining eight projects. This method of funding is a departure from typical MLP model, and is one that we believe benefited our current unitholders and which preserves equity value for future long-term unitholders. Our LNG CFVO will grow by approximately $310 million as a result of our newbuilding book. And this incremental cash flow is a key component of our capital allocation strategy that we will discuss in a moment. We believe we have the most diverse customer base with only one customer, Shell, accounting for just over 20% of our contract portfolio. At 6.5 years, our fleet is younger than the industry average of 8 years, and we have a contract backlog of $10.6 billion, or over $320 million per LNG carrier on a percentage of ownership basis. None of our peers can make similar claims to the facts on this page. Turning to Slide 6. Roughly $10.5 billion of our $10.6 billion book of forward fee-based revenues comes from our LNG carrier fleet, and we service the customers whose logos can be seen across the bottom. These are definitely blue-chip customers. On an invested capital basis, nearly 90% of our invested capital is in LNG carriers. With the recent sale of two of our main four legacy crude oil tankers, we expect this will be over 90% soon, meaning that we are now basically a pure-play on liquefied gas carriers. We have included these two charts this quarter because we have a time at times can view this having heavy exposure to the LPG market, which we are optimistic on the longer-term. However, as we start to syndicate, we are primarily an LNG shipping company. We are the world's third largest independent LNG carrier company and we expect LNG shipping will remain our main focus for many years to come. Turning to our next slide, Slide 7. On our last few earnings conference calls, we have spoken about a balanced capital allocation plan as one that will allow us to focus on deploying capital in multiple ways simultaneously, all to the benefit of the unitholders. Starting at the bottom of this slide, we have listed out a few of the key objectives of our balanced capital allocation plan. First, it needs to provide the significant balance sheet strengthening. Given the timing of our newbuilding deliveries, we are currently levered at nearly 9x cash flow. And while we are confident, our fixed rate cash flows are solid, we view this as too high on a long-term basis. We would like to target a ratio of approximately 5.5x cash flow or lower, which leads us to our second objective. We need to use discipline and ensure that when we deploy capital, it is sustainable over the long-term. We expect our priorities will ebb and flow between the three uses indicated here and part depending on the relevant returns at a time. However, ideally we will be positioned to do all three on a sustainable basis going forward. The third objective is that we would like Teekay LNG to be more self-funding and reliant on the MLP markets as a primary source of the equity funding. We have not issued any common units since mid-2015, and we have no plans to issue additional units to complete our existing growth projects. We believe the MLP markets have been in its module state for the past number of years, and the ability for firms like ours to raise competitively price capital as diminished since the energy downturn in late 2015. We do not see this trend improving in the next few years. And therefore, we need to ensure we can fund the equity portion of new growth more through internally generated sources. And lastly, we are using more fundamental financial metrics like free cash flow, including debt amortization payments, when analyzing distribution levels and our own intrinsic value when evaluating divestment returns, because sometimes buying our own fleet through share repurchases is the best investment we can make. Looking to the top of the slide now. As we mentioned previously, we have just come through a massive newbuild program of over $3 billion with the final vessel schedule to deliver towards the end of 2019. And while we are extremely proud of the team's ability to bring each of these vessels in on-time and on-budget so far, we believe we need to pause on growth for a little while, in part, because we do not find current new investment returns compelling, but also because we need to focus on the other avenues for deploying capital. Yesterday, we announced our intention to increase distributions by 36% in 2019 with the future increases and/or stock buybacks to be analyzed at least annually. While we will continue to analyze the amount of capital we are returning to unitholders, with the goal of increasing returns overtime based on our outlook for the LNG market, the amount of free cash flow available after debt amortization, the relative return of investing in new growth versus buying back our balance sheet leverage and future liquidity needs. Thanks to the recent strength in the spot LNG carrier market and our upcoming exposure to it. Our delevering plans will likely be expedited, providing us with the opportunity to deploy excess capital potentially earlier, which brings us to the left of this diagram and our key focus for the next couple of years. With our leverage currently near 9x, we will focus the near-term allocation of Teekay LNG's capital towards debt repayment, because the stronger balance sheet will allow us to ramp up capital allocations to unitholders or for attractive growth opportunities in the future. I will now turn over to Scott to cover the next couple of slides.

[Scott Gayton:]

Thank you, Mark. Looking on Slide 8, I'm happy to say that our leverage will naturally decline from the current 8.9x or 8.7x, on a proportionate consolidated basis, down to our targeted range of approximately 5.5x as newbuild projects and their associated cash flow deliver, and begin to have a positive impact on our balance sheet. We expect to generate total CFVO of approximately $650 million to $680 million next year, including our proportionate share of equity accounted joint ventures, which will help us to repay approximately $300 million per year of scheduled debt amortization payments on a proportionate consolidation basis, and representing more than 25% of our market account. And importantly, all of this value accretes to our unitholders. And as we approach our targeted leverage range of 5.5x, we will look at increasing returns to unitholders in the form of distributions and/or unit buybacks and pursuing attractive growth opportunities in a very disciplined manner. The other unitholder auction we announced yesterday is one we discussed on last quarter's earnings call and summarized on Slide 9. We intend to amend our tax structure to that of C-Corp for U.S. tax purposes, because we believe this will help us to attract new investors who may not focus on MLPs to file K-1s. This amendment is subject to our unitholder both that we plan to hold on December 18, 2018. And the details of the special meeting can be found on the proxy statement that has been filed with the SEC today. The partnership does not expect to incur additional taxes as a result of this conversion. And while some investors will recognize a gain on the conversion, we expect this gain to be more than offset by lower taxes on cash distributions paid by TGP in the future. We urge all investors to vote in favor of this proposal at the December 18 meeting because we believe it will facilitate our ability to attract new investors to Teekay LNG compared with our current tax status as a K-1 filing MLP. I will now turn the call back over to Mark.

[Mark Kremin:]

Thanks, Scott. Turning to Slide 10, we will now look at recent activity in the LNG shipping market. We've seen a significant increase in short-term charter rates in recent months with average rates across the third quarter of 2018, exceeding the $80,000 per day. Rates are continued to increase significantly in the fourth quarter, and have averaged $180,000 per day so far in November. This is the highest rate ever recorded by Clarkson’s, and surpasses the previous peak seen in mid-2012, after Japan's nuclear outage. Several factors have contributed to the strong increase in charter rates. First, global LNG demand has remained firm, especially in Asia. Despite trade tensions, Chinese LNG imports are continued to increase by approximately 40% year-over-year, and global LNG imports are on track to increase by approximately 9% this year. Second, an increase in arbitrage trading at the start of the third quarter has supported LNG vessel demand. And European LNG reloads in 2018 were the highest in several years. Lastly, the availability of LNG carriers on the spot market has been reduced to very low levels in recent weeks due to charter securing vessels in advance of the winter season and which has allowed remaining vessels to command higher rates. As discussed earlier, Teekay LNG’s vessels operating in the spot market have been able to take advantage of these stronger rates with many of our vessels, recently securing vessels, started charters at attractive rates significantly above the long-term market average. We believe these rates are further evidence of an ongoing tightening in the LNG shipping market. And we expect attractive rates to continue on average through the winter season, and into 2019 and 2020, supported by the start-up of new LNG export capacity. New export trends at four products that have recently started or are scheduled to start in the fourth quarter of 2018. And we expect this ongoing growth in global LNG supply will continue to support LNG shipping demand. Turning to Slide 11, we turn our attention to the growing influence of the emerging Asia region on LNG demand. Global LNG demand growth is now largely driven by importers and the emerging Asia region, which includes China, India, and several smaller but growing LNG importers such as Singapore, Thailand, Pakistan and Bangladesh. Collectively imports in this region have increased from less than 10% of global demand in 2010 to more than 30% of global demand in 2018. Last year China became the world's second-largest LNG importer behind Japan. And this year China is expected to be the world's largest total importer of natural gas, which includes both LNG and pipeline imports. The importance of this region to the LNG market is expected to continue growing with total imports reaching nearly half of all LNG supply by 2030. Turning to Slide 12, we will highlight recent export project activity that will support the long-term growth of global LNG supply. After several years of delay, the broad-based recovery in energy markets is now supporting new LNG export projects and moving towards successful final investment decisions. The recent decision to construct LNG Canada represents the largest export capacity to be sanctioned since 2014. And we're also tracking 8 other projects with the combined export capacity of more than 70 million tons per annum that appear best positioned to reach final investment decision before the end of 2019. Recently, Wood Mackenzie stated that they anticipate 2019 could be a record year for LNG final investment decisions. This new supply will underpin the long-term demand for LNG vessels, which would require more than 200 LNG carrier newbuild orders within the next 10 years to fill this growing demand for LNG shipping. In summary, we are encouraged by improving supply demand balance to the LNG shipping market, and we maintain a positive outlook in both the near and longer-term due to the expected strong growth in global LNG supply demand. Since, similar to the last couple of quarters, we included Slide 13 as our scorecard of health, what we're doing to add value to our shareholders. Our financings are progressing well with one of the Yamal Spirit newbuilding still to be financed, which we expect to sign in the next couple of weeks. After that, we have only one JV LNG carrier to be refinanced in Q4 2019. 2020 and 2021 are similarly like. Our newbuildings are delivering on time or early. Everything delivered to date has been on budget, and we're not expecting cost overruns on any of our remaining projects. As evidenced this quarter, the cash flows have been -- we've been guiding to for many years now are starting to positively impact our results and we expect this to continue. With our announcement overnight of a 36% increase in our distributions and our ability to significantly delever from our current state into our targeted range over the next couple of years, we are executing on our balanced capital allocation strategy. And we believe this approach will add significant value to our unitholders. The market is acting as a tailwind for Teekay LNG right now. The spot market is very strong sitting at above $175,000 per day, and we're benefiting directly from it. And finally, we see a significant number of vessels that will be required to service new FIDs that have been taken. And we expect we will be well positioned financially to be able to take advantage of these opportunities in the future. Operator, we are now available to take questions.

[Operator:]

[Operator Instructions] And our first question will come from the line of Michael Webber from Wells Fargo Securities. Please go ahead.

[Michael Webber:]

Mark, first question is on the distribution. And I guess you bumped up 36%. So in true equity fashion, I want to start focusing on what's going to happen a year from now. But you gave some language around revisiting it, at least annually. I just wanted to firm up the right way to think about your intentions there. Is it a right way to interpret that this is something you would expect if all things goes as planned to grow annually in a relatively traditional sense? Or is the right way to read that that you are keeping your options open for different means of capital returns? And is it really kind of CBD? I'm just trying to make sure I am interpreting that the right way.

[Mark Kremin:]

So – it’s okay with you Mike. I'll take a stab at this, and then I'll hand it over to Scott for further comments. But – yes, we do expect to hopefully continue to increase distribution year-on-year, but it will be at a moderate pace. So if we reiterate what we said, our deleveraging will be our focus over the next couple of years or few years. And so that’s going to be our focus. We've also mentioned today, and you’ve seen in the release, there's a lot of tailwinds. And so we may enjoy unexpected tailwinds over the next couple of quarters and over the next year in 2019, we hope to. And depending on how those look, we will analyze what the best opportunities for with our capital at that time. But just to kind of sum up, I think, we are anticipating a moderate increase going forward after this bump. Scott, do you have anything to add to that?

[Scott Gayton:]

Yes, I think, if I was going to add to it, I would say that, part of the reason that we’re not providing that 2020 guidance and beyond is we aren’t going to trying be more dynamic with the way that we are allocating capital on a go forward basis. And it really will depend on the best return at that time. And once we've got a clear path for reaching our target at leverage levels, like Mark said, I think, we would really be looking to deploy the capital to the highest returning avenue we can find at that time. And whether that's a dividend, then great, if that happens. The new buybacks are more beneficial to unitholders, then that make sense too, or further down, the less would be growth opportunities, but you never know what's going to hit us in that timeframe. So I think that we’re trying to be a little more dynamic. It's not that we don’t want to give visibility. We're just trying to transition towards looking at things on more overall return basis.

[Michael Webber:]

That's helpful. One of your competitors at the GP level, kind of introduced and kind of embraced the idea of special dividends on top of kind of fixed kind of flat payout just to kind of keep some flexibility, and be a bit more tactical. Is that something that if it's come-up with you or at the board level or this menu you will think about as well. Should that be included in the mix? Or is it – or are you looking at more traditional tools kind of buybacks and kind of bumping the predictable distribution?

[Mark Kremin:]

Yes, I think, I would say again and come back down with that relative return. I know that the peer that you are speaking of is trading in a very large premium to their NAV. And so in which case doing stock buybacks is probably not the best way of deploying that capital. And I would say that we are on the other end of that spectrum. So maybe that's a high path for all of that they are trading at such a premier to NAV that you would look at doing structure dividend. So, no, at this point given where we were trading and what we think our ultimate value is, it hasn’t come up, but it's really just more to do with the fundamentals of it.

[Michael Webber:]

And Scott just on refinancing, the ARC7 and the conventional carriers and moving those up, was there any lag that’s developed associated with in terms of the new delivery schedule versus when that refinance cap -- that refinance that would get released. I'm trying to figure out whether there is any sort of get over-equitized to get them delivery because there is a lag around the revise just scheduled?

[Scott Gayton:]

Good question. And we were, as soon as we get a request from the charter, we go right back to the shipyard to see that they are able to do at 3 to 5 months early. And once they give us the go ahead, then we go to the lenders to make sure that they are able to fund commensurately. So there will be no difference in timing, expect for everything the draw-downs and the equity portion everything else just simply gets moved up from where it was to the new delivery date.

[Michael Webber:]

So it’s still on unlock step. Okay. And then Mark, one more, and I'll turn it over. But you mentioned when you talked about this – obviously, the focus on deleveraging, which I think makes sense. Within your comments that you mentioned are not liking returns on new business right now. And it's interesting because it's something that I know that, some of your peers and their calls as well. Just curious, are you seeing new entrants into the LNG carrier market way on, so just we kind of newbuild business and kind of the 5 to 7 year tenure range? I know you guys are -- I don’t know how active you guys are right now in some of these tenders, but it seems like there's a little bit of pressure there. And I'm wondering if that's kind of what you're referring to, and if not, what were you referring to?

[Mark Kremin:]

I think we are referring to that Mike. So we have seen on the five to seven year charter type of length that’s been in competition, and some of that’s been new entrants and some of that’s been more established entrants. And so those returns we don't think are the best paid value right now, almost spot market is better or long term is better, if it's available. But that mid-term seems to be one, which is prevailing and it's not that attractive to us to date. That said we are still looking at it. We have shifts that come off charter from engineer, for instance, at around the time that those charters start. And the same two-strokes that everyone has on order right now. So we will be competing against those for those charters, but with existing tonnage. I think for us to go out and buy a new charter respectful tonnage for those kind of opportunities, to five to seven years is with the order book as it is today is not a prudent measure for us right now. On the other hand, there is always these standards that will come out that are bespoke. And I don't know whether what exactly they are certainly Artic 2 type of tender. But there will be other type of bespoke, and newbuilds that are always be required, I think, in the future where you can't necessarily compete with an expected newbuild. And so hopefully, we get a good look at those as well as things pan up.

[Operator:]

Your next question will come from the line of Randy Giveans of Jefferies. Please go ahead.

[Q –Chris Robertson:]

This is Chris Robertson on for Randy. Thanks for taking the call. In the past, you provided a slide that shows the remaining CapEx and completed undrawn debt financings. Could you provide an update on that for the end of 3Q?

[Mark Kremin:]

Sure. So remaining CapEx as of the end of the third quarter is about $830 million, of which we've got completed and undrawn debt financings of around $640 million. And if we add to that, the Yamal Spirit financing that may expect to complete in the next couple of weeks, which is going to be around $160 million. So with that, then we do expect to be fully financed to take delivery of the remaining ships.

[Chris Robertson:]

With so much focus on delevering the balance sheet, what will be the plans for the crude tankers and some of the LPG carriers? Are they potential divestment candidates? Or what's the story there?

[Mark Kremin:]

Well, starting with the crude tankers, we have signed an MOA for Suezmax just this month, and we expect to deliver that ship in December. So we will be left with one crude oil tanker and one product tanker. And we basically exited that space. I would anticipate the last of our crude oil tankers could be sold as recently as this year or very soon and the product tanker that we have will be sold at the end of early next year. So we are basically -- have been and we will continue to divest completely out of the tanker space. On the LPG side, I think what we have there is a cyclical play. As we put in our remarks, it’s a relatively small part of our liquefied gas carrier fleet. The franchise that we have, particularly on the midsize base, our JV of Exmar is the world leader in the midsize gas carrier space, is strengthening and we see that as a good franchise to hold. As you know, the shipping market goes up and down, and I think we are on the upswing of that. So we don’t have any ideas to sell from that fleet. I will say, however that going into the bare market that you are now in, we did sell them a number of LPG ships from that fleet. And on the ethylene side, which is a much, again smaller part of our fleet, that's 7 small ethylene carriers. It's to be determined. We are working on the TMC fleet. We've been gaining traction with customers. But we keep our eyes on that. It's probably less core than certainly the midsize and definitely less core than the LNG. So we'll just – we’ll see how that grows over the next couple of quarters before we do anything there.

[Chris Robertson:]

And just a follow-up on that delevering question. What are your expected debt repayments in 2019? Can you give, at least a range of minimum and maximum for that?

[Mark Kremin:]

Yes, if we look at it on a proportionately consolidated basis, and some markets-given guidance of the -- where we expected be overall EBITDA come in that 640 to 680 range. So we would expect to have amortization payments of around $300 million. And then I would say that on top of that, there would be interest expense of around $250 million.

[Operator:]

And your next question will come from the line of Fotis Giannakoulis from Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

I would like to focus a little bit more on the potential opportunities out there. I understand -- the market is booming right now. And I understand that you do not find very attractive and long-term business. Is this something that we consider is the structural because of the increased competition? Are you planning to focus more on the spot business in the future, especially since I saw that you’re chartering one vessel from -- you are on one of your JVs to increase your spot exposure?

[Mark Kremin:]

Sure, Fotis. So when we look at -- we've done recently with the -- we can talk it about taking a prudent measure on the distribution. We have a diverse fleet and most of which is fixed out. We’re not held hostage to payout structure, which, yes, it does allow us to take a better look at spot market ships. And we don’t have to necessarily do a 5- or 7-year charter, which we are forced to payout. So if the balance and the reward is in the spot side, I think, with our ships that we have available for exposure, we are happy to take a look at it whereas 5 years ago or so we probably done it frankly. So yes we will be looking at spot market. On the -- just to reiterate what I said about the 5 to 7, I'm not sure we would necessarily order a speculative ship at this point to be competing against it, but we have ships that will be rolling off of good 5-year charters at the same time. So we will be able to compete for those charters with two strokes that we already have. And it's with optimizing our current fleet for those types of charters rather than ordering a newbuild for a relatively short charter. So we will participate, and I just wouldn’t order a newbuilding against it. Does that help you?

[Fotis Giannakoulis:]

Yes, absolutely. And can you also comment about the new round of newbuilding orders or the new round of long-term charters because we see some projects that we are reaching effectively LNG Canada some years expansion, Qatar has mentioned that they are going to grow their production very soon. At what point do you expect that these participants will try to look for vessels and sign long-term contracts?

[Mark Kremin:]

Hopefully next year. We are in agreement on those projects you mentioned. They should be taken FID relatively soon. They will need shipping. And hopefully next year we will start to see the tenders come out. In the mean time, what we are seeing is, existing trains or trains that are about to start up shortly, looking for five to seven years starting say '20 or 2021. That sort of 2023 start-up for these new projects is something we hope to see for shipping starting next year.

[Fotis Giannakoulis:]

Can you comment about the order book and the increase in newbuilding orders, some of them recently speculative? At what point do you see that we should start worrying about the increase of the supply? Or do you expect that we still have a plenty of room to grow? And I'm talking about for the period of 2021-22, when these vessels will be delivered.

[Mark Kremin:]

I think we should start thinking about that where we are at right now. I have seen in the news that one of our peers is kind of perhaps order another -- a couple of ships by the end of the year. The newbuilding order book, as we see it today, is probably getting close to saturated before the 2021. So that’s – obviously, it’s going to be a lot more ships in the -- over the next 10 years. But we think that the newbuilding space right now is getting saturated.

[Fotis Giannakoulis:]

One last question about the spot market, right now. Henry Hub has increased significantly, probably well above most people's expectations. Do you see that this has caused any impact on the trading of spot volume out of the U.S.? Does this make it harder for U.S. exporters to sell their volume, especially given the very tight shipping market?

[Mark Kremin:]

We haven’t seen it. What we've seen more or so is storage. So you have talked about the production side and the pricing there. We have seen certainly a lot of close to tank top situations in Asia. And that seems to be driving things more than the production side for us. It seems to be tying up shipping, its tying up at least some of our shipping at which we are aware. And that’s probably having a greater impact on shipping right now than the production as far as we can see.

[Operator:]

Next question will come from the line of Chris Snyder of Deutsche Bank. Please go ahead.

[Chris Snyder:]

So I just want to follow-up on the last question on natural gas prices, but maybe taking a longer-term view. And how it affects LNG shipping markets somewhat, and obviously, higher natural gas prices will increase production and cash flows for producers, which generally drives infrastructure investments. However, also compresses the spread between the U.S. and China, which makes many of these projects attractive. So I know this futures market just as moved to short live, but I'm interested just to see how you guys think about how all these moving parts take out?

[Mark Kremin:]

I'm not sure I understood the question. Sorry. Could you repeat that?

[Chris Snyder:]

Just kind of thinking about longer-term, U.S. natural gas prices are structurally higher, right. Do you view that as a positive or a negative for LNG shipping market? Because higher prices, of course, drive higher cash flows for natural gas producers when those are generating cash so more likely turn back to infrastructure and LNG terminals. But on the other side, part of what makes U.S. projects so attractive is, the low prices of the natural gas and the spread between that in the far east. So just kind of longer-term and how do you think that would shake out?

[Mark Kremin:]

So a couple of things. When we talked about rising gas prices in the U.S., what we see overtime is a pretty flat line. And that's been -- it's been pretty flat for a while, and we expect it will be remain relatively flat compared to Asia, for instance. The demand growth in Asia is -- and that we've discussed in our prepared remarks, is significant in getting more significant all the time. And I'm not sure that the ARC on -- is ever going to swing that much by increasing prices in the U.S. We are not seeing that.

[Chris Snyder:]

And so you guys have clearly taken on a bit more spot exposure over the last couple of months. Should we expect this trend to continue as you guys kind of transition more towards being C-Corp?

[Mark Kremin:]

Well, we're certainly, probably more open to it as we behave more like a C-Corp, but we only have so much tonnage to have. And we have to be mindful of what we've also said today, which is that these good times as we say in-house maybe transient. And by 2022 or whatever is you might -- things might come not be as lumpy as they are today. So we will certainly be enjoying the spot market over the near-term, but we will also be looking at some point to fix these ships out on a multiyear. And so, I think both of those things will happen.

[Chris Snyder:]

But so kind of seems like the vessels that are coming available over the next 6 months, you guys would potentially be open to operating those in the spot market, just kind of given where the term and spot rates are at that time?

[Mark Kremin:]

Absolutely. We have tonnage coming-up as we've said in our remarks. We had tonnage coming up in Q1 and Q2. And we have, yes, so definitely those ships are probably earmarked for spot business for the foreseeable future.

[Chris Snyder:]

Okay. And then just one last one on the charter out contract you guys announced. Based on some of the data provided, I kind of see that charter out to 5 months contract to be in the 120,000 a day range. So I guess my question is well, one, is that right? And two, obviously, that purely encompasses the seasonally strong part of the year. But is that kind of where you think the term market is currently?

[Mark Kremin:]

Well, first of all you are pretty close to the range, so that's for starters. And in terms of where we’re going to be, I think that were in a good seasonal point, right now, being winter coming on, and there is a lot of winter fixtures. I think we see a little bit of softening, probably in Q2 or so. But the second half of next year, we anticipate will be a strong or stronger than we are today. So I think you can look at that charter, although it covers a season as being representative of what we might hope to expect for all of 2019.

[Operator:]

And your next question will come from the line of Noah Parquette of JP Morgan. Please go ahead.

[Noah Parquette:]

I want to ask, if you guys kind of deleverage the balance sheet. I think, [indiscernible] what things have to go, what parts of the capital structure do you find core? And what things you think we would paid-off first, [Indiscernible]

[Mark Kremin:]

Yes, I think that most of what we will be delevering is just simply regular amortization that go us a long way, the ship mortgages that we have taken on lot of our newbuild book. And so I wouldn’t say that there is a ton of flexibility within that in order to pay things off. But if there is or if we do have excess cash flow, then we will just simply look at what is going to be the easiest and most cost efficient to pay off. Initially, that would be revolvers, obviously, just given their very nature. No region bonds, for example, yes, they’re more expensive. But if they’re trading above par, then that may not make sense to deployed capital doing that. And then the other one is potentially preferreds. Preferreds carry a high ticking fee. I kind of look at preferreds as equity and walls closing. So that maybe something that we would also look at doing, and really just comes to add to the cash flow that we have and where the best return is to deploy. And as we said earlier, while initially our plans are to delever, as we do delever, and if we delever quicker, then that actually may be better off being put back towards equity where we can get the highest returns. So we are going to trying to be flexible, and really analyze ourselves as a C-Corp voyage, and not necessarily be holding to payout structure where you are not always making the optimal decisions.

[Noah Parquette:]

Okay. And then on the conversion to the C-Corp structure, and I don’t think the IDR has a ton of value now, but will there be anything associated with that in terms of compensating in GP or is this just moving K-1.

[Mark Kremin:]

No. There is nothing that happens to either the GP or the IDR by moving from a K-1 to to a 1099 filer. I would say that the K-1 is probably legacy and something that we have had since we IPOed over 10 years ago. And all we are trying to do is to move into the neighborhoods of the rest of our LNG peers are in. If we were to continue to go further through that spectrum and go from being a 1099 to a C-Corp, then you are correct, we would have to address both the GP and the IDRs, but that’s not in the plans right now.

[Noah Parquette:]

And then just one modeling -- one on the local ships next year. Can you just remind me or refresh my memory about how much -- what the sale proceeds will be? And how much debt are associated those two ships?

[Mark Kremin:]

The sale proceeds will be about $130 million at the end of 2019. On the debt side…

[Scott Gayton:]

Yes, I think, we are about $75 million or so, on each one of those vessels.

[Noah Parquette:]

All right. $75 million each ship?

[Mark Kremin:]

Yes, that’s correct.

[Operator:]

And gentlemen, there are no further questions at this time. I would like to hand it back over to Mr. Kremin for closing remarks.

[Mark Kremin:]

Well, thanks to everyone for your support. We hope you will agree that your patience has started to pay off. And we hope to give you even better news next quarter. Thanks and good bye.

[Operator:]

And this concludes today's call. Thank you for your participation. You may now disconnect your lines. And have a wonderful day everyone. Good bye.