Teekay LNG Partners' (TGP) CEO Peter Evensen on Q2 2016 Results - Earnings Call Transcript

| About: Teekay LNG (TGP)

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

Q2 2016 Earnings Conference Call

August 04, 2016 11:00 AM ET

Executives

Peter Evensen - CEO

Scott Gayton - CFO

Vince Lok - CFO, Teekay Corporation

Mark Kremin - President, Teekay Gas

Analysts

Michael Webber - Wells Fargo

Spiro Dounis - UBS Securities

Fotis Giannakoulis - Morgan Stanley

Nick Raza - Citi

Operator

Welcome to the Teekay LNG Partners Second Quarter 2016's Earning Results Conference Call. [Operator Instructions] As a reminder, this call is being recorded. Now, for opening remarks and introductions, I would like to turn the call over to Mr. Peter Evensen, Teekay LNG Partners’ Chief Executive Officer. Please go ahead, sir.

Scott Gayton

Before Mr. Evensen begins, I would like to direct all participants to our website at www.teekaylng.com, where you'll find a copy of the second quarter 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 statements is contained in the second 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, Scott. Good morning, everyone, and thank you for joining us on our second quarter investor conference call for Teekay LNG Partners. I'm joined today by Vince Lok, Teekay Corporation's CFO; Mark Kremin, President of Teekay Gas; and Teekay LNG's Controller, Brian Fortier. During our call today, I'll be taking you through the earnings presentation, which can be found on our website. Turning to the Slide 3 of the presentation, I'll review some of Teekay LNG's recent highlights. For the second quarter of 2016, the partnership generated distributable cash flow or DCF of $76 million and cash flow from vessel operations or CFVO of $135 million, which were up by 16% and 13%, respectively from the same period of over the prior year, primarily due to a favorable settlement related to an LNG carrier charter contract termination dispute in our 52% owned Malt joint venture, of which Teekay LNG's proportionate share was $20 million.

We generated DCF per limited partner common unit of $0.95 per unit, resulting in a strong distribution coverage ratio of 6.7x. With the recent delivery of our second MEGI LNG newbuilding, the Oak Spirit, which commenced its 5-year charter contract with Cheniere Energy, the partnership has now delivered both MEGI LNG newbuilding vessels to Cheniere. During the second quarter, our Exmar LPG joint venture took delivery of the seventh of 12 mid-sized LPG carrier newbuildings. This vessel commence its 5-year contract charter to Statoil in August, transporting LPG in the North Sea. Lastly, I'm pleased to report that we continue to make significant progress on the partnership's debt financings related to our committed growth projects. Since May, we have secured lender credit approvals on over $900 million of new debt financings. We'll provide more details on the status of these financings later in this presentation.

Turning to Slide 4, the partnership has now successfully delivered from DSME the world's first 2 MEGI LNG carriers, the Creole Spirit and the Oak Spirit. Both vessels are now operating on their respective 5-year fee-based charter contracts to Cheniere Energy, lifting volumes from Cheniere Sabine Pass LNG export facility.

The latest delivery, the Oak Spirit, which commenced its contract with Cheniere on August 1, will transit the new expanded Panama Canal on its maiden voyage to the U.S. gulf to pick up its first cargo from Cheniere. These vessels are expected to generate approximately $50 million in annual CFVO and $30 million in annual DCF, and were financed under new long-term lease facilities with ICBC Leasing. The successful delivery from the yard and commencement of charter contracts of these 2 vessels is an important milestone for Teekay LNG, as we continue to focus on executing on our committed growth projects. Turning to Slide 5. Securing financing for our growth projects remains top priority, and overall, we're seeing strong interest from commercial banks, export credit agencies, and leasing companies to fund our projects. Most of which are secured on long-term charter contracts with strong counterparties. As previously mentioned, we've recently completed the financing and delivery of the Oak Spirit, which was financed through a long-term lease facility with ICBC Leasing.

Moving down the list. I'm pleased to report that we've now secured lender credit approval for a sale leaseback transaction to finance 3 of our MEGI LNG carriers delivering in 2017 and 2018 for approximately 90% of the cost of these vessels, including the Torben Spirit, which is currently uncharted and will deliver between February and December 2017 at our option. We're currently tendering this uncharted vessel on various projects. Financing for 3 additional MEGI LNG carriers, which are all employed on charter contracts to Shell and deliver in 2017 and 2018, is currently in negotiation, and is expected to be completed by the end of the year. We will evaluate our financing options next year for the 2 remaining MEGI LNG carrier newbuildings, which don't deliver until the first half of 2019.

One of the vessels will operate under a 13-year charter contract with BP, and the other vessel is currently uncharted, but is also being tendered on various opportunities. The 4 LNG carrier newbuildings delivering in 2017 through 2019 on long-term charter with Shell, formerly BG, are already fully financed through a long-term nonrecourse debt facility. And I'm pleased to report that together with our 50-50 joint venture China LNG Shipping, or CLNG. We've now secured lender credit approvals to finance our first 2 ARC7 LNG carrier newbuilding vessels delivering in 2018. These 2 vessels will be financed through a long-term lease facility at a leverage ratio of approximately 80% of the delivered cost of the vessels. Financing of our joint ventures remaining 4 ARC7 vessels delivering in 2019 and 2020 is currently being negotiated.

Together with our joint venture partners, we expect to conclude the financing with commercial banks and export credit agencies for the Bahrain regasification terminal in Q4 2016, in which Teekay LNG owns a 30% interest. Teekay LNG's a 100% owned newbuilding FSU, which will commence a 20-year time charter to this project upon startup in the fourth quarter of 2018, is anticipated to be financed in the first half of 2017. Finally, the Exmar LPG mid-sized carriers delivering in 2016 and early 2017 are fully financed through a commercial debt facility, and a new leasing facility, which was secured in the second quarter. And together with our 50-50 joint venture partners, Exmar, we've agreed terms for the remaining 3 vessels, and expect to conclude these financings by the end of the year. So as you can see at the bottom of the slide, 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're putting in place, resulting in minimal impact on TGP's liquidity. Together, we expect these projects to make a significant cash flow contribution to the partnership.

Turning to Slide 6, we provided an update on Teekay LNG's 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 now that we've taken delivery of the Cheniere LNG carriers and begin to take delivery of TGP's other MEGI LNG carriers in 2017. Partially offset this year by the deferral of a portion of the charter payments on 2 52% owned LNG carriers uncharted to the Yemen LNG project. The sale of 2 Summit - Suezmax tankers, and the planned sale of one of our conventional tankers over the next year. Given the back-end loaded nature of TGP's newbuilding deliveries, Teekay LNG's run rate CFVO will be - really begin to ramp up in post-2017, and we expect to add an incremental $250 million of annual run rate CFVO by 2020.

Thank you for joining us today. And operator, we're now available to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Michael Webber from Wells Fargo.

Michael Webber

Peter, just to start off, you mentioned the uncommitted MEGI in participating in a number of tenders. Can you - maybe within the context of that ship. Can you kind of talk about whether those are - you're looking at kind of single asset employment or kind of putting in on the Cheniere, so those have supplemental volumes, or is it part of a larger and multi-vessel tender? So I guess maybe a good way of asking, can you kind of describe what the tender environment looks like right now maybe within the context of how you guys are approaching that uncommitted MEGI?

Peter Evensen

Sure. For competitive reasons, I'm not going to talk about exactly which projects we are tendering or not. But there are multiple opportunities to charter newbuilding vessels for various periods from 5 up to 20 years, and that depends upon which volumes you want to take. Obviously, we're looking at volumes that are chiefly coming from the U.S., as well as from Australia, and people want to lock up long-term tonnage. What we have seen is that there's been a delay in people locking up tonnage, which you would expect because the spot market has been relatively cheap, so they've been willing to supplement with the spot tonnage before they ultimately fix long term. And I think that as people start to see the fuel savings that you get on the MEGI LNG carriers, then people will start to see in a more benign oil price environment that they want to go with the MEGI. And so that's why we're seeing a lot of interest in these. And we can't fill the multiple vessel tenders, but we have 2 ships. And so they're being delivered - one in 2017, one that delivers in 2019. So those are the ones we're putting on for these projects. But a lot of them are after 1, all the way up to more vessels.

Michael Webber

Right. Yes, I guess what I was asking, are those kind of do you view these ships as kind of, but the lead kind of tip of the spear for a 4 or 5-vessel tender that you guys are looking at, or are they kind of one-off, kind of - are they more kind of one-off employment that's more viable for those, too?

Peter Evensen

Right now, we're not - we have - right now, we're not really focused on booking more growth. Ultimately, through 2020, there is going to be a need for more LNG vessels in 2019 and 2020. We - there aren't enough ships for all the existing projects that are being put online. But we're not really focused on growth right now. We're focused on...

Michael Webber

Sure. That makes sense. Just trying to get a sense on what that environment look, and what was out there for what was available, I guess maybe..

Peter Evensen

I would say, there are some that are serious tenders, and some that are really more price checks that they don't have to go because there is a slack in the system.

Michael Webber

I got you. Okay, that's helpful. I guess kind of turning to, I guess, the spot market in general. You guys don't have much of any real exposure there, but you do have some assets that are chartered up to the - that are heading the way up on the LNG side, and what we've seen rates tick up a little bit here to kind of 35k, and maybe just a bit under 40. Just curious as to what you would need to see in the market for those vessels to reenter the spot trading dynamics? And in general, when you guys look at the next kind of 6 months, do you think we'll get to a point, where the average LNG carrier is not burning cash?

Mark Kremin

Hi, Mike. Just to kind of - the 2 ships that we have at the parent level, just to clarify, that they have - it's actually been moving cargo at this point, and we expect that to continue into the second half. So that's a good signal for the market as a whole. Obviously, those are niche trade ships. So they're in a little bit more when they're in the trade, they do different trades, but those are active - we have active currently at this point. But as a whole, that gives you an indication that the market is, I think, improving. We - as you say, we have limited exposure in it through our joint venture with Marubeni, but we have some. And we have of 2 ships, the Methane and the Magellan that has been on the spot market. And what we see from half to half in hopefully next year is us - is a gradual improvement, not necessarily in rates. We've seen the 20,000s, the 30,000s script into the 40s, but it's more important that time charter equivalent. So the ballast bonus that we're seeing, the timing between fixtures is improving ever so slowly, but surely. And so it's going to take some time, but things seem to have bottom out. And we've also seen recently rumors, and we'll see more how - we're getting to - we're beginning to see some term charters, I think are getting fixed. So where we were joined voyage-by-voyage, it's now month-by-month, and we're now hearing about year-by-year, and that's a good sign as - of hope for the improvement.

Peter Evensen

Just to clarify, Teekay Corporation charters. 2 ships from Teekay LNG, and those ships were idle in the second quarter, and one of them is coming out, and is being employed on short-term voyages.

Michael Webber

Right.

Peter Evensen

So that's an indication, as Mark was saying, that the market is improving.

Michael Webber

Yes, it's helpful, and I appreciate that. Just one more and I'll turn it over. And this is just kind of higher level, Peter. But we, I guess, throughout the space, the idea of kind of building out kind of higher spec, Marine infrastructure be at FSRUs or FSUs or LNG, been a pretty big focal points for the past year, year and a half, and it seems as though, maybe most of 2015 and early '16 that the economics associated with kind of converted assets seem to be relatively favorable because you're hearing a lot about it, it's kind of an outlet for LNG tonnage or excess LNG - carrier tonnage than we certainly saw it on the FLNG side. And then you guys have been active in that sort of stuff in the past, and just in terms of converted project. But I'm just curious as we stand today with a lot of excess shipyard capacity in and around Korea, whether - kind of where are those relative economics stood for converted assets be it FSRUs, FSUs versus newbuilds? You guys are obviously busy on the FSU side, but I know you got a pretty purview into this. But have we seen any sort of meaningful shift, where the Korean yards are getting a bit more competitive in terms of newbuild pricing for higher spec floating LNG infrastructure?

Peter Evensen

Yes, I would say that when you compare - if you're talking about the shipyard prices in general, we expect to see a softening because, obviously, the order books are running down. And so that's what we're seeing. And obviously, with only 4 LNG newbuild orders being placed since the start of 2016, you can start to see that there is going to be some slack in in the system looking out into 2018 and 2019. But as it relates to FSRUs, we've done the studies on conversions, and we've looked at various projects. We continued to believe that newbuilds will be preferred because over-conversions because the only thing that conversions give is faster time-to-market, whereas on the whole, people would rather have newbuilds. And the pricing of the newbuilds looks like it's more competitive than maybe doing conversions.

Michael Webber

Okay. That’s helpful. I will turn it over, but thank you for the time guys.

Operator

[Operator Instructions] We'll now take our question from Spiro Dounis from UBS Securities.

Spiro Dounis

Hey, good morning, everyone. Thanks for taking the question. Just wanted to start off with the distribution. And I won't try and draw you on the specific timing or anything, but it seems like you laid out a pretty clear path to obtaining the committed financing. And as far as capital markets goes, it seems like MLPs are out there raising capital again. So I guess just relative to when you made a decision to cut back in December to right now, is that pathway to restoring the distribution closer further or about the same as to where it was before?

Peter Evensen

Well, obviously, it is 8 months closer because 8 months has happened since we unfortunately had to temporarily cut the distributions. So but we continue to believe it was the right thing to do because we've been able to use the money saved on the distributions to as the equity for the down payments. And as I said in my prepared remarks, that puts us in a position now that we have made the down - we've used that money that we've saved to make the down payments, and that has saved us from some dilutive equity issues. And so without being drawn on the time, we expect to restore our distributions, as we complete the financings that I talked about.

Spiro Dounis

Okay. That's clear. And then second one just sort of housekeeping on the options, you, I guess, defer the LNG carrier. Two parts, and sorry if I missed it, but did that option cost you anything? And then in terms of the CFVO guidance, do you provide - is there any sort of run rate baked into that CFVO for the specific vessel?

Peter Evensen

Sure. So the answer is we do have to pay a ticking fee to DSME if we delay the delivery, but it is in the low single digits as a percentage. So we feel that if we don't get employment for the ship, we would be better off delaying the delivery. But I would emphasize that we are tendering it in for employment that would mean, we would take delivery in early 2017. But if we don't win those, then we'll delay it. And on the CFVO, Vince, do you want to take that?

Vincent Lok

Yes, we did include that on slide 6. I know it's difficult to see that relative to all the other items that we've conservatively estimated. A small amount of CFVO for that ship, sort of middle way through that slide.

Spiro Dounis

Got it. Okay. That’s helpful. Appreciate the color. Thanks guys.

Operator

Our next question is from Fotis Giannakoulis from Morgan Stanley. Please go ahead.

Fotis Giannakoulis

Yes. Hello, guys and thank you. Peter and Vince, it seems that you have done a lot of progress on the debt financing, and you are close to finalize all your credit facilities. I see the there is a difference over - about $120 million kind of $130 million that will have to still to be covered by equity. How - where do you think that you will have - when do you think you will have to raise this equity? And what other options does the company have except of common equity in order to create this liquidity? And if you can also comment on the debt maturities that you have and the refinancings that they are coming during the next couple of years?

Peter Evensen

Sure. So the answer is we don't anticipate raising equity to close that hole. The money that we're saving by not - by having reduced the distributions is going toward filling that. So we're continuing to generate excess cash flow because as you saw our distribution coverage was over 6. And so we will not be - we do not anticipate accessing the markets with a follow-on offering for that. And as it relates to the - so we're putting in place the financings for the existing ones going forward. And then we anticipate we can go from cash balances and with a combination of refinancings.

So for example, we have a bond due in May next year of $125 million, then we anticipate that we could pay that off with cash if we can't extend it going forward. But - so we feel relatively comfortable on that side of things. We have some existing loans that are coming due in 2017 and 2018, and we have no reason to think that we won't be able to extend those since those vessels remain on charter contracts longer period, with the exception of the 4 Malt vessels, where we expect to just extend that debt refinancing in 2017.

Fotis Giannakoulis

Thank you, Peter. And one last question about the overall market and the liquefaction projects. Earlier this morning, GasLog tried to draw the attention to a couple of developments, including the Kinder Morgan, Elba Island projects that is expected to take aside this soon. I remember that you have been a little bit cautious about the projects, the FIDs of additional projects in the U.S. and worldwide. Has some things changed during the last couple of months? Do you see that there are the conditions of seeing new projects taking FID going forward?

Peter Evensen

Well, obviously, I haven't had a chance to hear what GasLog said. So I'll just say what I think, and I'm not as optimistic about that. But what we're talking about is projects that'll come in beyond the 2020 time frame. I'm more concerned with what's happening in 2016 up to 2020. And there, I can say things are actually much better. Last quarter, we reported that the LNG trade was flatter. But now when we look at first half of 2016 against first half of 2015, we actually have seen that the LNG trade is about 9% higher. And crucially, we've seen imports into China up 30% first-half on first-half. And in India, we've seen imports increased 45%, and that is a function of a renegotiation of prices, such that those LNG has - that the LNG has become competitive compared to other prices of other fuels.

So I think on the whole, that is good news. There has been some decrease in Japan, but on the whole, the growing economies of China and India growing means that we're starting to see that repair. At the same time, what we're seeing on the newbuildings side is that people aren't placing orders. So we see all the right fundamentals going in toward an improving market. And so I think that's, on the whole, very good news, and I'm much more focused on that. If we actually look and see what happened, there is more LNG that is being traded right now, as we've had volumes coming in from Australia, and volumes from the U.S.

But the reality is it could be even better because we've had startup problems on Gorgon in Australia, as well as Angola has been delayed a little bit further to late summer. So when those volumes come up, we should actually see more LNG that is available to be traded. And on the whole, that's good news because that'll soak up that and give increased utilization to the spot market. And when the spot market increases, then I think we have all the essential ingredients for a slow, but gradual recovery in LNG rates as the utilization picks up. And that's a little bit what we're seeing this summer. So I'm concerned more about that rather than a post-2020. But let's wait and see who takes FID. I think these brownfield projects, whether it's Lake Charles, Elba Island, when they take FID, then we'll know, but those won't come online for 3 or 4 years.

Fotis Giannakoulis

Thank you very much, Peter.

Operator

[Operator Instructions] We'll take our next question from Nick Raza from Citi. Please go ahead.

Nick Raza

Thanks, guys. Just a couple of quick questions. In terms of the actual slack in our surplus vessel capacity that exists out there, I mean, when do you see that going away?

Peter Evensen

I just see it gradually recovering as more ships are required as more LNG projects ramp up to capacity. And so I see a steady improvement. Yes, will it - will you get some gyration in rates? But that's way we had 2 ships idle in the second quarter. It didn't affect TGP because there were on charter. But now we start to see that other projects are coming in. We can bring those ships up and get some trading again.

Nick Raza

Got you. So then I guess if we were to sort of talk about some of the tendering activity that you mentioned, is there an understanding that a new tender would require new vessels? But are you seeing on the tendering side, specifically, customers willing to, say, sign up for excess capacity or vessel capacity? So for instance, a project coming online, are they more prone to come out and say, we'll take the older vessels for X number of years and help out with the surplus capacity?

Peter Evensen

That's exactly right. What we saw was the market change, as the spot market made sure that there were enough vessels available. There were - so let me give you a little more color. There were about 33 vessels when we talked about 90 days ago. Now there's about 23 vessels. And so one of the chief requirements is that you have the confirmed vessel employment. But people feel there is enough wiggle room right now and slack capacity that they're okay to be in the spot market. But ultimately, those are going to convert to fixed employment. And that's where Teekay LNG has a chance to put some of its existing ships on to medium term charters and charter our newbuildings for a longer-term'.

Nick Raza

Okay. And then just switching gears a little bit. In terms of the Exmar JV, is there an end goal to IPO joint venture or monetize it somewhere? Or is that something that TGP will hold on to?

Peter Evensen

I don't think so. We're very happy with joint venture. It has been very successful, generated a lot of cash. And we've been going through a fleet renewal program on that fleet. And that's actually been well received by customers because it trades in environmentally sensitive areas like the North Sea, they're very interested in our new modern tonnage that's more fuel-friendly. So that has enabled us to charter out most of that fleet. We've been able to sell the older ships at a premium. And so we've not only reduced the average age of that fleet, but we've enhanced it in the eyes of its customers to carry short-haul LPG and ammonia.

Nick Raza

That’s all I had. Yes. Thank you very much.

Operator

We'll take our next question from [indiscernible].

Unidentified Analyst

Just wondering on the 2019 noncontracted deal, we saw BW doing FSU conversion on that earlier this week, and you mentioned that, you're receiving kind of the newbuild side it makes more sense to do that FSUs on the conversion. I mean, could you do that on the 2019 delivery?

Peter Evensen

I actually think it's - we could, I guess, but we actually see enough opportunities for the point-to-point LNG market that for us, we would rather be on point-to-point LNG. We don't - it isn't part of our investor thesis to have speculative FSRUs. We're much more comfortable waiting until we get a contract before we go into the FSRU market. And all of these contracts in the FSRU market, from our point of view, usually, the counterparties aren't as strong as what you see in the point-to-point LNG and counterparty risk is one of the things we concentrate on.

Unidentified Analyst

All right. And then is there - could you give any more color on the 2 Yemen vessels? So just looking at Page 6, are you assuming those to be starting early next year?

Mark Kremin

We probably don't assume them to start early next year, but the agreement that we have on the deferral does end of this year - at the end of this year. So we'll have to have more talks with the Yemen. Right now, the plant is certainly ready. It’s in good shape, and it's been maintained, and that's where the cash and the sponsors for the project have gone. So it's ready to start up in a short period of time or months. But it's probably given the news of where the peace talks are, we think it'll probably take a little longer than that. In the meantime, the ships are being subchartered out to, I guess, multi-month spot type of business.

Unidentified Analyst

That's helpful.

Peter Evensen

So that is hurt - so that's hurt the partnership CFVO by about $20 million. But I would emphasize that that contract is still valid, and those funds are deferred.

Unidentified Analyst

And finally, on your model, you're supposed to be beginning any sort of terms on kind of the [indiscernible] profile and the interest?

Peter Evensen

Yes. As - when we finish them, we'll give a little bit more color on those. They've not been completed yet, we've agreed terms.

Unidentified Analyst

That’s it from me. Thanks.

Operator

[Operator Instructions] It appears that there are no further questions at this time. Mr. Evensen, I would like to turn the conference back to you for any additional or closing remarks.

Peter Evensen

All right. Thank you all very much. As you've heard, we've made a lot of progress both in taking delivery of our new MEGI LNG's as well as on our top priority of completing the financings, which is a necessary requirement before we can restart distribution. So thank you very much, and we look forward to reporting back to you next quarter.

Operator

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines.

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