Golar LNG Partners LP (GMLP) CEO Brian Tienzo on Q3 2018 Results - Earnings Call Transcript

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About: Golar LNG Partners LP (GMLP)
by: SA Transcripts

Golar LNG Partners LP (NASDAQ:GMLP) Q3 2018 Earnings Conference Call November 5, 2018 11:30 AM ET

Executives

Brian Tienzo - CEO & Chief Financial Officer

Analysts

Kenneth Hoexter - Bank of America Merrill Lynch

Benjamin Nolan - Stifel, Nicolaus & Company

Randall Giveans - Jefferies

Jonathan Chappell - Evercore ISI

Fotis Giannakoulis - Morgan Stanley

Andy Gupta - HITE Hedge

Operator

Good day, and welcome to the Golar LNG Partners LP 3Q 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Brian Tienzo. Please go ahead, sir.

Brian Tienzo

Thank you, Operator. Good afternoon, and good morning to all of you. Welcome to Golar Partners' Q3 2018 Results Presentation. My name is Brian Tienzo. I am joined here today by our Head of Investor Relations, Stuart Buchanan. So let me start the presentation by jumping over to Slide 3 for the main highlights. We report net income attributable to unitholders of $49 million and operating income of $62 million for 3Q '18. Furthermore, we generated distributable cash flow of $29.2 million and a distribution coverage of 1.02x. These improvements, relative to the same metrics in Q2 '18, can be attributed to the commencement of Golar Maria's multi-month charter and contribution from Hilli Episeyo, whose drop-down was completed in July. However, the full positive impact of these was somewhat hampered by plant off-high days due to Methane Princess' drydocking.

Our in-depth study of the FSRU requirement to service our 1five year project in Jamaica led us to conclude that we'll reduce the Golar Freeze for this opportunity. The FSRU is due to complete its modification shortly, after which, it will sail to Jamaica for commissioning. As you will have heard from the previous Golar LNG's call, shipping market continues to be bouyant with opportunities, and consensus suggests this will continue to be so. As a result, we moved Golar Mazo out of its warm layer, where the vessel entered employment immediately and has since performed numerous voyages.

Finally, we announced in May that we needed to review our distribution policy. This was followed by months of various activities to get to the right decision. Following this, we concluded and recently announced that our distribution for 3Q and subsequent quarters will be $0.4042 per unit. Let's now turn over to the page to go through the income statement highlights. As expected, net income for the quarter increased to $49 million, up by approximately $20.5 million from 2Q '18 of $28.4 million.

Similarly, operating income increased to $62 million compared to Q2 '18 of $36.6 million. The main reasons for these are as follows. We saw disclosed accelerated recognition of the remaining income of the Golar Freeze from its charter with DUSUP. The Golar Maria commenced its multi-month charter in July. We completed a drop-down of the partnership of 50% of Hilli Episeyo's common units. We also saw a decrease in G&A following one-off costs incurred in 2Q '18. However, all of these were negatively affected by the planned off-hire days of Methane Princess due to its drydocking. The vessel incurred 37 days off-hire during the quarter, with some more days incurred in October.

Net interest expense at $18.9 million increased by $2.9 million compared with the prior quarter of $16 million due to lower interest income from Golar LNG Limited in respect to deposits for the Hilli Episeyo acquisition, which is then converted to cost of investments upon the closing of the drop-down on 12th of July. Other financial items resulted in net gain of $10.8 million, which is a $2 million -- $1 million decrease compared to 2Q '18. Within OFI is a write-off of a $1.6 million in respect to valuation of the embedded derivative liability on the earn-out units issued in connection with the IDR research in the current quarter.

Turning over to Page 5 to look at the balance sheet assets. Cash and cash equivalents decreased to $75.8 million by the end of the quarter, mainly due to scheduled debt repayments, capital expenditures for the Golar Freeze modifications and Methane Princess drydocking and the distribution payout in respect to 2Q '18 results. However, in addition to our cash balance, we also have a $75 million undrawn credit facility available to us through to 2021. Let's go with the Page of Slide 6, balance sheet liabilities. At the end of the quarter, our net debt was $1.6 billion with 3Q EBITDA of $105.7 million. This quarter's net debt-to-EBITDA ratio of 3.8x is an improvement against last quarter's level of 4.4x. At the end of the quarter, the percentage of debt swapped to fixed rate was at 107%. The average fixed interest rate of swaps related to bank debt is approximately 2.2% with an average lending period to maturity of approximately 4.9 years as of the end of 3Q '18. So the partnership is pretty well protected from interest rate viability.

Turning over to Page 7, the distributable cash flow. The improvement in this quarter's results compared to 2Q results have also manifested itself in helping coverage to increase from last quarter's level of 0.56x to this quarter's coverage of 1.02x. Further improvement is expected in 4Q due to the following, full quarter's contribution from Hilli Episeyo; full quarter's contribution from Golar Maria; incremental and budgeted contribution from the Golar Mazo; and a full quarter's contribution from Golar Igloo, whose charter have elected to extend its regas season to the end of December. And of course, no impact of material off-hire is expected except that of the Methane Princess, whose drydocking concluded in October. Our life-to-date distribution coverage at 1.11x remains pretty strong. And having now announced reduction in distribution going forward, I would expect around this level to be at least maintained for the foreseeable future.

So then let's talk a bit more about our new distribution level. And for that, let's turn over the page. Over the past year or so, we've had a few charges either expiring or terminating. Earnings into these charges were set during periods when these vessels commanded premium. It is therefore natural that absent equivalent charters, revenues going forward would be lower. Furthermore, whilst we continue to see impressive developments in shipping and, of course, high interest remains for FSRUs, there remains uncertainty as to timing when these assets can be put into long-term positive cash flow generative charters. It is within this background that the boards sought to set a level of dividend that needed to mitigate the risks mentioned above but also a level that remained attractive to investors but, most importantly, a level that can be sustained. We believe a distribution reduction of 30% achieves all of the above. In arriving at this, we have taken to conservative estimates and assumptions. For example, whilst we continue to witness the buoyancy of shipping economics, we have taken a pragmatic approach and assumed a big hack relative to current executed steam rates. Furthermore, the Golar Spirit is currently being bid into various FSRU projects. But due to timing uncertainty, we have assumed no contribution from the FSRU.

On the Golar Igloo, we have not taken anything for granted such that was we are hopeful for an extension from the existing charter. We have, nevertheless, assumed an earnings level, which is consistent with shipping earnings, which is actually almost at par with FSRU earnings. We have previously talked about restructuring some of the debt facilities within the fleet. This is work-in-progress and would improve cash flow. We have not assumed any debt optimization. We have assumed no additional earnings contribution from additional drop-down of Hilli Episeyo's remaining common units. Of course, there remains some risks to these assumptions. This can never be eliminated. Nevertheless, we believe we have set a distribution level that allows us to manage through unforeseen rough quarters and continued to maintain the new distribution level that has been set and use that as a foundation for growth.

Now one of the more crucial factors we took into account when arriving at the new dividend level, it is what's happening in shipping. So let's have a quick look at that now.

Turning over to Page 9. So as you can see from this chart, there have been material improvements in shipping spot rates partly as a result of lack of front vessels. This applies to both TFDE and steam vessels. It is against this background that we took the decision to take the Golar Mazo out of its warm layer. We were able to secure employment immediately, and its employment has recently been extended by the same charter. Golar Maria will also complete its multi-month contract in the summer of 2019, and we expect the vessel to be cash-generative through and beyond that period. On the basis that our shipping exposures comes at a time within a period of a much improved shipping market and is continuing, we feel confident that our conservative shipping assumptions are sound and are driving at a new distribution level.

So then how we go about funding potential growth? Let's turn over to Page 10. The recent movements in the common unit yield from 16% to currently 11% or so is a welcome rebalancing, but this level still makes it uneconomic to fund under any equity scenarios. While we also hope to be able to observe this improvement in debt spread or yield, this typically lags behind movement in equities, but it does normally follow. Additionally, we have debt which amortizated steeply relative to factors considered when arriving at distributable cash flow. The graph shows that whilst it's not quite there yet, the Partnership's debt capacity is reemerging once again. So an optimization of our debt facilities as well as more effective debt pricing are just some of the options that will help us to fund our growth going forward.

Turning over to Slide 11. So Slide 11 is something that you will have seen in our previous presentations. It shows that a partnership continues to have a significant revenue backlog. The most notable movement from previous versions of this slide is on Mazo and Maria ,where both are now in front of the employment. However, what is more exciting are the potential drop-down candidates. These are shown at the bottom of the slide and encompasses the Hilli Episeyo, the FSRU Nanook and associated cash flows in the Sergipe power project. Golar LNG share of the EBITDA of the latitude is approximately $99 million over our 25 years. Suffice to say, ownership of such cash flows would further strengthen the partnership's coverage as well as contract length and mitigate residual risk.

Turning over to Slide 12 now. So in summary then, uncertainty over the level of dividend has been removed. The new level of distribution is both attractive and sustainable. On the basis of a continuing excellent operational function, a solid contract base from which to service our distribution, a robust growth in the LNG market and a committed GP to provide growth opportunities, the partnership's now in a solid foundation to contemplate interesting prospects in the future.

And on that note, I'm turning over now to -- the presentation to the moderator for Q&A session.

Question-and-Answer Session

Operator

[Operator Instructions]. We will now take our first question from Ken Hoexter from Bank of America.

Kenneth Hoexter

Brian and Stuart, can you just talk about the FSRU market? Obviously, it still seems to be kind of extending the weakness you talked about. Obviously, one has gotten rechartered. One is operating as an LNG carrier. And you've got the Spirit, I guess, coming up or lay up. Maybe just talk about the status of what would change that supply-demand market just given what we're seeing on the shipping side.

Brian Tienzo

Sure. I think, first and foremost, it's fair to say that there are a lot of FSRU interest there. We're not short of them. I think the -- on taking the decision to reduce our dividends, what we have taken into account is the time it takes for these FSRU contracts to actually execute and become operational. So to that extent, we've not assumed anything in the very near term. Having said that, the Golar Spirit, for example, is being bid into various opportunities. We're talking about South America, Southeast Asia, Middle East and so on and so forth. So it's not short of employment opportunities, but we've taken a pragmatic approach against that. And then to talk about -- to answer your question about what it would change, I think to the extent, we do still have some FSRUs out there that remain unemployed. Obviously, it is -- makes the competitive environment much more so. I think the good thing is that the shipping market is actually helping to put away some of those FSRUs albeit possibly more in the short term. So I think to that extent, I think that, that will help the FSRU environment. What I can say, though, is that what we are seeing for -- under FSRU environment is that there's a few FSRU opportunities out there now that are contemplating smaller scale FSRU, that is to say smaller regas capacity. And to that extent, Golar Spirit would be cheaper and, therefore, much more competitive under those scenarios. So I'm hopeful for the Golar Spirit, but the timing of it is uncertain to me.

Kenneth Hoexter

Okay. And then just, I guess, my second one, just on the -- your future growth prospects. Obviously, nuke would fit in on the FSRU side with what your expertise is, the Hilli expansion. Obviously, it goes along with the Hilli drop-down you commented. Maybe just talk about Sergipe in terms of any other protections you'd look at getting into a market that on the MLP side would need protection. Or is that just a standard kind of rate structure contract like this long-term shipping one?

Brian Tienzo

So there are two components to the cash flows associated with the Sergipe project. One is the FSRU, which is a U.S. dollar-denominated contract. And so from a risk-reward perspective, it very much follows what we have done previously. On the associated cash flows to the power project, that is denominated in Brazilian real. So in order for us to remove the variability and the cash flows, we would have to hedge that, and that would be taken into account in the event a drop-down scenario is contemplated.

Operator

We will now take our next question from Ben Nolan from Stifel.

Benjamin Nolan

My first question relates to the Igloo on Slide 11 with all the vessels that shows that it comes off contract at the end of the year with an option for 2019. And of course, you guys have said or it's been out there that they've been tendering for a replacement. At some point, you have to make a decision at least on that option for 2019 pretty soon, correct? I mean is that -- any color that you might be able to give at least for 2019 there?

Brian Tienzo

No, that's absolutely correct. So we announced sometime, I think it's for the second quarter earnings, that we were expecting the charter to come to market or attend the process. That hasn't materialized. Of course, we, being the incumbent FSRU provider, had been in discussions with them for an extension of the contract. Now those discussions have been very positive, so we are hopeful to be able to secure that. Of course, until such time as everything is formalized, nothing can be guaranteed. But what we expect will happen is that there is more likely to be a need for at least another year of FSRU service for the Golar Igloo.

Benjamin Nolan

Okay. And would that be simply the exercising of the option for next year or striking a new contract maybe at different terms?

Brian Tienzo

Well, it will be an exercising of the option. But in the event they want to have a look at the rates, I think we can be okay with that as long as it's not too at -- too much at variance with what we are earning today.

Benjamin Nolan

Okay. And then going back to maybe one of Ken's questions about the Spirit, and I understand the challenges of timing and everything else, but as it relates to Avenir in small scale, is it possible that you might, especially for something like the Spirit, you might be willing to say, okay, we'll go into market where maybe the power consumption demand is relatively low, but we can use it as a hub for other small-scale developments in other areas, and maybe a way to fit in FSRU into a market that historically wasn't substantial enough to warrant an FSRU? Is that how you're thinking maybe about that one in particular or just opportunities in general?

Brian Tienzo

No, no. I think you're absolutely right. So the -- when I mentioned about the various opportunities, it's a mixture of pure rate higher, and others include similar to the nuke where the vessel goes in not fully utilized, and that's enabling us to use some of the redundancy as well. So we'll look all the various opportunities. And there are a few, except that -- and of course, anything that we -- from the current scenario we are at the moment, anything that we are able to land on the Golar Spirit will just be an upside. But given the timing, we've just taken a bit of a pragmatic approach and say, look, we've been marketing this for a while and we vented the FSRU into various projects previously, and it's just taking a long time to execute those and get a contract for the vessel.

Operator

We will now take our next question from Randy Giveans from Jefferies.

Randall Giveans

Question for the Hilli trains 1 and 2, I know you're continuing discussions for a potential drop-down of additional units. Do you have any guidelines or maybe timing or scale of these? Could you do it in 5% increments? Or are you kind of waiting for a large chunk?

Brian Tienzo

No. I mean so we did a 50% purchase of the common units initially. There is no specific metrics that we have to follow to effect another drop-down. I think clearly, what we need to be able to have is sufficient confidence that we're able to fund it. I think we have shown that there could be various funding sources coming up. But to answer your question, it can be flexible.

Randall Giveans

Okay. That makes sense. And then looking at the kind of distribution coverage ratio, now that the prudent cut has been made, what is your current target of distribution coverage into maybe 2019 and beyond? Just trying to think about timing and scale of possible distribution increases in the future.

Brian Tienzo

Yes. So I mean on coverage -- average coverage to date -- live to date is actually about 1.12 or something like that. So having reduced the dividend and surrounded by what we believe to be conservative assumptions, I think we'll be able to at least maintain that throughout 2019. Obviously, in 2019, there will be some drydocking -- a drydocking of the Golar Eskimo toward the latter end of '19, so the coverage during that period will be slightly lower but still be much above the ratios that we've seen of the previous couple of quarters.

Randall Giveans

Okay. And then for -- is there like a minimum period that you have to keep the distribution at current levels before increasing possibly in 6 months, 12 months?

Brian Tienzo

I think, first and foremost, we need to satisfy the market. The dividend that we have set is sustainable, and I think that will happen over the next couple of quarters, and let's see how the investing community reacts to that. I think clearly, we do have some growth opportunities in front of us, and those could be the opportunities to increase the dividend then. But you need to be able to have the currency to be able to affect those, and hopefully -- I mean the equity market has reacted quite well to it. I'm hoping that the debt market will follow suit. Normally that lags a little bit behind. And to the extent that it does, then we will have the currency to be able to flip from one funding source to the other for growth opportunities.

Randall Giveans

Okay. That's fair. And then last quick question here. Looks like, obviously, you didn't repurchase any common unit during 3Q '18. So what is the remaining repurchase authorization? And should we expect possible unit repurchases in the coming months?

Brian Tienzo

So we had approved $25 million of repurchase, I mean last -- early this year. We've only used $10 million of that, so there remains about $15 million that we can do should the board require us to. So we have sufficient capacity to do that.

Operator

We will take our next question from Jon Chappell from Evercore.

Jonathan Chappell

First one on the LNG shipping side, I mean we've obviously seen how strong the spot export market has been, and I think there has been some broker estimates to what medium-term time frame of contracts may be. But I'm not sure any of those have been executed. Are you seeing increased inquiry on term charters maybe for the Mazo and the Maria, even the Grand that, that option is not exercised in the 2- to 3- maybe even five year type of duration?

Brian Tienzo

Yes, the answer to your question is yes. So we recently had a couple of inquiries for steam vessels of duration of about 5 years. I think we believe the charters haven't yet caught on to the idea that the rates have moved on sufficiently positively since, well, let's say the beginning of this year. So there is that expectation to manage. But clearly, there is now the thinking on behalf of the charters to try and cover tonnage shortage that they can see coming forward.

Jonathan Chappell

Got it. And just as a follow-up to that one really quickly. How do you kind of manage internally? I mean you're still an MLPs, so you want the visibility around cash flows. Obviously, you don't want to give away too much of the market upside. But how do you kind of knew to trade-off -- between a 5 year, especially steamships and removing some of the rechartering overhang there versus getting kind of a true market rate on those vessels?

Brian Tienzo

I think you answered your own question. I think to the extent that we're an MLP, we don't really want too much variability in our cash flow. So if there -- an opportunity arise, a right opportunity arise for putting the vessels away into long-term charters, then we would take that more seriously than treating them at, what could be super profits but over a short period of time only.

Jonathan Chappell

Okay. And then just finally is my kind of true second question. You mentioned all over the press release both for GMLP and GLNG and even in the presentations flattered debt amortization profile that better reflects the economic life of the assets. Obviously, that's kind of refinancing the debt. So is that, in this type of financing environment, realistic, you think, that could happen in a short period of time? And how do you envision that kind of unfolding?

Brian Tienzo

I think so. I think what typically happens in our industry is -- LNG in general at the moment is a -- has a good fashion statement. So to the extent that people see it as a bouyant kind of sector, then you have a bit more credit available made to it. And then of course, against that, you also have to have a look at the various contracts you have for refinancing. And the contracts we have at Golar LNG Limited remains quite significant, actually, and so that lends itself for a refinancing. Now what is -- to me, what would be more crucial is to be able to potentially refinance the Hilli, which is all the debt we have available. Probably, the steepest one is amortizing. And being able to do that actually augments cash flow quite materially. So it doesn't have to be that -- with like the goal of the Hilli plus -- sorry, the Hilli Episeyo plus a few of the other vessels in there to refinance just to align it much better to the way we calculate dividend, coverage and distribution.

Operator

We will take our next question from Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis

I would like to ask you about your growth pipeline that you sold. These are assets that you owned partially or through the joint venture with Stonepeak. Would the drop-down refer only to the stake of Golar LNG? Or you think there could be an agreement with Stonepeak as well? And how do you think that the -- your parent can facilitate these potential drop-downs?

Brian Tienzo

So to answer your question -- first question, Fotis, so whilst we only highlighted the EBITDA attributable to Golar LNG Limited in the slides, I mean clearly, Golar LNG Partners has signed an Omnibus agreement to Golar Power. So to that extent, Stonepeak could also be included along those economics. So there is an opportunity to do both Golar LNG Limited and Stonepeak share should they wish to do so. And how do we go about financing, well I think as we've seen -- there is a reemergence of GMLP's debt capacity coming up. Hopefully, the debt yield for new debt will also improve over the coming months or so, following an improvement in equity yield. So that's an option, I think. But clearly, for big transactions such as, for example, the Golar Nanook, then we would still need to see a little bit of improvement on the unit -- on the common unit pricing to be able to use that. It isn't currently there at the moment. How can Golar LNG Limited facilitate it? Well, to some extent, we've done it previously. So where -- it allows us to be able to drop-down assets, and Golar LNG could potentially allow -- sell us credit to be used to augment the coverage in earnings and allow Golar LNG Partners to subsequently finance the drop-down if its currency isn't quite there yet at the time.

Fotis Giannakoulis

Brian, that's very helpful. One more question. I mean I assume that the yield will be helped significantly when you will have a better financing package for your existing fleet. You alluded to that. What is the timing of this potential restructuring of the debt repayments and improvement of amortization schedule of your existing debt? And how much of the cash flow could improve when you would reach an agreement?

Brian Tienzo

So that's currently a work-in-progress now within here. I think clearly, it's probably a bit too late to execute anything before the end of this year. I think that's a first half 2019 project for us. Now obviously, the amount of cash flow improvement is going to very much depend on where we'll land at in terms of amortization of the new debt facility and the pricing. And as I said, I think we would only be able to determine that when the sort of the debt capital will have taken into account the -- what we hope to have been a enhancement to credit as a result of the reduction in dividend. So to answer your question, Fotis, we don't know just yet. But clearly, there is something in there.

Operator

[Operator Instructions]. We will now take our next question from Andy Gupta from HITE Hedge.

Andy Gupta

Two quick ones. One is, Igloo and Spirit, given the strength in the LNG carrier market, why don't just operate them as LNG carriers?

Brian Tienzo

Absolutely, we could do. I mean the Golar Igloo, in the event the existing charter doesn't extend the charter, which we hope and expect that they do anyway, it could easily just unhook and trade as an LNG carrier. And actually, its earnings wouldn't be too much at variance with an FSRU rate. The Golar Spirit is a bit more difficult. It's less efficient compared to some of the vessels we're seeing today. They very likelihood is that we'd have to incur some capital costs in order to get it out of the cold layer. Because remember, it's been cold layer now for more than a year. And as a result, there needed to be some refurbishments required to the vessel. But it can be done. And what I gather is that in the event we want to exercise that option, she could be trading within 4 or 5 months.

Andy Gupta

Understood. And my second question is on the refinancing on Hilli. As you mentioned, I agree, that's quite a compelling opportunity. I would imagine that the terms were set at a time obviously when the Hilli was still unoperational, right? So even though this is a seven year term, I would imagine that now that it's operating, it's operating really well, that the banks will be amenable to a greater balloon. Is that the thinking?

Brian Tienzo

Well, we hope so. I mean you're absolutely right. So when we secured the Hilli financing, it was back in 2015, so yes, under Golar LNG Limited. So at that time, I'm also without a charter in place at the time. So it's now operational. The vessel is working really well, has had no downtimes since commissioning has been completed. So from that perspective, it's been derisked. And clearly, with the cash flows being much more visible now that the lenders clearly see, then we would hope that every financing could be achieved. And I think it can be achieved. It's a matter of when rather than if.

Andy Gupta

Is that based on maybe Train 3 getting the green light here? I would imagine at that point it becomes a no-brainer.

Brian Tienzo

I agree. It is independent. It is independent on Train 3. It's -- at the time of financing, it was purely on the basis that there's a certain economics into the Perenco contract. And that's -- Train 3 was an option, and so that couldn't be taken into account. So it's purely on what it's seeing now rather than what it could be seeing with Train 3.

Operator

It appears there are no further questions at this time. I'd like to turn the conference back to your host for any additional or closing remarks.

Brian Tienzo

Thank you, moderator, and thank you, everyone, for your participation. Hopefully, you found this call sufficiently informative for your analysis, and I look forward to speaking with you again for the fourth quarter results. Thank you, and goodbye.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.