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Teekay LNG Partners LP. (NYSE:TGP)

Q1 2013 Earnings Call

May 10, 2013 11:00 am ET

Executives

Ryan J. Hamilton

Peter Evensen - Chief Executive Officer of Teekay GP LLC, Chief Financial Officer of Teekay GP LLC, Principal Accounting Officer of Teekay GP LLC and Director of Teekay GP LLC

Vincent Lok - Chief Financial officer, Principal Accounting Officer and Executive Vice President

Analysts

Fotis Giannakoulis - Morgan Stanley, Research Division

Paul Jacob

TJ Schultz - RBC Capital Markets, LLC, Research Division

Operator

Welcome to Teekay LNG Partners First Quarter 2013 Earning Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now for opening remarks and introductions, I would now like to turn over the call to Mr. Peter Evensen, Teekay LNG Partners' Chief Executive Officer. Please go ahead, sir.

Ryan J. Hamilton

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekaylng.com, where you'll find a copy of the first quarter of 2013 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 of 2013 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 2013 investor conference call. I'm joined today by Teekay Corporation's CFO, Vince Lok; its Chief Strategy Officer, Kenneth Hvid; and its MLP Controller, David Wong.

If you turn to Slide 3 of the presentation, I will review some recent highlights. The partnership generated distributable cash flow of $53.7 million in the first quarter, up 6% from the same quarter last year when we generated $50.8 million of distributable cash flow. The year-over-year increase is mainly due to the partnership's fleet growth over the past 12 months, including our accretive acquisition of a 52% interest in the 6 Maersk LNG carriers at the end of February 2012. In February 2013, the partnership completed the acquisition of a 50% interest in a new joint venture with Exmar, named Exmar LPG, which controls a fleet of 25 LPG carriers and is primarily focused on the Midsize Gas Carrier or MGC segment. This accretive acquisition is expected to contribute approximately $10 million to Teekay LNG's distributable cash flow in 2013. However, on a run rate basis, the contribution of this fleet is expected to increase as new buildings deliver between 2014 and 2016, partially offset by lower cash flows due to the sale of one of the MGCs in April, subsequent to completing the transaction. As a result, the Exmar LPG fleet currently stands at 24 vessels, including new buildings.

For the first quarter, we declared and paid a cash distribution of $0.675 per unit, which was consistent with the previous quarter. Since the start of 2013, we've seen a significant increase in the amount of tendering activity for new LNG carriers and floating storage and regas units or FSRU contracts, driven by the large number of new liquefaction projects scheduled to come on line starting in 2016.

To provide an indication of the current activity levels, right now our gas business is bidding on 4 LNG projects and 3 FSRU projects. We look forward to reporting back on these initiatives in future quarters.

Turning to Slide 4, I'll discuss the recent developments in the LNG market. LNG shipping rates have weakened since the start of the year with spot shipping rates dropping below $100,000 per day for the first time since August 2011. The decline is primarily due to a reduction in LNG cargoes, as the result of production outages in Nigeria, Algeria and Indonesia. In addition, interbasin trade between the Atlantic and Pacific declined by approximately 10% year-on-year during the first quarter of 2013 due to a narrowing of the arbitrage between European and Asian natural gas prices.

Looking at the remainder of the year, LNG supply issues are expected to ease in the coming months, which should lead to more cargo availability. However, 21 new LNG carriers are due to be delivered by the end of 2013, with a further 28 delivering in 2014. With little in the way of new LNG supply coming online prior to 2016, this could lead to downward pressure on LNG shipping rates in the coming months. However, when we look further ahead, the outlook for LNG shipping demand from 2016 onwards look significantly better, with a number of liquefaction projects coming on stream, primarily from Australia, but also from North America, Africa and Russia. U.S. liquefaction projects have so far been slow to materialize, but we believe that more projects will gain approval in the coming months, providing potential upside to our demand estimates. TGP is well positioned to take advantage of these market dynamics as our LNG fleet is fully fixed through the expected weak market between now and 2015. In 2016, TGP will take delivery of 2 173,000 cubic meter vessels with fuel-efficient MEGI engines. And in addition, we have 3 options we can use in LNG tenders. These ships are expected to deliver into a strong demand environment as new liquefaction plants come on stream and the high fuel savings offered by these ships should make them very attractive to prospective charterers looking for vessels.

Turning to Slide 5, we take a look at recent developments in the LPG market. As shown on the chart at the top of the slide, 1-year time charter rates for Medium-sized Gas Carriers or MGCs have remained steady at just over $800,000 per month through the first quarter of 2013. The MGC segment, which is historically has been one of the best-performing sectors in the LPG market, is typically operated through a mixture of spot, time charter and contract of affreightment or CoA employment. And earnings are less volatile compared to other sectors of the LPG market. This trend is highlighted by looking at VLGC spot rates, which, as the chart shows, fluctuate wildly from month to month.

In the early part of 2013, VLGC spot rates have been impacted by a reduction in OPEC crude oil production, which has a knock-on effect on associated LPG production in the Middle East. More recently, however, VLGC rates have started to pick up with earnings currently at approximately $800,000 to $900,000 per month or the same as the MGC 1-year time charter rate.

Looking further ahead, the supply of LPG is expected to grow in the coming years from both traditional sources, including the Middle East, as well as from the U.S. Shale gas is expected to provide additional export volume. The chart at the bottom of the slide, which is from the U.S. EIA, shows that the U.S. should remain a net exporter of LPG in the longterm, and in a high oil and gas production scenario, could emerge as a significant supplier. Rising U.S. LPG exports could, therefore, add to LPG carrier ton-mile demand in the long-term and TGP is well positioned to take advantage of these through the joint venture we have with Exmar.

Turning to Slide #6, I will review our consolidated operating results for the quarter comparing an adjusted Q1 2013 income statement against an adjusted Q4 2012 income statement, which excludes the items listed in Appendix A of our earnings release and reallocates realized gains and losses from derivatives to their respective income statement line items.

First of all, commencing this quarter, we've included the cost of ship management activities in vessel operating expenses. We'd previously included these items in general and administrative expenses. This new presentation is more consistent with the presentation utilized by many other shipping companies. We've reclassified such costs in comparative periods to be consistent with this new presentation.

Starting at the top of the income statement, net voyage revenues decreased by $2.1 million primarily due to the scheduled dry-docking of the Arctic Spirit period during Q1. For the second quarter, 66 off-hire days are expected from scheduled dry-docking of 1 Suezmax conventional tanker and 1 LNG carrier. Vessel operating expenses were comparable to the prior quarter. Depreciation decreased by $2.1 million mainly as a result of the vessel impairments that occurred last quarter. General and administrative expenses were comparable to the prior quarter. Equity income increased by $1 million primarily due to the income from our new 50%-owned LPG joint venture with Exmar, which was acquired in mid-February. And net interest expense is comparable to the prior quarter.

I won't walk through all of Slide #7, which was included in our earnings release. However, I would like to point out that our coverage ratio of 1.01x for the first quarter was lower than normal and we expect it to increase in the second half of the year as we realize the full benefits of the Exmar LPG joint venture and we work our way through the scheduled dry-docking. For an overview of the scheduled dry dockings through 2013, please refer to the appendix of this earnings presentation, which is also available on our website.

Operator, I'm now available to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from -- I apologize for now if I mispronounce this name, Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis - Morgan Stanley, Research Division

Peter, I would like to ask you about the FSRU market. You mentioned that there is an increased tendering activity for FSRU projects. Can you name some of the countries and are all these projects scheduled for 2016? And when do you think the tenders will be decided?

Peter Evensen

I think the tenders will be decided by the end of the year and probably in the coming 2 quarters because you need to get the orders in. All of these that we're looking at are for new building, so we would order new building FSRUs to meet these requirements. There are some near-term ones but as we don't have any FSRUs on order, we don't qualify for them. But the ones that we're looking at are in the Mid East and Asia.

Fotis Giannakoulis - Morgan Stanley, Research Division

And the 2 new buildings that you have right now on order, are they able to be converted or to be upgraded into FSRUs?

Peter Evensen

We don't have -- we haven't agreed in the contracts that they would be FSRUs, but we can always go back and ask the shipyard. But we would probably just add and order new ones because we really like those ships that we've ordered to be for the transportation tenders that we're bidding on. So it would be additive to what we have.

Fotis Giannakoulis - Morgan Stanley, Research Division

And regarding the increase in the tendering activity for the LNG. These are all, again, I assume for post-2016. And have there been any discussions for Sabine Pass project? From what I understand, this volume has -- does not have committed ships for the moment?

Peter Evensen

Yes, some of the tenders we're looking at includes U.S. export volumes, including Sabine Pass. Yes.

Fotis Giannakoulis - Morgan Stanley, Research Division

And last, regarding the spot market. I know that you are not active in the short-term shipping market, but we had a very weak first quarter relatively to what we were used to be. Do you see more activity in the second quarter? And also, when is the Angola volume is expected to start? And how is this going to impact the short-term market?

Peter Evensen

Well, you're right. As I -- to add to what I said in my prepared remarks, we actually saw about a 4% fall in LNG volumes in January and February this year. And a big part of that was the fact that there was less supply available. As you point out, Angola has still not come on. They're saying it will come on in the next 6 weeks, by the end of 2Q. So let's see if that happens. There was also outages that were unplanned in Nigeria and in Norway. So I think Nigeria has come back already. Snøhvit is coming back in Norway and so there should be more cargoes available to actually move. And the other negative was, of course, that there wasn't as much demand for the LNG out of Asia. So it actually wasn't a question as much as the rates as it was of utilization. Ships weren't utilized all the time on the spot market and that led to a lower average TC. So that's what we're seeing.

Fotis Giannakoulis - Morgan Stanley, Research Division

Last on the tanker fleet. We had some discussions about restructuring some of the contracts last quarter. Has there been anything new on that? How shall we see the tanker contracts?

Peter Evensen

We only restructured 2 of them and that's now been reduced from a fixed time charter to a lower minimum rate with 100% of the upside going to Teekay LNG. So if rates improve, we'll get the full benefit of that. But that's only a reduction for 2 years, then it will come back. So our coverage ratio is lower than it should be because of a little bit lower on the tanker rates, but also because we have a lot of dry-dockings this year. So we see those as short-term factors.

Fotis Giannakoulis - Morgan Stanley, Research Division

But the -- apart from these 2 vessels that you mentioned in the previous quarter, everything else looks pretty solid, I assume. Is that correct?

Peter Evensen

Yes, we haven't gotten -- nobody has changed around any of their time charter rates. It remains to be seen if people continue to roll them over, but we're fully prepared for that.

Operator

And our next question comes from Paul Jacob from Raymond James.

Paul Jacob

Peter, so in regards to the bidding activity, I'm just curious, do you have a preference in terms of what you're bidding on, either towards LNG carriers or FSRUs? Or is it just kind of where you see the demand coming?

Peter Evensen

Paul, we actually have a preference, I would say, for the LNG transportation because we've ordered these new ships, which are the biggest that can go through the Panama Canal and they have a lot of fuel savings. You really get the fuel savings when they're underway. So with an FSRU, as you know, you're tethered to a port, so we don't get the benefit of our change in technology as much in the FSRU market. The FSRUs generally yield a little bit more unlevered IRR, so there's balance. What we like about the market is with more tenders out, we can be more choosy about which ones we want. And we look at what the overall tenor is of the contract. And people are down as low as 5 years and then into a 10-plus. So we're weighing up those factors along with the counterparty.

Paul Jacob

Okay, that's helpful. And then there's been a lot of discussion recently about Japan potentially bringing on some nuclear reactors for power demand supply maybe in the fall or beyond the fall. How do you see that shaping out? What's your opinion on that? And do you think that's going to have any long-term implications in terms of your contracts with -- obviously, you've got those locked in for the next couple of years at least, so they're not going to roll over in the near term, but do you think that, that's going to carryover say, into the 2015, 2016 time frame?

Peter Evensen

Well, so first of all, I don't think I have an educated opinion on nuclear reactors starting up in Japan. I'm just reading the same thing everybody else is. But it appears that the government is serious about bringing back nuclear reactors, which would mean that ultimately -- but I think there's a lag effect on this, ultimately, it would reduce the amount for LNG, which has led to this spike that we got after the Fukushima. But we're much more focused on the long term. And that's saying that in 2016, you start to get a lot more LNG coming out on the market and that's just going to lead to, as we say, another wave of requirements for LNG transportation. I think the good news is that the overall demand for LNG continues to climb. So we are looking at things like nuclear reactors in Japan, as well as the fact that Europe right now is importing coal and preferring it over gas because of their carbon credit situation. But in the long term, these are short-term factors and I don't think anyone disputes the fact that you're going to see a lot more LNG being moved on the sea in the 2016 to 2020 time frame.

Paul Jacob

Okay. Last question, I guess, is you have that cash flow adjustment on the conventional tankers that was mentioned before. And I'm just curious if those rates do stay kind of level, then should we expect that, that's going to be about the same amount over the next 4 or 5 quarters? Or is that likely to fluctuate?

Peter Evensen

Yes, we're at the minimums right now. So the 2 Suezmaxes that we reduced, they can't really get much -- they can't go any lower. So that's the situation. So for the balance of '13, I can't see that changing. It can go up.

Operator

And we do have another caller. And again, I apologize if I mispronounce your name. From Lodovag Alversori [ph] from I -- CIS.

Unknown Analyst

A few questions. First, it's the clarification on -- it was from the first caller's set of questions. Towards the end, he asked about renegotiation of 2 tankers. Just wanted to make sure that was not for LNG tankers. Seems as though you would renegotiate something in order to capture 100% of the upside should chart rates go up? Just wanted to make sure whether that was LNG or LPG?

Peter Evensen

No, those were Suezmax oil tankers. So [indiscernible]

Unknown Analyst

So moving on to the LNG transportation tenders, which you mentioned in the presentation. You said that's, I believe you said there were 4 transportation tenders that you were looking at. And you earlier gave a time line for when you would expect the FSRU tenders to be awarded. Could you likewise give a time line to when you'd expect those transportation tenders to be awarded?

Peter Evensen

Sure. I think we'll see some be -- I think we'll see 2 be decided by the third quarter and the other 2 by the end of the fourth quarter.

Unknown Analyst

Okay. Okay. And would they be for project-based business? Or could they be for more trader-type entities?

Peter Evensen

No, they're all for defined project volumes. It's what they're booking out for 2016 and on.

Unknown Analyst

2015. Could you give a breakdown of, perhaps the regions on -- I know you mentioned Sabine Pass to be one of them. But have you got any -- I mean, I know you're looking at some of the Australian projects, for example?

Peter Evensen

I don't really want to be drawn on it for...

Operator

Our next question comes from Malburg [ph] from Pareto.

Unknown Analyst

Peter, so my question is related to the bridge facility. Regarding the Marubeni transaction which took place last year. How's refinancing going with the facility?

Peter Evensen

Vince, do you want to take that?

Vincent Lok

Sure, the refinancing is going very well overall. And we are in the process of finalizing 2 out of the 4 ships. And then the remaining 4 ships are moving along as well. So we should have all those loans refinanced prior to the bridge maturing this summer.

Operator

And we do have one more question from TJ Schultz from RBC Capital.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Sorry. I missed some of the earlier part of the call. So sorry if this was addressed. But last quarter, you guys provided the table in the presentation that gave the accretion from the Exmar transaction over time. Just want to see if you're still comfortable with that kind of outlook through 2015 given some of the offsets on dry-dockings this year and then the accretion to Exmar through 2015?

Peter Evensen

Yes. As we pointed out, we're comfortable with Exmar and then we have some dry-dockings in the Suezmax crude oil tanker renegotiations that we said were headwinds.

Operator

[Operator Instructions] There are no further questions at this time. Please continue.

Peter Evensen

Thank you, all, very much. We look forward to reporting back with you next quarter.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your line, and have a great day.

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