Golar LNG Partners' (GMLP) CEO Graham Robjohns on Q2 2014 Results - Earnings Call Transcript

Aug.26.14 | About: Golar LNG (GMLP)

Golar LNG Partners LP (NASDAQ:GMLP)

Q2 2014 Earnings Conference Call

August 26, 2014 12:00 PM ET

Executives

Graham Robjohns - CEO

Brian Tienzo - CFO

Analysts

Ben Nolan - Stifel Nicolaus

Jon Chappell - Evercore Partners

Sameed Musvee - Wells Fargo Securities

Fotis Giannakoulis - Morgan Stanley

Operator

Good day, and welcome to the Golar Partners LP Q2 2014 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Graham Robjohns. Please go ahead, sir.

Graham Robjohns

Thank you and good day to everybody as the operator just said my name is Graham Robjohns and I'm joined here by colleague and Golar LNG Partners’ CFO, Brian Tienzo.

We start the presentation we’ll move over the forward-looking statements slide on Page 2 to Slide Number 3 to start with highlights and recent events for the second quarter of 2014. We’re very pleased to report net income attributable to unitholders of 37.8 million and an operating income of 62.1 million and we generated distributable cash flow of 45.1 million for the quarter with a coverage ratio at 1.25 times.

Improved earnings and distributable cash flows have resulted and primarily as a result of the full quarter’s contribution from the latest acquisition the FSRU Golar Igloo which we acquired right at the end of the first quarter of 2014. As a result to that acquisition we declared an increased second quarter 2014 distribution at $0.5475 a unit representing a 4.8% increase from the prior quarter’s distribution.

Moving over to Slide 4 on the income statement as you can see revenues are increasing in the first quarter to 101.6 million largely due to the full quarter’s contribution from the Golar Igloo in addition to there being one extra day in the second quarter as compared to the first quarter. Total operating expenses also increased to 39.5 million also as a result of the Igloo operating for the full quarter. Interest expenses were increased at 11.3 million and as a result of the addition of the Golar Igloo debt which was assumed as part of the acquisition.

Other financial items were a loss of 8 million in the second quarter as compared to a loss of 6.2 million in the Q1 as a result of non-cash mark-to-market interest rate swap valuations which were a loss of 3.3 million in the second quarter and this compared to a loss of 1.8 million in the first quarter and is being driven by decline in longer term interest rates. As a result the bulk net income after non-controlling interest was 37.8 million as compared to 32.7 million for the first quarter.

Turning over to Slide 5, we have the balance sheet assets which haven’t had a significant movement since the end of March. So we’ll move on to Slide 6 and balance sheet liabilities. On the liability side of the balance sheet our total debt from the capital lease obligations net of restricted cash were 1.09 billion at quarter end and our net debt-to-EBITDA multiple was 3.3 times which has improved from the first quarter again as a result of the Golar Igloo’s EBITDA being taking into account in the calculation for the full quarter and the second quarter. We have a strong financial position as a result of this and I think one which allows us to increase that somewhat to help finance future acquisitions. At the end of the quarter 98.1% of our debt was swapped to a fixed rate average swap rates was approximately 2% and average bank margins were up approximately 2.3%.

Turning over to Slide 7, the distributable cash flow, this has also increased this quarter up at 45.1 million again as a result of the contribution from the Golar Igloo. Common unit distributions as I have said were increased by 4.8% for second quarter but at the same time our coverage ratio is improved to 1.25 times. Having said that, the ratio of 1.06 in the first quarter was influenced by distributions paid to unitholders on the new 5.2 million units, which were issued in connection with the acquisition of the Golar Igloo.

Turning now to Slide 8, here we show the chronology of distributions and coverage over the time since our IPO. The yellow line you can see is effectively our coverage ratio. You can also see of course how we’ve consistently managed to increase distributions overtime. Coverage ratio for the last four quarters has been very strong there was a dip in the first quarter of 2014 as I mentioned driven primarily by the issued new units in connection with the acquisition of the Igloo and we also had a period at the end of 2012 and the beginning of 2013 where coverage was less than 1 and that was driven by a period in which we had four vessels dry docked. So since IPO our distributions have grown by 42% and as I said 4.8% in the second quarter.

Moving over to Slide 9, we have the summary of our assets in contract, which is a common slide in these presentations average remaining contract term is six years with 2.4 billion contracted revenues. Importantly, I think particularly as we’re going through a relatively soft period in the spot market for LNG carriers of course we are contracted through 2017 which means our first re-contracting of the vessel would be in a period where we anticipate the market for LNG carriers to be quite a bit strong than it is right now.

Turning over to Slide 10, we have information on the recent acquisition of the Golar Igloo. Again, we have the slide in the last quarter’s presentation where it was just reiterating the fact that that vessel was purchased for 310 million and has an estimated EBITDA of 32 million to 34 million and that excludes the three months window in the winter period from December through the end of February where the vessel is deliver back to it in affect and unable to trade as an LNG carrier so that 32 to 34 is a base level of EBITDA. And again as I said the, as a result of the transaction which was accretive of course we were able to increase quarterly distributions from $52.25 to $54.75 per quarter.

Our next acquisition target is the Golar Eskimo, that has already being contracted for 10 year period to the government of Jordon EBITDA on this vessel was actually quite a bit higher than the Igloo for the first five years it’s 46 million a year EBITDA project is due to start up in the first part of 2015, and as I said it is affirmative in terms of acquisition target and for Golar LNG Partners.

Looking for reports from this Golar Eskimo over the next 24 and 30 months the growth of the MLP will come from further FFO use and carriers on the left hand of this page or this slide on Slide 12 we cover FSRU and across five FSRUs in the fleet with the six the Eskimo coming and Golar LNG Limited has a further un-contracted FSRU that is currently under construction, and most of you that listen to the Golar LNG conference call have heard about a number of projects but potentially opportunities for the next FSRU which is called the Golar Tundra and in particular one in Ghana in West Africa. It’s a small market FSRUs but it’s growing quite rapidly. What is interesting to note is that of the 12 new LNG markets that have been opened up since 2007 almost all of them have been using these FSRUs, and there are several number of new markets that will be opened up in the years to come and many of these will indeed use FSRUs as well.

On the LNG carrier side there are four carriers in the current fleet the Golar LNG our parent has 12 carriers either operating or being built and 10 of those are brand new dual fuel vessels, tri-fuel vessels represents future potential acquisition targets. As I mentioned before we’re going to appear to be relatively soft spot market. And they are not a huge number of good long-term opportunities to contract these vessels out there right now but I think those will come. As you can see from the graph on the top right hand part of this slide the growth in liquefaction capacity as estimated by Wood Mackenzie accelerates and quite dramatically from 2014. And by the time you get out to sort of ’16, ’17 and ’18 it is growing quite rapidly as I say.

And liquefaction total forecast over 2014 to 2030 is estimated to grow at 6.2%. And now if you look at the chart on the bottom right here you can see that with existing vessels of 371 on the water an order book of 123. By 2020 the estimate using Wood Mackenzie’s liquefaction capacity data is that we will still need more new buildings to be built between now and the end of the decade. So we have no structural oversupply of vessels is just a matter of timing. And that market for carriers and opportunities to contract which will deliver acquisition targets for GMLP we anticipate to gather price overtime.

And now I think moving on from that and as we sort of alluded to in the press release even if our growth in distributions over the next two years maybe less than 10% and post that we have a significant opportunity to be growing at substantially more than 10% as and when the Golar LNG parents closing the production projects gets up and running. And these assets depends -- provide an extremely interesting acquisition platform for Golar LNG Partners then being high valued and likely to be long-term contracted assets and with high margins as well which should provide very interesting, secure and accretive acquisition possibilities for Golar LNG Partners.

Certainly the demand for LNG is there we’ve seen on the previous slide the growth in the production capacity as you can see in the right hand side of this chart both the absolute demand in global LNG is expected to grow as significantly and rapidly overtime and indeed LNG share of the total world gas demand is also expected to grow.

So in summary Golar Partners currently has a solid contract base with its 2.4 billion of revenue backlog and average contract service six years which I said our contracted position through the end of 2017. Operating results continue to be excellent with an average of 99.9% utilization or uptime for the last four quarters, we haven’t identified next acquisition target having already acquired the Igloo post distributions in 2014 by almost 5%. The next acquisition target for 2015 is the FSRU Golar Eskimo. The market growth for LNG is extremely strong, there is increase in supply, demand is there and that will require increased related infrastructure which includes carriers FSRUs and indeed FLNG assets. And of course our parent or sponsor Golar LNG Limited has a fleet of carriers, it has a non-contracted FSRU and as I alluded to the development of FLNG will be a significant boost to the MLP as well to Golar LNG Limited.

And with that I thank you for listening and turn the conference over to the operator for the opening up of questions and answers.

Question-and-Answer Session

Operator

Thank you (Operator Instructions). We will now take our first question from Ben Nolan from Stifel. Please go ahead your line is open.

Ben Nolan - Stifel Nicolaus

Thank you and nice quarter guys. My first question is a bit well I guess would you guys have any interest in maybe acquiring any of the traditional LNG carriers from Golar that might not have a long-term charter attached to it? And then at this point you’ve got an awful lot of fixed cash flow so one incremental vessel wouldn’t really move the needle a whole lot but it would give you some optionality at the outside as these charters become available. I mean would that be at all in the -- a possibility as the size of the partnership grows?

Graham Robjohns

I don’t fairly not in the short or medium-term would we expect to buying spot vessels from Golar I mean that’s a risk that as an MLP we don’t particularly want to acquire. I mean we have some re-contracting exposure with even our long-term contracts coming to an end. But we managed that by continually acquiring assets with long-term contract. I mean if you look out much longer term I think that maybe possible the MLP could be acquiring assets and so for a much longer term now either directly from the shipyard and so possibly or in fact we could acquire assets from third-parties that have their contracts with them but I can’t say it’s acquiring stock ships in the near-term it’s not really a risk that we want to entertain.

Ben Nolan - Stifel Nicolaus

Okay, that’s helpful. And then my next question relates to the Igloo if I am correct that contract is a little unique and that there are three months of the year when it is does not employed under its existing contract in the next…?

Graham Robjohns

Yes, correct.

Ben Nolan - Stifel Nicolaus

And that period is coming up within I suppose a few months from now that. How are you currently thinking about utilizing that asset I mean are you in the process of marketing it for on a short-term storages or something else I mean is that come around yet?

Graham Robjohns

Yes, I mean as I’ve sort of said that in the presentation that our base case and the sort of what underlies our current distributions is simply the guaranteed income from the nine months of the year and anything we earn for the three months is a bonus. So it’s a little bit early for us to be looking at short-term trading during that three month period now but in fact what we will be looking to do is to try to vessel as an LNG carrier and maybe do one or two cargo voyages during that period just to and a little bit extra.

Ben Nolan - Stifel Nicolaus

Okay, that’s helpful. And then lastly from me, you mentioned in the press release that the year in the process of refinancing the debt on the Maria could you maybe give me an idea of how I should think about modeling your annual debt repayment schedule post this refinancing and just in general I mean how are you building that into your own cash flow assumptions?

Graham Robjohns

So, I think and I mean there are number of options we have with the Maria we simply just can’t do a refinance bank debt refinancing and that would have a repayment profile of the loan of in the sort of 15 years cost of area. And the alternative is that we look at possibly bond finance across seasonal partners the company that I am involved in is being quite successful with term loan Bs and that’s an area that we have been looking at for Golar which I think we’ve talked a little bit about before. So if with shuffling in going down that route in refinancing the Maria and possibly some of the other debt as well that will reduce our debt amortization and reasonably substantially I don’t have the numbers to give you here now but I think our expectation is to reduce total debt amortization and as part of this refinancing.

Operator

We will now take our next question from Jon Chappell from Evercore. Please go ahead. Your line is open.

Jon Chappell - Evercore Partners

First question has to do with you mentioned when you were talking about the balance sheet that you have the potential to take on increased debt for future acquisitions. So just trying to get some clarity around that and specifically how it relates to the Eskimo. Are you considering a potential all debt transaction for the Eskimo or there is still going to be an equity component that’s required as maybe less than it was for the Igloo?

Graham Robjohns

Well so we probably too early to make an absolute commitment but I certainly think there will be a significantly higher debt level than there was for the Igloo and it’s only possible it could be an all debt transaction. I think we are at net debt to EBITDA of 3.3 times and we’re comfortable at sort of high three four times, so there is certainly capacity for us to increase.

Jon Chappell - Evercore Partners

And as far as the ’15 growth profile is concerned obviously with the Eskimo you’ll be able to add some distribution increase next year. But then even I guess best case scenario will be the Tundra which probably wouldn’t really be up and running until probably early ’16. So is the Eskimo basically it given that there is no long-term charter contracts on the carriers of Golar Limited and given their 12 to 18 months outlook it doesn’t seem like now would be the time to be walking on the end anyway?

Graham Robjohns

The sort of conservative base case would be Eskimo and then sort of Tundra probably early ’16 and that’s, we would increase distributions already 5% this year, Eskimo would other things being equal likely be more than that which is I think where we were getting to in terms of where we have set the next two years of distributions are in that sort of 5% range. And as sort of base case then the LNG asset coming along are going to change that quite dramatically. But I don’t think that the possibility of contracting and having enough of assets possibly towards the end of ’15 is asset equation it is just not obviously visible at the moment. There are always sort of things that we’re working on.

Jon Chappell - Evercore Partners

One last super quick one and then I’ll turn it over. Just maybe it’s better for Brian but in the press release there is $0.8 million provision for claim and corresponding receivable. Can you just explain what that was and was that essentially one-time in nature?

Brian Tienzo

It doesn’t have direct impact on a cash flow impact due to the partnership and it’s essentially a claim that’s happened prior to the business entire recast start drop down and because under the selling post agreement between Golar Partners and Golar Limited, Golar Partners is essentially indemnified by Golar Limited under those circumstances. And so while there is an impact or there is a hit to the income statement the corresponding credit is in the balance sheet. So essentially it’s a wash as far as cash flow is concerned but on the U.S. GAAP we could net them off and so we had to present them that way.

Operator

We will now take our next question from Michael Webber from Wells Fargo Securities. Please go ahead. Your line is open.

Sameed Musvee - Wells Fargo Securities

This is actually Sameed on for Michael. Just a really quick question regarding the existing GMLP fleet, I noticed that of the current LNG carriers in the fleet, about three of those carriers, to Golar Mazo, the Golar Grand, and the Golar Maria, either have their contracts expire or that option period expire around 2017, which is obviously very great time potentially for the LNG market with a lot of projects coming online then. But as you think about recharging those assets, could you give us like an update on the priority in terms of risk assets you would look to re-charter first?

Graham Robjohns

Well I mean I don’t think we have any preference between which we contract first and probably a little bit early in terms of looking at the re-contracting situation for all three of them although having said that there was one of them that we have an opportunity, good opportunity that we’re currently looking at. And so there is no preference between the three.

Sameed Musvee - Wells Fargo Securities

Got it. Specifically for the Golar Grand, I noticed that the option period for that asset starts in mid-2015. So is that -- has Golar decided to essentially exercise that option period? Or how should we think about that asset specifically?

Graham Robjohns

It’s actually a plus option on a call option so Golar LNG Partners option so that the current charter BG have an option to extend that charter and until for another three years from March 2015 we currently think that unlikely that they would extend that if they don’t extend then the Partnership has a plus option to charter it to Golar LNG Limited.

Sameed Musvee - Wells Fargo Securities

Got it, that’s all I have in mind I’ll turn the call over.

Operator

(Operator Instructions) We will now take our next question from Fotis Giannakoulis from Morgan Stanley. Please go ahead your line is open.

Fotis Giannakoulis - Morgan Stanley

I wanted to ask you about the NR Satu. There is a contract expired or at least the earliest expiration is in 2015. Are there any discussions about renewal of this vessel?

Graham Robjohns

The NR Satu did you say?

Fotis Giannakoulis - Morgan Stanley

I said that buy FSRU, yes.

Graham Robjohns

I am not sure we caught the first bit of your question Fotis so the Golar Freeze which is the Dubai FSRU is contracted to until 2020.

Brian Tienzo

And the NR Satu which is contracted to Indonesia is until 2022.

Fotis Giannakoulis - Morgan Stanley

So you do not have any vessel expiring next year except of the Grand?

Brian Tienzo

Correct.

Fotis Giannakoulis - Morgan Stanley

Okay, that’s very clear. Thank you. And regarding the FLNG that the Golar spoke earlier have you thought about potential dropdown multiples or potential dropdown valuation and financing of this vessel or it’s too early?

Graham Robjohns

It’s a little bit early I mean I don’t think our approach will change I mean we will continue to use discounted cash flow is an important tool in terms of looking at evaluation I think obviously what will be important to the MLP is very carefully reevaluating the residual risk for an asset class that is obviously less liquid than an LNG carrier, for example. Finance it would like what may welcome with debt finance associated with it that Golar LNG has already put in place but we’re interested in one of the reasons we’re looking at refinancing existing debt potentially was some term loan B or may be bond finance because of the large numbers involved with FLNG assets and we see quality advantages of having the U.S. debt capital markets open to us.

Fotis Giannakoulis - Morgan Stanley

And I know that some of the descriptions might be a little bit premature, given the longer timing until the delivery of the FLNGs. But in case you have any view if there is an initial contract over the next few months for the first FLNG, and if that involves the some of the available trains of the FLNG are you considering potentially dropping the FLNG down in multiple stages after the trains find the contract? Or would you expect that you will do it altogether in the MLP will have a full ownership of?

Graham Robjohns

Well it is a interesting question, and I guess from GLNG’s point of view probably have some amortization to looking at for the structures than we would I do I mean I think the interesting thing for the MLP with these assets is the absolute size which gives the future amount of the distribution increase potential the high margins and the long-term contracts. Now having said that we certainly have considered buying parts of these vessels just because of their share side so a little bit like the construct in scheduled partners where you have an operating company that owns approximately say 50% or buy 50% of the vessel and then the next transaction is volume up 50%. I am not saying 50% but giving just as an example.

Fotis Giannakoulis - Morgan Stanley

Okay, that's clear. Thank you. And regarding, again, the FLNG timing and also about the IDRs, how they work right now, the MLP is about 50% split. Are there any thoughts that this 50% split might potentially change in order to make the accretion of the dividend much easier? You got any thoughts on that?

Graham Robjohns

Not really that we can kind of say now, I mean obviously we’ve seen the space of IDR resets in the MLP space. I know something that Golar LNG has looked a little bit out and considered something in term to look out from further FLNG assets approach. I think from GLNG perspective in effect GMLPs cost of capital edges up as it goes up the IDR ladder. And therefore that obviously has an impact on the acquisition at the end of the day GLNG has got a big interest in the MLP. So it’s something I am sure that will look at and consider.

Fotis Giannakoulis - Morgan Stanley

So is there any preference between the GLNG getting value from the drop-downs through the IDRs versus the initial drop-down price? Or at this point it's too early to answer?

Graham Robjohns

Is there any preference from GLNGs point of view, I mean I think that’s basically the conundrum if you like and I am not sure that those divisions been made yet, and we looked at near upon.

Brian Tienzo

I think also of course the way these assets value is through an engagement of third party values through context committee. So to some extent there is that to be considered and so to some extent it lessens the variability on how you value these assets, which of course has an impact on how you go about distributing the cash flows from those assets.

Operator

There are no further questions. (Operator Instructions) As there are no further questions I would like to turn the call back to Mr. Graham Robjohns for any additional closing remarks.

Graham Robjohns

Thank you very much operator and thank you everybody for dialing into listen today and we look forward to talking to you again in three months time. Thank you and good 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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