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Q2 2013 Earnings Call

August 20, 2013 8:30 am ET


Thor Knappe - Senior Vice President of Business Development

Paul Wogan - Chief Executive Officer

Simon Crowe - Chief Financial Officer


Jonathan B. Chappell - Evercore Partners Inc., Research Division

Seth Lowry - Citi

Eirik Haavaldsen - Pareto Securities


Good morning. My name is Paula, and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog's Second Quarter 2013 Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Today's speakers are Paul Wogan, Chief Executive Officer; Simon Crowe, Chief Financial Officer; and to commence the call, Thor Knappe, Senior Vice President of GasLog. Mr. Knappe, you may begin your conference.

Thor Knappe

Thank you, operator. Good afternoon, and good morning to those of you in the Americas. Thank you for joining us for our second quarter 2013 results conference call. As a reminder, this conference call, webcast and the presentation we are using this afternoon are available on the Investor Relations section of our website, A replay of this call will be available until August 27 at 11:00 p.m. London time, 6:00 p.m. U.S. Eastern Time. As shown on Page 2 of the presentation, many of our remarks this afternoon contain forward-looking statements. Let me refer you to our second quarter 2013 results press release and our reports filed with the SEC, where you will find factors that could cause actual results to differ materially from these forward-looking statements.

In addition, some of our remarks this afternoon contain non-GAAP financial measures as defined by the SEC. A reconciliation of the non-GAAP financial measures to the most comparable GAAP measures is attached as an annex to the presentation. Today's call is set to end at 2:30 p.m. London time, 9:30 a.m. Eastern Time.

If we now turn to Slide 3, the agenda for the presentation, and I will turn the call over to Paul Wogan, GasLog's Chief Executive Officer.

Paul Wogan

Thank you, Thor. Good afternoon, and good morning, and thank you to everyone for joining us. On today's call, I'll provide you with an overview of our second quarter 2013 highlights and performance. Simon will then review the second quarter 2013 financial results and provide a summary of our forward committed revenue. I'll then give a brief update on the LNG market in Q2, followed by an overview of our fleet and charter information, including details of the 2 new vessels that we announced last week. We'll end the prepared comments with a strategic update and summary.

So please turn to Slide 4 of the presentation. I would like to start by simply saying this has been a good quarter for GasLog. We continued to execute well on our existing business plan, whilst the order of the 2 additional LNG carriers that we announced last week has further added vessels to GasLog's ever-expanding fleet. These new orders continue to demonstrate the ability of our LNG shipping platform to attract new accretive business opportunities.

In the second quarter, we took delivery of the GasLog Sydney, whilst the GasLog Skagen delivered in the second quarter. Both vessels were ahead of schedule, on budget and both concurrently commenced their multi-year charters to a subsidiary of BG Group. So GasLog now has 6 ships on the water, all earning revenues in the multi-year charters. The newly delivered ships have performed well, and along with our other on the water vessels, have achieved 100% utilization during the quarter. And we're also pleased to announce today the payment of our 4th successive quarterly dividend of $0.11 per share.

Q2 also saw GasLog utilizing the bond market for the first time through the issuance of an $82.5 million Norwegian bond. This demonstrates our ability to access capital from a broad range of sources at competitive prices, which we believe will be a competitive advantage as we look to finance further accretive transactions. Finally, the LNG industry continued to see positive developments, including further regulatory approval for liquefaction plants in the United States.

I'll now hand over to Simon, who will take you through the second quarter results in more detail.

Simon Crowe

Thank you, Paul. Good afternoon, and good morning. Paul touched upon the fact that we've delivered another solid quarter, one in which we continue to execute to the business plan that we set out at the time of the IPO. I'm very pleased with our continued progress and the additional 2 new builds that we've recently announced. I will now take you through the financial highlights. Please turn to Slide 5 of the presentation.

Revenues for the quarter increased by over $16 million to $32.9 million compared with the same period in 2012. The increase is mainly attributable to the delivery of the GasLog Shanghai, the GasLog Santiago and the GasLog Sydney during the first half of the year and the immediate commencement of their charters. The third [ph] revenue figure is underpinned by the 100% utilization of all the ships in our fleet.

EBITDA was $33.8 million for the quarter compared to $2.2 million for the same period last year, with profit for the quarter of $20.4 million. The Q2 figure was an increase of $24 million on the same period in Q2 2012. This increase in profit is mainly due to the following reasons: a $16.2 million increase in revenues; a $4.4 million increase in vessel operating in 2 provision costs, mainly attributable to the delivery of the 3 new ships in the first half of 2013; a $3.2 million increase in the depreciation of fixed assets, mainly linked to the 3 new ships delivered in the first half of '13; a $1.5 million decrease in G&A expenses compared to Q2 of 2012, and this decrease is mainly attributable to a decrease in equity settled compensation expenses and a decrease in net foreign exchange losses, which is partially offset by an increase in employee-related expenses and legal expenses in line with the GasLog's planned growth; and finally, a $14.1 million net gain on financial costs and swaps. The breakdown was $18.2 million increase in unrealized gain on swaps and this is partially offset by an increase of $4.1 million in other financial costs. And this, of course, is mainly related to the interest expense and amortization of the loan fees from the facilities we drew in the first half of 2013.

If we look at adjusted profit, the increase of $4.5 million compared to Q2 in the previous year excludes the effects of the unrealized gains and losses on swaps and foreign exchange impacts. For the second quarter, EPS is $0.32 compared to a $0.06 loss in the same quarter last year. The increase in EPS is mainly due to the increase in profit.

Please now turn to Slide 6 of the presentation. Here, we've set out the growth in revenue, EBITDA total assets, an average number of ships in the graphical easy-to-read format. The changes in these metrics mainly arise from the delivery of the new vessels and the continued solid execution of the business plan. We delivered one new LNG carrier in the latter half of the second quarter, giving an average fleet of 4.3 ships.

Please now turn to Slide 7 of the presentation. The fixed asset line reflects the 5 ships that we had in our fleet as of June 30, 2013, with the combined book value of almost $1 billion. The large increase in December 31, 2012 reflects, of course, the delivery of 3 LNG carriers during the first half of the year. In addition, we have 7 ships on order as of June 30, for a total of $141.7 million as of that date. The decrease at December 31, 2012, reflects the delivery of the 3 ships in the first half of 2013, partially offset by the progress in the construction and installments paid for the 7 ships on order at that time. The impact of the delivery of 1 LNG carrier since then in Q3, and the ordering of 2 more LNG carriers in Q3 is not included.

If you look further down this table, you can see that GasLog's cash and cash equivalents were $212 million at the end of June. The balance reflects the planned vessel delivery schedule as well as the proceeds of the recent Norwegian bond.

Please now turn to Slide 8 of the presentation. The major items on the liabilities side of the balance sheet relate to our 5 debt facilities on the delivered fleet as of June 30, as well as the bond agreement signed on June 27, 2013.

Please now turn to Slide 9 of the presentation, where we consider the debt facilities in place. This slide should be familiar to most of you. It highlights the debt facilities we have in place for our fleet and it now includes the Norwegian bond that was issued near the end of the second quarter. The second quarter saw us draw down on one more facility, coinciding with the delivery to our fleet of GasLog Sydney. Our total investment as of June 30, 2013, was $739 million, and this includes the $82.5 million outstanding under the Norwegian bond agreement that is repayable in June 2018.

We've spoken to you before about the refinancing of the debt facility on GasLog Singapore. The final signing occurred in the second quarter, and as expected, the facility represented $160 million loan amount, of which $110 million was a fully drawn down term loan and $50 million is a revolving credit facility that was undrawn as of June 30, 2013.

The 4 LNG carriers that we have ordered this year, 2 in the first quarter and the 2 we announced last week, are not on this slide. Given that they all deliver in 2016, we expect to start looking at financing these vessels in 2014. You may recall that we have a good track record of achieving tail-heavy payment terms, and so it still remains a little bit early to enter into such financing commitments.

We have, as of June 30, 2013, an undrawn revolving credit facility of $50 million, an undrawn loan facility with an aggregate amount of $717 million that we used to partially finance the delivery of 5 new buildings. Borrowings under these loan facilities will be drawn down upon delivery of the ships, which is scheduled for various states between 2013 and 2015.

With the recent delivery of GasLog Skagen in Q3 2013, $138.5 million [changed by company later] was drawn. As of June 30, 2013, GasLog has entered the interest rate swaps agreement on our bank loans for a total notional amount of $917 million. This is in relation to the outstanding indebtedness of $657 million on the undrawn loan agreement of $767 million as of that date.

In addition, as of June 30, 2013, GasLog entered into 3 cross currency swaps related to the bond signed on June 27, 2013. The interest rate and the currency exposure for the Norwegian bond are now fixed.

In total, 62.1% of GasLog's expected floating interest rate exposure has been hedged at a weighted average interest rate of approximately 4.6%, including margin as of June 30, 2013.

During the second quarter, GasLog has recognized a noncash gain of $12.9 million on swaps, primarily attributable to the mark-to-market valuation of these swaps, carried at fair value through profit and loss. This reflects the sharp rise in interest rates during the quarter and the adoption of IFRS 13 in Q1 2013.

Please now turn to Slide 10 of the presentation where we consider the contracted revenue looking forward. The table here illustrates our contracted revenue position after 2026. The figure for our 2013 excludes the first half of the year. The table does include the 2 LNG carriers we announced last week, delivering in 2016 and each scheduled to commence a 7-year charter to the BG Group.

You can see from the table that we have 100% contract cover for this year and for 2014 and it is over 70% the following 2 years. You can also see, in the total column, that we have 43% of our available base contracted in the period to 2026, inclusive. The contracted revenues going forward are now around $2.2 billion following last week's announcement. Please note, these revenue estimates do not include any earnings of our 2 uncommitted ships and similarly, there's no revenue included for likely earnings in the ships following the completion of their initial charters.

Turning now to the full year for 2013. Based on our current business plan, full year EBITDA remains in line with consensus. We expect our operating costs and net interest costs to reflect the delivery of remaining vessels scheduled for 2013 and the drawing down of associated debt. We remain on track and on plan. We continue to evaluate different funding alternatives, and as you saw, we entered the Norwegian bond market last quarter for the first time. We have announced today a dividend for the second quarter of $0.11 per share. This dividend will be payable on September 13, to stockholders of record as of August 30.

Going forward, we look to maintain sufficient liquidity in the business to fund our existing business plans and to fund profitable growth. Where we see there is excess cash in the business, we remain committed to returning it to shareholders. And that concludes the financial highlights of the presentation. And so now, please turn to Slide 11 of the presentation and I'll hand you back over to Paul.

Paul Wogan

Thank you, Simon. So Slide 11, a market update.

In Q2, we saw continued strong demand for LNG. Once again, Far Eastern demand was a big driver, although South America also saw a significant demand. The pipe availability [ph] of shipping in the Atlantic Basin, combined with the relatively high gas prices in the Far East kept the arbitrage window open, and as a consequence the near-term spot shipping market was firm and rates increased in the quarter.

There was further developments in the LNG industry in Q2 that we expect will provide future demand for additional LNG carriers, such as Cheniere took Final Investment Decision on the further 2 LNG production trains at their Sabine Pass facility. The nameplate capacity of these 2 trains is expected to be a combined 9 million tons per annum. The free project on the U.S. Gulf Coast became the second U.S. export project to receive approval from the U.S. Department of Energy to export LNG to countries with free trade agreement status. And earlier this month, Lake Charles export project also received such approval. These new projects are likely to export LNG to the Asian market and as such, should create incremental demand for significant numbers of LNG carriers. We continue to see announcements regarding Japanese and Indian buyers, securing planned U.S. LNG export volumes. And we also saw the potential for Canadian exports continuing to improve.

E.ON of Germany signed up for volumes from a potential project on the East Coast of Canada, whilst both BG and ExxonMobil filed applications to develop large export facilities on the Canadian West Coast. Further progress was also made by our Russian developers, and in particular, in this quarter, Rosneft announced agreements with Japanese buyers and a trader. And I think all this illustrates the ongoing global development of LNG.

Late 2014 and 2015 remain very important years for global LNG based on a large number of projects that are scheduled to commence their LNG production at such time.

Please now turn to Slide 12 of the presentation. Last week, we announced the order of 2 more LNG carriers to be built by Samsung Heavy Industries in Korea. On delivery in 2016, these ships are scheduled to commence 7 year charters to BG. We are very pleased that BG continues to entrust GasLog with their business, and we believe it shows their confidence in the high-quality LNG shipping that we provide. As a result of ordering further ships in the same series, we obtained a lower delivered cost than for the 2 sister ships announced earlier this year. The charters on these 2 new orders are expected to earn a combined EBITDA of $46 million to $47 million in the first year of operation. The charterer has the option to extend the charter after the initial 7-year period. And in connection with ordering these 2 ships, GasLog now holds options for a total of 6 LNG carriers at Samsung, 4 of which are priced at we believe are attractive terms. These options expire in fourth quarter 2013.

I would also like to point out the attractive terms achieved when ordering these ships, combined with the Norwegian bond that we did in Q2, mean that we do not foresee the need to raise equity to fund these new vessels for at least a couple of years.

Please now turn to Slide 13 of the presentation to review the GasLog fleet list. The slide shows the build-out of our modern fleet with multi-year charters to leading industry participants. As Simon mentioned earlier, the large amount of contract coverage provides us with the flexibility to be more opportunistic in the charters we are considering for hulls 2043 and 2044. While it's the strength of our underlying contract cover, the $2.2 billion of revenue that -- committed revenue that Simon mentioned also means we can be opportunistic when looking to buy existing on the water vessels. Please note, that this list only includes the vessels we own and does not include the 11 LNG carriers we manage for third parties.

So now please turn to Slide 14 for the summary. As I said to commence with, this is another strong quarter for GasLog, in which we continue to execute well on our existing business plan and to further fleet growth. And looking forward, we remain optimistic about future opportunities. We are pleased to announce the payment of our fourth dividend in a few weeks' time. We remain focused on operational excellence and we're maintaining the 100% fleet utilization we have achieved to date. In addition, we will continue to focus on the execution of on-time and on-budget delivery of the 8 LNG carriers we have on order. We believe that the forecast expansion of the LNG industry, combined with GasLog's experience, technical platform, a proven track record of project execution and our strong industry relationships, mean that we are confident that we will continue to see attractive growth opportunities for our company. That brings us to the end of the presentation.

Before we start with questions, I would like to use the opportunity to highlight that we will be holding an Analyst and Investor Day on the afternoon of Tuesday, the 10th of September, in New York, starting at 2:30 p.m. For details and to RSVP, please contact, and we very much look forward to seeing you all there. Operator, could you please open the call for questions.

Question-and-Answer Session


[Operator Instructions] We'll now take our first question from Jon Chappell of Evercore Partners.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Paul, my first question is on some of the existing ships. If I remember correctly, during the IPO process, they had contracts with expiration kind of middle of this decade, maybe a little bit later. But they also had options to the charter, a bunch of them. As you think about maybe creating a vehicle, an MLP, that will have longer-term contracts, how do you think about the options associated with those? And have you had contract -- discussions with BG about maybe locking those in, so there's more visible cash flows on those vessels?

Paul Wogan

Yes. It's an interesting question, Jon. I think we do -- obviously, we have a rolling portfolio of contracts, some of them coming off as we go further into this decade. Actually, when we look at where we are with the LNG market at the moment, these options are looking, I think, fairly well priced. So we would expect those contracts to be maintained. I think that our customers like the optionality they get from having those contracts, but I think they would also be very open to discussing extending those further. It's not a conversation that we've had at this point with our customers, but it's certainly something I think that's open to us looking forward.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

That makes sense. And then also on the 2 unchartered ships, I remember not too long ago, kind of the thought process that you'd be looking for contracts for those, maybe even by the end of this year. Now obviously, the 4 new ships that you've announced this year with delivery in '16 and the change in your long-term contract profile, has that changed the way you're thinking about those vessels as well? Do you want to keep the optionality, or would you ultimately aim to have contracts on those well before delivery?

Paul Wogan

We actually quite like the optionality on them. I think having the $2.2 billion of revenue that we're talking about before gives us underlying strength to the business. That means we can be opportunistic. So when we look at those ships, I think we look at them -- we're not sort of ruling anything out. If we saw value in putting those ships on longer-term contracts, we would certainly take a look at that. But I think we can also see there is potential value in having those ships running on contracts which are not necessarily long or medium term. And so we'll kind of continue to evaluate that. But as I said, I think the nice thing now is the underlying strength of the business is allowing us to take that sort of more opportunistic view of those vessels.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay, understood. Two more quick ones, just one more for you Paul. On the new build options, with 6 of them now, would you aspire to have contracts for those before you went ahead and contracted those, or could you potentially do something like you've done with these 2 unchartered and have optionality somewhere in the future, given that they probably won't be delivered until kind of the 2017 time horizon?

Paul Wogan

Yes, I think the great thing with the options, is we've got that optionality now over the next few months, so I think we'll continue to evaluate whether we do something with our ships on contract, whether we'll obviously take a look at whether we do something with them outside contract. But having got those options at the moment, we'll sit back a little bit and just see how our customer discussions develop and how the market develops over the next few months.

Jonathan B. Chappell - Evercore Partners Inc., Research Division

Okay. And then just one last quick one for Simon. The G&A, obviously a big step down this quarter. There's things like the stock comp part. What's a good run rate to look at going forward? Because that's a pretty meaningful step down on a sequential basis.

Simon Crowe

Yes, Jon. I mean, we feel -- we talked that question actually before, we thought we might get it, not sure where [indiscernible] from you. But I mean, look, if I'm going to model this and I'm sitting there, I'm probably going to use the run rate for the 6 months. That's kind of roughly where I am. I thought maybe we'd come in a little bit below that. We might execute some things later in this year, and the timing of those is a little bit uncertain. There's FX that could impact it, but if rough rule of thumb, we're 6 months in, you can see the number. I'd probably use that as a rough run rate for the end of the year if I was putting it in my model.


Our next question comes from Christian Wetherbee of Citi.

Seth Lowry

This is Seth Lowry, in for Chris. If I could continue along with some questions on the options. A question was, you secured or your fixed prices for 4 of the 6 option vessels? I'm just wondering, was it a conscious decision to let the other 2, I guess, remain floating in the market? Or is that just simply a work in progress?

Paul Wogan

No, I mean, when you're negotiating options with partners, the further out those options go, the more uncertainty there is in terms around the pricing. I think we are very pleased to have 4 fixed priced options with a great shipyard like Samsung. And we are also comfortable that we have the ability to have the other 2 vessels behind that. So I think we have more focus on the 4 priced ones we got than the 2 unpriced ones to be honest.

Seth Lowry

Okay, fair enough. And then in the instance where you go ahead and exercise all 6 options, can you talk about, is there any opportunity for further, or I guess, incremental discounts from the shipyards for the series ordering and the bulk ordering of vessels from the same yard?

Paul Wogan

Yes. And that -- I mean, the way it works is there are a number of things that play to your advantage when you order a series of ships. So we're keen to take advantage of those by ordering into the series and hope we can do that with the future vessels.

Seth Lowry

Okay. And then my last question is, you mentioned you don't have a need for equity over the next few years with your existing fleet, but in the instance where you exercise all of your options, would you foresee a need to raise equity to fund maybe the down payments? Or would you look to do that with capital from other sources?

Paul Wogan

Yes, I think if and when we do that, we'll look at each scenario as it comes along. So if we were looking at doing more vessels, then I think we would be also be then looking at what's the best way to fund those vessels as we've been doing so far. I think, as well as the new buildings, I think there's going to be opportunities as well in on the water vessels because I think we're seeing some of these ships delivering into owners who don't necessarily have the platform that we have, so we may see some opportunities there. So I think as each of those opportunities come up be it ships on the water or new buildings, I think we'll look at what's the best way to fund those vessels. And that may be additional debt, it may be taking on some equity. But certainly, we'll be looking at the way to fund that that makes the most accretive sense for the business.

Simon Crowe

I think that's right, Paul. I mean, we're running a range of scenarios all of the time, which obviously includes the 6 options, as Paul indicated. It includes evaluating opportunities with ships on the water. And then we look to a range of funding alternatives. You've seen us started to broaden now with the $2.2 billion platform we've got, we're broadening out our funding alternative. You've seen us dip into the Norwegian bond market. And so we're constantly evaluating different funding scenarios, making sure that the underlying opportunities are accretive and are very good investments and meet the hurdle rate. So I think as Paul said, there are a number of scenarios that we have continued to evaluate and we'll look to choose the most appropriate funding sources at that time.


[Operator Instructions] Our next question comes from Eirik Haavaldsen (Pareto Securities).

Eirik Haavaldsen - Pareto Securities

Could you just give me some color on how you're thinking about the 2 new builds without contract at the moment? Are you perfectly comfortable taking delivery of those without the contract? And would you kind of need a contract on those before you go ahead and exercise adoptions? And then how are you thinking about that?

Paul Wogan

I think we're very comfortable with those ships. We -- given the platform that we have, we're confident that we will do well with our ships. So I think as we look out the options, those ships are not something that would, if they're not fixed, prevent us from doing options. Given the underlying strength of the business that we keep talking about, then I think we can do that. I also like the optionality that we have with those vessels, to be honest. I think that we're going to be seeing a strengthening market as we see new liquefaction plants coming on, and having those vessels available, I think, is going to be -- is going to play well for us going into the future. So over the next 16 months before those vessels deliver, we'll look at -- as I said, we'll look at all the different options that we have, whether to take the ships into longer-term charters or run them on more short-term business and evaluate. But as I said, given our platform, I'm very comfortable that we'll do a good job on those vessels.

Eirik Haavaldsen - Pareto Securities

Okay. But do you actually see any kind of interest in the market for longer-term charges with commencement in early 2015, or is that something that's -- you haven't really gotten to that point yet in the market?

Paul Wogan

Yes. I mean, we've seen people in the market for 2015 charters. We saw Cheniere were in the market. We've had discussions with a number of our customers. I think what's important here is we're seeing business that perhaps others don't because we have play with a track record with a strong operational platform. So yes, we are seeing potential business for those vessels. For us, the trick is to make sure that we optimize on the earnings.

Eirik Haavaldsen - Pareto Securities

But then, when you talk about looking at existing tonnage, you mentioned that you might be looking at the operators without kind of your experience and your administration abilities. But would you be prepared to kind of go out there, if obviously, depending on the cost, but would you be looking at taking existing tonnage now in order to trade in it the spot market through 2014? Or would you kind of require the contract before you go out and do something like that?

Paul Wogan

I think, it depends on the actual deal, it depends on the vessel, it depends on what's happening. So it's very hard to speculate. But what I would say is that we're happy to take a look at, given the underlying strength of the business, the platform we've got, we're happy to look those -- at all different types of deals and evaluate them at the time.

Simon Crowe

Case-by-case basis.


As there are no further questions at this time, I would like to hand the call back to Mr. Wogan for any additional or closing remarks.

Paul Wogan

Okay. Well, just like to say thank you very much for everyone for joining us today. Sorry that we disturbed potentially your summer holidays to do it. But we do appreciate your time, and we look forward to hearing from you in the future. Thank you.

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