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GasLog Ltd. (NYSE:GLOG)

Q2 2014 Earnings Conference Call

August 20, 2014, 8:30 AM ET

Executives

Jamie Buckland - Head of IR

Paul Wogan - CEO

Simon Crowe - CFO

Analysts

Jon Chappell - Evercore

Michael Webber - Wells Fargo

Fotis Giannakoulis - Morgan Stanley

Herman Hildan - R.S Platou Markets

Ben Nolan - Stifel

Prashant Rao - Citi

Nish Mani - JPMorgan

Operator

Good morning. My name is Mary and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Ltd. Second Quarter 2014 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. 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, Jamie Buckland, Head of Investor Relations at GasLog.

Mr. Buckland, you may begin with the conference.

Jamie Buckland

Thank you, Mary. Good afternoon, and thank you for joining us for our second quarter results call. As a reminder, this call webcast and presentation are available on the Investor Relations section of our website, gaslogltd.com, where a replay will also be available.

As shown on page 2 of the presentation, many of our remarks contain forward-looking statements. Let me refer you to our Q2 results press release and our reports filed with the SEC where you’ll 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, and a reconciliation of these is attached as an annex to the presentation.

If we now turn to slide 3, the highlights for the presentation, I'll hand over to Paul Wogan, GasLog Ltd.’s Chief Executive.

Paul Wogan

Thank you, Jamie. Good afternoon and good morning to all of you in the United States. Thank you to everyone for joining us on our Q2 results call. On today’s call, I will give you an overview of GasLog’s highlights and performance this quarter. Simon will follow this with a review of the financial results and give an update on the MLP, which we launched during the quarter. I will then discuss the trends in the LNG shipping market and give an overview of our expanding fleet and some charter information.

So, first of all, I’m very pleased with our achievements in the three months to 30 June, 2014. As you can see from this slide, we’ve executed on a number of important initiatives. We successfully launched the MLP, which has performed well since the IPO and will provide capital to continue to grow the business.

We added seven new vessels to our on-the-water fleet, almost doubling the number of ships we have at sea to 15. In the capital markets, we completed a second equity offering and a tap of our NOK bond, and we’re delighted with the results of both of these financings.

We placed a total of four newbuilding orders at Samsung and Hyundai which will deliver into attractive markets in 2017. In addition, we also continued to build and strengthen the management team. In combination, all these initiatives have significantly strengthened the operational, financial and commercial platform of GasLog. I mean we’re well placed to continue to take advantage of the ongoing opportunities in the LNG market.

We now have a total consolidated fleet of 25 vessels and we look forward to continuing this fleet growth with attractive opportunities in the coming years.

Simon will discuss the financials in more detail, but in summary, we grew our revenue and EBITDA significantly in the period reflecting the growth in the fleet. Adjusted profit and adjusted EPS were both higher year-on-year. We’re also very pleased to announce a dividend of $0.12 for the quarter.

So if you now turn to slide 4, I’ll hand you over to Simon to take you through the financials.

Simon Crowe

Thank you, Paul. Good morning and good afternoon to everyone, and thank you for joining us. It’s been another busy quarter for GasLog and I am very satisfied with what we’ve achieved. Alongside the significant growth in the business we’ve seen in the quarter, we have further broadened our access to the capital markets to give us additional financial flexibility.

Expanding our finance platform is extremely important for GasLog and will allow this strong growth to continue into the future. In the quarter, we were able to facilitate multiple ship deliveries funded by debt and equity, as well as successfully IPO-ing the GasLog Partners MLP.

For me, as the CFO, one of the most pleasing things is the positive response GasLog has had from the capital markets as a whole. Our second equity raise was done at a 4.6% discount to the previous night’s close, and the second NOK bond issue achieved a fixed dollar coupon of 5.99%, which shows the growing strength of the GasLog credit.

The MLP gives us further access to the capital markets and the recent newbuilding orders at Samsung and Hyundai already evidence of how we will look to recycle capital from the MLP at the parent to grow the business in the future.

I will now take you through the financial highlights for the quarter, talk about the recent announcements and provide some guidance for 2014 as a whole.

We produced another solid quarter in line with our plans and remain on track for the full year. Revenue and EBITDA for the quarter increased significantly year-on-year due to the rollout of the fleet over the period.

We’ve added seven ships to our on-the-water fleet this quarter with three of the BG vessels delivering in early April and three staggered through June in addition to the newbuilding at Solaris delivering on the last day of the quarter.

Net financials for the quarter of $27 million can be broken into $18 million of financial costs and $9 million of impact from our swap portfolio. As you know, we’ve hedged a large part of our interest rate exposure, and from an economic perspective, this gives us certainty around our interest costs and mitigates cash flow volatility. However, the accounting is complicated, and thus, cause fluctuations in the P&L.

Notes 10 and 11 in today’s published financial statements outline the accounting treatment in some detail. The financial costs for the quarter include some one-off non-cash loan arrangement fee write-offs which arose when we dropped the three vessels down into the MLP and paid down some of the debt associated with the GasLog Sydney. These write-offs are non-cash in nature and only occur if we refinance debt or pay it down early to de-lever the balance sheet as you saw us do with the vessels in the MLP.

Please now turn to slide 5 of the presentation. You can see by the increases across all metrics that we continue to grow significantly year-on-year. EBITDA has more than doubled year-on-year and the average number of ships we had in the quarter has increased as we added the six vessels acquired from BG as well as the Solaris.

Please now turn to slide 6 of the presentation. Fixed assets have increased materially with the seven new vessels I just talked about added in the period. At the end of the quarter, we had $242 million of cash in the bank, which is a significant increase from the end of the year. This largely reflects the proceeds from the MLP at GasLog Limited and GasLog Partners as well as the NOK bond tap issue.

If we turn over to slide 7 of the presentation, I’d like to draw your attention to the non-controlling interest line of $188 million. This represents the net proceeds from the MLP IPO of $186 million plus the $2 million of profit for the period earned by the 10 million units that we sold to the public. The other key change is the increase in long-term borrowings to $1.8 billion and that reflects the addition of the BG vessels acquired in the quarter, the second bond issue, and the drawing down on the debt for the Solaris.

Please now turn to slide 8 of the presentation where we have shown our projected CapEx out until 2017. We often get asked for this detail and you can see on the slide the changes year-on-year. You can clearly see along with some stage payments for future deliveries, the delivery of GAS-nine at the end of 2014 and GAS-ten in 2015. 2016 and 2017 show the newbuild deliveries being added to the fleet.

Please now turn to slide 9 of the presentation. We have, as usual, laid out the contractual revenue going forward. You can see that for the remainder of 2014 we’re almost fully contracted. The unfixed days is related to the GasLog Chelsea, which is on a seven month charter that began in May this year and could come off of contract in December. As you can see in the bullet, we also expect one of the BG ships that we recently acquired, the Methane Lydon Volney, to go into drydock in the third quarter which will result in about 30 days of lost revenue and you should update your models to take account of this.

The scheduled drydock was brought forward at the request of the customer to fit into their commercial schedule for this year and next. We remain largely fixed in 2015, ‘16, ‘17 and ‘18 and you should remember that these percentages do not include any of the optional periods that the charterers can use to further increase the length of the contract.

Please turn now to slide 10, the full-year update. It was another very busy quarter so we wanted to spend a little bit of time just going over some of the assumptions and how you should think about the remainder of the year.

Revenue should be fairly straight forward to model. If you take the first half revenue number of $130 million and add to that the $192 million figure shown in the contracted revenue table and add in a couple of million dollars for the managed vessel revenue, you’d get to around $320 million, which should be a reasonable assumption for the full year. This revenue number may be subject to some slight fluctuations depending on the timing of scheduled maintenance.

On the cost side, we had an EBITDA margin of approximately 65% in 2013 which again should be a good working assumption for the full-year 2014.

On G&A, we reported $8 million for the quarter and a total of $14 million for the first six months of the year. We’ve been building GasLog into a business that can be scaled up materially in the future for a much larger fleet from the one we have today. as a result, we have recently strengthened our financial, operational and commercial abilities and are preparing to open a London and New York office which will bring us closer to our customers, investors and finance providers. These initiatives will better position us to take advantage of the LNG shipping markets and we would expect economies of scale as we continue to add more vessels to the GasLog fleet over time.

Going forward, I would model in $9 million to $10 million per quarter for 2014 as we take account of some of the one-off new office setup costs in the second half.

As highlighted last quarter, depreciation for the year should total around $70 million and this takes into account the BG ship deliveries in April and June. As a reminder, newbuilds have a useful life of 35 years and the purchased BG ships have a remaining useful life of 27 and 28 years as they were built in 2006 and 2007.

For finance costs, you should continue to see an all-in interest rate of around 4.5% on our debt. For this quarter and for all quarters going forward, we will have a payments to minorities line, which reflects the non-GasLog owned units in the MLP. This is calculated by taking the number of units not held by GasLog and multiplying by the distribution for the quarter. So for this quarter, the pro rata payout of $0.206 is multiplied by 10 million units to get about $2 million in payments to minorities.

For the minimal quarterly distribution of $0.375, the payment would be $3.75 million. This would change as the result of the recent drop-down announcement. So your model should be adjusted once the proposed increase in distribution is confirmed.

And finally, at GasLog parent, we now have a fully issued share capital of 81 million shares outstanding.

If we now turn over to slide 11, I thought it would be useful just to spend a minute talking about how we account for the MLP and talk through some of the changes you will need to make to your models and numbers going forward.

GasLog Ltd. owns 10 million LP units, or 49.8% of the total units, plus 400,000 General Partner units, which equates to an additional 2%. The public and insiders own 48.2%. At present, GasLog Partners is fully consolidated into the GasLog Ltd. accounts so there are minimal changes to our financial statements. The one adjustment you do need to make though is in the P&L for the payments to minorities as already discussed.

In Q2 2014 adjusted EPS has been calculated before payments to minorities to give a like-for-like comparative for the first quarter. Going forward, we expect to report adjusted EPS after payments to minorities, so you should adjust your numbers and your models to reflect this.

I’d like to finish up by spending a minute on the joint announcement that the GasLog Ltd. and GasLog Partners made last Thursday. GasLog Ltd. has agreed to sell two vessels to GasLog Partners for $328 million. This transaction is a milestone for both companies as it marks the first drop-down from the parent to the MLP.

For GasLog Ltd., the transaction is particularly attractive but it results in a significant increase in the quarterly distribution and should mean we are into the first incentive distribution threshold.

So in summary, for me, it’s been another very busy and successful quarter with significant growth through acquisition and newbuildings. We have again been active in the capital markets with successful equity and bond raises, as well as the launch of the GasLog Partners MLP.

And with that, I’ll hand back to Paul to take you through the rest of the presentation.

Paul Wogan

Thank you, Simon. Please turn to slide 12, the market update. With so many things happening, I think it’s worth taking a step back to review GasLog’s overall commercial strategy which has been based on being a long-term contracted owner with strong counterparties such as BG, Shell, and Exxon, and as we look to continue to grow the pipeline of business for the MLP, you will see this remain a significant part of our business for the foreseeable future.

However, as we continue to be confident about the long-term outlook for the LNG industry and LNG shipping, we also like our limited exposure to the shorter-term market. It gives us increased access to new customers and over time will give us exposure to a rising interest rate environment -- rising rate environment.

There is no doubt that rates have been falling over the summer months as new ships have delivered into the fleet. However, we’ve seen a flurry of activity in recent months with over 50% more fixtures in the spot market year-to-date compared with the same period last year. In July alone, there were 16 spot fixtures versus five in July 2013. We believe this is demonstrating that the short-term market is growing and developing and will continue to do so and GasLog wants to play a part in that future market development.

We expect rates will rise over the next couple of years as new LNG production comes on stream and starts to create additional employment for the new ships being delivered.

And if you turn to slide 13, we highlight a number of interesting recent developments that underline our ongoing enthusiasm for the sector. In short, a number of existing new projects have either started production or are close to doing so whilst the number of planned projects have either received the necessary permit approvals and/or taken final investment decision, or FID.

For example, in the second quarter, the Exxon-led Papua New Guinea project commenced production ahead of schedule. The 6.9 million tons per annum project has a total requirement of about eight ships and is already operating at full capacity.

In the second half of the year, we expect the 4.5 million ton per annum Gassi Touil train in Algeria and the 4.3 million ton per annum BG Curtis train in Australia to commence production, both of which will require a number of additional ships. And this momentum carries over into next year as two of the big Australian projects, Gorgon and Gladstone, are scheduled to commence production, as well as a number of other smaller projects in Australia and Southeast Asia.

Whilst in the U.S., we feel that the streamlining of the regulatory approval process will be positive potentially accelerating the time-table for some of the near-term projects, in our supply and demand models, we presently assume five U.S. projects will be built. Any further projects that are approved and take FID provide additional upside to our projections.

If I go into a bit more detail, in Q2, Cameron became the second U.S. project after Sabine Pass to receive Federal Energy Regulatory Commission, or FERC, approval, and this was followed by the project taking an FID in early August whilst after the end of the quarter, the Freeport project became the third project to receive FERC approval and is expected to take FID by the end of the year.

I think the strapline on this page is important and it backs up, I believe, that LNG and LNG shipping are set for significant growth in the years to come. There are presently 17 plants with approximately 115 million tons of new LNG production that are under construction. This equates to a 40% increase in LNG production over the next few years, but we will undoubtedly see new projects taking FID and so out to 2020 we expect a requirement of between 200 to 350 additional ships.

Please turn to slide 14, the fleet page. This slide keeps expanding quarter-on-quarter as we continue to grow the fleet. For this quarter, you can see the addition of four newbuildings which are scheduled to deliver in late 2017. We ordered these vessels without charters as we believe that the second half of 2017 and 2018 will be a very good time to have tonnage available. We will look to find multi-year employment for these vessels at attractive rates prior to their delivery.

Please now turn to the summary on slide 15. It’s been another very busy quarter for GasLog. We launched the MLP and have subsequently announced the first drop-down. We believe the MLP will be a significant value driver for GasLog shareholders going forward.

We added seven vessels to our on-the-water fleet and ordered four newbuildings, bringing the total fleet size to 25 vessels, 2.5 times the size of the fleet that we set out with at the time of the IPO in the spring of 2012.

We continue to enhance our ability to finance the growth of the business in the quarter accessing both the bond and equity markets and launching the MLP. At GasLog, we will continue to look for attractive opportunities to grow our fleet and to place long-term contracts against our vessels which make them eligible for drop-down to the MLP, thus maintaining the partnership’s visible growth pipeline.

The forecast expansion of the LNG industry combined with GasLog’s experienced technical platform, proven track record of execution and willingness to drive consolidation in the market mean that we are confident that we will continue to see attractive growth opportunities that will benefit the shareholders of both GasLog Ltd. and GasLog Partners.

And that brings us to the end of the presentation. Operator, could you please open the call for questions?

Question-And-Answer Session

Operator

Thank you. (Operator Instructions) We will now take our first question from Jon Chappell of Evercore. Please go ahead.

Jon Chappell - Evercore

Paul, I wanted to ask you first about the hull, 2043 and 2044. Over the last couple of years, you talked about the flexibility that some of your long-term contracts on the newbuilds have provided and maybe you can take a shorter-term view with those ships, but now that you have the 2017 on -- contracted, new buildings coming now that you have the MLP and the fact that the time charter markets really held in there at rates very similar to what you have already contracted your current fleet on relative to a weak short-term environment, has that kind of changed your thinking about the employment of those vessels or would you look to lock those down sooner rather than later?

Paul Wogan

I think we’ve been looking at this for a while. So I mean the great thing about the long-term contracts we have on most of the vessels in the backlog of revenue that we have gives us the optionality on those ships to either look at those in the short-term market or if we feel it’s the right thing to put them on the longer-term contracts, and that really hasn’t changed.

So if we see the right value at the longer end of the fixtures, then you could see us putting those ships away, but likewise if we don’t feel there’s value there, we’re also feeling comfortable to run those ships in the spot market.

Jon Chappell - Evercore

And then, I wanted to ask a question about the drop-down timing to the extent that you can answer it. With the announcement that you’ve already made, you’ve already -- the closest, you’ll have hit the top end of the 10% to 15% CDU or distribution growth range that you spoke about in the MLP’s IPO with only four months in. How do you kind of weigh more accelerated drop-downs to move up the IDR splits versus trying to not cramp too much of the pipeline down early so you can have more of a staggered or sustainable drop-down and thus distribution growth?

Simon Crowe

Jon, yes, it’s Simon here. I think it’s a good question. We remain, as we said at the IPO, we remain focused on sort of three to four drop-downs per annum. Clearly, we’ve -- on this one, it looks like it’s at the upper end of that 10% to 15%, but as you said in your question, it’s about weighing up that sort of pacing and not cramming and not going too quickly. So I think there is a balance there.

We’re delighted that we are able to announce as we did last Thursday the two ships drop-down. We think that makes a lot of sense for everybody, and we think it’s particularly good for GasLog Ltd. in terms of driving value out, and we think -- we remain committed to that three to four, but I think we just have to be mindful of the markets and pace it right, it’s about that balance.

Jon Chappell - Evercore

Finally, just a quick one. The 93% utilization in the quarter, was that strictly just the Chelsea before it started at the Papua New Guinea contract or is there any other off-hire time? And then also I can’t remember if you said this or not, but just the third quarter vessel that’s had the accelerated drydock, which vessel is that?

Paul Wogan

We had some downtime obviously with the Chelsea, but we did also have some downtime with one of our vessels, the GasLog Singapore, had some technical issues, and I think going forward as we grow our fleet and have more ships on the water that’s something that could well happen. I think the record we’ve had up to now of continued 100% utilization is fantastic and we’ll continue to strive for that.

But I think you will see, as is the nature of shipping occasionally, some ships having minor issues, we stay them out for a short while. So that was the combination there. And the vessel that we’re talking about for the scheduled drydock is Lydon Volney and that ship was scheduled to have a drydock early into next year, and working with a customer, we’ve just pulled that forward, so it’s just a matter of timing on that ship rather than anything different.

Operator

We will now take our next question from Michael Webber of Wells Fargo. Please go ahead.

Michael Webber - Wells Fargo

I wanted to go back to John’s second question around the dropdown timing and the growth because it’s clearly the most pertinent issue here and most pertinent driver. You did hit the high end of your threshold kind of already - kind of right out of the gate and I think everyone kind of knew you had that lever to pull if you wanted to. On a go-forward basis, maybe within the next 12 months or -- maybe on a 2015 basis, should we continue to model in roughly a 15% growth rate or do you think we should be a bit more aggressive than that, just maybe a bit more guidance around the next 12 months and what people should be putting in their models and baking into the growth expectations for the stock?

Simon Crowe

Yeah, Mike, Simon here, good question. I think 10% to 15% is our guidance. I mean I would probably be tending towards the upper end of that as I go forward, but it is really about pacing it. It is the three to fours we said at the IPO on a go-forward basis. That’s kind of how I like to think about it.

We’ve got this pipeline. We’re building that pipeline of growth. We’ve seen it it’s go out in all of those four other ships, two at Samsung and two at Hyundai. So I think I’m comfortable. I know Paul is in - we certainly talked to Andy a lot about it, but the sort of 10% to 15% is a good way to model it, if you want to model at the upper end that kind of - that would make sense.

Michael Webber - Wells Fargo

Just shifting kind of briefly to the market. I think, Paul, you mentioned in your comments the market has ticked up a little bit here in Q3 and that’s off of almost kind of no base at all in Q2. There aren’t a lot of data points, can you maybe talk to where rates are today? And obviously they are certainly lower than kind of that equilibrium rate kind of somewhere in the high-70s, low-80s, but do you think we could see a scenario in the back half of this year or early ‘15 where you do see maybe either kind of a flat rate curve or I doubt that ratio will come into play but basically better spot rates in kind of the 40k to 50k where maybe you’re seeing right now?

Paul Wogan

It’s interesting when we try to say where the spot market, because I think it’s actually coming to a bit of a two-tier market at the moment. You’ve seen a lot of the new entrants with new buildings coming out where they haven’t got operational size, they haven’t got cold ships, taking lower rates. So we’ve seen vessels fixing away in the fortes.

At the same time, we have actually seen ships are being fixed in the 70s, traditional owners with ships in the right position. And going back to my comment I talked about earlier, the spot market actually this year has been very, very active, and so what that’s done is actually at certain times led to real tightness in the markets, so you are getting this opportunity where you are suddenly seeing maybe one ship that’s cold, in position with a good owner behind it able to good rates where some of the other ships have been struggling.

So I think you’re right in terms of where you say where the equilibrium rate at the moment. It’s probably not in the high-70s, I would put it probably somewhere in the 60s, but around that you’re seeing quite a lot of volatility depending where you’re sitting in that sort of two-tier market.

When I gave that figure of 40% change in the spot market this year, so far we’ve seen 81 - well, we’ve counted up 81 fixtures this year compared to 50 last year and a lot of those were in the sort of second half of the year and suddenly when that happens, you can see a tightness in this market even with the newbuildings delivery hitting it quite quickly.

Michael Webber - Wells Fargo

And I guess kind of along those lines and talking to a couple of brokers, it seems like there is a bit of a floating storage, I don’t want to call it a trade, because it’s not really driven by a particularly wide corridor, but it seems like there are some prop cargos that are getting loaded and just kind of sitting and waiting for a firmer winter market, is that playing a role at all in terms of a meaningful role rather I guess in tightening this market up, and is it something you guys perch about, do you think it’s a major factor?

Paul Wogan

I mean, we’ve counted few ships which are being taken with that in mind so anywhere between sort of four to eight vessels that we think have been taken kind for that play. So yeah, I mean again it isn’t a hugely liquid market in terms of the number of ships. If you see that number of ships going, then certainly that definitely plays a part, and especially if they are just sitting there, holding onto the cargo for a while to play that arbitrage opportunity.

It’s interesting as well obviously Angola has had some issues and not only the product not come out from Angola, you’ve had seven additional ships pushed into the market, which again I think is being one of the factors which has been bringing the market down over the summer months, but the other interesting data point from that is, I understand that all those ships that were made available out of Angola are now actually fixed and not available at the moment for charterers. So again it just talks to the fact that there is a lot more liquidity in this market than we’ve probably been seeing over the past couple of years.

Operator

We will now take our next question from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis - Morgan Stanley

I would like to ask you about the acquisition front, you recently ordered a few more newbuildings. First of all, can you give us some more clarity about the options that you have to Hyundai and Samsung? When do you have to exercise them? And, if possible, tell us how many of these charters are available and what will make you go ahead and exercise these options? And my second question is if there are more second-hand acquisition opportunities either from BG or from third-parties that you think they are feasible?

Paul Wogan

Yes. So first of all on the options that we have, we do have additional options with both Samsung and Hyundai which are declarable in the third and fourth quarter this year. As we’ve showed in the past, we do have the ability, if we want to, usually to push out those options, so I’m fairly relaxed about that in terms of getting access to that space.

In terms of on-the-water vessels, yes, I think we talked about the ability to find consolidation opportunities, both through existing ship-owners but also through the oil majors, and I think we will see further oil majors looking at diversing out of that fleet if you like and moving that on.

I can’t really comment too much in detail about what we are looking at at the moment, but I think there are opportunities and with what we are seeing in the spot market as well, I think there are going to be opportunities around the new entrants. We’ve been talking about this for awhile, but I think with the new entrants, the reality of the market and I’ve already talked about what we’ve seen in terms of the two-tier market, I think there will be opportunities there for further consolidation.

And I think as we talk about we are well placed given our operational platform, given our strong balance sheet to be able to look at those, but, of course, we will only look at them if they are accretive deals, if they are at the right price and if they make sense for the shareholders.

Fotis Giannakoulis - Morgan Stanley

One thing just a little bit more on the BG relationship and the vessels that you are managing for BG, have there been any discussions about potentially acquiring the remaining vessels and if you can remind us how many vessels they are? And also, we saw recently a deal between BG and Teekay with Teekay buying a minority stake in four of the BG vessels. I just want to ask if this is a build that was of interest to you, how come you were not part of this deal?

Paul Wogan

Yeah. So, at the moment, we are managing five ships for BG. We talk to BG about a lot of things. I think you’ve seen that BG have been looking not to own ships going forward and I’m sure looking at those vessels. I can’t really comment on any specific deals, that would be unfair of me I think, but that’s the number of ships we do for them.

In terms of the ships Teekay have done with BG in China, these were ships that Teekay have taken the technical management for those vessels sometime ago, the supervision -- supervision of those vessels when they were built in China and that was something that came out of that. So the thing about BG is they are very big players in the market. They have a number of suppliers in the industry. We are not the only people who supply tonnage into them or do deals with them.

But I do think our relationship going back over the last 12, 13 years is probably as strong as it gets and I think the opportunity is that BG have, I think we would have at least as good as, if not, better opportunity to look at it if we wanted to do than other players in the market.

Fotis Giannakoulis - Morgan Stanley

One more question about the market, you have mentioned a number of projects and the significant growth in LNG production throughout 2020. If you can tell us how do you view the chartering requirements, the shipping requirements to be awarded, how big of a risk is it the fact that perhaps some of the players might either the producers or the off-takers might decide to build their own vessels against the LNG contract vessels, giving them to independent buyers and if you have identified any areas or any specific projects that they are going to be awards, tender awards other than direct contracts negotiations with the companies?

Paul Wogan

Yes. I mean I think you can’t rule out that some of the players in the market may look to own the ships themselves, but I think it’s a trend we are not seeing that happening. I think most of the people have got off takes, they are looking to have tonnage provided to them by third party owners and operators, and I think they are doing that because for a lot of them, it doesn’t actually make sense to allocate that capital into the shipping.

The returns that we feel are good returns for us and not necessarily great returns for the major oil companies et cetera, but you can’t rule out that some of them will do that, but I think if that happens, my view is and especially given the discussions we’ve been having in the last few months that that will be on the margins rather than a large number of vessels.

And if we look at what’s happening in the market right now, we talked a lot in the presentation around what’s getting FID permits and FIDs in the U.S. and that’s driving, if you look at the people who were the off-takers from those, people like Mitsubishi, Mitsui, BP, GDF Suez, et cetera, all are going to be coming to the market, I believe, to actually find tonnage for those requirements.

So I think as we look at that, there will be quite a large number of tenders coming down in a fairly short space of time I think as well, because a lot of these projects are going to be coming on at similar times and so I think it’s going to be a very interesting space in the market over the next, certainly over the next 12 months.

Fotis Giannakoulis - Morgan Stanley

Taking the opportunity from the comment that you made about the returns of shipping, in one recent investors meeting of Golar, Golar expressed a view that perhaps shipping returns have been shrinking and they are not as attractive as they used to be, what is your view on that? Do you think that there are still going to be attractive opportunities or there is too much competition out there for the long-term contracts, especially given the fact that there are plenty of MLPs with very low cost of capital? And the second part of the question is would you be considering of expanding beyond the traditional LNG shipping business by the re-gasification or liquefaction or even in the ethane transportation?

Paul Wogan

Yes. I think as we look at the returns, I think so far we’ve been happy with the returns that we’ve been getting in this business. The deals that we’ve done recently have not been eroding the returns that we’ve been getting. I can’t talk to the rest of the shipping, but I think in LNG, some of the barriers to entry which we see there are helping in that respect.

As we look at the business, I think we feel we’ve actually built a very good technical and operational platform within it. We’ve got a good access to finance and we feel that we are well placed to move along the value chain if you like. So as you said, things like the FSRU, certainly I think are and will continue to be of interest to us.

I think there will be a lot of bunkering going on for LNG fuel for ships, which I think could be of interest to us as well along with other areas. So I think as we look at this business, if we can see marine-related areas where our LNG and marine knowledge can move us into those areas, then certainly that’s something that we are focused on and we will look at.

Simon Crowe

And of course the risk adjusted, Simon here, the risk-adjusted returns need to be right for that entry point to make sense for us, and as Paul said, we’ve built I think a significantly strong platform to leverage of and we will be looking at those as we go forward.

Fotis Giannakoulis - Morgan Stanley

Does this include also liquefaction following Exmar-Angola and does this exclude ethane transportation?

Paul Wogan

We haven’t really -- we’ve been focused I think very much on the LNG side. We haven’t spent a lot of time looking at the ethane side of the business. We think there are so many opportunities within the LNG space at the moment, and I think where we have one of our competitive advantages. In terms of the FLNG, I mean it’s something that we’re looking at. I think it’s an interesting concept. I’m not sure that we will be the first movers in that area, but certainly it’s something that we would continue to follow.

Operator

We will now take our next question from Herman Hildan of R.S Platou Markets. Please go ahead.

Herman Hildan - R.S Platou Markets

I had a question on, if you think about the long-term supply and demand, you mentioned that you think the demand until 2020 for about 300 incremental ships. If you compare that to your capacity, I think on our estimates last time your capacity was about 70 or 60 ships per year. With the hull, it now seems to be limited availability in ‘16 and you are moving into 2017, how do you think about or what’s your impressions when talking to the yards about the long-term capacity and obviously that’s the same sort of competing with the FLNG as well, do you think there is going to be tightness at the yards towards the end of 2020 or towards 2020?

Paul Wogan

It’s Paul here. We gave a range. I think a lot of it depends upon what we see taking FID, so we get a range between 200 and 350, which is a big range, but I think we don’t get carried away until we see those projects in place, but I do think a lot of those ships will be required.

I’ve never been a great believer in shipping, we will not be able to -- the shipyards will not be able to turn the ships out. They always seem to find a way to be able to do it, but what I think will happen as we see quite a lot of pressure coming on the shipyard is especially with the new projects coming on in the U.S,, because I think you will see significant price pressure on LNG vessels going forward.

And so our view has been very much around the [end of 2017] [ph] ships, but actually this is a good time in terms of pricing and availability to be able to order those ships now because we do believe that there will be continued price pressure.

Herman Hildan - R.S Platou Markets

Is it possible to kind of give that flavor on the size of your option portfolio and how far it stretches?

Paul Wogan

We have, I think, up to six optional vessels at the moment, stretching out to the end of the year, but as I said, I think those options will, and we can, if we want to, push them out further.

Herman Hildan - R.S Platou Markets

And also I mean with the pipeline growth for Angola partners, call it the likely increase in distributions for Angola partners as you dropped down the indentified candidates, it seems by that 20 - call it ’17, you will be able to basically replicate your growth from distribution you get from partners with four ships, of course incremental growth for you --?

Paul Wogan

We can’t comment on Angola partners on this call, but --.

Herman Hildan - R.S Platou Markets

Sorry, I mean GasLog Partners, sorry.

Paul Wogan

We will be happy to say the connection.

Simon Crowe

That was important to point out.

Herman Hildan - R.S Platou Markets

A lot of the partners out there, but my point really was if you think about the cash flows that you will receive from partners I think long-term, obviously there is an internal kind of growth path there if you decide to use all those proceeds for growth, but do you think -- have you made any reflections, at what point you may be distributing that distributions to GasLog shareholders?

Simon Crowe

Yeah, Herman, Simon here. Very good question. We have been reflecting on that quite considerably because obviously we see the recycling of capital coming from the MLP now that we’ve set it up and indeed we started that recycling with the four ships that we’ve just ordered.

I think with everything it’s the balance between the accretive opportunities we see out there in various different markets, potentially LNG being the key market for us, but as we just discussed on the previous question, other opportunities may present themselves adjacent to the LNG shipping market, and it’s about making sure we’ve got the right balance of risk-adjusted returns, but then balancing that with returns to shareholders in the form of dividends and the like.

So we’re discussing that continuously with the board. It’s early days in the MLP, but as the MLP matures and we start to build cash and deploy cash, we will be making those assessments. I think we like to think we’ve been good stewards of capital since the first IPO of GasLog Ltd., but we continue to have that reputation and that, as you pointed out, has a balance of making investments, accretive investments with the right risk-adjusted returns, but also considering distributions to shareholders.

Operator

We will now take our next question from Ben Nolan of Stifel. Please go ahead.

Ben Nolan - Stifel

My question, my first question I guess relates to sort of how to think about the -- how you guys are reporting your interest in the partnership, and as you begin to drop down assets in that partnership raises new equity and your position becomes a smaller stake of the whole, at what point should we think about, from a modeling perspective, that no longer being accounted for into the equity method, but de-consolidated from the numbers?

Paul Wogan

Yes, Ben, it’s a very good question, I mean as we think -- as I think about it going forward, it’s about control and you are right as we execute on the drop-down plan that the basic math suggests that the ownership percentage would decrease. Now, we control the GP, we control the board so the discussion has to be had about the level of control.

So I don’t think there is a bright line that one can draw in terms of deconsolidation, but it is something that I look at and we are looking at and ultimately we will flag that in advance as and when we think that may be effective, but it is something you should think about and you should model going forward, but I can’t draw a bright line because it all depends on the pace of the drop-downs, it’s about the number of board seats and the control that one has at the GP, but I’m in active dialogue with our auditors and others about that eventuality, I mean kind of eventually kind of will happen but I can’t exactly tell you when.

Ben Nolan - Stifel

Well, would you expect it to [have with] [ph] the drop-downs on this next two or probably not - on these specific --?

Paul Wogan

Again, there is a number of factors that come into the deconsolidation. So I would just sort of think about those and try and draw some of your own conclusions. We will flag it as and when we get towards that point, so that everyone is good and ready for that.

Ben Nolan - Stifel

And then, you guys were mentioning a little bit earlier about the Angola project and those vessels allocated to that project are now active under contracts in the market, but have you heard any noise at all as to when actually the production is likely to be coming online, has there been any developments there such that you can feel comfortable at some point in the not too distant future, actually you can have a lot more volume coming out of that which should tighten the market more broadly?

Paul Wogan

Yes. I mean I don’t really have any insights into that, Ben, other than we’ve seen the market which I think the latest we’ve seen from them is they are expecting it towards mid-2015 to come on stream.

Ben Nolan - Stifel

And then lastly, just trying to get a sense. Obviously, there is a lot of these projects that are now moving forward very quickly including in the U.S. and elsewhere, [indiscernible] have vessels allocated to them, and clearly those guys are going to start to be looking for contracts, have you seen -- I’m just trying to get a sense from you as to the pace of activity, has there been a more active dialogue with producers in the past quarter or I mean are those discussions beginning to pick up such that you feel like the pace of contracts and tenders isn’t likely to accelerate in the near-term?

Paul Wogan

Yes. I mean I think if you look at those projects, you’re looking at 2017, 2018, if you think that you are going to need a three on average three years for the shipping to be put in place for that, you’re really looking ‘14, ‘15 for the shipping. So I think you will see people coming to market over the next few months for those tenders to put themselves in a good position and we’ve already seen, they’re already in [number ten] based around the -- certainly around the American projects coming on and we have seen sort of the pace of people talking about discussing, thinking about that, certainly picking up over the last three to six months, yes.

Operator

(Operator Instructions) We will now take our next question from Chris Wetherbee of Citi. Please go ahead.

Prashant Rao - Citi

This is Prashant Rao for Chris Wetherbee, how you’re doing? So a few questions, first on the dropdowns, the recent valuations have been about 9.5 times EBITDA, and we were wondering if that could hold or vary? Can you tell us a little bit more about maybe what was the valuation guide that you used in determining that 9.5 times?

Simon Crowe

Yes. It’s Simon here. I mean I think we’ve talked on the road about between 9 and 10 times and we are pretty much straight down the fairway on this one, and we think that makes sense for GasLog Partners, it makes sense for GasLog Ltd.

As we said on the road to all the investors and they seemed to all agree with us, it was not about sort of arbitraging in a huge way the asset value. It was about getting ourselves into the higher splits, doing accretive deals for GasLog Partners being able to raise that equity at GasLog Partners level.

So we think this is a sensible transaction. We took some advice, we had a lot of discussions, it was the first dropdown, so this is new to many of us. So we think we’ve played it straight down the middle, we played it very consistently with what we said at the time of the IPO, so that’s how we think about it going forward.

We think about that as sort of components of value, it’s sort of asset value, contract value and then sort of holding value in the premium that one might take for doing that transaction initially and warehousing that asset, but again those sort of 9 to 10 times EBITDA guide post I think a pretty good one.

Prashant Rao - Citi

Right, so we can model those going forward at least for the time being then it sounds like?

Simon Crowe

A reasonable conservative assumption going forward.

Prashant Rao - Citi

And my next question is, I think you guys touched upon various elements of this, but just to sort of draw the focus on the comparison, in the fleet expansion, could you talk about how you are thinking in terms of exercising your options for newbuilds versus the opportunity for sale leasebacks, particularly going into the next, into 2015, may be early 2016?

Paul Wogan

Yeah, it’s Paul here. I think the thing is with the newbuildings, we have complete control over that. We can decide whether we want to go and order newbuildings and at what time. With the sale-leaseback consolidation opportunities, those tend to come along as and when -- so the real trick there is to be ready to be able do it, to have the balance sheet, to have the firepower to be able to do it, and to have the relationships in place that you have the opportunity to do those.

So we see those as two complementary things. We like the consolidation opportunities, we like the ships on the water, if we can see more of those that are accretive, makes sense from a risk-adjusted return, then certainly that’s something we would look out, but the newbuildings as well will continue to be a large part of our portfolio.

Prashant Rao - Citi

Okay. It sounds like both options are on the table depending on - targeting the risk-adjusted returns?

Paul Wogan

Yes.

Prashant Rao - Citi

And finally just one last housekeeping question, the $0.12 dividend, in terms of return to shareholders and such, how are you thinking about that going forward, could we possibly seeing that move upwards a few cents in the back half of ‘14 here?

Simon Crowe

I think as I said earlier, I think we are on the lookout for accretive opportunities. We want to maintain our reputation as being good stewards of capital. We recognize that shareholders want to see a return in both growth and potentially dividend yield. So we are trying to balance those up. We are in active discussions with our board. We continue to do that. So we are thinking that through.

Paul Wogan

I mean just from my side, as we talked about earlier, what we’re doing with the MLP, we also see a lot of capital recycles into the parent company and one of the things we’re talking to the board about is around how do we allocate that capital and what should be our dividend policy going forward, so I think you will see more from us on that in the future.

Operator

We will now take a question from [Nish Mani] of JPMorgan. Please go ahead.

Nish Mani - JPMorgan

A lot of my questions have been asked. I’ll be brief. But can you guys remind us how we should be thinking about the future portfolio fleet of both the Corp and the MLP and how those vary over time. I mean do we envision a scenario in which GasLog Ltd. becomes essentially a holder of very small fleet a publicly traded [indiscernible]?

Simon Crowe

I mean I think as we said and we continue to say, we are positioning ourselves to grow the fleet at GasLog Ltd. and that means growing the fleet at GasLog Partners as we continue to dropdown vessels. It’s all about recycling the capital at an accretive return and doing the right sort of investments.

So I think as we look out, we certainly think we can scale this business up whether that’s through newbuilds or consolidation opportunities on the water ships, but those avenues are open to us, and as Paul has said, we want to position ourselves to be able to execute on newbuilds at the time of our choosing, but also position ourselves to be able to react to an opportunity as and when it comes up.

And the softness in the spot market may present some of those opportunities, and it may not, but we need to be ready, so I think getting to [indiscernible] about our fleet going forward is not the right way to think about it. I think about recycling the capital, growing the fleet accretively with the right risk-adjusted returns, expanding our business with the platform that we’ve now got and potentially feeding the MLP with more and more assets, but also feeding GasLog Ltd.

I mean yes, the GP hold co. concept is something that we also think about and discuss, but I think we’re just in the first couple of months at the MLP in terms of its existence, so getting to that GP hold co. place is a few - is a while away.

Paul Wogan

And I think, we also talked earlier, Nish, about the other opportunities we see in the LNG space where we can bring out LNG, marine LNG experience about and I think you will see us looking at those opportunities more concretely going forward as well.

Nish Mani - JPMorgan

And then just touching really quickly, we saw last week, the announcement by Kinder Morgan to essentially collapse it’s MLP structure, consolidate into one entity. I know it’s in a different sector obviously than GasLog, but have you guys gotten any kind of queries as related to your guys kind of whether or not MLP structures too difficult for investors to understand and whether or not the financial engineering which may not be necessary and ultimately beneficial?

Simon Crowe

No, I mean we’ve met hundred investors plus on the road, everyone gets it, they understand why we’ve done this and what we’re doing. So we’ve had no pushback from anybody.

Paul Wogan

I think - probably to the contrary, a lot of people did get in - a lot of people felt it was the right, definitely the right way to go and to do it. So interesting move as you said by Kinder Morgan, but we have no feedback after that in any sense.

Nish Mani - JPMorgan

No, that makes sense, unit price certainly [indiscernible].

Operator

That concludes today’s question-and-answer session. I would now like to turn the call back to Paul Wogan for any additional or closing remarks.

Paul Wogan

Well, I just like to say thank you very much everybody for joining us, thanks for spending the time and we look forward to speaking to you in person or on the next quarterly call.

Simon Crowe

Thank you very much, everyone. Bye-bye.

Operator

Thank you. That will conclude today’s conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.

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Source: GasLog's (GLOG) CEO Paul Wogan On Q2 2014 Results - Earnings Call Transcript

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