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GasLog Partners LP Common Units representing limited partnership interests
Q2 2021 Earnings Conference Call
7/27/2021
spk00: Good morning. My name is Liz, and I will be your conference operator today. At this time, I would like to welcome everyone to the Gas Log Partners second quarter 2021 results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. As a reminder, this conference call is being recorded. On today's call are Paul Wogan, Chief Executive Officer, Paolo Inoizzi, Chief Operating Officer, and Achilleas Tassioulis, Chief Financial Officer. Joseph Nelson, Head of Investor Relations, will begin your conference.
spk03: Good morning or good afternoon, and thank you for joining the GasLog Partners' second 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 two of the presentations. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our second quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these measures is included in the appendix to this presentation. Paul will begin today's call with a review of the partnership's second quarter highlights, following which Achilleus will walk you through the partnership's financials. Paul will then provide an update on the LNG shipping and LNG commodity markets, We will then take questions on the partnership's second quarter. With that, I will now turn it over to Paul Wogan, CEO of GasLog Partners.
spk02: Thank you, Joe, and good morning or good afternoon to all of you. So please turn to slide four for GasLog Partners' second quarter highlights. I'm pleased to report that the partnership continued to make good operational and commercial progress in the quarter. The fleet performed at approximately 100% availability, despite the ongoing challenges of COVID and the resulting crew change issues. We took advantage of the seasonally slow second quarter to complete the dry docking of three vessels, which unfortunately encountered some delays due to the COVID related issues at the dry dock facilities. In recent weeks, we signed four new multi-month charters with high quality customers, solidifying our financial position. Last week, we released the Partnership Sustainability Report for 2020, detailing progress against our committed ambitions across environmental, social, and governance issues. And we retired another $19 million of debt during the quarter, bringing the total to $55 million during the first six months of the year. Turning to slide five, which summarizes our recent chartering activity. The LNG shipping market has been counter-seasonally strong in recent weeks, especially for 6-12 month charters. We've taken advantage of this strength and since mid-June we have announced four new multi-month time charters, all with high quality counterparties and on attractive terms. Together, the charters on this slide increase our charter coverage to 100% for 2021 and 69% for 2022, and represent a combined $70 million of fixed-rate EBITDA. With the signing of these new charters, the partnership's operating, overhead, and debt service costs are now covered through at least 2022, further strengthening Gaslog Partners' financial foundations. Turning to slide six. POTEN registered record chartering activity in Q2 2021, with 99 spot and short-term fixtures reported. This continues a multi-year trend of rising market liquidity. Commodity trading houses, LNG portfolio players, and the merchant arms of large LNG producers were all active market participants. In addition, a record 45 charters greater than six months were fixed, including three by Gaslog Partners. Headline spot rates have declined modestly in recent weeks, which is usual at this time of year, but the right-hand chart shows that they remain well above last year's levels. LNG shipping spot rates have benefited from sustained LNG demand and increasing prices in Europe and Asia, as both regions seek to meet summer cooling demand and refill depleted LNG inventories ahead of the winter. LNG carrier sport rates have also benefited from persistent Panama Canal congestion, mainly due to growing container ship and LNG carrier traffic. This has forced some LNG carriers loading in the U.S. to sail to Asia via the Cape of Good Hope, adding an additional eight days to each leg of the voyage, thus adding to ton mile demand. We expect the LNG carrier sport market this year to to continue to outperform 2020, assuming continued global economic recovery. However, the recovery could still be affected by the rising level of COVID infections related to the Delta strain. European gas storage levels are presently at 54%, compared to a five-year average of 71% and 85% at this time last year. We expect restocking in Europe and Asia to continue to create high demand for US LNG, which is positive for LNG shipping in the coming months. Slide 7 highlights our operational leverage. The recent fixtures have increased our cash flow visibility, as shown by the figure on the far left. The partnership retains meaningful exposure to sustained strengthening in the LNG carrier spot market. Specifically, each $10,000 per day increase in TCE above our operating and overhead expenses generates approximately $8 million of incremental EBITDA in 2022. Slide 8 presents some of the highlights from our sustainability report for 2020. I'm pleased to report positive progress towards our ESG ambitions, despite the challenges of COVID. The partnerships fleet consumed LNG 93% of the time, helping to reduce NOx, SOx, and CO2 emissions. Our fleet is commercially and technically managed by our general partner, Gasflow Limited, and the combined fleets achieved nearly 8 million man-hours without a lost time injury last year, a testament to to the dedication and skill of our seafarers. We also continue to operate with high standards of corporate governance and are consistently achieving the highest ranking of marine limited partnerships. And with that, I'll hand over to Achilleas to take you through the partnership's Q2 financials.
spk01: Thank you, Paul. Turning to slide 10 and the partnership's financial results for the second quarter. As Paul mentioned earlier, our financial performance in quarter two 2021 was affected by three scheduled dry dockings, as well as increased spot exposure in our fleet compared to the same quarter last year from the expiration of certain initial long-term shutters. More specifically, revenues for the second quarter were $70 million, a 17% decline from the second quarter of 2020. The revenue decline, year over year, is primarily due to the dry docking of the Gaslok Greece, Gaslok Glasgow, and Methane Rita Adria, all three of which were completed within the second quarter where we faced certain COVID-19 related delays. Adjusted EBITDA was 45 million while adjusted earnings was 10 cents per unit. Declines in adjusted EBITDA and adjusted earnings per unit were due to lower revenues and higher operating costs related to the three dry dockings completed in the second quarter. Looking forward, the partnership has two vessel schedules for dry docking in the third quarter of 2021. In addition, As Paul discussed earlier, we recently initiated four new charters for our fleet on attractive terms and therefore expect our financial results to improve significantly during the third and fourth quarter of this year. Turning to slide 11 and the discussion of our operating overhead and financing costs. Our operating expenses for the second quarter averaged $15,734 per vessel per day and Operating expenses include the impact of three dry dockings of which $1,109 per vessel per day of related costs were expensed as incurred during the quarter. We also incurred additional expenses related to COVID-19 challenges, which increased the group costs. Our overhead expenses were $2,554 per vessel per day, a significant improvement over 2020. As we look toward the full year, we expect our unit operating expenses to average for the year $14,850 per vessel per day. This number includes costs for the remaining dry dockings as well as additional costs due to COVID-19 related factors. We expect our overhead expenses to average $2,600 per vessel per day. This guidance follows structural improvements in our overhead costs, which we have discussed on previous calls. Lastly, declines in LIBOR as well as lower debt levels have reduced interest expense on the unhedged portion of our secured vessel debt by nearly $4 million in the second quarter of 2021 compared with the first quarter of 2020. Slide 12 shows that the partnership's credit profile continues to be resilient with net debt to total capitalization at 48%. The partnership ended the second quarter with $122 million of cash and time deposits, which includes approximately $10 million of cash raised through our at-the-market equity offering program earlier in the second quarter. With the partnership's cash flow visibility and liquidity much improved following the four new charter agreements discussed earlier, we do not have any immediate plans to issue additional equity. It is important to note that Gaslock Partners has no committed growth capex, but we will have two scheduled dry dockings in the third quarter of 2021, as I previously mentioned. We expect to continue strengthening our balance sheet, beginning with a scheduled retirement of approximately $110 million of debt in 2021, and at least an additional $110 million in 2022, which, as Paul noted earlier, is more than covered by our existing contracted revenues and cash flows over this period. Reducing debt balances will reduce the partnership's cash flow break-even levels over time, improving further the competitiveness of our fleet. Turning to slide 13, at the discussion of how our focus on debt repayment creates equity value for our unit holders. On this chart, we demonstrate how amortizing our debt beats balance sheet capacity and equity value using the Gaslock-Glasgow as an example. All the partnerships' debt is at the vessel level, and this debt amortizes at roughly twice the rate our ships depreciate. As you can see from this slide, our loan-to-value ratio on the Glasgow declines by over 15% during the three-year period from the end of 2020 through the end of 2023. During the same period, our book equity for the vessel, net of depreciation, is projected to increase by 20 million, which represents a 9% compound annual growth rate in equity value. As this compelling value creation demonstrates, we believe that prioritizing debt reduction supports the partnership's future growth in equity value. With that, I will turn it over to Paul to discuss the LNG commodity and LNG shipping matters.
spk02: Thank you, Achilles. Slide 15 presents LNG demand and supply for Q2 2021. POTEN reported LNG demand increased 11% in the second quarter of 2021 relative to Q2 2020, as shown by the left-hand figure. Asian demand was robust for much of the quarter due to a combination of cooling demand and restocking of inventories ahead of the winter. Demand from Latin America was also strong due to lower hydroelectric output, increasing the demand for LNG-fueled electricity generation. For 2021, Wood Mackenzie forecasts LNG demand to grow by 5%. On the supply side, U.S. production in Q2 rose 61% year-over-year to 18 million tonnes, due to no shut-ins and the ramp-up in production from the third trains at Freeport, Cameron and Corpus Christi LNG facilities. Strong Asian demand met by robust U.S. supply meant ton-mile demand grew by 15% in the second quarter, underpinning the strong shipping market. Slide 16 shows global gas price differentials. the futures market presently implies a steady and widening differential between U.S. export and Asian import prices through at least the 2021-2022 winter. Further out, the forward spread continues to be supportive through most of 2022 and 2023. This should help ensure high levels of liquefaction utilization underpinning shipping tonne miles. Slide 17 illustrates our view of shipping supply and demand through 2022. Demand is partly based on the number of vessels needed to export 1 million tons of LNG per annum, expressed as the shipping multiplier. And this shipping multiplier is particularly strong for cargoes exported from the USA. This analysis does not assume any vessel scrapping, although there are currently 28 vessels, or about 5% of the global fleet, over the age of 30, and 6 vessels have already been scrapped so far this year. As shown in the figure, we project a relatively tight LNG shipping market over at least the next several quarters. Slide 18 displays the LNG carrier order book and delivery schedule according to POTEN. Although we are encouraged by the high level of spot market activity and rates this year, the LNG carrier order book remains high, with 26 vessels scheduled to enter the fleet through the remainder of 2021. 84% of the order book has secured multi-year employment, and just five unfixed vessels are scheduled to deliver during the remainder of 2021. Nevertheless, these deliveries do add to the global fleet and therefore have the potential to offset some of the volume and turmoil demand growth. Slide 19 highlights some of the International Maritime Organization, or IMOs, new environmental regulations and their potential impact on the LNG trade. In June, the IMO adopted two intermediate steps aimed at reducing the global fleet CO2 emissions by 40% in 2030 when compared to 2008. These are the Energy Efficiency Existing Ship Index or EEXI and Carbon Intensity Indicator or CII. These two proposed measures aim to reduce emissions through ship and operational efficiency. They mean that all vessels greater than 5,000 gross tons, including LNG carriers, will have to reduce their carbon intensity by at least 2% per annum from 2023 to 2026. For the steam turbine vessels, which are the least efficient vessels in the global LNG fleet, the most effective way to meet the 2% per annum reduction is through reducing speed. Steamed turbine vessels comprise nearly 40% of today's LNG carrier fleet and will still represent over 30% of the fleet by 2025 when the current order book has delivered. Slow steaming ships is the equivalent of removing shipping capacity from the market at a time when we expect a tight shipping market. This means this is an LNG industry-wide challenge with the potential to risk tonnage availability if not carefully implemented. While we await further clarity from the IMO for 2027 onwards, it's important to highlight that the partnerships fleet will be compliant with EEXI and CII regulations, and we continue to investigate options to improve further their efficiency and prolong their trading lives. Slide 20 shows the LNG importing and exporting infrastructure currently under construction. As import terminals can be built much more quickly than production facilities, 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. There presently remains 125 million tonnes per annum of LNG production under construction, 62 million tonnes of which is in North America. The right-hand chart shows 160 million tonnes per annum of regasification capacity being built today, 70% of which is in Asia. This again highlights the shipping-intensive nature of this growth. So turning to slide 21 and in summary, our financial foundation is robust following the execution of the four new multi-month charters with high quality customers in recent weeks. Our contract revenues alone through 2022 more than cover all operating overhead and debt service costs over this period. With 30% of our operating day still open in 2022, we maintain significant operational leverage to a sustained recovery in LNG shipping spot rates, and we expect the shipping market to be tight through 2022. Our capital allocation plans for 2021 prioritise debt repayments, and along with our cost reduction initiatives, we expect to improve our free cash flow capacity over time. In addition, with our cash flows improving and our balance sheet and liquidity de-risking over the near and medium term, we are positioning the partnership to become an industry consolidator. Our strengthening balance sheet should allow us to opportunistically modernize our fleet through the purchase of new assets and the disposal of older assets. And lastly, we anticipate continued growing demand for LNG and hence for LNG shipping for many years to come, as a complement to renewables as the world transitions to a carbon-free future. Before opening the call to questions, I would like to advise that Paolo Enoisi will also be joining us for the Q&A session. As you hopefully know from a previous press release, on August 1st, Paolo will take over as the CEO of GLOB. I think this is a hugely positive move for the partnership. Powell's focus on this business and his in-depth understanding of the operational and commercial aspects of shipping are exactly what the partnership needs to execute on its strategy of reducing break-even rates and looking to become a market consolidator. With that, I'd like to open the call for questions. Operator, please go ahead.
spk00: If you'd like to ask a question at this time, please press the star, then the number one key on your touchtone telephone. To withdraw your question, press the pound key. Again, that is star, then one, if you'd like to ask a question at this time. Our first question comes from the line of Chris Weatherby with Citi.
spk07: Hey, guys. Good morning. James on for Chris. So I think... Based on what you said, it seems like you're fairly positive on spot rates throughout the rest of the year, but it also seems like you don't have much leverage to the improvement in spot rates. So I just wanted to understand that a bit more. Am I mischaracterizing anything, or was the decision more around risk management, just trying to understand the puts and takes around that?
spk02: Yeah. Hi, James. It's Paul here. I think we do see a continuous strong market, but I think also the chart shows Our customers also saw a continued strong market, and there's a disconnect right now between the forward rates for one year and the spot rates in the market. Many of the customers were left without shipping last winter, don't want to be in that same position again, especially when we're seeing Henry Hupp trading at $4 and JKM, for example, trading at $14. There's huge arbitrage opportunities there. So they were willing to pay... pay a premium to take ships for 12 months, which we found attractive. So whilst we think that there will be a continuous strong market, we felt that locking in that premium at this point made good sense for the partnership.
spk07: Got it. Also, you made a comment around fleet renewal. I just wanted to get an understanding of what that actually looked like. So would you consider basically buying assets that are already on the water? Are you considering new orders, but possibly maybe investing in the fleet to incrementally improve energy efficiency? What does the fleet renewal, as well as in the context of the broader IMO regulation and investing in the fleet really,
spk02: look like for you um obviously you may not have plans out there but just what the most likely case is and sort of like what might look the most attractive yeah i'm i think there's probably maybe two parts to that question james i'll take the first one and maybe invite paulo to take the second one around you know uh potential uh ways to uh improve the existing fleet but i do think um With the way that we're strengthening the balance sheet, I think with our operational and commercial platform, we do believe that we can be consolidators in this market, especially for spot operating ships. I think we could see fleet renewal through existing ships. At the moment, I don't think we're not looking at gas lock partners at new buildings. We haven't found the economics of those to be attractive at this point. But that's certainly an opportunity for us going forward. And I think we continue to see strength in the spot markets I spoke about. And if we opportunistically have the opportunity to sell out some of the steam vessels to projects or to companies, companies that, you know, have utilization for them, then we would also look at that. So I think, you know, all of the above in terms of, you know, the modernization of the fleet from fleet sale and purchase, but maybe, Paolo, you want to give us a view on what else we can achieve around changes to the fleet.
spk05: Sure. Thank you, Paul, and hi, James. The The environmental regulations are being built now, but I think what we see is, as we mentioned before, we definitely see the steam vessels going in for an important low steaming as of 2023 onwards, and eventually having to deal with the hurdles of the 2% increase per year. Again, slow steaming is probably there to stay, even after 2023. And as you can see from different developments, like getting to zero coalitions for instance, development of net zero fuels are going to be probably the most important game changers, together with maybe important developments like fuel cells, especially for the TFTE vessels. So it's going to be, you know, there's not going to be a silver bullet, and I think the partnership has, you know, assets that can actually use this kind of technology as soon as they develop in a cost-efficient way and from an availability point of view.
spk07: Makes sense. And then one more. If you don't mind, just around the share issuance in the quarter, just understanding the proceeds and the motivation and any sort of detail beyond what was said previously would be great. And that's all from me.
spk01: Thanks. I'll take that. So we took the decision to reactivate the ATM in quarter one as a form of insurance. The spot market in the second quarter started off and we took the view that there remains quite a bit of uncertainty around COVID. So since mid-June, though, our cash flow and liquidity profile has improved greatly, so we don't have any immediate plans to issue more equity. Today we have stronger liquidity and better visibility, and our focus continues to be on deleveraging.
spk05: Got it. Thank you. Thank you, James.
spk00: Our next question comes from Randy Gibbons with Jefferies.
spk04: Hey, guys. This is Chris Robertson on for Randy. Thanks for taking our call. Hi, Chris. Hi. So you mentioned, of course, the rates and the rates performing counter-seasonally strong. One question around, you mentioned – Asian demand being up for the cooling season as well as inventory rebuilding. Do you have a sense if any of the fall kind of rebuilding period has been pulled forward into the summer, how might that affect the inventory restocking in the fall for the Asian region?
spk02: Yeah. Chris, I think there's not as much visibility about the stocks in Asia as there is in Europe. In Europe, we can get a very good real-time view on what's happening there. But it does appear from the information we can pick up that actually the stocks have been slow to build again in both Korea and Japan. I think Japan is getting back to something like its requirements. But also in China, we understand there's been very hot weather there. a real pull on electricity demand, and we think there's more restocking needs to be done. So, you know, there's two things happening. One, there continues to be a forecast for a colder winter again than normal, like we had last winter, and there's been a very hot summer, which is, you know, pulling down existing LNG stocks. So I think it's setting itself up nicely to, you know, to continue to have a strong demand LNG commodity market with the pricing and hence, you know, a good LNG shipping market.
spk04: Okay, great. My next question is around the recharters, specifically on the steam turbine vessel. So, obviously, the market's open to operating the steam carriers. Can you shed some light maybe on kind of the competitiveness or maybe the discount that the steam turbine vessel gets compared to the others? And can you quantify, just talking about in the future regarding the CII and the slow steaming, do you have a sense of the average reduction in knots that you would expect on the steam turbine vessels?
spk02: Yeah, so what's interesting is, you know, for the steam, certain trades, certain ports are restricted and need the sort of size that the steam turbines have. And the advantage we have with the steam turbines in the partnership is that they're basically the most modern and most efficient ships in that trade. So when we were able to put that ship on charter, it was basically only around $10,000 a day lower than we were seeing for TFTE vessels at that point, and a very nice, strong rate. So there are definitely opportunities where if you understand the trade, you can do well with the steamships, and I think that certainly continues. In terms of the effect of the regulations, I'll again pass that back to Paolo. I think he's probably better able to answer that question than me. Paolo?
spk05: Sure. Chris, I think you spotted it well. The first hurdle where the slow speeding will be executed will be on the achievement or let's say acquiring the possibility to operate after 2023. Difficult to say exactly what the impact will be for steam vessels because, you know, size and type of land are different. But I would say that you can probably expect that, you know, vessels that were at a capacity to speed up to something around 20 or 90 knots will find themselves having to slow down to an equivalent of 2-3 knots below that threshold. I think enough to see probably a growing demand on a vessel multiplier, especially from the busiest month of the year. And that's only for the EXI, for the CII. It's a continuous improvement cycle. Slow speed will be there, not only for the sea vessels, but for every vessel that will want to achieve emission reduction, in addition, as we mentioned, with other, you know, update on technologies or alternative fuels.
spk04: Right. Okay. Last question for us. Has there been any additional thoughts on changing the corporate structure or possible consolidation?
spk02: I think we reported a couple of quarters ago, Chris, we'd taken a look at the corporate structure and the strategic opportunities for gas log partners and concluded that the best way to maximize value for the unit holders at this point was to continue to operate as a standalone company. We continue to see optionality and continue as an MLP. You know, right now the MLP market is not there, but that doesn't mean that that will continue forever. And I think, you know, what's interesting is having taken that view and having set out a strategy of how we want to develop the company since that point, we've probably doubled, the share price has probably doubled. So, you know, so far I think that strategy is working well and we continue to look at how we can continue to make Gasluck Partners thrive as a standalone company and continue to grow as a standalone company.
spk04: Great. Thank you for taking our questions.
spk02: You're welcome.
spk00: As a reminder, if you'd like to ask a question at this time, that is star, then one. Our next question comes from Chris Sung with Weber Research.
spk06: Hey, guys. How are you?
spk05: Hello, Chris. Hi.
spk06: Paul Kalius and Paolo. I wanted to ask earlier, I think someone mentioned about the ATM program, and I may have missed the answer, but what was the use of those proceeds, around $10 million that you guys were able to raise?
spk01: Paolo Davidelli- Well, we haven't used them yet. They are on our balance sheet. So, as I said, it was a form of insurance, and we have been quite successful in the past where is our liquidity today. We don't have any intention, any immediate plans to continue using this program. I think I believe that we continue our strategy to focus on our leveraging, reducing our break events, and improving our cash flows. So we don't know how the future will develop. We have seen a lot of volatility in the past. So I Today, we are in a good place, I believe, in terms of hours.
spk06: Okay, great. All right, thanks. And just another quick one for the methane head of Sally. That rate is fixed, right? It's not floating?
spk02: Yes, it's fixed.
spk06: Okay, cool. That's it for me. Thanks, guys.
spk02: Thank you, Chris.
spk00: I'm showing no further questions in queue at this time. I'd like to turn the call back to Paul Wogan for closing remarks.
spk02: Thank you very much, Liz. Well, thank you, everybody, on today's call for listening. Thank you for your continued interest in Gaslock Partners. We certainly appreciate it. And I know that Paolo and Achilleus look forward to speaking to you in the next quarter. In the meantime, if you've got any questions, please contact the investor relations team and have a good rest of the day. Thank you.
spk00: Ladies and gentlemen, this concludes today's conference call. you for participating. You may now disconnect.
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