GLOP conference call transcript for Q4 2019 | GLOP Message Board Posts

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GLOP conference call transcript for Q4 2019



Good morning, my name is Sidney, and I will be your conference operator today. At this time, I would like to welcome everyone to the GasLog Limited and GasLog Partners LP Fourth Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question answer session. As a reminder, this conference call is being recorded.

On today's call are Peter Livanos, Chairman of GasLog Ltd and Director of GasLog Partners; Paul Wogan, Chief Executive Officer of GasLog Ltd; Andrew Orekar, Chief Executive Officer of GasLog Partners; and Alastair Maxwell, Chief Financial Officer. Phil Corbett, Head of Investor Relations will begin your conference.

Phil Corbett

Good morning or good afternoon and thank you for joining GasLog Limited and GasLog Partners fourth quarter 2019 earnings conference call. For your convenience this webcast and presentation are available on the Investor Relation's section of our website, and, 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 fourth quarter earnings press release. In addition, some of our remarks also contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the Appendix of this presentation.

During the presentation, Andy will cover the Partnership's fourth quarter, and full year 2019 highlights and the revised capital allocation strategy announced today. Paul will then cover an update on the LNG and energy shipping markets before taking you through GasLog's fourth quarter and full year 2019 performance. We will then be happy to take your questions. But before we commence today's presentation, Peter Livanos will make some introductory remarks.

Peter Livanos

Thank you, Phil. As we enter the new decade, I wanted to take the opportunity to give you my perspective on the LNG industry and the outlook for GasLog and GasLog Partners. World today is keen to deal with pressing concerns regarding climate change, consequently, making the sustainability of any business a key value driver. The LNG transportation industry and GasLog in particular can and will play a key part in achieving this for an energy sector in transition.

Firstly, I remain confident in the outlook for natural gas demand and LNG's key role in delivering supply to meet the consumption growth. This positive view is underpinned by the switching from coal to gas as a primary fuel source, as well as playing a critical role in supporting the fast developing renewable power sector. In addition to the power sector, LNG will have a vital role in the ability of the shipping industry to achieve the stated IMO targets of 25% reduction of CO2 emissions by 2030 by providing the most effective and readily available fuel on the path of this transition, thereby adding yet another demand driver to the LNG story. Must not forget that the LNG industry involves significant investment over long term horizons.

In any cyclical business, there may be a temporary mismatch between supply and demand, such as the one currently playing out in the global gas markets. However, as we have seen time and again, low commodity prices are the catalysts for new and structural gas demand growth, particularly when there is also a clear environmental benefit from doing so. I'm pleased to see the growing commitment to new downstream LNG infrastructure projects, in particular the significant capital commitments in China and India to increasing each country's regasification capacity.

Against this backdrop, we are seeing LNG demand continue to increase. This is characterized by the growing role traders, emboldened by the greater liquidity in the spot LNG market. These changes are opening new markets and trade routes positive for LNG shipping demand with the potential to increase ton miles albeit one likely to result in shorter term charter durations. In shipping, we have seen significant new building ordering in the past two years.

This has been driven by historically low shipyard prices, coupled with improved propulsion and boil off systems. However, we expect further technological advancements will be minimal over the next several years. The rapid changes in propulsion technology, steam power to diesel electric engines to medium speed diesel engines, as well as a significant improvements in boil off rate from 0.15% to 0.07%, coupled with the structural changes in vessel carrying capacity over the last 10 years have reached levels where further optimization is either impractical or not cost effective.

Flattening technology curve when combined with shorter charter durations, inherent in a more liquid commodity environment leads me to believe that speculative new building ordering will abate relative to the levels of the last few years. Our track record of support from lenders and export credit agencies puts us in a preferred position relative to others in our industry, given the critical importance of capital cost to breakevens and returns.

At GasLog we remain committed to the two-company structure, maintaining strong and beneficial links between GasLog Limited and GasLog Partners, allowing each company the autonomy to pursue their own strategies. GasLog Limited once our new building program is fully delivered in 2021, will have a fleet of 20 ships of which 13 will be ultra-modern vessels with compelling unit freight cost economics. These vessels have the additional benefit of being fully financed and supported by long term charters that deliver attractive, committed revenue with strong counterparties.

I see this strategy as a key differentiator of GasLog Limited from our peers who may have uncommitted new building quarters. A portion of the GasLog fleet for TFDEs remain exposed to the spot market. And although somewhat less technologically advanced than other ships are very much in the upper half of the global LNG fleets technology cost curve.

We are mitigating this exposure by developing opportunities in the floating storage segment into which we will deploy uncommitted TFDE ships on attractive long term charters. Paul will be discussing two of these projects in his presentation. Our revenue growth is underpinned by our commitment to operational excellence and the ability to deliver our new ships into service on time and on budget.

This growth requires no incremental equity or debt. And as such, I take great comfort in having a fully funded program. Consequently, our strategy of GasLog Limited for 2020 and the next few years is simple. We are concluding a chapter of material growth for the business, delivering modern vessels onto long term charter to leading companies in the global LNG sector.

We will now focus on harvesting the fruits of this strategy while continuing to address our administrative and operational cost base. We will focus on deleveraging our balance sheet and use surplus free cash flow to reward our loyal shareholders primarily through common and special dividends.

Moving on to GasLog Partners, our [inaudible] Company in which we are by far the largest shareholder. After several years of successful equity generation for the Group. We are moving to a strategy that prioritizes the strengthening of our balance sheet through debt reductions.

Setting the stage Andy will talk to you about the book values of the steam fleet, and rebasing the level of distributions. Andy will shortly be going through both these events in more detail. But suffice us to say the rebased distribution will facilitate a further strengthening of the GasLog Partners' balance sheet over the next several years.

This will position it as a cost effective provider of LNG shipping. GasLog Partners' financial strength will act as a catalyst for growth when acretive opportunities appear in the coming years. GasLog Partners' fleet of 15 ships will consequently benefit from lower cash flow breakeven levels as a result of debt reductions and optimization of cost.

Combined effects will allow GasLog Partners to prosper under the backdrop of an increasingly short term and opportunistic LNG transportation market. In conclusion, we are laser focused on balance sheet strength, commercial flexibility, efficiency and operational excellence. This will give us the ability to exploit changes in the LNG shipping market and to maximize the earnings and utilization of both GasLog and GasLog Partners' fleets. At the same time there's an emphasis on cost control across all levels to enhance competitiveness.

We believe that the changes already underway will deliver a leaner and more agile organization without sacrificing safety for our market leading operational standards. As the biggest single shareholder and against the positive but shifting outlook of our industry, as well as GasLog's track record our share price performance has been deeply frustrating.

I do understand some of the drivers of our share price, global growth uncertainty, very weak gas pricing as well as a challenged MLP model. However, I strongly believe that the actions we have announced today provide a platform for all owners of our capital structure to benefit going forward.

I fully endorse the initiatives taken by management to reduce costs and prioritize balance sheet strength. I believe all these actions underpin the investment case for both businesses going forward. And with that, I will now hand over to Andy take you through the Partnership presentation.

Andrew Orekar

Thank you, Peter. I'll begin today with the Partnership highlights of the quarter and full year 2019, after which I will discuss the evolving commercial environment for our ships and the current challenges based in the MLP capital markets.

These two key issues underpinned our decision to take the conservative action of rebalancing our commenting and distribution in the first quarter of 2020 in favor of strengthening our balance sheet. In time, we expect this approach will improve the competitive positioning of our fleet and allow us to continue our acquisition growth strategy in future years.

Turn to Slide 5, for a review of our performance in the fourth quarter and full year of 2019. After a strong quarter of operational and financial performance today, GasLog Partners reported our highest ever annual results for revenues, EBITDA, and distributable cash flow. During the fourth quarter, we met the distribution guidance we established for 2019 declaring a distribution of $0.561 per unit. And we repurchased $3 million of our units bringing our totals for the year at $23 and $1.2 million of our common units retired.

Our strong financial performance enabled the Partnership to return a total of $130 million to our common unit holders in 2019 or $2.71 per unit and increase of 25% over 2018. Combining the capital we have returned in the form of common distributions plus the unit repurchases we executed over the last 12 months. GasLog Partners is currently trading at a 26.5% total return on yield.

We do not believe that continuing to pay such an elevated deal is the most long term value enhancing use of our capital, which I will discuss in more detail shortly. Lastly, as of December 31, we recognized the non-cash impairment charge of approximately $139 million related to our five theme ships built in 2006 and 2007, primarily as a result of lower expected utilization and earnings estimates for these vessels.

On Slide 6, you'll see our track record of fleet growth since our IPO. Including our vessel acquisition in 2019, our fleet stands at 15 wholly owned LNG carriers with a revenue backlog of $945 million. Today, we are proud to say that the Partnership is one of the largest independent owners of LNG carriers with a scale platform. Although our fleet had 81% of its operating days fixed in 2020, the Partnership fleet is expected to be increasingly exposed to the spot market in future years. This creates an opportunity to capture cynical upside in a strong market for our ships, but also significantly reduces our cash flow visibility relative to prior years.

Turning to Slide 7. Despite our accomplishments in 2019, the backdrop for MLP capital markets has remained challenging. As you can see from the chart on the left, there have been nearly $5 billion of outflows from the MLP in mid-stream sector since January 2018. Issuance of common equity from the entire sector was just $2 billion last year, and only $5 billion in total over the last two years.

And lastly, the difficult environment for MLPs can be seen in the trading yield of the benchmark Alerian index, which is expanded by 300 basis points over the last several years and is now approximately 10% indicative of a higher cost of equity capital for the industry as a whole. As the Partnership has relied primarily on external capital to fund its growth, the challenging backdrop for common equity issuance makes funding additional acquisitions difficult for us to execute at this time.

Turning to Slide 8 and discussion of the recent industry wide trends for term chartering of steam vessels. As you can see on the right hand panel of the slide, only 16 levels were fixed under term charters of one year or more during 2019. A poor result relative to 2018, which saw a total of 12 stream 600 term deals. While this trend in the multiyear charter market has been disappointing, it is important to note that steam vessels continue to represent 42% of the global LNG shipping fleet. There remains a sizable spot market for steam as demonstrated by the total of 76 spot charters for steam vessels in 2019, representing more than a quarter of all spot fixtures reported for the year.

Slide 9 sets out our adjusted EBITDA guidance and capital allocation plan for 2020. In light of the capital markets and vessel utilization challenges I've just discussed, today, the Partnership is taking a proactive step to focus on further strengthening its balance sheet. While we did not take this difficult decision lightly, we believe our plan for 2020 will be in the best interest of our unit holders over the long-term.

This morning, we announced adjusted EBITDA guidance of $230 million to $260 million for 2020. In preparing our guidance, our assumptions are based on our fleet generating approximately $200 million of adjusted EBITDA from our vessels of fixed rate charters, with the remaining $30 million to $60 million subjects and charter rates earned by our vessels expected to operate in the spot market in 2020.

In addition, today, the Partnership declared a distribution of just over $0.56 for the fourth quarter of 2019. For 2020, beginning with the first quarter of this year, we expect to pay a quarterly distribution of $0.125 or $0.50 annually. Our rebased annual common distribution represents only 10% of our adjusted EBITDA guidance for 2020. And we can through this level to be a conservative and sustainable payout of our earnings per unit.

Our plan for 2020 will reduce the Partnership's annual common distribution by $83 million and considerably decrease our cash outflows during the year. In the near term, we plan to prioritize debt repayment, while continuing to opportunistically repurchase our common units. In time, we expect today's decision will create greater flexibility for the Partnership to continue growing of assets with reduce reliance on common equity markets.

Slide 10 sets our balance sheet metrics, plan debt repayment over the next several years and capital commitments. The Partnership's credit profile is robust with net debt to trailing EBITDA of 4.6x. Our net debt to capital after the write-down of our steam fleet remains a strong 52%. We expect to further strengthen our balance sheet in 2020, beginning with the expected retirement of approximately $115 million of debt this year.

Lower common distributions and reducing debt balances will improve GasLog Partners' cash flow breakeven levels overtime, which will enhance the competitiveness of our fleet. Lastly, it is important to note that the Partnership has no committed growth CapEx this year, but we'll need to spend $20 million in maintenance capital expenditures related to four dry-dockings with one scheduled in each of the first two quarters followed by two in the third quarter. Our four dry-dockings are expect to cost the total of $13 million with an additional one-time cost of $6.8 million for the installation of ballast water treatment systems as required by regulatory compliance.

Turning to Slide 11 and a discussion of how our focus on debt repayment creates equity value for our common unit holders. On this chart, we demonstrate how our amortizing debt build balance sheet capacity and book equity using our most recent acquisition of the GasLog Glasgow as an example. This vessel has approximately $134 million of existing debt as of the end of 2019. All of Glasgow Partner's debt is at the vessel level. And our debt amortizes at roughly twice the radar shifts depreciate.

As you can see from this slide our loan to book value ratio on the Glasgow declined by over 9% from the end of 2019 through the end of 2021. During the same period, our book equity for the vessels projected to increase by $40 million, a 10% compound annual growth rate in equity value. We believe that prioritizing debt reduction will support the Partnership's future growth in book equity value per unit, which today stands at approximately $13 and well above the current trading price of our units.

Turning to Slide 12. In summary, in the fourth quarter, the Partnership delivered a strong operational and financial performance resulting in record annual revenues and adjusted EBITDA for the full year of 2019. We met our distribution guidance for the year returning a total of $130 million in capital to our common unit holders in the form of quarterly distributions and unit repurchases.

Our adjusted EBITDA guidance of $230 million to $260 million is supported by our 81% charter coverage for the year with approximately $200 million of adjusted EBITDA expected from our vessels operating under fixed rate charters. We have taken a more conservative approach to capital allocation for 2020 focusing on debt repayment, a well-covered common distribution and opportunistic share repurchases. We believe that strengthening our balance sheet today will position the Partnership for accretive growth in future years.

Finally as one of the largest independent owners of LNG carriers, our scale and continued focus on operational excellence, cost control and reducing cash flow breakeven will improve the Partnership's competitive positioning in a growing LNG market. With that, I'll now turn it over to Paul to discuss the LNG macro and shipping outlook.

Paul Wogan

Thank you Andy. Let me first provide you with an update on the LNG and LNG shipping market and then take you through GasLog's fourth quarter earnings and outlook. Turning to Slide 14. LNG supply in 2019 totaled 364 million tons, a 7% compound growth since 2000. Capacity is set to continue growing strongly with a record 71 million tons per annum of new LNG production sanctioned in 2019. With McKenzie estimates at least another 50 million tons per annum of LNG capacity will take FID this year.

Slide 15, shows LNG demand growth forecast by region. Would McKenzie expect net LNG demand to grow by 90 million tons between 2019 and 2025 or a full percent compound growth per annum. While half of forecast demand growth comes from the Pacific basin nearly three quarters of forecast supply growth comes from the Atlantic basin which should drive greater tons miles and future demand for LNG shipping. Furthermore LNG is a marine fuel is forecast to grow quickly and account for approximately 9 million tons or 10% of demand growth through 2025. This trend is being driven by rapid growth in the number of LNG fuel ships which are expected to rise more than fivefold over 2015 to 2025 period.

On Slide 16, nearly 150 million tons per annum of new LNG production is expected over the 2019 to 2025 period. In tandem [ph.] reclassification capacity is expected to double in the high growth markets of India and China.

Slide 17 illustrates our shipping -- our view of shipping supply and demand through the end of 2021. Our demand range is in part based on the number of vessels needed to export 1 million tons of LNG per annum expressed as the shipping multiplier. Our analysis supports a tight market through the 2020-2021 winter. However, recent headwinds in the global gas market, including the uncertainty caused by the Corona virus outbreak, could have a dampening effect on near term gas demand.

Moving to Slide 18 and here, I'd like to reiterate several of Peter's earlier messages. Here I'd like to reiterate several of Peter's earlier messages that embodied the GasLog investment case. We have seven medium speed diesel new buildings delivering through the third quarter of 2021 that are all on time and on budget, and they will join the five model medium speed diesel vessels already in the GasLog fleet.

These new buildings are backed by fixed rate charters to high quality counterparties with an average eight year duration, resulting in annualized EBITDA of $145 million was fully delivered. Currently, we have no further plans to expand our fleet beyond this new building program. As we enter this harvest period, we will focus on strengthening our balance sheet with over $1 billion of scheduled debt amortization during the 2020 to '23 period. In parallel, we will also look to continue executing on our strategy of enhancing shareholder returns, which resulted in nearly $1 per share of common and special dividends announced during 2019.

While the gas market is presently oversupplied, we are seeing low prices incentivize further gas demand growth, particularly switching from coal. With many regions of gas demand growth also seeing indigenous production declines. We remain confident in the longer term fundamentals of LNG and LNG shipping demand.

Slide 19 shows the GasLog fleet, the majority of which are modern, medium speed diesel vessels contracted to high quality counterparties. As of December 31, 2019, the average duration of the GasLog Limited charter fleet is seven years delivering a backlog of approximately $3 billion. The bottom of the slide also highlights the FSU and FSRU opportunities we are currently developing.

And Slide 20 provides further details on these opportunities. In September last year, we announced a 10 year charter for the GasLog Singapore as a converted floating storage unit, supporting a power project be developed in Panama. The Singapore's conversion will take place in conjunction with a vessel scheduled five years special survey later this year, enabling both cost and time synergies.

The charter is expected to generate approximately $20 billion of EBITDA per annum. We will also tender for the supply of an FSRU into the Alexandropoulos gas import project in Greece, for which we already hold the operating contract. If successful, we will convert an existing TFDE into FSRU before selling it into the project.

Recently, this project has made meaningful progress. Last month Gas Trade launched the binding bed phase for customers to take capacity and the project. The Greek utility Deepak agreed to acquire a 20% shareholding in Gas Trade whilst the Bulgarian government is also close to acquiring the same level of ownership. We expect both parties will provide anchor throughput commitments to the project.

Moving to Slide 21, we have a strong year operationally. We took delivery of two newbuild on time and on budget. Enjoyed an exceptional safety record, high vessel uptime and strong service delivery to our customers. We continue to develop new customer relationships through concluding long term charters with Jeri and Ends and the fixing of two vessels on multiyear charters to Guvnor at market linked rates of higher. Financially, we delivered our highest ever net revenues and adjusted EBITDA underpinned by our new building deliveries.

We secured a $1 billion newbuild finance, and we achieved significant improvements to our covenants across all our bank debt at both GasLog and the Partnership. We also took a strategic decision to relocate more of GasLog's people and most of the senior management to our Piraeus office in order to enhance execution, improve efficiency and reduce administrative costs.

We expect that the restructuring will deliver annualized savings of approximately $6 million from 2021 onwards after one off costs of a similar magnitude over 2019 and 2020. These savings are equivalent to approximately 14% of our underlying 2019 G&A.

Slide 22 shows our financial performance for the year. Net revenues increased 4% year on year has initial contributions from the GasLog Warsaw and GasLog Gladstone charters offset lowest spot vessel revenues. With unit OpEx broadly unchanged year on year adjusted EBITDA increased 3% on 2018. The consolidated adjusted EBITDA figure excludes the $162 million impairment charge incurred in the fourth quarter on the consolidated fleet steam vessels, as well as restructuring costs of $4.7 million. The benefits of which will help expected unit G&A to average around 10% less than 2019 levels. By 2020, we expect unit OpEx to average around $14,500 per day, subject to movements and exchange rates.

Slide 23 shows the Q4 2019 performance of our variable rate vessels. These vessels earned approximately $66,000 per day in Q4 2019, which is in line with our guidance of $60,000 to $70,000 per day. To reiterate, our commercial strategy has been wherever possible to charter those variable rate vessels with scheduled dry-dockings in 2020, right up to those dry-docks to minimize both positioning costs and waiting time.

While this has resulted in a trade off on charter rate, we believe the strategy will optimize the earnings of these vessels through to the dry-dock. We've also favored multimode charters over Scott business to mitigate any seasonality in rates, falling the northern hemisphere winter. We expect that this commercial strategy will enhance utilization and reduce the volatility of variable rate earnings across quarters.

The second chart on this slide shows GasLog and GasLog Partners contracted an open days by quarter due in 2020. These figures exclude dry-dockings. The details of which can be found in the appendix of today's presentation. For our variable rate charter TFDEs, we expect to earn a TCE of $50,000 to $60,000 a day in the first quarter. And again further information for the vessels on variable rate charters during the first quarter are included in the appendix.

Slide 24, illustrates the successful financing of our new building program over recent years. At the start of 2018, the expected GasLog equity payments on a new building program were close to $300 million. Today we've paid 75% of these commitments and have only $75 million of remaining equity payments.

We expect to fund these payments through our unrestricted cash balances, available revolving credit facilities and operating cash flows from our growing fleet. The deck component of the new built financing expanded through the ECA facility announced in December, which extends GasLog's track record of accessing secured debt on highly attractive returns.

So turning to Slide 25. In summary, GasLog Limited has a young and increasingly important fleet underpinned by long term charters to high quality customers, which will deliver revenue growth through 2022 and average 70% charter coverage for the GasLog fleet over the 2020 to 2023 period. We have a clear commercial strategy to focus on utilization on charter cover for a variable rate fleet. As Peter advised, we have a laser like focus on cost control and operational efficiencies, and we will benefit from significant debt reduction overtime.

We believe there are two decades of experience in LNG shipping. Our reputation for high operating and safety standards, as a leader and more agile organization leaves us well positioned to capitalize on a growing but fast evolving and increasingly fragmented LNG shipping market. And finally, our investment case is underpinned by our focus on delivering shareholder value for fleet growth, deleveraging and cash returns.

Finally, on Slide 26, we invite you all to our upcoming Analyst and Investor Day to be held in New York on May 7, 2020, where we look forward to providing you with an in depth update on the Group's strategy and outlook. With that, I'd like to open up for Q&A. Operator, could you now please open the call for any questions?

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