Teekay LNG Partners' (TGP) CEO Peter Evensen on Q1 2016 Results - Earnings Call Transcript

| About: Teekay LNG (TGP)

Teekay LNG Partners L.P. (NYSE:TGP)

Q1 2016 Earnings Conference Call

May 20, 2016, 10:01 AM ET

Executives

Scott Gayton - Investor Relations

Peter Evensen - Chief Executive Officer

Vince Lok - Chief Financial Officer of Teekay Corporation

Mark Kremin - President of Teekay Gas Services

Analysts

Fotis Giannakoulis - Morgan Stanley

Nick Raza - Citigroup

Spiro Dounis - USB Securities

Operator

Welcome to the Teekay LNG Partners First Quarter 2016 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards, you will be invited to participate in a question-and-answer session [Operator Instructions]

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.

Scott Gayton

Before Mr. Evensen begin, I would like to direct all participants to our website at www.teekay.com where you all find the copy of the first quarter of 2016 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 statement is contained in the first quarter 2016 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, Kim. Good morning, everyone and thank you for joining us on the first quarter investor conference call for Teekay LNG Partners. I’m joined today by Teekay Corporation's CFO, Vince Lok and Mark Kremin, President of Teekay Gas Services.

During our call today, I will be taking you through the earnings presentation, which can be found on our website. Beginning on Slide 3 of the presentation, I will review some of Teekay LNG's recent highlights.

For the first quarter of 2016, the Partnership generated distributable cash flow of $54 million and cash flow from vessel operations or CFVO of $114 million, which were both down slightly from the same period of the prior year. We generated DCF per limited partner common unit of $0.68 per unit resulting a strong distribution coverage of 4.79 times.

During the first quarter, Teekay LNGs first MEGI LNG carrier newbuilding Creole Spirit commenced its five-year charter contract with Cheniere Energy, which delivered in late February and subsequently transported its first U.S. shale gas cargo to Europe and is currently on its second voyage from the U.S. to the Middle East.

Both shipments originated from Cheniere Sabine Pass LNG export facility located in Louisiana. The partnership's second MEGI LNG carrier newbuilding is undergoing sea trials and is on-track to commence its five-year charter with Cheniere in the third quarter of 2016.

During the first quarter, Centrofin the charter of the Bermuda Spirit and Hamilton Spirit Suezmax Tankers exercised its options under the charter contracts to purchase both vessels for a total price of approximately $94 million. The Bermuda Spirit was sold in mid April and the Hamilton Spirit was sold in mid May and we used the proceeds from these sales to repay existing term loans associated with these vessels.

Lately in April, the sponsors of the Yamal LNG project recently announced a significant milestone for the project in securing long-term debt financing, which I will touch on in greater detail in the presentation.

Turning to Slide 4, we provided an update of Teekay LNGs projected run rate CFVO including the proportionate share from its equity accounted investments. Starting with the Q4 2015 run rate CFVO of approximately $470 million, we expect this to be relatively stable, increasing moderately as we take delivery of the Cheniere LNG carriers and begin to take delivery of TGPs other MEGI LNG carriers in 2017.

Partially offset this year by the one year deferral of a portion of the charter payments on two 52% owned LGN carriers, which are on charter to the Yemen LNG project. The sale of the two Suezmax tankers to Centrofin and the planned sale of one of our conventional tankers over the next year.

Given the backend loaded nature of TGPs newbuilding deliveries Teekay LNGs run rate CFVO will really begin to ramp up post 2017 when we expect to add an incremental $250 million of annual run rate CFVO by 2020.

Turning to Slide 5 as I mentioned in my opening remarks, the Yamal LNG project announced it had achieved a significant milestone in securing all the required financing to complete the construction of the project, which includes the construction of three LNG trades with a total capacity of 16.5 million metric tons per annum.

The project will be financed through $16.2 billion of new bank financing from Russian and Chinese lenders with the remaining funded by the National Welfare Fund of Russia of $2.4 billion and equity contributions totaling $12.8 billion from the projects sponsors including Novatek, Total, CNPC and Silk Road Fund.

The project is progressing with an estimated 51% completed as of March 31, 2016 and the first LNG train is over 65% completed as of March 31. The project is currently scheduled to start up in late 2017.

Teekay LNG through its joint venture with China LNG Shipping have six ARC7 Ice-Class LNG carrier newbuildings being constructed in South Korea that will commence charter contracts with the Yamal project through 2045 with extension options. Our vessels remain on-track for delivery in 2018 through 2020.

Our joint venture also achieved significant milestones with steel cutting on our first vessel in April. Together with China LNG, we’re making good progress on securing debt financing for these vessels and we’re currently evaluation multiple attractive offers from Chinese financers which I’ll talk about on the next slide.

Turning to Slide 6, securing financing for our growth project remains the top priority and overall, we’re seeing significant demand from commercial banks, export credit agencies and leasing companies to fund our projects. A majority of which are secured on long-term charter contracts with strong counter parties.

The Exmar LPG carriers delivering in 2016 are already fully financed through a committed debt facility and together with our joint venture partner we expect to conclude financing on the remaining four vessels delivering in 2017 and 2018 by the end of this year 2016.

As previously mentioned on our last earnings call, the financing of our second MEGI LNG carrier newbuilding on charter to Cheniere for five-years has already been secured to a new $179 million leasing facility with ICBC leasing. Upon delivery, we expect to be reimbursed approximately $35 million of equity from the vessel, which can be used to fund the equity requirements in our other growth projects.

We’re looking to finance our six MEGI LNG carrier newbuildings delivering in 2017 and 2018 as a package and are currently negotiating a term sheet on a sale lease back transaction for approximately 90% to 95% of the cost of these vessels. Five of the vessels are on six to eight-year charter contract with SHELL and one is currently unchartered, but is part of a LNG newbuilding contract tender that is outstanding.

The four LNG carrier new buildings delivering in 2017 through 2019 on long-term charter with SHELL which were originally done with BG Group are already fully financed through a long-term non-recourse debt facility. As mentioned earlier, we are currently reviewing several terms sheets from Chinese financers to finance a portion of our six Yamal LNG carrier newbuildings delivering in 2017 to 2020 and currently expect to debt finance approximately 75% to 85% of delivered cost.

Together with our joint venture partners, we expect to conclude the financing with commercial banks and export credit agencies of the Bahrain regasification terminal in the third quarter of 2016 in which Teekay LNG owns a 30% interest. Teekay LNG is a 100% owned new building FSU which will commence a 20-year time charter contract to this project upon start up in Q3 2018 is anticipated to be financed in the first half of 2017.

Lastly, we will evaluate financing options on our last two MEGI LNG carrier new buildings delivering in the first half of 2019 starting next year. One of the vessels will operate under a 13-year charter contract with BP and the other vessel is currently unchartered.

As you can see since we have funded a large portion of the initial yard installments of these projects with equity in previous periods, most of the remaining CapEx payment will be funded with new debt facilities that we are putting in place resulting in minimal impact on TGP’s liquidity. Together we expect these projects to make significant cash flow contributions adding over $300 million to TGP’s annual CFVO.

Thank you for joining us on the call today, and operator we are now available to take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from [indiscernible] of JP Morgan. Please go ahead.

Unidentified Analyst

Hi thanks for taking my questions. I want to ask about the follow-up to the Yamal LNG vessels and one of the ships was reported the delivery has been pushed back to January 2017. Have you had any discussions with the shipyard regarding voluntary delays to your vessels?

Peter Evensen

Yes, this is not our vessel this is owned by [indiscernible] and that was part of the original plan that the first one was ordered with a lot of room, so that you can work out any kings, ours are coming later and they are still budgeted on time.

Unidentified Analyst

Okay. Great. And then regarding your kind of the maturity profile and deleveraging strategy. What is your intention for the refinancing of the [NOK] (Ph) bond that come due over the next few years. Do you expect to just repay those and deleverage or will you refinance a portion of it?

Peter Evensen

Yes, we have some unsecured volumes due in 2017 and 2018 and 2020. In terms of TGP’s existing bonds they are actually trading at a decent level. So there is a good chance that the market even though the Norwegian bond market isn’t that active right now, there is a good chance that we can refinance those bonds. If not, we have the sufficient liquidity given all the financings that we are currently working on to probably just repay at least the 2017 bond with existing liquidity. But we hope to be with access to bond market starting next year.

Unidentified Analyst

Okay. And just lastly, is that real that’s going give a full 90-days, 91-days in Q2 revenue purposes?

Peter Evensen

Yes, that’s correct.

Unidentified Analyst

Okay. Thank you.

Operator

Thank you. The next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

Fotis Giannakoulis

Yes, hello and thank you. Peter I think you mentioned you mentioned you have got financing for four of the SHELL vessels, I assume the SHELL vessels are five is the fifth vessel still pending and is this a leasing financing what you have got for this SHELL vessels?

Peter Evensen

Hi Fotis. Actually we are going to put five SHELL vessels, you right we have five vessels on to SHELL and we’ve one that is currently unchartered. So we’re going to finance all six together.

Fotis Giannakoulis

Okay. Thank you that’s very helpful. And then is it going to be bank debt financing or it leasing sale and lease back?

Peter Evensen

It will probably be with Chinese financing, so we haven’t decided if we’ll do it with bank financing or lease financing.

Fotis Giannakoulis

Okay. Thank you. And regarding the power project in Bahrain, can you remind us a little bit the economics and what kind of returns this project is looking and if you see a number of similar opportunities in the marker right now where you can take advantage of high electricity prices and low gas prices?

Mark Kremin

Hi Fotis this is Mark. On the Bahrain it’s not actually a power project, the gas is just is likely to be used for aluminum or other type of industry. But in any of that the economics are that we’re investing 100% of the FSU, which will be on 20-year charter to the Chem Co, of which we’ll take 30% and the Chem Co investment is slightly larger than that we would expect in the FSU a little over $200 million and around $250 million.

So overall the total investments is over $500 million the returns we expect are better than we would achieve on certainly and LNG short term or long term chart it’s slightly better than that. The for the future, there are lot of FSRU projects regasification projects most cities for FSRUs only with perhaps a little bit of infrastructure, but we’re seeing some similar build, own, operate and transfer both projects where we would just provide an FSU and the infrastructure. And so we’re looking at those but probably none will get fit this year is my guess.

Fotis Giannakoulis

Recently we are reading about a number of companies interested in converting LNG carriers into FSRUs and how many of these do you think that they can be converted and how many projects do you expect to see the next two-years, three-years. We use to expect two, three FSRU or worse every year. Has this number increased and what kind of investment do you estimate that we are going to see in the next few years in the FSRU markets?

Mark Kremin

Sorry go ahead.

Peter Evensen

I think I would say that we’re probably more conservative than some of our competitors are. I think a lot of people are saying they are going to take their point-to-point conventional LNGs and convert them to FSRUs, because the spot market isn’t very good. We of course have well over 95% locked up on long-term charters.

In our view actually the conversion market will only be actual once the built for purpose FSRUs are taken out. We see significant slack in FSRUs seeing a lot of competitors coming out with purpose built FSRUs, which are actually preferred.

The market has changed for people to prefer purpose built FSRUs from the yard rather than conversions because the projects as Mark was saying on FSRUs are taking much more time. And therefore you can have a purpose built FSRU rather than a conversion because right now the projects are slowing down so the speed to market you can get with a conversion really doesn’t have any value.

Fotis Giannakoulis

Thank you, Peter. And I want to ask about your view on both LNG shipping and the LNG prices you have been correct on forecasting the downturn. How long do you think that this is going to take until rates, they exceed the breakeven levels. Is this a couple of year estimate or its going to take a much longer. And also on the LNG prices, historically they have been driven by oil, oil seems to be moving higher, we haven’t seen any meaningful impact on natural gas prices. Is the disconnect definite or is a time lag and when do you expect that the LNG prices will start increasing.

Peter Evensen

Sure. Wells let’s start talking about the LNG trade first what goes into all of that and what we had seen was that LNG trade was flat, because Japan was using importing less and we haven’t really seen the market pickup. What is really nice to see is that the global LNG trade was about 5% higher year-on-year in the first quarter and this was because we had more supplies coming, but we also had more growth particularly in Europe whereas Japan and South America they were flat to down I think Japan was down about 6%. So it was nice to see Europe picking up.

However, as you pointed out landed prices for LNG in Asia were not beneficial for the LNG trade they were trading below $5 and I think they are about $4.20 now. So they are actually below the oil linked price and so we really need to see a greater pickup. I think the good news is we're seeing some terminals come one and then we are going to see more gas and all eyes are really on Chevron, because they have two projects Angola and Gorgon, which are due to startup mid-year. And so there has been a lot of delays in that with Angola, Gorgon but we have seen short-haul trades moving up.

So what has hurt the LNG market is that we haven’t had a lot of ton miles. So what we really need to see is the gas price come up and that really won't happen until people are sure about the supplies that are coming on. So the answer as it relates to LNG rates is what we're seeing which I think is good for the LNG market is that rather than take long-term contracts and building new ships people are saying there is enough spot markets that I can be relying upon them. So we can see that sopping up demand - and so I think will start to I think we will bottom out now and will start to see improvement into 2017 and 2018.

Now what exactly that translates into rates that will depend upon how much gas is on the market. So I won't give you a clear forecast accept to say, we see it getting better in 2017 and 2018 as we have more gas and we sop up the excess demand or excess supply rather of ships.

Fotis Giannakoulis

Thank you, Peter. That has been a very helpful. One last question about the LPG market. Most of the investors they seem to be very concern about the trade of propane and butane, but I understand in your vessels they do a lot of ammonia. Can you talk to us about the distinction between the [VLGC] (Ph) and what kind of a cargos do you see and how the supply demand in your LPG is developing?

Mark Kremin

Fotis this is Mark. We’re mostly also on LPG so although we do carry a fair amount of ammonia to the likes to Potash Corp is just catch on, we do mostly LPG, but regardless the MGC or mid-size sector that we are in is very different from the GLC sector that is taking propane almost exclusively to China.

The rates obviously on the VLGC side have been very volatile, they are now less than mid-size rates. Our mid-size rates have maintained pretty much the levels that they had for the last few years. We’re also by the way we are over 85% fixed through this year anyway, but the mid-size sector should stay stable where the VLGC sector will continue to see volatility.

Fotis Giannakoulis

Thank you very much for sharing all this thoughts.

Peter Evensen

Thanks Fotis.

Operator

Thank you. The next question comes from Nick Raza of Citigroup. Please go ahead.

Nick Raza

Good morning guys. Thank you Peter for answering a lot of those questions. I just have a couple of quick questions. First of relating to sort of the floating storage contango play. Are you guys seeing a lot of that right now in your conventional segment?

Peter Evensen

No.

Nick Raza

You are not. Okay.

Peter Evensen

Sorry just waived that but no.

Nick Raza

Okay, I guess the second question, in terms of follow-up for the LPG question. Do you sort of see some about volatility trigger down into the mid size? And if your answer is no, could you sort of provide a little bit more color on that?

Peter Evensen

Yes, I think it will influence it, but only if the VLGC market stays low. Where we benefit is that we are in more regional trades. And so the ports will take more MGCs sometimes. So we are talking about medium gas carriers LGCs and VLGCs. The problem seems to be in the VLGCs and we don’t see them from a port constriction really entering in and coming into RO section, which is more 35,000 cubic rather than 75,000 cubic.

One thing we have seen which I think bodes well for the MGC is that we were concerned that there were a lot of ships being delivered into the MGC because of shipyard problems in particular, a couple of shipyards in China, we now see a lot of those MGC is probably won't be delivered. So that’s a good news story.

Nick Raza

Okay, and then little quick to your slide presentation on Page four. Does the incremental cash flow through 2017 and through the LPG vessels as well - I don’t think I see that unless I’m missing something?

Mark Kremin

No, it's not material because we are also assuming that some of the older vessels will be sold in due course. So we didn’t include that on the chart, but in reality incrementally there will be some additional cash flow.

Nick Raza

I see, and just around CapEx, I notice that you guys did not provide a lot of detail around it like you had in your previous quarter. are we to assume that the CapEx schedule is still sort of the same?

Mark Kremin

Yes, so we just aggregated it in one table and this time for ease of reference, but no material changes what you saw, other than just passage of one quarter of time.

Nick Raza

Fair enough. That’s all I had. Thank you so much guys.

Peter Evensen

Thank you.

Operator

Thank you. The next question comes from Spiro Dounis of USB Securities. Please go ahead.

Spiro Dounis

Hey good morning gentlemen. Thanks for taking the question. Just wanted to touch on maybe tendering and Chartering and it sounds like you have got one up for tender right now, and without getting into specific of that tender. Just wondering maybe year-over-year, what have you seen change if anything in that process, whether it be moiré pressure on the cost to capital, when you are bidding on a rate or maybe you are seeing tenders go longer or shorter?

Peter Evensen

Sure, so let's start with the good news. I don’t think anyone has ordered an LNG ships in September of that last year. So that’s a good story. And what we are seeing actually is a lot of tenders come out, but they don’t get completed and that’s because charter are price checking. But we know that their volumes as Sabine Pass comes on that they haven't filled with long-term contracts. But as I said earlier, it seems like their contempt to go with short-term contracts with existing ships.

And so they would prefer to have new MEGIs that are more fuels efficient, but they are not in a hurry to lock up long-term tonnage. So that’s builds well for the spot market getting better, but it means that there is less long term contracts that Teekay LNG specializes in. So we feel pretty good that we have two vessels that were available to stick into tenders, one comes in 2017, one comes in 2019. But most of the startups that we are seeing on tenders are for 2018, 2019 startup. Otherwise, people are content to play the spot market.

Spiro Dounis

Okay, the next question is, I guess on that first MEGI that delivers in early 2017, say for assumption that if you win this tender would that contract be concurrent with the delivery or could we see a delay?

Peter Evensen

We might see a delay.

Spiro Dounis

Okay, got it. And then just last one on that tendering activity... sorry go ahead.

Peter Evensen

And then we might intern adjust for delivery date back.

Spiro Dounis

I see okay, so you have that option. Okay good. And then just on the 2019 MEGI, just trying to figure out basically it sounds like you said it might that almost be worth waiting a little bit longer to tender anything now if this market isn’t as hard as you would like it to be. So I guess I’m wondering where are our expectation should be for chartering that 2019 MEGI, if it's make sense to wait here to see how things I guess evolve in the market or is that your preference to maybe lock that thing as soon as possible?

Peter Evensen

Well, I wish it was my choice. We were just responding the customer request. But what we have seen I mean probably the most public tender was the [Gayle] (Ph) tender. That’s probably been out three times, it will come out one more time. But what we do know is that there is a need for ships for volumes that are coming out of Cameron or Sabine and people haven't locked up the tonnage. So it's either way you either end up with long term fixed rate contracts or you end up sopping up to lot of the tonnage that is free right now.

Spiro Dounis

Got it. I appreciate the color. Thanks guys.

Peter Evensen

Thank you.

Operator

Thank you. There are no further questions. Mr. Evensen, I'll turn the call back to you.

Peter Evensen

Great, thank you all for listening and have a great weekend and we look forward to reporting back next quarter.

Operator

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

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