Teekay LNG Partners LP. Management Discusses Q4 2013 Results - Earnings Call Transcript

Feb.21.14 | About: Teekay LNG (TGP)

Teekay LNG Partners LP. (NYSE:TGP)

Q4 2013 Earnings Call

February 21, 2014 11:00 am ET

Executives

Ryan 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

Analysts

Fotis Giannakoulis - Morgan Stanley, Research Division

TJ Schultz - RBC Capital Markets, LLC, Research Division

Operator

Welcome Teekay LNG Partners Fourth Quarter and Fiscal 2013 Earnings Results Conference Call. [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 fourth quarter and the fiscal 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 fourth quarter and fiscal 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 fourth quarter and fiscal 2013 investor conference call. I'm joined today by Teekay Corporation's CFO, Vince Lok; Chief Strategy Officer, Ken Hvid; and MLP Controller, David Wong. During our call today, I will be walking through the fourth quarter and fiscal 2013 earnings presentation, which can be found on our website.

Turning to Slide #3 of the presentation, I would like to review some recent highlights. The partnership continued on its course of steady growth in the fourth quarter of 2013, generating distributable cash flow of $63.4 million, up 18% from the same quarter of the prior year. For the full fiscal year, the partnership generated distributable cash flow of $237 million in 2013, up 8% from 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 charter-back of 2 LNG carriers with Awilco LNG in late 2013.

In November, we completed the accretive acquisition and charter-back of the second LNG carrier from Awilco LNG on similar terms as the first vessel that delivered in September. Based on the additional distributable cash flow resulting from the Awilco transaction, the partnership declared and paid a fourth quarter distribution of $0.6918 per unit, an increase of approximately 2.5% or $0.07 per annum, bringing Teekay LNG's total annualized distribution to $2.70 -- $2.77 per unit.

In mid-November 2013, we exercised an option with DSME for 1 additional LNG carrier newbuilding, bringing our LNG order book to 5 vessels. All of these newbuilding LNG carriers will be equipped with M-type, Electronically Controlled, Gas Injection or MEGI twin engines, which are expected to be significantly more fuel-efficient and have a lower emission level than other engines currently being utilized in LNG shipping.

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We expect to secure long-term charters for the partnership's 3 MEGI LNG carrier newbuildings delivering in 2017 because they should be well-positioned to take advantage of the anticipated strong LNG shipping fundamentals due to the scheduled start-up of several new LNG liquefaction plants beginning in 2016 and 2017. These vessels will complement our other 2 MEGI LNG carrier newbuildings, which are chartered to Cheniere and which will deliver in 2016.

In addition to our LNG order book, we also have 12 midsize LPG carriers on order through our 50% joint venture with Exmar, all of which are scheduled to deliver between 2014 and 2018. In late January, 2014, the joint venture secured 4 new fixed rate charter contracts. Two of the contracts are with Statoil, which will employ 2 of the joint ventures' newbuildings LPG carriers for an initial period of 5 years with extension options up to a maximum of 10 years following the delivery of the vessels in 2016. The other 2 contracts are with the Potash Corporation, which will have a duration of 10 years to be serviced by 2 of the joint ventures existing on-the-water LPG carriers.

As I reported in previous quarters, there continues to be a significant amount of LNG and FSRU project tender activity, and our business development group is actively evaluating and bidding on several of these with expected delivery dates in 2016 and beyond.

Turning to Slide #4. We take a look at developments in the LNG shipping market. LNG shipping spot rates, as shown by the chart at top of the slide, are currently on the decline due to a combination of limited cargo availability and fleet growth. Having peaked at approximately $150,000 per day in the middle of 2012, both spot rates and 12-month time charter rates recently dropped below $80,000 per day and continue to show weakness. Ongoing production outages at various liquefaction plants around the world continue to limit the supply of LNG available for shipping. In addition, no new projects are scheduled to start up until later this year. At the same time, more than 30 LNG carriers are due to be delivered into the fleet this year, almost half of which are not committed to long-term projects. On this basis, we anticipate the short-term LNG shipping rates will continue to decline in the near term due to a surplus of vessels compared to demand.

Starting in 2016, however, we expect that the new LNG supply will soak up available fleet capacity and create new demand for LNG carriers. This is shown by the chart at the bottom of the slide, which shows that expected LNG liquefaction capacity region by region out to 2020. As you can see from the chart, the real ramp-up in new supply comes from 2016 onwards when new supply is expected to come online from Australia and the United States. These volumes may be joined later in the decade by new LNG exports from Russia, Western Canada and East Africa.

Turning to Slide #5. We take a more in-depth look at the supply-demand balance for LNG carriers. As you can see from the chart, between now and 2016, we anticipate the market will be oversupplied with vessels, as there appears to be insufficient supply of new LNG to absorb the large number of newbuildings coming into the market. This will be particularly problematic for those ships delivering prior to 2016, which are uncommitted to projects, and we expect fleet utilization and, therefore, spot rates will fall during this time as we've witnessed recently.

However, from 2016 onwards, the fundamentals point to a tightening in the market, as new LNG liquefaction plants start to come online. And by 2017, we believe the supply and demand balance once again shows the vessel deficit, meaning that new LNG carriers will be needed to meet the demands. As you can see from the chart, this timing coincides well with the 2017 deliveries for the partnership's 3 currently unchartered LNG carrier newbuildings, which are under construction. We therefore remain confident that these ships will deliver into a firming market and that we will secure employment at attractive levels.

Turning to Slide #6. I'd like to highlight that with 100% of Teekay LNG's on-the-water LNG fleet operating under fixed rate contracts with an average remaining duration of 12 years, the partnership is largely insulated from the recent declines in spot LNG shipping rates.

Since our IPO in 2005, we've deliberately focused on new business that enhances the stability of the partnership's cash flows and which has minimal exposure to commodity price or volume volatility. Over the next 3 years, Teekay LNG only has 2 LNG carriers, of which we own 52%, rolling off their existing contracts; thus, the partnership's exposure to potentially weakening LNG shipping rates is minimal.

Turning to Slide #7. We take a look at developments in the LPG shipping market. Starting at the top of the slide, rates for medium-sized gas carriers or MGCs have remained relatively stable in recent months at approximately $835,000 per month or $27,500 per day. You'll notice that MGC rates show far less volatility compared to the very large gas carriers or VLGCs. We believe this is favorable to Teekay LNG as it means our large fleet of MGCs, owned jointly with Exmar, should deliver stable cash flows and largely avoid the earnings volatility that can incur in the VLGC market.

Looking at the chart, you can see that VLGC spot rates have been at very high levels in recent months, with rates in the summer of 2013 reaching their highest levels since 1990. Rates have since come off, but we believe there's a more seasonal swing rather than a worsening in the supply-demand fundamentals. This uptick in VLGC earnings is largely due to the impact of growing LPG exports from the U.S. as shown by the chart on the bottom of the slide. Rising U.S. shale gas production is leading to a surplus of LPG available for export at prices which are competitive for those from the Middle East. This increase in U.S. LPG production is expected to continue in the medium term and could add significantly to LPG carrier ton mile demand in the coming months and years. While these exports primarily benefit the VLGC market, we anticipate that there will be positive effects felt in the smaller ranges, including the MGC segment.

Moving to the financial results for the quarter on Slide #8 and starting at the top of the income statement. Net voyage revenues increased by approximately $3.4 million, primarily due to revenues on the Awilco LNG carriers, partially offset by a decrease from the Asian Spirit and African Spirit Suezmax tankers being off-hire for a total of 48 days for their scheduled drydocking. For the first quarter, 22 off-hire days are expected as a result of the scheduled drydocking of 1 LNG carrier.

Special operating expenses increased by $0.5 million, primarily due to the timing of repairs and maintenance expenditures. Depreciation expense was consistent with the prior quarter. General and administrative expenses increased by $600,000, primarily due to higher business development costs incurred to support our growth. Equity income decreased by approximately $3.6 million, primarily due to $2.3 million noncash charge related to the purchase price allocation adjustment for the Exmar LPG joint venture; higher interest expense in the LNG joint venture we have with Marubeni Corporation, following the completion of a debt refinancing in Q3; and higher operating expenses within that Angola joint venture as a result of increased crew and repairs and maintenance expenses.

Net interest expense increased by $2 million as a result of a full quarter of interest expense related to the Norwegian kroner bonds issued in September of 2013 and a new test facility used to finance the delivery of the first Awilco LNG carrier. Finally, income tax recovery increased by $1.1 million, mainly due to a tax provision adjustment related to the Tangguh joint venture. I

won't walk through all of Slide #9, which was included in our recent earnings release. However, I will note that our average ratio of 1.08x for the fourth quarter is within our target coverage range of between 1.05x and 1.10x.

Looking ahead to 2014, as we indicated in previous earnings calls, 3 of our 5 Suezmax tankers on charter to Sepsa [ph] are in the process of being sold. In mid-December 2013, that Tenerife Spirit's Suezmax charter contract was terminated and the vessel was sold. We expect the same to occur with the Algeciras Spirit's Suezmax tanker in late February 2014 and the Huelva Spirit by mid-2014. We anticipate that these contract terminations and vessel sales will negatively impact the 2014 DCF by approximately $7 million. However, this will be more than offset by the full year cash flows from the 2 Awilco LNG carriers, which were acquired in late 2013. In addition, we have some additional revenue upside relating to 2 other Suezmax charters, which are on charter to Centrofin, whereby our partnership receives 100% of the upside above the base charter rate of $14,000 per day based on spot Suezmax rates. Given the strengthening of Suezmax rates in late December, TGP received an additional $500,000 of revenue from this in the fourth quarter. Suezmax rates spiked further 2014, and thus, we expect to earn approximately an additional $2 million of revenue in the first quarter from these 2 charters. For an overview of the scheduled drydockings in 2014, please refer to the appendix of this earnings presentation.

Wrapping up on Slide #10. Based on the anticipated strong fundamentals in the LNG shipping market that I talked about earlier on this call, we believe the modest buildout in our newbuilding order book will provide an attractive pipeline of distributable cash flow growth over the next few years. In addition to the 2 MEGI LNG carrier newbuildings charted to Cheniere starting in 2016, we believe the partnership's 3 currently unchartered MEGI LNG carrier newbuildings delivering in 2017 will be well-timed to take advantage of the start-up of several new liquefaction projects beginning in 2016. In addition to securing employment for these unchartered newbuildings, the partnership is also engaged in LNG shipping and floating regasification project tender opportunities, with expected start-up dates in that same time frame.

Operator, I'm now available to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Michael Webber from Wells Fargo Securities.

Unknown Analyst

This is actually Samid [ph] on for Mike. So really quick first question is the follow-up on LNG projects and potential FSRU projects out there. I know you guys won't comment specifically on any specific projects. But given our understanding is a lot of these projects are in various geographies across the world, how would you guys think about risk-reward in terms of the potential return you would need for kind of these projects out there?

Peter Evensen

Every project is a little bit different, so we don't classify them, really, by region. We look at the doability of the project and the actual cost price of the project. We look at what its contracts are, like have they presold a lot of the gas? And then so I would say, it's more project dependent than region dependent when we're looking at it. But obviously, we're focused in on a lot of the U.S. projects that are coming in and receiving FERC approval right now. But there are other regions of the world, including Australia and Russia, where we're looking at projects.

Unknown Analyst

Got it. And switching from LNG carriers to more FSRUs, is there any updates in terms of potential projects, FSRU projects, you guys are looking at right now?

Peter Evensen

No. We aren't commenting specifically on FSRU projects that we're working on. No, for competitive reasons.

Unknown Analyst

Got it. And switching gears to distribution. And I know you guys recently raised your distribution as of Q4. But in terms of future guidance, is there any updates on any changes to the distribution we should expect in the coming quarters?

Peter Evensen

Yes. As you know, we don't give guidance on distributions, but we have a good track record of raising the distribution every year as we add new projects. The good news about our -- is that we -- or the good news about the partnership is that we have to add new projects, and we have some projects coming in 2014, the LPGs, which are coming in. And then there is a much bigger ramp in 2016 and 2017, and we intended to supplement that by making on-the-water acquisitions as we did late last year. So -- but we don't give actual guidance on what the distribution increases will be.

Unknown Analyst

Got it. And one final question for me, and then I'll turn it over. My understanding is that you guys still have 3 options for LNG carriers at DSME, potentially for 2017, 2018. Beyond that, as you look at all different projects out there, is there a potential to add to that number in the future in terms of getting more options for 2017, 2018? Or are you finding that slots are already kind of filling up for that time period, given the potential inflection point for LNG at that time?

Peter Evensen

We actually find that the yards have capacity. Probably, the biggest competition is that some slots are being reserved out by the actual projects themselves. And so it's a fluid situation, I would say, but -- and as well as some of slots were taken up by some of the new FLNG facilities that are being planned. But on the whole, the availability is there, which is why we get a lot visibility. In other words, the liquefaction projects has to be -- those contracts has to be placed well in advance of when our shipping has to be placed.

Operator

The next question comes from Fotis Giannakoulis of Morgan Stanley.

Fotis Giannakoulis - Morgan Stanley, Research Division

I want to ask you more about the LPG sector. This is a new sector, a relatively new sector for you. We have seen the last few months, there are very steep increase in the order book. More than -- is right now more than 30%. Do you feel that the opportunity is still there? And how will this order book impact the balance the next couple of years?

Peter Evensen

Well, so just for everyone's benefit because I know you know this, Fotis. So our exposure to the LPG market is in the medium-sized or the MGCs, which, as I said in my prepared remarks, have lower volatility. You're asking about the VLGCs, which -- where we have 1 older one in our LPG joint venture that we have with Exmar. We're constructive on the VLGC market, but there's a tendency for ship-owners to get ahead of themselves. And so what we've seen is that people have been ordering and they've been ordering because they know the prices are going up on VLGCs. So they might as well order now. The actual project has to materialize, but as I said, we're -- we've been pleased with the amount of new capacity, and we continue to go watch that market. If we could get medium-term contracts, you would see us entering into the VLGC market, but I would say that we're seeing normal seasonality. Rates are down below -- rates from VLGCs right now are -- on a spot basis are below the MGCs, which is a normal seasonal trend. But on the whole, we're positive on the VLGC market. And so the 30% on order isn't truly exceptional. If people continue to order, then, I think, we can have that discussion. But we think that the amount on order now will be comfortably absorbed.

Fotis Giannakoulis - Morgan Stanley, Research Division

And can you also describe us the LPG market? You signed some long-term contracts recently. Do these contracts exist in this particular subsegment that you are in the mid-gas carrier segment? Do you forecast that the market will develop to such a degree that more long-term contracts will be able to be signed in the broader markets?

Peter Evensen

I think the VLGC market will always be -- have shorter-term charters, just due to the inherent volatility of it. But some of the bigger players are -- can clearly get more CoA or volume contracts going forward. But because it's a traders market, so you're never going to see long-term markets. Whereas our relationships that we have with Statoil and Potash, those are ammonia and LPG runs where they know they're going to always needed ships. So that's why they enter into long-term contracts. But where you basically have traders, they'll always enter into spot, 1-year or 3-year contracts. And that's the VLGC market, which is why as our partnership, which wants stable cash flows, why we concentrate on the medium-term market rather than in the VLGC.

Fotis Giannakoulis - Morgan Stanley, Research Division

I understand that you do not disclose the levels of your contracts. But given the fact that these are very long-term contracts, the ones that you signed. Is there any -- how shall we think the discount that you have offered in order to get these long-term contracts?

Peter Evensen

I don't think you should think about it as a discount because you should think about it as long-term customer relationships where we're renewing our customer relationships, which is what we have with Potash and Statoil, as well as several other customers. So are these are long-term relationships where we're rolling over contracts. And the purpose of ordering the 12 newbuildings was to renew the fleet, and we have a lot of base customer coverage. And so it is more based upon the customer relationships than it is to point to any single market. We have an extraordinarily high market share in the medium-term market, and it's based more on being the shipping arm of our customers in that market.

Fotis Giannakoulis - Morgan Stanley, Research Division

I want to switch over on the LNG space. I understand that there is one vessel, if I'm not mistaken, the Methane Spirit that comes out of contract in early '15. Have you started any discussions about the renewal of this contract? How is the chartering environment for 2015?

Peter Evensen

The chartering market is weak, and we have started conversations with charters about whether they're interested in that unit. And so just to be simple, the market is weak. So I think we'll have to be competing on that. Luckily, we only own 52% of it, but we believe rates will be down in the rest of '14 and '15 because there's too many ships and that's the just plain fact of life. Because it's not a huge amount of -- it doesn't have a huge effect on our DCF, we're okay with that.

Operator

[Operator Instructions] The next question comes from TJ Schultz of RBC Capital Markets.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Just one question on U.S. exports. It seems like there's been more constructive discussions recently around the potential for ethane exports. If you could just comment on that market, what type of vessels would be required, and if there's an opportunity for you all as that market develops?

Peter Evensen

Yes. So we actually competed on one of the ethane long-term contracts because you need a more specialized vessel rather than a VLGC in order to ethane, and we lost. So -- but that's okay. You have to compete on a whole bunch of them. But we think that's a very interesting growing market on the ethane side, particularly, from the U.S. to Europe because it's a good feedstock. And so we think that will continue to build out, but you have to get the specific ports and the pipelines to get to the ports. And that's taking a little bit longer time. But we have high hopes for that market.

TJ Schultz - RBC Capital Markets, LLC, Research Division

Okay. Would you characterize it as seeing more opportunities this year to potentially bid on projects such as that?

Peter Evensen

Yes. We saw the volumes coming out of the Marcellus, and ultimately, I think you'll see volumes coming out of the U.S. Gulf as well. And that was the first export one. And you need more specialized ships in order to move them. And what will happen is you'll need bigger ships. And so we expect volumes to come from the U.S. to go to places like India as well. And so the types of ships that have been shipping ethane had been smaller and when you get for the longer haul just to make things work, you need a bigger ships. So that's a great opportunity for newbuildings and sets up well with our contract mentality.

Operator

There are no further questions at this time. I'll turn the call back to you.

Peter Evensen

All right. Thank you, all, very much, and we look forward to reporting back on our progress next quarter. Thank you.

Operator

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

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