Teekay LNG Partners L.P.
Q1 2014 Earnings Call Transcript

Published: 16 May 2014

[Operator:]

Welcome to Teekay LNG Partners First Quarter 2014 Earnings Results Conference Call. During the call all parties will be in a listen-only mode. Afterwards 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. Peter Evensen, Teekay LNG Partners’ Chief Executive Officer. Please go ahead, sir.

[Ryan Hamilton:]

Before Mr. Evensen begins, I’d like to direct all participants to our website at www.teekaylng.com, where you’ll find a copy of the first quarter 2014 earnings presentation. Mr. Evensen 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 first quarter 2014 earnings release and earnings presentation available on our website. I will now turn the call over to Mr. Evensen to begin.

[Peter Evensen:]

Thank you, Ryan. Good morning everyone and thank you for joining us on our first quarter Investor Conference Call. I’m joined today by Teekay Corporation’s CFO, Vince Lok; Chief Strategy Officer, Kenneth Hvid; and MLP Controller, David Wong. During our call today, I will be walking through the first quarter 2014 earnings presentation, which can be found on our website. Turning to Slide #3 of the presentation, I will review some recent highlights. The Partnership’s portfolio of long-term fixed rate contracts continued to provide stable cash flows during the first quarter generating distributable cash flow of $60.1 million up 12% from the same quarter of the prior year. The year-over-year increase is mainly due to cash flows from the Partnership’s 50% investment in the Exmar LPG joint venture and the acquisition and fixed rate charter-back of two LNG carriers with Awilco LNG in 2013, partially offset by the sale of two 2000-built conventional tankers in December 2013 and February 2014 respectively. With a 100% of Teekay LNG’s on-the-water LNG operating fleet operating under fixed rate contracts with an average duration of 12 years, the Partnership is largely insulated from short term LNG shipping rate fluctuations. For the first quarter of 2014 the partnership declared and paid a cash distribution of $69.18 per unit consistent with the prior quarter. I’m pleased to confirm the Teekay LNG Partners through a new 50

[Operator:]

Thank you. (Operator Instructions) The first question comes from Michael Webber of Wells Fargo. Please go ahead.

[Unidentified Analyst:]

Hi, Peter, this is [Sameer] [ph] on again for Michael. How are you?

[Peter Evensen:]

Fine. Thanks.

[Unidentified Analyst:]

So our first question is really on the LNG and FSRU tenders you noted in your prepared remarks. I believe at a recent facility opening in Glasgow, Teekay noted you are looking at approximately 25 LNG carriers adding on to the fleet by the end of the decade. How should we think about potential spot availability of the yards for you guys right now to potentially order those vessels?

[Peter Evensen:]

Well first of all if we order a ship now we’ll get it in 2017 or more likely 2018. So we’re talking about tenders that we’re competing on over the next two, three years in order to get that availability. We can see that coming especially with U.S. and Australian exports that they’re going to need dedicated tonnage. And that is of course on top of the conventional tonnage that the Yamal project will take. So that’s a goal of ours to basically double the fleet, we think it’s possible given the tenders that are out there but a key requirement for us isn’t to have more vessels, it’s to have vessels under contract. So if the contracts are there then we’re building vessels against them and that’s the key requirement. But we can see based on our conversation that there is going to be a requirement for that many ships and we want our fair share.

[Unidentified Analyst:]

Got it. In terms of geographies you noted the U.S. and Australia and potentially Canada I would assume as well. But are there any other geographies involved in potential tenders you guys are looking at right now?

[Peter Evensen:]

It’s really the U.S. and Australia that are featuring right now in addition to of course the Yamal project.

[Unidentified Analyst:]

Got it.

[Peter Evensen:]

Mozambique, BC they’re too far off, they haven’t actually taken FID. And so the – people are not starting to negotiate the shipping requirement yet.

[Unidentified Analyst:]

Got it. Makes sense. And switching onto LPG growth, in your prepared remarks you noted that VLGC rates have risen to record highs recently. The majority of Teekay’s LPG JV with Exmar has MGC vessels. How do you think about potentially looking at a VLGC asset and adding that onto that fleet?

[Peter Evensen:]

Well actually our Exmar LPG joint venture has a couple of VLGCs. So we’re benefiting from that. But it is not a area that we plan to grow on. And the reason is because we’re looking for more stable cash flows so it isn’t to try to – that doesn’t suit our partnership, our partnership wants long-term contracts. What we liked about the mid-size is it underpins or is underpinned by longer term contracts as opposed to the VLGC where it’s time-charter and short term contracts. So while on the face of it, it looks attractive, there is much greater scope for over tonnaging in the VLGC market as for example you’ve seen a lot of VLGCs ordered. So I really see the VLGC market as being the opposite of the LNG market. We see softness in the LNG market for the next two years but then we see strength in the LNG market. And the VLGC market in our opinion looks the opposite, we see strength in the next two years and then we see too many ships coming. But on the mid – and so we’re benefiting right now from the VLGCs that the two that we have but I think ultimately we won’t expand inside VLGCs because it doesn’t fit the stable contract nature of our partnership.

[Unidentified Analyst:]

Got it. And the final question is really on the Yamal LNG project. As you mentioned in your prepared remarks I mean looking at potentially six icebreaking LNG carriers through a JV which Teekay is invested in would be about $1 billion or about say, about $333 million per vessel. How should we think about the potential risk associated with that project? We obviously know that those are longer-term charters 25 to 27 years, but how does Teekay think about the potential risk associated with those assets?

[Peter Evensen:]

Well clearly there is a whole bunch of different risks. But let’s start with the project. The project actually has low cost gas so as opposed to some other projects that where the cost of the gas after liquefaction is quite high Yamal because it’s rich gas, is very low and by our judgment it’s actually the lowest compared to Qatar. And then we look at the need for the vessels. These vessels that we’re building are absolutely critical because of the ice nature, so they cost more than a conventional LNG but they’re absolutely critical for the project if they’re going to export. And then we get to the politics that are going on in Russia right now and I don’t think my opinion is any better than other people about that, about the politics. But this project has been going on for four or five years and what we do note is that they’ve taken FID and there is a – and they’re moving forward on the development of it. So that’s how we see the project. We’re convinced that it will come to fruition.

[Unidentified Analyst:]

Got it.

[Peter Evensen:]

And I would also note that this project is an old style project in that they’ve already sold well over 12 million tons of the 16.5 million tons per annum which is an incredible figure. It is truly an incredibly large figure and that’s where I think it’s done much better than some of the other export projects that you see that you mentioned BC, Mozambique, some of the U.S. projects where they haven’t sold all of the gas.

[Unidentified Analyst:]

Got it. I appreciate the color. I think that’s pretty much all I have in mind. I’ll turn the call over.

[Peter Evensen:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) The next question comes from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Yes, good morning, Peter and thank you. I want to ask about the announcement of Enterprise Product Partners. There is a lot of discussion in the shipping industry about the long-term contracts for ethane vessels. Is this something that you might have some interest and you might be considering over building ethane capable vessels to charter them to the Enterprise project?

[Peter Evensen:]

Yes. I’m not sure Enterprise will be the charterer, but we’re very interested in moving into the ethane market in order to provide transportation. And we have noted some of our competitors that want some of those projects and that will need a different kind of vessel. Obviously with our ethylene ships we’re familiar with the type of ships that need to be built but they need to be built in bigger volumes. So the short answer is yes. That’s a project our business development teams are looking at.

[Fotis Giannakoulis:]

Shall I assume that if you’re going to go ahead with a project like that this is going to be through the Exmar JV? And what type of vessels, what is the size of the vessels that you are expecting to be suitable for a project like that and what are the economics that you expect to see on those type of contracts?

[Peter Evensen:]

For competitive reasons I won’t go into the returns that we expect to see. But it actually revolves around who is the end-user. You’re seeing projects all the way from Europe where you would probably use a smaller size vessel but somewhere around 20, 30,000 to the longer haul out to Asia where you’d have a bigger ship and I’m talking cubic.

[Fotis Giannakoulis:]

Thank you, Peter. One last question about the Yamal project. That’s definitely a great success for your company. What was the competitive process and what was the differentiating factor that made you win such a significant portion of this project?

[Peter Evensen:]

Well it’s speculation on my part, but I would say it was Teekay’s operating record. And the fact that we know they’re convinced that we have the ability to train up the crews, we have the icebreaking capability and over the two years plus that we talked with them, they were very concerned with the operational excellence of the charters that we are chosen. So we’re one of three groups that have been chosen to supply the first 16 and I would say it was much more the commitment to training the crews to having the icebreaking capacity and be there for 25 to 27 years that were important.

[Fotis Giannakoulis:]

Okay. Thank you very much for your answers.

[Peter Evensen:]

Thank you, Fotis.

[Fotis Giannakoulis:]

Thank you.

[Operator:]

Thank you. (Operator Instructions) There are no further questions at this time. Please continue.

[Peter Evensen:]

Alright. Thank you very much. We look forward to updating you on all the new projects that our business development teams are working on in the future. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude the conference call for today. You may now disconnect your line. And have a great day.