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GasLog Partners LP Common Units representing limited partnership interests
Q2 2022 Earnings Conference Call
7/28/2022
spk04: Good morning. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the Gasblog Partners second quarter 2022 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. During the question and answer session, to queue up with your question, you can press zero then one on your touchtone phone and these instructions will be repeated for you. As a reminder, this conference call is being recorded. On today's call are Paolo Ennuesi, Chief Executive Officer, and Aselia Stasulis, Chief Financial Officer. Robert Brinberg from Rosen Company will now begin your conference. Please go ahead, sir.
spk00: Good morning or good afternoon, and thank you for joining the Gasblog Partner Second Quarter 2022 Earnings Call. For your convenience, this webcast and presentation are available on the investor relations section of our website, gasbogmlp.com, where a replay will also be available. Please now turn the slide to 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 second quarter earnings press release. In addition, similar remarks contain non-GAAP financial measures as defined by the SEC. The reconciliation of these measures is included in the appendix for this presentation. Paolo will begin today's call with a review of the partnership second quarter highlights, following which Achilles will walk you through the partnership's financials. Paolo will then provide an update on the LNG shipping and commodity markets. We will then take questions on the partnership's second quarter. With that, I will turn the call over to Paolo Inoizzi, CEO of Gaslag Partners.
spk01: Thank you, Rob, and welcome, everyone, to our second quarter conference call from very warm Athens. Please turn to slide four for Gaslag Partners' second quarter highlights. The LNG market has become increasingly dynamic as demand for energy and energy shipping has been positively impacted by energy security concerns in Europe. Sadly, the tragedy situation in Ukraine was a catalyst for heightened energy security concerns. While we're hopeful that a resolution will be reached soon, we believe the market dynamic has been permanently altered. Spot rates in Q2 were volatile due to uncertainty on short-term supply following the fire at the Freeport LNG facility. At the same time, the term market has remained strong, with one-year time charter rates well above historical ranges throughout the first half of the year. Term fixing are supported by shrinking available tonnage as charters lock in available vessels in anticipation of winter demand. Now, against this backdrop, we recently secured two new charters, one for the steam vessels and the other for the TFD. both at attractive rates, bringing our total contracted revenue backlog to $513 million. We previewed the upside to our contracted coverage during our last earning call, and we are realizing it. Further upside remains with 460 open or spot-linked days in 2022. We were also able to take advantage of an improved S&P market values through the agreement to sell the steam vessels maintained Shirley Elizabeth for a sale price of approximately $54 million. The vessel sale, if completed, will further enhance our liquidity and provide us with additional flexibility as we continue to execute our strategy. Our steam vessels represent both a potential source of revenues and liquidity, and we're also pursuing a sale and leaseback for the sister vessel. We expect to continue to generate healthy cash flow from a tight LNG market. which we are on using to optimize and de-risk our balance sheet. In the second quarter, we retired $20 million of debt and lease liabilities, and we purchased another $8.7 million of our preference units in the open market, bringing the total repurchase to $37.1 million since the repurchase program was initiated last summer. The results are a reduction in all break-even levels, which enhances our free cash flow generation potentials, and continue progress in our leverage ratios towards our targets. Turning to slide five, you may have seen that we recently published our 2021 sustainability REPLs. Now, you'll be able to view the full REPL in the Gaslop-Palton's website. In the REPLs, we provide all the ESG-related KPIs in accordance with the SASB standards. and we outline three primary areas to focus on the partnership, which are decarbonization, safety, well-being, and D&I. It is clear that the LNG shipping is being viewed favorably from an environmental perspective, and this is reflected in the decision made by the European Parliament to add natural gas to its green taxonomy starting in 2023. Setting aside the near-term focus on energy security, LNG remains one of the cleanest sources of energy and will definitely play a role in the clean energy transition for decades to come. On slide six, we highlight the two charters I referenced earlier. Both charters are with high-quality counterparts and add an aggregated EBITDA contribution of approximately $52 million during their contract term. In the reminder of 2022 and full 2023, we have a good mix of contractor revenues and spot exposure to a market we expect to remain tight. Slide 7 shows the potential we have to enhance our free cash flow in 2022 and 2023 due to our market exposure. The cost of sponsorship generated in the first half of the year, combined with our charter coverage through year end, more than covers our overhead and debt service obligation for 2022. As you can see from the chart on the left, we have approximately 17% of our remaining operating days open or on spot-linked contracts. In the fourth quarter, which is typically the strongest quarter of the year, we have market exposure on 21% of our operating days. For the balance of the year, every $10,000 per day increase in the time chart about the equivalent would increase our adjusted EBITDA by approximately $4.6 million. And looking ahead in 2023, a spot market exposure is once again weighted toward the back half of the year. I will speak about our market outlook shortly, but first let me turn the call over to Achilles, who will review the partnership's second quarter financial performance. Over to you, Achilles.
spk03: Thank you, Paolo. Turning to slide 9 and the partnership's financial results for the second quarter of 2022. Revenues for the second quarter were 85 million, a 21% increase for the second quarter of 2021. This was primarily due to a net increase in revenues from our vessels operating in the spot market, as well as from 82 off-hire days related to dry dockings in the second quarter of 2021. Adjusted EBITDA was 59 million, an increase of approximately 14 million or 31% from the second quarter of 2021, primarily due to a 14.5 million year-over-year increase in revenues. Compared to the quarter one 2022, our EBITDA was slightly reduced because of the actual operating cost of managing solar that we took in-house following the delivery from Shell. Finally, our adjusted earnings was 37 cents per unit, which increased by 270% compared to the second quarter of 2021. Overall, we are pleased with our performance in the quarter as we continue to successfully manage our exposure in the spot market, rechartering our fleet at healthy rates and achieving an overall stable performance for the partnership. Turning to slide 10 and a look at our cost base. Our daily operating expenses per vessel were $1,729, lower in the second quarter of 2022 compared to the second quarter of 2021, and slightly above the full year guidance we gave on our last call due to inflationary pressures we have started to observe in our expenses. This reduction, quarter over quarter, was primarily due to a $1 million decrease in technical maintenance expenses and a decrease in vessel management fees partially offset by an increase in crew costs, with the latter largely related to the in-house management of the Solaris after her delivery into our managed fleet on April 6, 2022, as I mentioned earlier. General and administrative expenses increased by $900,000 or $657 per vessel per day in the second quarter of 2022 compared to the second quarter of 2021. This increase was primarily related to an increase in the administrative service fees to Gaslock LTD that has been effective since January 1, 2022. The changes in the vessel management, commercial management, and administrative service fees are in line with our commentary in the previous quarter and are disclosed in detail in our 20F file with the SEC in March 2022. For the balance of the year, we expect our unit operating expenses to average approximately $14,000 per vessel per day while we continue to evaluate the inflationary pressures in our full year estimate as mentioned earlier. Finally, our overhead expenses are expected to average approximately $3,250 per vessel per day for the full year. Slide 11. illustrates the progress the partnership has continued to make in its preference unit repurchase program. During the second quarter, we repurchased an aggregate of 8.7 million of our preference units in the open market. Since the program was initiated in August 2021, the partnership has repurchased more than 37 million in preference units in aggregate at an average price of slightly above $25 per unit, their par value. These repurchases have reduced preference unit distributions by approximately 3.1 million or 6 cents per common unit if we annualize second quarter distributions to preference unit holders and 7 cents per common unit based on the number of preference units outstanding as of June 30, 2022. We expect to continue opportunistically repurchasing preference units in the open market as conditions dictate And there are 95.6 million in series B preference units are studying as of today, which are callable any or all in March 2023. Slide 12 shows the progress we have made towards our leverage targets, which we first introduced in the third quarter of 2021. We have made good progress on these goals, despite the $104 million non-cash impairment charge we took in the fourth quarter of 2021 on our STEAMs and additional impairment of $28 million in the second quarter of 2022 in connection with the two STEAMs that we have classified as held for sale, as mentioned by Paolo earlier. Inclusive of $20 million of debt and lease principal repayments made in the second quarter of 2022, we have repaid $112 million in aggregate over the last four quarters. As a result, Our gross debt to total capitalization, one of the two leverage targets we have set, has been reduced from 53.9% as of the end of the second quarter of 2021 to 52.3% as of the end of this past quarter. When combined with our $157 million of cash and short-term cash deposits on the balance sheet, our net debt to capitalization has been reduced from 48.6% to 44.7% over the same period. In addition, our net debt to trailing 12-month EBITDA has been reduced from 5.3 times to 3.9 times, which is currently marginally below our long-term target. It is important to note that our net debt to EBITDA may fluctuate based on the spot market performance in the future. We expect to continue strengthening our balance sheet, beginning with a scheduled retirement of approximately $114 million of debt and lease principal payments in aggregate in 2022, which is more than covered by our contracted cash flow over this period. Reducing debt balances and making opportunistic repurchases of preference units will further reduce the partnership's cash flow all-in break-even levels over time and increase our free cash flow generation potential, enhancing the partnership's equity value. With that, I will turn it over to Paolo to discuss the LNG commodity and LNG shipping markets.
spk01: Thank you, Achilles. Turning to slide 14. Market volatility, uncertainty of supplies, and a continued scarcity for independently owned vessels that are able to offer charters the duration and flexibility they require has kept the term market at a premium to the spot market. This has allowed independent owners to secure multi-year deals at a strong rate despite the current weaknesses on the spot market. During the first half of 2022, a total of 146 term charters have been concluded, and the market is on pace to surpass the 165 term charter records set last year. The dip in one-year time charter dates in the second quarter, which has been as high as $120,000 a day, was related to the fire at the Freeport LNG export facility that reduced the number of cargoes available for export and increased the number of lead ads. Now, this dynamic is not expected to persist as Freeport exports are scheduled to return to normal levels by the end of the year and reabsorb the vessels tied to its contract. And this dynamic does support the industry view for strong-term market fundamentals. Slide 15 presents energy demand and supply during the second quarter of 2022. The energy demand increased by 4% this past quarter compared to a year ago, with Europe making the largest increase at 35%. This came at the expense of imports into Asia as Europe continued to struggle to replace disrupted Russian pipeline imports. In addition to previous curtailments, Russia has recently reduced export via Nord Stream 1, which were previously stable. LNG supply grew by 6.9%, with U.S. supply growing at 16.5%, narrowing the gap between the U.S., Qatar, and Australia as the largest exporter of LNG. U.S. supply growth will be supported by the high number of FIDs anticipated in the next two years due to high prices and interest in the long-term contract. Thus far in 2022, Corpus Christi Phase III and Plaquemines have taken FID. But as you can see in slide 16, those two projects are far from the only ones we can anticipate to take FID over the next few years. In fact, we can expect nearly 95 million tons per annum of capacity to take FID just from the U.S. with an estimated commercial operation date in 2027 or before. This is driven by continuous success in signing long-term SBAs with reputable counterparts, a favorable price environment, a structural supply deficit, as well as a constructive public and political climate, as the world focuses more on both high energy prices and energy security. U.S. projects make up about 53% of the total universe of PFID projects. The price volatility shown on slide 17 supports healthy demand for vessels due to supply shortages in the LNG market as well as the recent impact of geopolitical events. Europe's demand for continuous LNG imports remains driven by its plan to reduce dependence on Russian gas, and inventories have largely normalized due to increased LNG flows. However, close to JKTC continues to dominate the LNG market at about 48% of total LNG imports, down 8.5% from the second quarter of 2021. The impact on LNG demand is not expected to be significant as the majority of flow to JKTC are contracted and therefore heavily in the money compared to spot prices. On slide 18, we show a constructive outlook for LNG carrier supply and demand through the end of 2023. The calculated multiplier for U.S. exports normalized as exports to Europe declined from their peak and are expected to continue to be a smaller portion of global trade as Asia. Now, Asia will likely soon begin to actively compete for energy cargoes, increasing ton-mile in order to fulfill seasonal demand and restocking needs. This is expected to deliver a strong boost in demand into early 2023. Slide 19 displays the energy carrier order book and delivery schedule according to Poland. The order book has continued to expand to 219 vessels by the end of June, filling out increasingly scarce yard slots and driving places up to 240 to 145 millions. Eighty-six percent of the order book is committed, and few, if any, slots remain available for delivery in 2026, as many yards are unwilling to take orders for delivery beyond 2026, due to currency and still price risk exposure. In terms of fleet growth, the impact of recent ordering is not expected to impact the fleet before 2026 and 2027, assuming no slippage in production, delays, and cancellation. This will give the market time to decalibrate to better match increased tonnage with energy volumes from FID project. Turning to slide 21 and in summary. LNG is increasingly recognized as a reliable and flexible source of energy security and a stepping stone for energy transition. We are hoping for a faster solution to the situation in Ukraine, but it is clear that the energy market has been fundamentally changed by Russia's invasion. Such focus on reliable sources of energy keeps driving LNG shipping demand, resulting in strong rates and generally a positive outlook as additional capacity gets sanctioned in the next two years. The partnership has been able to monetize the buoyant market through profitable term charters and keeps an upside through open and spot-linked days in the seasonally strong period. Finally, we continue to execute well on our strategy targets, build equity value to our shareholders by delivering our balance sheet, repurchasing our prep units opportunistically, and positioning the partnership to evaluate opportunities for fleet modernization in this dynamic market. With that, I'd like to open the call for questions.
spk04: Thank you. We will now begin our question and answer session. If you have a question, please press 0 then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0 then 2. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, if you have a question, please press 0, then 1 on your touchtone phone. And we have our first question from Chris Tsang with Weber Research. Please go ahead.
spk02: Hi. Good morning. Good afternoon, Paolo and Achilles. How are you? Hi, Chris. We're good. How are you? Good. Good. Thanks. I wanted to just ask if you're able to expand on the decision to sell and lease back the steam vessel compared to perhaps another option such as converting to an FSRU?
spk01: Sure. Thank you, Chris. I think we have to start from the fact that the partnership has five sister vessels in the water. And I think the overriding comment is that we are taking a portfolio approach to manage, you know, residual value and the opportunity to employ the vessels in the different parts of the market. We are pursuing, as we mentioned, infrastructure projects like the FSIU project, the one that we are publicly following in Dennis Energy in Adelaide. We are working on a few yet interesting opportunities for FSIU we have decided to monetize this tight market by fixing favorable charter rates, as we reported, and at the same time also take advantage of a more liquid S&P market with higher valuation than sell the Shirley Elizabeths. So, you know, I think we show that, you know, there are many avenues that we are following, and we believe all of them are really accretive to the usage of the steam vessels in the partnership.
spk02: Okay, thanks. That makes sense. And just moving on to a couple of vessels that you guys have rolling off with an option, you know, specifically the Santiago and the Mary Jane Elizabeths. At what point will the Charter need to notify you guys that they'll exercise those options?
spk01: Chris, just to clarify, are you asking when does the Charter need to declare their option? Yes. Okay. So on the Santiago, the next Charter period, needs to be declared by the end of August. And on the Jane Elizabeth, the discussion is in the first quarter of 2023. Got it. Thank you.
spk02: And just one final one for me, and I'll jump back in the queue if I have anything. On slide 18 of your deck, I was just curious, how did you guys forecast or estimate the best of demanders? That's just something from one of the sources. Sorry, can you say that again? Because you broke up a little bit. Yes, sorry about that. Just on your slide 18, I was just curious how you guys were able to forecast or what you guys were thinking about to forecast the vessel demand?
spk01: Yeah. I think, well, the demand, we take the demand with different sources. As we mentioned, we use Bowden, we use Wood Mackenzie. And we use Kepler, and then we overlaid with our own estimates. Our own estimates, however, is mostly connected to the supply side. But we also take a view on the amount of projects that will be sanctioned, and we apply some filters onto it.
spk02: I see. Yeah, just curious, just thinking about the ton mod multiplier, where if Europe's absorbing a lot more of the LNG, much shorter distance than, you know, going to Asia, and I'm just kind of curious on that. But that's fine. I can take that offline.
spk01: Thanks a lot. No, no, but I think if you go to slide 15, I think you see that the US shipping multiplier in Q2 still remained quite high at 197. I apologize. I don't have the previous ones, but I remember that in our forecast, we normally use as a reference a number that is close to 2.13, 2.15 for multipliers that take most of the cargo to the east. One thing that I can comment on is that we have seen a really modest drop in the multiplier even though more volume has flown into Europe because still a lot of volume goes to China. And the volume that doesn't flow from Russia to Europe is automatically, you know, creating an additional need for tonnage because it actually flows into much farther distances. So it's not a simple model, and more than happy to take it offline with you at any point in time.
spk02: Yeah, no, thanks for the call. That's helpful. That's it for me. Thanks, guys.
spk04: Thank you, sir. And thank you, sir. I'm standing by for further questions. You can enter the queue with your question by pressing 0 then 1 on your touchtone phone. At this time, I see no questions in queue. Ventures, do we have any closing remarks?
spk01: Thank you. Well, if there's no other questions, thank you, Vanessa, for assisting us. And thanks, everyone, today for listening and for your continued interest in the Gaslow partner. We really appreciate it. We look forward to talking to you in the next quarter. And in the meantime, stay safe. And again, if you have any further questions, please contact the investor relationship team and Rob at Rosenco. Have a nice day. Bye.
spk04: And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
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