GasLog Partners LP (NYSE:GLOP) Q1 2021 Earnings Conference Call May 6, 2021 8:30 AM ET
Paul Wogan – Chief Executive Officer
Achilleas Tasioulas – Chief Financial Officer
Joseph Nelson – Head-Investor Relations
Conference Call Participants
Randy Giveans – Jefferies
Ben Nolan – Stifel
Greg Lewis – BTIG
Good morning. My name is Anara, and I'll be your conference operator today. At this time, I would like to welcome everyone to the GasLog Partners First Quarter 2021 Results Conference Call. All lines have been placed on mute to prevent any background noise. After speakers’ remarks, there will be a brief question-and-answer session. As a reminder, this conference call is being recorded.
On today's call are Paul Wogan, Chief Executive Officer; and Achilleas Tasioulas, Chief Financial Officer. Joseph Nelson, Head of Investor Relations will begin your conference. Please go ahead.
Good morning or good afternoon, and thank you for joining the GasLog Partners first quarter 2021 earnings conference call. For your convenience, this 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 first quarter earnings press release.
In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these measures is included in the appendix to this presentation. Paul will begin today's call with a review of the partnership's first quarter highlights, following which Achilleas will walk you through the partnership's financials. Paul will then provide an update on the LNG shipping and commodity markets, and we will then take questions on the partnership's first quarter.
With that, I will now turn it over to Paul Wogan, CEO of GasLog Partners.
Thank you, Joe, and good morning, good afternoon to everybody. Please turn to Slide 4 for GasLog Partners first quarter highlights. I'm pleased to report that the fleet performed at approximately 100% availability, delivering near flawless service to our customers. Our ability to change crews continue to improve, although many jurisdictions especially in the Far East, still prevent crew changes. We delivered adjusted earnings per unit of $0.50, a 19% increase over Q1 2020, driven by cost control and a strong spot winter market, as discussed later in this presentation.
And finally, we retired $36 million of debt during the quarter and increased our charter coverage to 75% for the remainder of the year, executing on our strategy of balancing our operational and financial leverage. Turning to Slide 5, which shows that our contracted revenues, along with the cash generated in the first quarter are more than sufficient to cover our debt service and maintenance capital expenditures for 2021.
During the first quarter, adjusted EBITDA was approximately $64 million, almost unchanged from Q1 2020, in part due to our cost control efforts, as Achilleas will discuss later. Additionally, as of the end of Q1, our 75% charter coverage through the remainder of 2021 represents over $166 million of contracted revenues. This visible cash flow stream will allow us both to continue deleveraging our balance sheet with approximately $110 million of debt due to be retired this year and pay the $18 million related to our five dry-dockings.
Slide 6 highlights our operational leverage. The chart on the left shows that although, we have taken steps to secure revenue and cash flow visibility in recent months. The partnership maintains meaningful exposure to a continued recovery in the LNG carrier spot market. Specifically, each $10,000 per day increase above our operating and overhead expenses generates approximately $10 million of incremental EBITDA over the remainder of 2021.
With that, I'll hand over to Achilleas to take you through the partnership's Q1 financials.
Thank you, Paul. Turning to Slide 8 and the partnership's financial results for the first quarter. Revenues for the first quarter were $87 million, a 5% decline from the first quarter of 2020. However, adjusted EBITDA was $64 million approximately unchanged with respect to the first quarter of 2020 while adjusted earnings per unit was $0.50, a 19% increase year-over-year. Financial results for the first quarter of 2021 compared with the first quarter of 2020 were impacted by the expiration of the initial multiyear chapters of all of the partnerships into bank vessels, offset by lower operating expenses, overhead costs and indirect expenses.
Looking forward, the partnership has five vessels scheduled for dry-docking in 2021, one of which we anticipate will take 40 days as the vessel is having a ballast water treatment system installed, a regulatory requirement. See the appendix of this presentation for an updated dry-docking schedule for this year.
Turning to Slide 9. And you can see that our cost reduction initiatives taken in 2020 have been borne out in our results. Our operating expenses for the first quarter averaged just over $14,100 per vessel per day continuing the trend of declining operating expenses over the last two years. Our overhead expenses were $2,275 per vessel per day, a significant improvement over 2020. As we look toward the full year, we continue to expect our unit operating expenses to average $14,550 per day per vessel given effect of actual improvements in our operating costs, which we have discussed on previous calls.
Lastly, declines in LIBOR as well as lower debt levels have reduced the interest expense on the unhedged portion of our secured vessel debt by approximately $5.5 million in the first quarter of 2021 compared with the first quarter of 2020. Slide 10 shows that the partnership's credit profile continues to be resilient with net debt to total capitalization at 50% and $125 million of available liquidity, which includes $95 million of cash. It is important to note that GasLog Partners has not committed growth CapEx, but we will have five scheduled dry-dockings in 2021, as I previously mentioned.
We expect to continue strengthening our balance sheet, beginning with a retirement of approximately $110 million of debt in 2021, which, as Paul noted earlier, is more than covered by our existing contracted revenues and cash flows for this year. Reducing debt balances will reduce the partnership's cash flow breakeven levels over time, improving further the competitiveness of our fleet.
With that, I will turn it over to Paul to discuss the LNG commodity and LNG shipping markets.
Thank you, Achilleas. Turning to Slide 12. Poten reported 93 spot fixtures in the first quarter, continuing a multiyear trend of rising market liquidity. Commodity trading houses, LNG portfolio players and the merchant arms of large LNG producers were all active in the market. In addition, a record 18 one-year time charters were fixed during Q1. Headline spot rates have risen sharply in recent weeks and, as shown by the right-hand chart, are now above the upper band of their five-year range. LNG shipping spot rates have benefited from sustained LNG demand and increasing prices in the major import markets of Europe and Asia, as both regions refilled depleted LNG inventories following the cold Northern hemisphere winter.
We expect the LNG carrier spot market to improve through 2021 relative to 2020, assuming the global economy continues to recover with the worldwide rollout of COVID vaccines. However, this is by no means certain as many countries continue to experience high levels of infections. In particular, India, the fourth largest consumer of LNG, is struggling with a huge increase in cases, which has begun to impact LNG demand.
At least six LNG cargoes have reportedly been diverted away from the country in recent weeks. In contrast to last year, we presently anticipate minimal U.S. cargoes to be shut in this summer. European gas storage levels are presently at 30% compared to a five year average of 42% and 64.5% at this time last year. We expect restocking in Asia and Europe to continue to create demand for U.S. LNG, and hence, is positive for LNG shipping in the coming months.
Slide 13 shows the LNG carrier order book and delivery schedule according to Poten. Although we are encouraged by the rising spot market activity and rates in recent weeks, the LNG carrier order book remains high. 54 vessels are scheduled to enter the fleet this year, half of which have yet to deliver. It is noteworthy that 87% of the order book has multiyear employment and just seven unfixed vessels are scheduled to deliver during the remainder of the year. Nevertheless, all these deliveries will add to the global fleet and therefore, have a potential to offset volume and tonne mile growth.
Slide 14 demonstrates the competitiveness of LNG as a marine fuel. As the two charts on this slide display, LNG is both the least expensive and the lowest CO2 emitting marine fuel available today. However, the international maritime organization is proposing to adopt two intermediate steps on the way to its target of reducing CO2 emissions from the global fleet by 40% in 2030 when compared to 2008.
These are the Energy Efficiency Existing Ship Index and the Carbon Intensity Indicator. Together, these two proposed measures will attempt to reduce emissions by addressing chip design and operations. These measures could potentially impact the steam turbine ships as the least efficient vessels in the global LNG fleet. While these new rules have yet to be finalized, they have the potential to impact the remaining useful life and residual value of the partnership's steam fleet.
And we are currently investigating mitigation measures which may include operating these vessels at slower speeds or making efficiency modifications. It's important to remember the steam turbine vessels comprise nearly 40% of today's LNG carrier fleet, making this an industrywide challenge with the potential to risk tonnage availability if not carefully implemented.
Slide 15 shows monthly regional LNG demand over the last 12 months. According to Poten, LNG demand increased 1% in the first quarter of 2021 relative to Q1 2020. Asian demand was robust for much of the quarter due to a cold and an average winter. However, European imports declined sharply as the region drew down inventories as record high gas prices in Asia pulled LNG away from Europe. The 2021 Wood Mackenzie forecast LNG demand to grow by 4%, with most of this growth showing in the second and third quarters.
Slide 16 shows quarterly U.S. exports, which totaled 17 million metric tons in Q1 2021, or a record 248 cargoes, according to Poten. U.S. exports are very shipping intensive as the distance to most major discharge destinations is above the global average. During the first quarter, approximately two ships were needed for every one million tonnes of LNG exported from the U.S., nearly twice the global average. Wood Mackenzie is forecasting 69 million metric tons of U.S. exports this year up from 48 million metric tons in 2020.
Slide 17 shows gas price differentials between export and import markets. The futures market presently implies a steady and widening differential between U.S. export and Asian input prices through at least the 2021, 2022 winter. This should keep liquefaction terminals operating at higher levels of utilization and expand shipping tonne miles. Slide 18 shows Wood Mack's forecast LNG demand growth of 97 million tonnes between 2021 and 2026, or 4% per annum. This is a nine million metric tons increase from their previous growth estimates of 88 million tonnes.
Nearly 85% of this demand growth will be in Asia, while much of the new production is likely to come from North America, underpinning the shipping intensity of the growth in the years ahead. Slide 19 illustrates the LNG importing and exporting infrastructure currently under construction. As a reminder, import terminals can be built much more quickly than production facilities, and so the data on the right only encompasses 2024. With many more planned additions for both production and regasification, we expect these numbers to continue to increase. Although Total recently halted construction of their LNG project in Mozambique, that presently remains 120 million tonnes per annum of LNG production under construction, 56 million tonnes of which is in North America.
The right-hand chart shows 126 million tonnes per annum of regasification capacity being built, 2/3 of which is in Asia, again, highlighting the shipping-intensive nature of this growth. However, the postponement of the Mozambique project also underscores the risks to the future shipping supply and-demand balance as LNG projects are often delayed, while vessels almost always deliver on time.
Turning to Slide 20 and in summary. We delivered a solid financial performance in Q1 as our cost control initiatives and the strong winter market offset revenue declines from several vessels ending their initial multiyear charters in 2020. We aim to deliver further cost base improvements as we seek to reduce our fleet cash breakeven. Our cash flows from the first quarter along with our 75% charter coverage for the balance of the year, more than cover our debt service and maintenance capital expenditures for 2021.
Our capital allocation plan for 2021 prioritizes debt repayments, further improving our free cash flow capacity over time. In addition, as our financial position improves over time, we expect to opportunistically modernize and grow our fleet through the purchase of new assets and the disposal of older assets, particularly considering new environmental regulations, which are expected to take effect in the years ahead. And lastly, we anticipate continued growing demand for LNG for many years to come as a complement to renewables as the world transitions to a carbon-free future.
With that, I'd like to open the call for questions.
[Operator Instructions] And our first question comes from Randy Giveans from Jefferies. Please go ahead, your line is open.
Thanks operator, howdy gentlemen how's it going?
Hello Randy, very good. How about you?
Excellent, good. All right. So I guess, looking at LNG rates. Obviously, there was a strong start to the year, followed some normal seasonal weakness and then has surprisingly now kind of bounced back pretty robustly. So with that, where do you see these kind of spot rates going from here into the summer? And then as it relates to GasLog Partners, with the improved cash flow, any chance of unit repurchases or increasing the distribution this year? Or are you only focused on further delivering the balance sheet?
Yes. Thanks, Randy. It's very really interesting to see what's happening this year. I think the real key is in what we're seeing in terms of the inventories and in terms of the pricing for the LNG. So we had a cold winter, which we hadn't had for the last couple of years, and it drained the stocks very quickly. And as we talked about, in Europe at the moment, the five year average is around 42%. This year, we're at 30%. So a lot of restocking to go on. And I think that's sort of anticipating that the fact that we're seeing the large differential in pricing between Henry Hub and both the European pricing and the Asian pricing is then allowing that – those cargoes to move, which is why we believe that we won't see shut-ins this year in the U.S. I think in terms of this winter, we'll probably see people moving as we have done to replace stocks earlier.
That's, I think, going to be positive for the pricing, for the earnings of the ships. But it may mean that we don't see the sort of massive jump up in rates that we saw last winter in the spot market. And then finally, what it's done is, I think last year, people saying that at times, there were cargoes available in the U.S., and they literally couldn't find shipping to take them out to the Far East and take advantage of the price arbitrage, are looking to take cover over the winter. So that, I think, is why we're seeing the 18 one year fixtures done in the first quarter, people trying to make sure they're in position for that. So I think as we said in the remarks, we see this has been a stronger year than last year.
Probably more ratable, not having the sort of the swings that we saw in the winter. But behind all that, we're still kind of saying – and that's assuming that we see the rollout of the COVID vaccine is going well, and we see things stabilizing. We are a little concerned by what we've seen in India recently in terms of those six cargoes being moved away. It's the fourth biggest consumer of LNG and that's the one thing. Still, there's the uncertainty there. We're feeling pretty good, but there's still that uncertainty there around what we're doing with COVID and stuff. I'll hand you over to Achilleas for your second question, Randy.
So excess liquidity, I guess, the dream of every CFO. But as my father would say, you better save it before you spend it. So as Paul said, we are at the early days of market recovery, and there is still some uncertainty in the future. So definitely, the focus today is on deleveraging, as we keep on saying consistently the last quarters and to improve our fleet's free cash flows and the breakevens. Ultimately, obviously, the overall goal is to improve the unit for the value. And at the right time, the Board will decide what is the right thing to do in terms of further debt reductions or unit matrices sold, extra cash returns to unitholders.
Okay. And then I guess, while I have you on the expense side, is 1Q 2021 a good run rate for vessel OpEx, G&A, depreciation and interest expense? Or is there any kind of squarely one-off items that led to reductions there for the first quarter that we won't see going forward?
It is on the low side, I would say. So the target that we have on the operating expenses is around $14,550. And on the G&A, the daily, around $25,000 approximately. So we have seen some one-offs here. We believe that it will normalize later. So I would not go that low.
Sure. All right. I guess when you put it all together with the recent charters, with a little bit of the trimming on the cost side, what's the expectation, I guess, for 2Q relative to 1Q?
I think we had a very strong 1Q here, as you said, quite rightly. In the beginning of Q2, we saw some of the rates coming off, and we're – now we're seeing it coming back up again in the last few weeks. So I would view that Q2 is not likely to be as strong as Q1, but we're still be hopeful, Randy, that we are in a much better position than we were this time last year in terms of the spot market.
Yes. Thanks, the writing is on the wall for theirs. So that’s a good time. But, thanks so much.
Thank you very much.
Thank you. Our next question comes from Ben Nolan from Stifel. Please go ahead, your line is open.
Thank you very much. So I wanted to dig in a little bit on, well, a couple of things. But you now have 75% of the remainder of the year booked. Obviously, a lot of that had already been in place, but there are a few new shorter-term contracts. I was curious if there – if you can give – and I appreciate that you don't give vessel-specific data, but any color as to sort of where you were able to kind of lock those short-term rates in for the balance of the year?
Yes. I mean I think if you look at where we are with the TFDEs and the steamships, we've been – the market, I think, in the last year was averaging somewhere around about, on earnings, somewhere in the 30s for the steam – early 30s for the steamships and high 40s for the TFDEs. We've been able – on the ships that we've been doing, be able to sort of beat those type of numbers, but not by a significant amount, Ben.
Okay. That's helpful. And then with respect to the handful of ships that are either in the spot market or coming off contract, is the aspiration here – well, and maybe even beyond aspiration, is the ability of you guys in this current market, is there – I guess, is there some capacity to be able to put those on contract? And is that what we should expect that you're trying to do?
There is the capacity to put them on for, I would say, one year, maybe sort of 18 months, things like that, not a capacity to put them on for sort of three year-plus charters at the moment. So if we see the right pricing, I think, we would look at those sort of one to two year charters, but we haven't seen much beyond that at the moment.
Okay. And the right pricing is in the same context of what you indicated you had been able to do sort of maybe mid-30s for steam and high 40s to 50s for TFDE? Is that fair to think that sort of that's the year threshold?
I think – we are seeing – we are also seeing a step-up in the pricing at the moment. I think if you look at the one year assessments right now from Poten, they're kind of giving it like low 70s for TFDEs and in the 40s for steam vessels, so that people are looking – scrambling to take ships. So I think if we were looking to do it, at the moment, we will be trying to get those type of rates.
Okay. Perfect. And then lastly for me, Paul, you talked a little bit about some of the regulatory changes. And that might mean that you have to think a little bit differently about your steamships. But the flip side of that, I suppose, well, obviously, there is probably a positive supply impact, but in terms of your steamships, you've done some work around using them for floating storage, you're possibly converting them, or things like that. Any update on that front? Have you seen any progress? Do you think that, that is an area that – especially for the steamships, that maybe even over the course of this year, you might have some positive momentum?
Yes. I mean we continue to look at those for the fleet as a whole, Ben, as we talked about in the past, the couple of the ships we have, steamships that we've got operating at the moment, are operating more as kind of in the logistic chain, a lot of floating storage, moving short distances to then supply into sort of restricted areas. So that's starting to happen already. I think it's something that we will continue to push and find opportunities. The good thing about the steamships that we have are they – are the kind of most modern 145s, fairly modern and fairly efficient. So if there are opportunities for those type, for the steamships, I think, we are in a very good place to be able to put those away, and that certainly stays very high on our wish list.
Perfect. Well, and I guess, maybe another way to phrase that last question was, obviously, we've seen, as you've pointed out, a pretty decent uptick in demand for LNG. Has that also translated into an uptick in demand from what you've seen for that type of project at all?
Yes. I think it's – certainly, there's a lot more interest in smaller scale LNG, and the ability of these ships to sort of be part of that logistics chain, I think, is really quite interesting. So yes, as we see LNG kind of making inroads into different areas, especially into transportation, things like that, then the requirement to have the sort of floating – fairly cost competitive floating storage options and offloading ability, I think, is becoming more pronounced. So yes, I'm quite optimistic about that.
All right. Well, I appreciate answering the question there, Paul.
Thank you. Our next question comes from Greg Lewis from BTIG. Please go ahead. Your line is open.
Yes. Thank you and good afternoon and good morning everybody. Paul, I was kind of curious last week with Total putting Mozambique on hold. I believe there were some new build slots associated with that project. We're realizing it's only, I guess, been about a week. Do we have any sense for what's going to happen to those slots at this point? Are those being marketed? Are those owners going to move forward with those? Any kind of color around that?
I haven't had any color yet, Greg. You're right. There were 17 slots in the shipyards, Hyundai and Samsung, which were allocated to that, those were always options which were declarable in May. And I'm not sure exactly when in May, they were declarable. Obviously, with Total saying that they're postponing it for at least a year, my guess is they'll try to sort of hold on to those slots, in case they are able to revive the project.
Whether or not they'll be able to do that or whether or not the individual owners who are sort of slated against that would take a risk on that, I don't know. A little bit early to tell at the moment, but that could, I think, open up some shipping births if they're not declared or if the shipyards decide not to extend on those options.
Okay. Great. And then just another question I had was realizing that LNG shipping FFAs, it seems like it's really still early days. I guess two things. One is, do you have any sense for what the volume or the notional volume of that market is right now? And really, what I'm wondering is with that out there now, it kind of gives – maybe it gives a potential customer more comfort around time charters. Like have we – we're in a counter-seasonal part of the market.
I think most of the consensus is that Q4 winter market is going to be solid. Has that kind of – like are we seeing any noticeable increases? It just seems like – it seems like there's a culmination of factors that seems – that should increase the number of term charters that are out of the market. Is that – are we – I guess, is that something that we're close to all being on the cost bulb?
Just so I understand the question, Greg, you're asking whether – around the FFAs, whether people were using that as a sort of way for the time charter market?
Yes. Really, what I'm wondering is, it seems like there's multiple factors that are occurring right now that seem like they should really drive an increase in time charter.
Yes. Yes. And that is – so if you just take the time charter, as I said, we saw a record kind of 18 time – one-year time charters done in Q1. And I think that was all around people not wanting to be stuck short of shipping next year if we see the kind of price arbitrage that we've seen – we saw this winter. From an FFA point of view, I think, it's starting from a very low base. But the liquidity is increasing all the time. It's very difficult – it'd be very difficult for us to go out, for example, and manufacture a time charter through the FFAs right now.
There just isn't really – even for one ship, there isn't really the availability. But you could go out and cover a portion of the ship for time – on time charter using FFAs, for example, and it's certainly something that we are preparing ourselves to be able to trade in that market though. In my previous life, I used FFAs quite a lot in the tanker market. And as a way to, if you like, for a time charter ownership – synthetic time charter ownership, they can be very useful.
So we are seeing increased interest in FFAs, and we are seeing, I think, greater volume. It's going to take a while for that to work through. But as we see the LNG commodity – the LNG market commoditizing, FFAs, I think, are going to play extremely important role in that.
Okay. Perfect. Thank you for your thoughts, Paul.
Thank you. And I'm not showing any further questions at this time. I'd like to turn the call back over to the presenters.
Thank you very much. Thank you to everyone for listening and for your continued interest in GasLog Partners. We certainly appreciate it, and we look forward to speaking to you next quarter. In the meantime, if you've got any questions, please contact Joe Nelson. Thank you very much.