GasLog Partners LP (NYSE:GLOP)
Q2 2016 Earnings Conference Call
July 28, 2016, 08:30 ET
Samaan Aziz - IR, Manager
Andy Orekar - CEO
Simon Crowe - CFO
Chris Wetherbee - Citigroup
Hillary Cacanando - Wells Fargo Securities
Fotis Giannakoulis - Morgan Stanley
Good morning. My name is Christie and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Partners' Second Quarter 2016 Conference Call. [Operator Instructions]. Today's speakers are Andy Orekar, Chief Executive Officer; Simon Crowe, Chief Financial Officer; and to commence the call Samaan Aziz, Investor Relations Manager. Mr. Aziz, you may begin your conference.
Good morning and thank you for joining GasLog Partners' second quarter 2016 earnings conference call. For your convenience, this call, webcast and presentation are available on the investor relations section of our website, www.gaslogmlp.com, where a replay will also be available.
Please now turn to slide 2 of the presentation. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our second quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures, as defined by the SEC. A reconciliation of these is included in the appendix of this presentation.
I will now hand it over to Andy Orekar, CEO of GasLog Partners.
Thank you, Samaan. Good morning and thanks to everyone for joining GasLog Partners' second quarter earnings call. I will begin today's call with our highlights for the quarter. Our CFO, Simon Crowe, will follow with a review of financial performance and strong balance sheet and I will conclude with our LNG market outlook and our plans for continued fleet and distribution growth. Following our presentation, we would be very happy to take any questions you may have.
On slide 3, you can see our highlights. In the second quarter, we generated distributable cash flow of $19.8 million which is 41% higher than the second quarter of 2015. We declared a cash distribution of $0.478 per unit or just over $1.91 on an annualized basis. This distribution is 10% higher than the second quarter of 2015 and unchanged from last quarter. Despite this quarter's scheduled dry-docking of one of our eight ships, our coverage ratio was 1.26 times, well above our 1.125 target. During the quarter, we utilized excess cash flow to further reduce our debt by $9 million. This debt paydown is accretive to our distributable cash flow on a per-unit basis.
Finally, on July 11 GasLog Ltd. announced a new seven-year time charter of Hull No. 2801 to Total, the French oil and gas supermajor, who is one of the largest LNG players globally. This vessel is scheduled to deliver in 2018 and increases GasLog Partners' drop-down pipeline from 12 to 13 ships.
With that as introduction, I will now turn it over to Simon to take you through our financials.
Thanks Andy and good morning and afternoon to everyone. I'm delighted today to be able to report another strong quarter for the Partnership. Turning to slide 4, we had increases across all metrics compared to Q2 2015, including a 12% increase in cash distributions declared. Compared to last quarter, there was an increase in EBITDA of 3% and distributable cash flow of 5%, mainly due to fewer dry-docking days in this period. I am very pleased that we will be distributing approximately $0.48 per unit for the quarter.
Turning to slide 5, you can see that we have outperformed our coverage ratio target of 1.125 times. For the second quarter, our coverage ratio was 1.26 times and this includes an approximately $2 million impact from the dry-dockings of the Methane Rita Andrea. Our cumulative coverage ratio since IPO is 1.24 times which represents approximately $26 million of cash in excess of our distribution.
Given our firm charters with Shell and stable cash flows, we have considered raising our distribution to bring our coverage ratio closer to our target. However, we have chosen to use this excess cash flow to repay some debt and to maintain our flexibility for future growth and as mentioned last quarter, we now have no scheduled dry-dockings until 2018.
Turning now to slide 6, we have repaid $66 million in debt since our last drop-down. At the end of the first quarter, total debt to total book cap was 55%, down from 58% at our last drop-down. This debt repayment gives us further flexibility in our capital structure as we consider growth alternatives.
Turning now to slide 7, you can see that at the end of the first quarter GasLog Partners had approximately $85 million of total available liquidity, further enhancing our capital flexibility. Net debt to EBITDA was 4.7 times, primarily due to lower revenues and higher expenses related to the dry-docking and we expect it to return back to around 4.5 times next quarter.
Before I hand back to Andy, I would like to sum up. It has been another good quarter for the Partnership. Our unit price has recovered significantly from the lows experienced earlier this year and our drop-down pipeline has been enhanced by the recent GasLog Ltd. charter announcement and I believe that the Partnership can continue this positive momentum.
And with that, I will turn it back to Andy.
Thank you, Simon. Turning now to slide 8, on July 11 our GP sponsor announced a new seven-year time charter with Total for a vessel under construction that is scheduled to deliver in 2018. With this charter, GasLog Ltd. has now fully contracted its newbuilding program. The expected rates of return from the Total charter are consistent with the historical returns from GasLog and GasLog Partners' existing multiyear contracts, demonstrating the resilience of long term rates despite volatility in the spot market. Most importantly for GasLog Partners, the Total charter increases our drop-down pipeline from 12 to 13 vessels and diversifies our potential customer base. In sum, we believe this exciting new long term charter helps validate our positive demand outlook for LNG shipping.
Now turning to slide 9 and more details on our drop-down pipeline. Today, GasLog Partners has rights to acquire 13 modern LNG carriers, each with a firm charter period ranging from 2020 to 2029, representing approximately $270 million in total EBITDA. This figure compares with less than $150 million of EBITDA at GasLog Partners today, so there is significant and visible growth ahead of us. Our extensive pipeline differentiates our risk/reward profile from our peers, as it not only provides growth, but also significantly derisks the possibility of cash flow disruption at the MLP level.
Turning to slide 10 and an update on the LNG market, on this slide we have listed the new liquefaction projects that have already taken final investment decision and are scheduled to come online by 2020. This group of projects alone represents approximately 140 million tonnes per annum. To transport this new supply of LNG, we continue to see a future shortfall of required vessels relative to the current fleet size and order book. This expected demand for shipping is consistent with the high level of tendering activity we're seeing currently for both on the water and newbuilding vessels.
Based on our customer discussions, today we see active and upcoming tenders for a total of 30 to 35 additional LNG carriers under long term charter. While our conservative supply forecast only includes these projects that have taken FID, there are several other projects that continue to progress in the current energy price environment. For example, Kinder Morgan received FERC approval in June for its 2.5 million tonne Elba Island project. The project is expected to come online in 2018 and is supported by a 20-year contract with Shell for 100% of the capacity. Projects such as Elba represent significant upside to our LNG supply and shipping demand forecasts.
On the demand side, there have been sizable year-on-year increases in import volumes from both new and existing nations looking to take advantage of lower-cost LNG. For example, in the first six months of 2016, China and India imported 29% and 45% more LNG, respectively, versus the same period in 2015. New importers such as Jordan, Egypt, Pakistan and Lithuania have also seen significant demand increases this year.
Now turning to slide 11, I will conclude first by looking back since our IPO and then look forward on the following slide. On the left-hand panel here, you can see that we have grown distributable cash flow per unit at a 16% compounded annual growth rate since our IPO, resulting today in annualized distributable cash flow of $2.29 per unit. This strong growth is due to our consistent operating performance, successful drop-down acquisition, cost savings and meaningful debt paydown. On the right-hand panel of the slide, you can see that we continue to outperform our 1.125 target coverage ratio. Our coverage for the second quarter was strong, despite the dry-docking impact Simon mentioned earlier and our cumulative coverage since IPO is 1.24 times.
Given our multiyear charters and stable cash flows, we've considered raising our distribution to bring the coverage ratio closer to our target. However, given the volatile MLP market and a prudent focus on stability, we have retained our excess cash flow to repay debt and increase flexibility for growth in the future.
Finally, turning to slide 12 and looking ahead, despite weak MLP market conditions since 2014, GasLog Partners has consistently met the 10% to 15% distribution CAGR target we first provided at IPO. We continue to believe in this guidance today, with a view to growing our distribution again in the next six months.
Our supportive sponsor, GasLog Ltd., remains committed to the Partnership, providing a drop-down pipeline of 13 vessels that give us significant optionality to maintain and grow our cash flows through 2020 and beyond. And we have a strong balance sheet, with liquidity that enables multiple financing alternatives.
In summary, GasLog Partners continues to meet its guidance and remains well positioned to deliver predictable and growing cash flows to our unitholders.
That brings us to the end of today's prepared remarks. Operator, could you please open the call now for any questions?
[Operator Instructions]. Our first question is from the line of Chris Wetherbee with Citi. Your line is now open.
I wanted to ask, I guess picking up on that distribution comment that Andy, you just made, in the next six months, should we think about that coming concurrently with another drop-down or how do we think about the timing of those two items? Are they discrete or should we be thinking about them a little bit more collectively?
Sure, so I think one thing we have been talking quite a bit about in recent quarters, including our investor day, is the several alternatives we have to grow our distribution, Chris and one of them is obviously with the assets we have and what we feel like is a strategically conservative coverage ratio. I think our general bias is that we would like to grow the distribution after growing assets and feel that we can do that in a number of ways, one of which we touched on last month which was acquiring minority interest in vessels with just the balance-sheet capacity we have.
But, of course, we do have 13 vessels that we have contractual rights to acquire and we very much expect to acquire. So, that is really plan A and something that we feel we have options to execute. But, again, there are several paths that we see to distribution growth and feel it is important to continue meeting our guidance which we feel strongly about.
So it's not necessarily to suggest that you get a drop-down, per se, of one of the 13, but there is likely to be some sort of asset acquisition, minority interest, otherwise involved in the next six months concurrent with that distribution increase?
Yes, I think that's a fair summary. I think we expect to increase the distribution and it is likely to come from adding assets at the Partnership, but it is not limited to that.
I want to ask a question about a couple of the drop-downs and think about it when you think about the agreement between the GP and the LP. In terms of the firm charter relative to charter option period, is there flexibility with the charter option period hitting the minimum standard of drop-down eligibility? I just want to get a rough sense as we think about maybe the next six months or maybe it is three or four quarters down the road what that group of 13 might look like, particularly on some of those vessels who I think have initial firm charter expiry in the 2020/2021 time frame?
Sure. The rights are triggered depending on what is the charter length when the vessel is either acquired by GasLog Ltd. or is taken delivery by the charterer. So with time passing, the right itself doesn't expire, but is simply a function of GasLog Partners and timing on when it chooses to acquire the vessel at fair market value. So the right is more governed by the delivery date to GasLog Ltd. or a period of time after its delivery date, not how much time is left on the charter.
Okay. But is it fair to say that there would be a preference to longer firm charter duration left, as opposed to firm charter plus option?
Sure. I think it depends on each ship has a different cost and a different charter rate and has its own return profile, so it's hard to make a blanket statement, but I think the view, of course, at the MLP is to give as much visibility on cash flow as possible because we feel that's what our investors value and if that can be provided through the firm period, that's obviously something that we will seek to do.
And then just when you think about, switching gears really quickly, a follow-up question on the broader market, as you guys highlighted, the 140 million tonnes of post-FID projects, as you think about the general market itself, how do you think about the cadence of a potential recovery in charter rates as we go through the rest of this year and then maybe into 2017? Is it the type of thing that we can see maybe in the second half of 2017, a more sustainably stronger market environment or does it feel like we're still maybe a bit longer term out than that?
Sure, Chris, this is Andy speaking. So I definitely expect Paul Wogan on next week's GasLog Ltd. call to comment on this, but I think to us it is fairly apparent that rates have bottomed and have begun to recover, depending on which basin you look at. We have seen some quite tight conditions in the Atlantic and, as we mentioned I believe on the call earlier, have begun to see some reemergence of round-trip economics where our charterers are paying from positioning to repositioning which is an excellent sign.
Obviously, it doesn't catch as many attention as a headline charter rate, but for us it's a very positive sign for health of the market. So, I'm reluctant to give you a precise sort of period of the year, but I think it is clear rates have bottomed and are moving in the right direction and the same old group of projects, whether it is Morgan, Angola, APL and [Gtrain 2, there is talk of train 2 at Sabine starting up, the same group of projects that continues to have a material impact on the market getting up and producing, we feel will have a very significant impact and it's just happening week by week, month by month.
[Operator Instructions]. Our next question is from Hillary Cacanando with Wells Fargo. Your line is now open.
I was wondering if you could elaborate a little bit on the recent uptick that you have seen in the spot market. Also, as of June, there were 18 vessels that were idle and available. I was wondering if that has changed at all. Are fewer vessels available now? If you could talk a little bit about that, that would be great.
So I think it depends on your definition of available and which basin, but some of the statistics I have seen are that number is low at 11 today and again, it depends on if you're talking available prompt or in the next month or so. But clearly, the trend is in the owners' favor and the direction that we're very positive about.
And again, I think part of this comes from a reopening of the arbitrage between basins that had been missing for some time and is obviously in a delicate form, but is there to some extent and some of these project ships actually going back and doing work on the project that they were chartered for.
Now even with that, you had Angola had a couple ships come back in because they went down for some usual pre-startup maintenance, but those will go back to the project here in August. So, it is still early days and small steps, but again, it has all been heading in a positive direction, from our perspective.
And also, you mentioned there were about 30 to 35 active tenders right now. If you could talk about some of the larger ones that you are seeing, I would appreciate it.
Sure, so just to be clear, I think the 30 to 35 is both active tenders, as well as ship demand that we see from tenders we expect in the near term and obviously those are confidential discussions. So, can't give you customer names or slice that up for you. But suffice it to say, it is from a range of charterers. I would say it is an broader range than we have seen historically when the business for many years was obviously largely the purview of the oil majors and the major project sponsors.
So, we're delighted with the diversity of customers, the geography of the customers and we obviously hope to win our fair share of that business and given the recent Total charter, we feel very confident about the rate at which that business will be awarded.
[Operator Instructions]. Our next question is from Fotis Giannakoulis with Morgan Stanley. Your line is now open.
I want to ask about the drop-down plan and what has prevented you from dropping down additional assets, given the fact that your stock has very nicely rebounded during the last few months. What is going to be the trigger point in order to expand your dividend through additional drop-downs?
I think as you know, we have been pleased with the recovery in the unit price book from obviously some very challenging times in the MLP market over the winter and early spring. I think we have continued to feel that the units were not really reflective of what we saw as fair value for the Partnership and where we have issued equity capital in the past. Clearly, the recovery helps that, but we have also wanted to be as good stewards of our investors capital as possible and without a need to raise capital, not try to do so in a market that was obviously challenged and recovering.
We really feel that the guidance we have given on our growth is something that we're able to hit and that we will over time be differentiated for meeting or exceeding, like we have in the past and so I think the catalyst for us, Fotis, is to continue meeting that rate of growth and that's why, as I said, we expect to grow again here over the next six months.
And I think Simon touched on in his prepared remarks. We have a variety of financing sources available to us. We have had both an extremely positive response on the debt side. We have had access -- our parent, of course, has accessed the preferred market. We have, of course, access hundreds of millions of common equity in the past and we feel like we even have access just off our own balance sheet without any external financing.
So it is really a calibration of all those options and what's most attractive and what will enable us to keep meeting that growth guidance and what the cost of financing is that we can optimize to meet that growth guidance. So, it is something we're studying. As you can probably imagine, we study it every day, every week, but we're delighted to have several alternatives and not just one that we're relying upon.
I want to ask about your charter announcement of your parent. There was a new charter for one of your newbuildings that was at quite a high rate compared to the spot market. Can you give us a little bit of background on this charter? Are there other opportunities for a long term chartering right now? How the shorter market is developing? We had a pretty weak first quarter. It seems that the second quarter has slightly rebounded. How do you view it developing the next few quarters?
Sure, so I will start with the first part of your question. I would concur with your comment that -- of course, the rate is a confidential number. The level of the rate is a significant premium to the spot market and frankly, you have heard us say it many times, Fotis, it is very consistent with what we discussed as a stability in the long term rate for LNG ships, despite ongoing volatility in the spot rates.
To Hillary's question earlier, we see near term demand for 30 to 35 additional carriers, some of which are tender processes that are very well underway and are within a handful of quarters of concluding. And, again, those rates are very consistent with what we have seen historically for long term rate. We feel confident about the stability in that market.
On the spot market, I would also concur with your point that in recent weeks we have seen a firming, headline rates for trifield ships getting closer to 35, up from 30. But, again, I think as I mentioned, there are several additional economics going back to owners that you really don't see in the headline rate around bunker costs and positioning and the like. So, there is good momentum there, but, of course, it is still lower than we would like to see and still lower than the term market. But it absolutely feels like it is moving in the right direction and it has been fairly consistent in that regard.
I understand that you do not look at the spot market on a daily basis since your vessels are chartered in the long run. But I wanted to get your view about the spreads between U.S. prices and international prices. I am talking about the commodity spreads. How do you see them developing? We have seen the last six months Henry Hub growing from 1.7 to 2.7 right now and at the same time, the international prices both in U.S. and in Asia and Europe have also gone up. How do you view these spreads developing and how do you think that the spreads are going to impact the shipping market?
Sure, I think, as you noted, the Henry Hub obviously has increased since the beginning of the year, although probably not as much as one would guess, given how hot a summer we've had and the energy demands, but that is interesting in its own right in terms of what production is still doing to Henry Hub upside. But I think the price in Europe NBP has continued to strengthen as you roll forward into the back of this year, as has the Far East price which is getting closer to $6 round about.
So I think it is still not -- certainly not a wide-open arbitrage, inclusive of all the cost to land gas, but it is again heading more in that direction and I think that, of course, is a major driver of spot market demand and activity. So I think it is still nowhere near where we were in 2014, to be certain, but the spread is beginning to emerge and with continued U.S. dollar strength, I wouldn't be surprised to see NBP cloud higher as we move through the rest of the year.
[Operator Instructions]. I am not showing any further questions. I would now like to turn the call back over to management for any closing remarks.
Again, thank you all very much for listening and your interest in GasLog Partners and we look forward to speaking to you next quarter.
Thank you very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.
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