Q3 2019 Earnings Call
Three 2019, Gaslog Limited earnings conference call all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session. As a reminder, this conference call is being recorded today's speakers or Paul Wogan, Chief Executive Officer, Alistair Maxwells, Chief Financial Officer and commenced the fall so Corbett head of Investor relation.
Mr. Corbett you may begin your conference.
Well, thank you Josh and good morning, well good afternoon. Thank you for joining Gaslog limited third quarter 2019 earnings conference call.
For your convenience this west coast I'm presentation.
Sellable on the Investor Relations section of our website Www Dot Gaslog Ltd Dot com wherever replay will also be available.
Please turn to slide two of the presentation.
Many of our remarks contain forward looking statements factors that could cause actual results could differ materially from these forward looking statements. Please refer to a third quarter earnings press release.
In addition, some of our remarks contain non-GAAP financial measures as defined by the FCC.
A reconciliation of these is included in the appendix all the presentation.
I will now sometimes the pool I can see Oh Gaslog limited. Thank you Phil Good morning, Oh. Good afternoon. Thank you for joining <unk> third quarter earnings call.
Well I'd be getting those of you who participated in our previous calls I have no just on new presentation format.
As part of a larger rebranding initiative, but both Casco limited and Gaslog partners to emphasize our priorities of safety operational excellence, a customer focus and we're delighted to be sharing this with you today.
On today's call I'll begin with all highlights for the quarter, including our recent commercial successes.
I wish there will then take usually the quarter's financial performance. Finally, I will review the current trends in the LNG and LNG shipping markets before opening the call for questions.
Turning to slide three.
During the third quarter, we continued to see the positive financial impact about chart to backed Newbuilding program as well as an improvement in the earnings about vessels operating in the spot market.
For the nine months ended September 30, Oh revenues increased 7% year over year.
The same period EBITDA was 9% higher driven impart by continued good progress on cost reduction initiatives.
Notably the earnings of all vessels trading in the spot market, where enhanced by market linked charters on both the Gaslog Shanghai and Gaslog silent.
In late July we took delivery of office X T. S vessel. The Gaslog also which immediately commenced the charter with shouldn't yet ahead of her long term charter with Endesa.
We would also successful in signing a 10 year charter for one about TFT East to act as a floating storage unit for gas the power project being developed in Panama.
We declared an unchanged dividend a 15 cents quota I appreciate it sorry for the quarter.
I'm also very proud to show you that the crew that meets let me say Allinson Victoria was awarded crew at the year at this years I checked market safety as he awards for the excellent safety performance over a number of years.
And finally pulling a planned transition Palo noisy assumed full CLL responsibilities in September and he is already a great addition to the senior management team.
I'm also pleased to report that I outgoing COO, Richard Chocolate has agreed to take on a new role as head of sustainability as we focus on defining our sustainability strategy and reporting and I look forward to providing further updates in 2020 .
Slide four provides detail about Panama efforts you charter.
In September we announced a 10 year Charter award with the Chinese Company, Sino which is developing a gas to power project in Panama.
The power project to sign long term power purchase agreements with leading Panamanian utility companies as one of the 15 year LNG purchase agreement with shell.
We expect to fulfill the time charter so the conversion of the Gaslog, Singapore, what about 2010 built TFT east.
Since September 2016, this special has been trading in the LNG carrier spot market.
The 10 year FSRU contract will deliver 100% utilization and fixed rate up higher for the duration of the charter, resulting in approximately $20 million of EBITDA on him over the life of the charter.
The conversion will take place during the vessels scheduled five year Special survey and the third quarter 2020 , enabling both time and cost synergies with the vessels regular dry docking.
The chart to commences on delivery at the ask US you it kind of a which is scheduled for November 2020.
We're looking forward to working with Sino I'm on this project to displace coal and oil products can panama's energy mix with cleaner burning natural gas now, let me hand over to Allison.
Thank you Paul Good morning will get off needs you will I'm pleased to report another strong quarter in terms of operating and financial performance.
Please turn to slide five.
Our quarterly a nine month financial results for underpinned by the operational performance of our fleet, which continued to be excellence with yesterday uptime of 98%.
As you can see and all 6K for the quarter voting exit from the cool pool, we not segment of fleet on our revenues into two categories.
But those vessels operating under multi year charters at fixed rates, regardless of the remaining duration of that contracts.
And second the remainder of the feet comprising vessels operating in the sports and short term market.
Hi vessels, such offered under variable rates contracts.
For completeness. We've also included the cool pool net performance in the table, where you will see that there was a very limited contribution to the Q3 financial performance.
The last about vessels exited the pool early in the quarter.
Well total year to date revenues of $463 million increased by 7% year on year.
Fixed rate net revenues increased by 9% as a result of the growth in our fleet of on the water vessels with multiyear chances.
Well not directly comparable with the historical net cool pool performance.
Our variable rate net revenues reflected lower year on year earnings in the spot market.
As previously disclosed on scheduled drydockings of around 100 days.
Well the Opex increased in absolute terms as a result of new vessel deliveries units Opex and unit DNA in the first nine months of 2019 declined by 5% on 4%, respectively compared to 2018 benefiting from our cost control initiatives and fleet growth.
As well as a favorable U.S. dollar euro exchange rate.
We continue to anticipate the full year 2019 unit Opex will come in at or below our formal guidance of $15000 per vessel per day.
Cost control and revenue growth combined to deliver a 9% increase in yesterdays EBITDA.
Turning to slide six and further information on our variable rate earnings.
As I mentioned on the previous slide benign segments operational revenues into variable rate vessels on fixed rate vessels.
During Q3, we had seven variable rate vessels, including the gas books, Shanghai and they got spoke Salem.
Both of which are on term charters, but at market link right.
During the quarter, our variable rate vessels on time charter equivalent net revenues just over $36000 per day.
Looking forward to the fourth quarter.
And based on current booked revenues and expenses as well as all remaining open days.
We expect that all variable rate vessels will deliver Tc net revenues of 60000 to $70000 per day.
This estimate reflects the fact that the ceilings and our marketlink chances.
While it very attractive levels compared to historical mid cycle right.
Ill below current headline right.
What is the fact that the charters on two of the vessels were fixed prior to the recent strong recovery in headline rates.
The other had a number of the fixes on all variable rate vessels will extend well into the first half of next year, thus, providing some cover against potential spot market seasonality.
Turning to slide seven which discusses our balance sheet.
We continue to amortize our debt or twice the rate on vessels depreciate.
Deleveraging, the balance sheet and creating equity value over time.
And 2020 , we expect to amortize $220 million of debt equivalent to the average assets two of our vessels.
Furthermore, we are proactively managing our upcoming maturities.
We've already commenced planning for the refinancing of the to secure debt facilities, which material in 2020 one.
That was what does the 750 million Norwegian kroner bond, which matures in the same year.
And we expect to complete these refinancings well in advance of that final maturity.
During the third quarter I'm also pleased to report that we made very good progress on the financing of our seven remaining newbuilds.
We have seen strong interest from all banking partners, resulting in the proposed new facility being significantly oversubscribed.
Currently in the documentation phase and plans to close the financing later this quarter.
In parallel we've been working on improving the financial on commercial covenants across all of our debt facilities, along the lines of the financing of the gas. The also under the Gaslog partners level, the new 450 million dollar facility, which closed in March of this year.
We will provide further information in due course.
Moving to slide eight we set our the average growth secured debt per vessel per our different classes of ship.
As you can see on Steve's in one part part yet the have considerably lower average debt vessels that are more modern vessels all of which operate under long term charters.
As a result, the steam vessels also had the lowest breakevens in the fleet in the mid to high $30000 per day and trending down overtime.
Moving to slide nine we've updated the chart illustrates not capital commitments.
We currently forecast cumulative future cash payments for the equity in the remaining newbuilds represented by the light Blue tranches of the top of each call than to be $93 million, achieving 80% loan to value, which is the most likely outcome of our new build financing.
On this basis, our current unrestricted cash balances and available also you have capacity plus operating cash flows from our growing on the water fleet on the strongest spot market are expected to be more than sufficient to cover the equity funding requirement.
Finally on slide 10, we show the evolution of our contracted revenue backlog.
Our successful chartering activity this year, including new charters with Jira Endesa gunboat scenario and most recently signed Atlanta continue to add to our backlog, which reached a new high of $4.1 billion at the end of the third quarter.
This backlog underpins, our future earnings and cash flow generation.
As well as our unrivaled access to cost effective capital at both Gaslog and Gaslog partners.
Ill now hand back to pull to discuss the LNG and LNG shipping markets.
Thank you Melissa.
Turning to slide 11, which shows the increase in LNG imports by country on a trailing 12 month basis.
LNG demand grew by 43 million tons year over year and increased 14%.
China posted the largest increase in absolute volumes importing 11 million tons more LNG at 22% increase year over year.
Natural gas continues to show it should grow its share of the country's overall energy mix and recently signed effects stated that it expects China's gas demand to increase by more than 80% from 2018 to 2030.
While Chinese demand continues to be strong LNG growth has been broad based.
Europe's imports grew by nearly 36 million tons over the period, a 105% year over year increase.
Driven by declining indigenous gas production continued coal to gas switching for power generation and available gas storage capacity.
Turning to slide 12 in the future outlook for LNG demand by geographic region.
In total wood Mackenzie expects net LNG demand to grow by 150 million tons between 2018 and 2025.
Although chinas imports have increased significantly in recent years, it's important to note that other countries in southeast Asia together with Europe account for nearly two thirds projected LNG demand growth through 2025.
Turning to slide 13, which shows new LNG supply.
Next year over 22 million tons of new LNG capacity is due to begin production mostly from projects in the U.S., which should have a significant positive impact on ton miles.
In particular, the second and third trains at both Cameron and Freeport are expected to begin production ramp up throughout 2020 and into 2020 one.
Further ahead 94 million tons, a new capacity is scheduled to start production in 2021 through 20 to 24, including venture go Globals Kelk issue pass in Louisiana, and the uptick LNG to project, both of which two F. I'd in the third quarter 2009.
The.
Turning to slide 14, and the future supply growth.
The LNG supply outlook continues to be dynamic and growing.
While 2019 is already a record year for new project sanctions Wood Mackenzie expects, an additional 7 million tons of LNG capacity to reach F. I'd prior to year end.
Followed by another 61 million tons in 2020 .
21 million tons in 2020 one.
These proposed supply expansions I mean supported by continued momentum in new long term LNG sale of purchase agreements with over 170 million tons per annum, having signed since the beginning of 2017.
Slide 15 shows how you export us exports have positively impacted shipping demand.
According to both that 119 cargoes were exported from the us in the third quarter.
40% of which were delivered into North Asia, North Asia, and the middle East destinations that require more than two ships to million tons of LNG export parana.
Compared to historical global average of 1.3 ships needed for LNG exported from the rest of the world.
Since exports out of the U.S. began in 2016, an average of 1.8 ships have been required for each million tons of LNG exported positively affecting shipping demand.
79 million tons per annum of LNG capacity is expected to be online in the U.S. by the end of 2020 .
Approximately half of which has been sold on long term contracts to Asian buyers.
Slide 16 illustrates our view of shipping supply and demand through the end 2020 won't based on wood Mackenzie and potent data.
This analysis implies a structurally tighter market through at least the 20 to 20 2021 winter with expected high levels of fleet utilization, even at the lower end of the range.
On slide 17, we discussed the rate trends in the LNG shipping market.
The OLED panel shows the monthly average headline spot rates for DFT carriers during 2019.
The Rockpile shows the average headline rate by month from 2011 through 2018.
Well the absolute values may differ from the historical monthly average is the trend in 2019 as closely followed previously observed seasonal patterns with headline spot rates generally bottoming in early spring and peaking in the fourth quarter.
As you can see significant headline spot rates have risen sharply in recent weeks predominantly as a result of two factors.
Firstly increased demand for LNG added the winter heating season in the northern Hemisphere, and secondly, the continued increase in production from new LNG liquefaction facilities, particularly in the U.S.
Slide 18 shows have periods, the strength and weakness in the spot markets have historically influenced activity for multi year charters.
Most recently 14 charters between six months and three years in duration, we reported in the third quarter 2019, the highest number since Q2 with 18.
These 14 charters 60, FDM and 16 ships were fixed on charter is greater than six months.
Potent currently assesses the one year time charter rate at $84000 per day for TFT 50000 per day for steam vessel, which are helpful. Benchmarks when discussing term charter opportunities. Although we would note. There is presently limited liquidity for charges of one year old great.
Turning to slide 19, let me finish on why Gaslog represents a compelling investment proposition.
I would almost 20 years of experience in LNG shipping has allowed us to build a leading operating capability founded on uncompromising approach to high standards of safety.
Gaslog is continually recognized by customers an industry bodies as best in class.
We continue to modernize our fleet when our seven X DFE Newbuildings deliver in 2021, we will have one of the largest fleets of latest generation vessels, all backed by long term contracts to high quality chunk counterparties.
Our seven new builds alone represents 144 million of annualized EBITDA growth on a fully delivered basis.
We continue to work with our customers to develop interrupted commercial structures the meet their needs and optimize the earnings of our fleet.
The Panama FSRU FSRU Award is yet another example of this capability.
In turn pushing up fixed charter backlog to an all time high of $4.1 billion.
We have strong balance sheet with scheduled amortization, leading to de leveraging over time.
We remain confident they're increasing demand for LNG will lead to structural tightness in the LNG shipping market potentially increasing spot market earnings on providing opportunities to re charter vessels operating in the spot market.
And finally, we remain proud about track record paying a progressive dividend, which has grown at a compound rate to 4% since our IPO not including the special dividend, we paid in the fourth quarter 2018, and we continue to explore opportunities to enhance shareholder returns against the backdrop of a strong.
LNG shipping market.
With that I'd like to open up for Q1 day.
Operator could you. Please now open the call for any questions.
Yes, as a reminder to ask a question you'll need to press star one on your telephone.
Question on press the pound keep our first question comes from Michael Webber with whatever research you May proceed with your question.
Hey, good morning, guys how are you.
Hi, Mike Good morning.
Yes.
Paul I just wanted to the first kind of.
Touch on the spot market is we're ramping into Q4.
I wanted to think about it or kind of in the context of is going to be as the year on year context.
Last year, we saw big ramp in storage early a big seasonal drawn than we had a hard landing in Q.
The middle of back into Q1 entered the market all of a while to recover from that just curious as you see the marketing market developing.
End of the back into Q4, how would you compare what we're seeing this year to what you saw last year, just given where we're at from a storage perspective and different market dynamics.
Yes.
I think certainly if you look at the way the markets react to this year has been following the trend of 2000, an 18.
Yes, there is a storage the storage I think is quite interesting I think the way that we people are looking storage is not only vessels, which I just thought though waiting.
To discharge somewhere offer for but also.
Yes, those that are taking longer to reach that destination.
I think what we're seeing in this market.
Yes.
Some storage, but some people doing what we've been talking about for a while which is playing the arbitrage and saying, Okay, where do we take the ships was the best place to put them, let's put them. If you like on a midpoint route between two areas, while we decide to go or let slow steam. So there's a lot of that going on which is trying to maximize the arbitrage.
Roger opportunities to maximize pricing on the vessels. So I think some of it is is out now storage, but I think some of it is just people trying to optimize the trading portfolio.
The second thing I think thats happening as we are seeing now and there was I think thats been slower than we would have like we are seeing this ramp up in new projects. We talk now about Freeport and Cameron coming Onstream those projects coming on so I think there is an underlying.
Right off the demand for ships in the market, which we hope will not lead to a full up in the rights that we saw last year.
For the final thing I would say is that we haven't we happened not the ships, which were trading in the spot market and we should always remember it's a small part of our fleet that fully delivered 35.
Seven at the moment right, but a number of those ships.
You for dry docking next year. So what we've done is looked to try to fix those ships through until that drydockings in that sort of first second third quarters next year.
And look into the rights that we can see now to make sure that there is that fall, which I'm not saying, we're expecting but obviously those the possibility that we maintain our our earnings.
Higher rate so.
We are hopeful we don't see that return we think there are some factors, which mean it isn't going to be it play out of 2018 2019, but I think we're also making sure that we position ourselves. If there is that fall off to maintain good earnings our ships month.
Gotcha that that makes sense.
To kind of leads into my next question and probably even pretty.
Pretty clear about kind of looking at 2021 with a with a pretty big question, Mark and 70, starting on slide 16, which I always like for you guys put out in terms of different different projections for supply and demand and it looks like.
There's there are scenarios in 2021, where you've got a bit of excess capacity.
Just curious as we it's closer to 2021, you guys put in place a pretty tactical dividend policy around potentially paying out specials.
Depending on on what Youre seeing in the marketing where rates are obviously, we're entering a pretty firm environment I'm just curious as your thought process and math around around that changed as we've gotten closer to 2021 or should we think about.
Should we think about in a pretty similar context too.
20 Nike.
Yes, I mean, I think we as we said.
Mike we're very focused on making sure that we can.
Create good value for our shareholders and I think as we look at this market strengthening that we think it is potentially that in the short term and medium term, we would like to reward our shareholders. We will make sure that we're in a good place.
In 20, 122, if we do see that market coming off so balancing those those two things, but certainly.
If we continue to see strengthening the market we think thats.
Potentially that for the longer term, we would like to reward our shareholders.
Okay. Thanks, guys I'll turn it over.
Thank you.
Thank you. Our next question comes from Jon Chappell with Evercore. You May proceed with your question.
Thank you good morning, and good afternoon.
Hi, Joe if I could follow up on a on one of Alister his comments Elster yourself I appreciate the breakdown of the fixed rate and the variable rate and I I understand the reasoning behind the 60 to 70 that you gave for this year given kind of the spike you nature of the market in booking some ships.
I mean for this quarter.
But you also mentioned the ceilings on two of those contracts and we've talked before about 100% utilization.
On those floating rig contracts is incredibly important but I guess, we don't really have a true sense of what the ceiling is so understanding the commercial sensitivities, but also understanding the volatility the markets is there any way you can kind of put us in the right range on where those things kind of tap out so we don't get.
Overestimate when the market gets as hot as it is today.
Yes.
Unfortunately.
John I comp because at the commercial sensitivities, we we did in their prepared remarks so.
Talk about the fact that it is.
Well in excess of the.
You know mid.
Cycle rights, which we've always talked about in the mid seventies.
It is well in excess of that but it is.
Well.
No up and this sort of 130 and 40000 dollar a day rates that we're seeing now, but it's difficult for me to give any more kind of guidance on that unfortunately, because it is I think commercially sensitive with the people. We have those ships on charter to <unk>. Okay. Then let me ask about the other two ships you said.
<unk> said, you get booked to kind of right before the rate movement, which is why maybe the 60 to 70 range is a little bit lower than what people have been tracking the market would have thought.
What's the duration of those voyages.
Yeah. It is just can you do you think you'll be able to return of them at some point in the fourth quarter, where at least in the past two years the market's been seasonally at its peak and then.
That buffer as Alan mentioned into one Q.
Uh huh.
What would be trying to do on those ships don't as we have a number of ships, which are going to be dry docking next year, we've been trying to because the thing that kills you in any of these markets as utilization <unk>. When you are the factory now which is the dry docking well that does this create uncertainty around the voyages you can take you.
Often have.
An inability to tighten ships close to dry docking and then trying to if you get them.
Before you suddenly find you can't Jonathan so what we'd be trying to do is to fix our ships through to the dry docking. So when we're talking about this sort of lower rates. It's because we've looked those those ships into rates, which take them through to dry docking, which I get from memory take us into so the they ended the first into the second quarter of.
Next year.
But as we said also if we did see a full of in the right seasonal rates those those earnings on those ships will be a.
Quite strong.
Okay final one for me.
Yeah, maybe we thought going into this winter it shouldn't be as strong as the last two and maybe not as peaky as last year's winter, but as strong as maybe last year's averaging in the winter before last year pleasantly surprised with the pretty robust special dividend, So given where you kind of sit today with the financing the rates that you think you'll achieve on on the for Q, but.
Also given the fact that stock prices almost 50%.
Due to 40% lower than where it was in November of the prior two years, how do you think about capital return for this fourth quarter period, if you do attained.
Healthy rates special dividend on the table or do you think maybe you'd be more aggressive with a buyback given the valuation today.
Hey, John I was to Oh, I think that.
And before talking specifically about one or the other.
I think that we continued to hybrids our priorities in terms of capital allocation portable, making sure that the new build program is is funded and I think where we sit today were where we're very confident about that.
Especially given the stage that were out with the the financing for that as I talked about in my in my remarks.
So I think having having that.
Our first priority.
We do continue to monitor the the market and the cash flows that.
That are coming from our ships that are trading in the spot market.
As we look forward to where we stand input in the fourth quarter. This year clearly the market is seeing a significant pickup.
Although we're not getting as much benefit now if you like for the reasons that we but we talked about and pool was explaining how you're wrong. So I think that we think about the scope for enhanced shareholder returns, it's something that we consider.
On a continual basis.
We're always looking to see if we can find ways to do it.
But we are watching in particular the performance of the on the spot market. We're also looking at other.
Elements of our strategy.
Rooting for example, our capital Raisings by Gaslog partners Dropdowns.
I was trying to think also play into how we think about shareholder returns and you'll recall that last year.
We had three things over the same time, we had.
A dropdown.
We had the IDR.
Adjustment modification and we had a very strong market and over the three factors that together put us in a position where we were able to pay that special dividend. So I think again full said earlier somebody that we monitor continually.
We're always looking for ways that we can enhance shareholder returns.
And.
Too early to tell at this stage, if we do fine scope to do that what do we would do it through share repurchases or through special dividends I think we'd need to see where we were at the time.
Okay I understand thanks, Alastair Thanks, Paul.
Thank you.
Thank you. Our next question comes from quick Chris Wetherbee with City. You May proceed with your question.
Hi, guys James on for Chris One the actually touch on the order book, there's still some speculative newbuilds hope there once you get a sense with market positioning going in.
Our past, peaking going into next year and how it might how the market's ability to handle some of that early season softness.
Comps last year trying to really get a sense of the industry's revolving around its ability to handle some of the downside surprises that can happen.
Yes.
Thanks.
A very interesting question.
I think we for some time have been saying we need to be careful in terms of new buildings in the industry. Because we see continued build out of LNG capacity, especially in the U.S. through 2021, but then there was up period between sort of to 52015.
In 2018 went very little was took half idea now just all moves forward to about 20, 123 period, where right now that's not a loaded new capacity due to come on stream.
I think one thing as an industry, we have to learn is that while.
We haven't overbuilt the on the shipping side.
In the past what we have done is have the ships arrive at the wrong time, so I'm pretty certain older ships, which are on order at some point will be required because this is a growing industry LNG demand is really very robust, but if you get the timing rolling you can have two three years, where you having new ships coming out waiting for.
New capacity to come on and so I think from our point of view to continue to order into a period, where we don't see new production doesn't make make a whole lot of sense for the industry. So, especially the people who are going out and ordering I think speculatively into that market.
I think.
Should be wary.
The second factor, though courses the.
There is another factor, which plays into this which is ton miles and if you have a period, where we start to see a rebalancing a strengthening if you like at the pricing of the LNG, which may which create arbitrage more arbitrage opportunities you could see situation going into 2021 way you actually see the.
Miles, increasing albeit that you havent seen new production coming on so you know there awesome. Some other factors playing at play here, but certainly we gaslog would not be advocates of going rushing out in doing newbuildings. At this point, we think as an industry, we don't need those.
Coming out in this sort of 20 122.
23 period.
Got it.
Just wanted to actually touch on.
Some of the strategy that was played out at your Investor Day, then how does that potentially high impact what you might do in terms of what's been next like of growth. It seems like you're a little bit more conservative about the market from 2021 forward. So these are things that you focus on there would it be de leveraging potentially thinking about.
Increasing returns to shareholders will be the next set of priorities.
Yes, I think I think.
Both of the above I think there's natural deleveraging as as Alister talked about in the business through the amortization I think.
Continues and is very positive for us.
In the future years, I think returns to shareholders, we've talked about a very important to us as well and we want to make sure that we're in a position to return.
Money to our shareholders.
And when we're able I think the other thing that.
Happens if you have a strong balance sheet. Good cash flow is it gives you opportunities for M&A.
M&A opportunities consolidation opportunities, which.
Going into a period, if there is a softening market we want to be in a strong position, where we could possibly take advantage of those so those are the sort of things that we're thinking about the us we look look two or three years down the track.
Got it and then just one quick one with all the influx with all the refinancing occurrence or how should we think about.
Potential interest savings there is some of the.
Other advantages you might get dental financing cost.
Thank you.
Yes.
Our interest savings or what James in terms of financing costs.
Interesting basically just the cost.
Financing the funding so financial cost one should be just think about that moving down slowly over time as a percent of that or is there anything from modeling perspective that we just need to be aware of as these refinancings occur, particularly anything around fees or anything around that.
So the the biggest driver of all of our financing costs.
Clearly the total amount of debt.
And we will see that on the one hand, we continue to monetize at a rate today of about $220 million.
That will go up as we take delivery and drawdown on financing for new builds so our total amount of debt.
We'll increase during the course of 2020 as we take delivery of those ships and then they will clearly contribute EBITDA.
The time, so that's the first driver, which is offset by scheduled amortization of the second drivers obviously libel.
Because all involved.
All of our mortgage debt secured debt.
Yes.
On a margin basis to libel.
We have had some success.
In reducing our margins all spreads over libel.
I don't think those.
Significant scope for further reductions in in our margins I think we already borrow at extremely competitive.
Levels.
The third factor, it's clearly the the impact of the derivatives, which is obviously non cash.
But that who's had.
Significant impact both positive and negative positive during the quarter 2080 negative during the quarter 2019 in these very.
Subject to the behavior.
Libel and reliable curve.
Over time, so I don't anticipate other than movements in LIBOR, which the you'll have is as good a view on as I do.
On the total mindset that I don't imagine.
There are any other factors, which will significantly impact on financing cost going forwards.
Thank you.
Thank you. Our next question comes from Greg Lewis.
You May proceed with your question.
Yes, Thank you and good afternoon.
Okay, Great under Alice Oh, Alastair just just following up on the last question.
Yeah, I guess, we would there was a preferred that if that comes due in April of 2020.
That's probably some of your more expensive debt.
I don't have retreated when they treated that cleared up with some of your more expensive.
I guess access the capital relative to some of your bank debt, how should we be thinking about.
I guess.
That.
Piece of.
Piece of debt in all right and how you think about going forward. If that's something that we think we're going to maintain inside the capital structure, just given all the things that you're talking about yes, you're taking on a lot more vessels the balance the amount of debt on the balance sheet is going to be going off just kind of curious how you think about trying to position the balance sheet over the next caller.
One or two years and what you expect the primary sources debate.
Greg.
Thank you so to the practice, obviously permanent capital.
And we can call we've been cooler Pratt from.
From second quarter of next year, but it is not.
It's not a maturity.
And so some I got dealers will relieve that leave that prep in place for the for the time being.
As I've said in my.
My prepared remarks I.
I think on next priority after putting in place the financing pool.
Current Newbuild program.
Working on the Covenant amendments that idea that I spoke about I think our next priority is going to be dealing with the 2021 maturities, which is to bank facilities.
And the the not bonds.
And we're already working on those.
In terms of preparatory work.
And we expect to as I said to complete those refinancings, well ahead of maturity and that puts some time in.
Sort of middle too early second half the 2020 is when I would expect to have.
Those refinancings completed I think those are all those are our initial priorities.
And as I said earlier in the background, we have continue scheduled amortization underway, which.
Which runs roughly as we said often in the past roughly twice the rate at which the we shipped appreciate.
Okay, and then just just thinking about the FSRU contract with.
Yeah, I guess the Singapore.
Yes, I guess as we look if the timing of that it looks like there was the potential.
To slip in the steam vessel.
So just kind of curious if that was something that was thought about or are we going or we now in a market where when we think about infrastructure type LNG assets is it isn't really.
There is now just more advantages to using the advantages are so great that it's just more as we think about the next three to five years could we see more tri fuel diesel electric and the vessels sort of become sort of the infrastructure of storage for LNG, where.
Maybe if you were to ask maybe two three years ago. I think the expectation was that was primarily going to be where all the steam vessels were gonna go kind of further final they use.
Yeah, Greg.
Well here.
On this one is simply a factor of size.
Even though there's not a huge amount of difference in the size between the two vessels.
The steam right now our steams on this worse, just slightly too small for the requirement so it fitted into.
The FDA.
But we are our and early stages looking at another couple of FSRU projects, which actually would fit or would be fit for for a steam vessels. So I don't think I would read too much into what happened in the Panama or I think it was just.
The size requirement for that particular project.
Okay. Thank you very much.
Thanks.
Thank you. Our next question comes from Randy Gibbons with.
Jefferies. You May proceed with your question.
Howdy gentlemen, how's it going.
I run it get done already there a few a follow up questions on the FSRU I'm. So what is the kinda total time for conversion total Capex I know you mentioned, a new lower daily Opex number if you can give us kind of a more.
Exact number around that and then also found it interesting that the FSRU contract is for 10 years, but the power project has a 15 year LNG sale and purchase agreement with shell. So is there a five year action. After the initial 10 years.
Yes, hi, there on the taking your last question first yes, they have a there are options.
To extend the vessel for a longer period.
We don't really talk about the firm period that we have on the vessel rather than talk about the options, but but there is that opportunity in terms of in terms of the cost of the conversions I think we've talked about before you are looking there somewhere in the sort of 15 to 20 million dollar range in terms of the cost.
And then we haven't given a lot of talk.
We haven't going into detail around Lee the opex, because what we've really talked about there is just was the EBITDA that do you get from the ship and the EBITDA.
It comes out at around $20 million per annum for the vessel.
All right and then the off hire days for the conversion.
Oh, sorry, the API digests equates.
You'd be looking at something like 50 to 55 days in total you'd normally for dry docking have something like 25 day 20, 530 day. So it's an additional sort of 25 days on top of the.
Okay.
Beth and then one more question. So one reason, obviously gaslog join the call pool was to improve utilization improved scale now that you've left the copel do you expect to kind of partner with other owners to recreate that spot exposure scale next year and then also looking at your spot exposed vessels are all of them currently employed.
Good for the fourth quarter.
Yes, so at the present all our ships up presently employed we do have a couple of coming opened in the fourth quarter, which are still going to be which are open to the market.
As we talked about Randy I think.
Our focus is very much around making sure that we take opportunities to put those ships away and so one advantage of not having the ships in the cool pool is that that gives us that opportunity to have.
Discussions with charters about spot charters, which often.
Roll into discussions about longer term charters not the two shifts that we have on the floating rate.
With utilization, where exactly that so at the moment I think we're quite enjoying having that ability to have a discussion with our customers across the period.
And with finding I think in terms of utilization our ability to do that helps us to make sure that we lock in the utilization. So I think we would be open to having discussions with it with other people around how we could maybe pull together to improve the service to the customers things like that but at this moment that's now.
Something that we as a company.
Looking to sort of be proactive on.
All right that's fair thanks, so much.
Thank you.
Thank you. Our next question comes from a spin landmark with friendly you May proceed with your question.
Hey, good afternoon, I just wanted to go back.
On the floating storage I mean, Paul you mentioned there are some differences this year with the degree of slow steaming into this as well I guess another difference from last year is that more vessels are actually you know storing and Europe versus most racial answers or when should we see different dynamics around the floating storage just this year or do we need a cold winter and the steepest cheaper.
On the curve for.
Right now for four or five in mid November again.
Yeah very very good question has been I mean, I think you kind of hit the nail on the head when you talk about the weather I mean, the weather is such a large factor in how that the market turns out last year, we had a very mild winter more or less or across the world and I think that affected the.
The demand for LNG.
Interesting to see this year does that patent repeat or out in a cold winter you know just demand for LNG continue to be at high level through.
As I talked about a little bit earlier I think we think there are some more structural.
Factors, which are playing in especially with the new production coming on and we don't think that the strength in the market is wholly dependent on.
Floating storage, but of course, we do get a number ships coming back at one time into a market that does have a downward factor, but we do.
Believes that there is more of a structural tightness given the production that's coming on stream.
We saw last year, and we're hopeful of a cold winter.
So for that.
You know.
20 million more tons of LNG into the market next year, we have European inventories. So you know already brand name.
You know our euro worried that we will see cargo cancellations or cannot reworked offtake agreements from information bars nicer, maybe around the you know the typical shoulder month.
Yeah, I mean, it's interesting they did the growth I think continues on the demand growth continues to be that certainly in Asia a lot of it I think is infrastructure.
Bottlenecks, which continue to be.
The be worked on.
Yes.
We've seen this year apart from the fact that with.
As you point out.
In Europe .
Quite a large amount storing but actually a huge amount of new demand for LNG.
As it got becomes cheap and replaces coal in power generation et cetera, especially in countries, such as Spain and Germany.
And I think the low prices are driving.
Behavior across.
Across the globe, but certainly in terms of Europe . So I think my view is the low prices continue to stimulate that one is people that made that swap over from the coal into the into gas power generation and industrial use et cetera.
You don't often see that going back, especially if we see can continue see competitive pricing, which we expect so.
Yep.
Given that can given the fact that if somebody doesn't want to lift to cargo they have to make it better.
I'm not clear three months ahead of time the people who have produced in Chicago, then have the option to produce that cargo and sell it with very very low variable costs. If you like.
We don't believe that we will see.
Production being being rain back on the basis of the market. We think as we go through 2020 to 21 that we will start to see that market rebalancing.
Okay, what's interesting thank you.
Thank you. Our next question comes from Chriss Snyder with.
So is your bank you May proceed with your question.
Hey, good morning, good afternoon, guys and thanks for squeezing me in so you've got access midpoint of about I think $65000 for the variable fleet in Q4, I know, there's a lot of moving parts here some still truly in the spot market. A couple other index linked contract you signed two contracts prior to the inflection, but it is disappointing and.
Good to see the variable rate come in below your average term rate, which I think is $75000 and then the one year rate you quoted in the prepared remarks about the mid eighties, just given that we're in the seasonal peak and the spot market is a very tight. So in this context, what are the benefits of the variable contract structure and the broader spot approach relative to the.
That's right term market is that these index linked contracts are allowing for a longer duration, allowing you to potentially bridge at week 2021 2022 markets.
Yes, I mean, there's some of the if you look at the one of the index linked contracts that we've done has done for three and a half years. We're also on a on looking at some longer term index linked contracts, but I think it also is.
Focused on optimizing the earnings of the vessels over both the longer term and if you like short to medium term and so.
I think one of the what are the things that you'll see falling out of how we've been looking at structuring our.
Portfolio of.
Ships in the short term market is that if we did see at full up in rates in the first and second quarter earnings.
Earnings will be much more robust and if you kind of look at it over the period, we think that we've we've done the a fairly good job of making sure that we have that our script bust earnings and again as you look at how would you want to reward your shoulders, having some certainty around how you see the market. How you see the earnings the ship is actually quite a advantageous for.
Yes.
Yes, Okay fair enough I appreciate the color.
Hi, My count your four vessels that are still truly trading in the spot market, excluding the variable rate contracts. So them spot markets. Obviously very tight right. Now can you just maybe talk about the breadth and of opportunities in the time charter market for these vessels I know you've kind of talking about transitioning vessels out of the spot market.
Just given the tightness in the market it seems like a pretty good time to do so you know are you guys. Just maybe we're thinking about hey, the marketing to keep getting tighter and reached interim rates should get better.
Maybe or longer duration kind of what's kind of the strategy there.
Yeah I mean.
Yes, it's really around the liquidity of the market. So we saw a number of term deals we talk about 14 and the third quarter.
This year.
Consequent to the strength of the market I think.
The timing market, especially if it stays tighter for longer does allow you to fix ships for out potentially for longer periods as well so.
Little bit around the earnings, but a lot of it is around duration as well I think you know we as a company have really sort of made money out of our longer term contracts and so our ability to look into rates for longer periods is something that we find attractive and we would like to make sure that we're in a position to tie.
Take advantage of that if and when we see those those opportunities but to be you know two on the other side tend to be fair Chris.
It also depends upon the liquidity in that market, which does come and go.
Depending on the the views of the charters in the strength of the spot market.
And then just following up on that real quick as the recent spot rate inflection led to any sort of increase inquiry for time charters, whether it's a longer duration better rates I remember last year. There were some pretty good time charters signed over the winter have you seen any positive impact here, just given how tight the spot markets got him.
Yes, yes, it does [laughter] without a doubt increase or the.
Interest interest in those and the conversations that we're having around those those opportunities. So yes definitely case.
Thank you appreciate the time.
Thank you.
Thank you. Our next question comes from Ben Nolan with Stifel. You May proceed with your question.
Hey, Thanks, guys.
So I have a couple just a last ones, but the as it relates to sort of the it's well going over to slide number nine where you kind of talk through that you have the cash flows in the liquidity in the financing to be able to fund the do the remainder of the Capex commitments that you have.
Without it appears meeting any dropdowns, how does that make you think about the dropdown cadence or or need and and you. If you know if the glop.
Unit price isn't good enough does that mean postponed or.
Sort of along those same minds does it make you a little bit more available to maybe some vessel swapping ideas, where there might be a steam ship down there that is coming off contract and you don't necessarily need the cash so you can.
Deliver a contracted vessel to them in exchange for steam ship and.
Cash or whatever.
Yeah I think.
The nice thing is it's there's two things I would I would emphasize I think first of all we continue to be in the fortunate position, where MLP is functioning well and does does work for us.
I think it's been.
Active when others haven't done on shown its ability to access different parts of capital. So thats nice, but it's also nice to be in a position where you don't necessarily have to have that happened to be able to fund the newbuilding side just gives us all.
Optionality in terms of.
No.
Blocked doesn't have to go out and raised capital and does not we don't have to drop ship sound, but if that works for both parties and then I think that works very well I think in terms of.
Support if you like anyway to him as GP support for full Globe you know those things that we continue to have discussions around.
It has to work for both the Companys, but are you know, it's it's something that we continue to discuss as I say because you know, it's it's advantageous for us to have a well functioning MLP.
Okay.
Well again sort of shifting gears, a little bit as it relates to the steam ships and this applies also for glop, but but certainly for you guys.
And in this market, where there's multiple tiers of ships and that it appears to be permanent.
Is there anything that you can do you know, adding re liquefaction or something else to really set your steam ships apart so that.
Maybe even if it's not necessarily better rates that you're you're able to sort of out early on in terms of utilization other ships as or I'm. Just curious if there's any levers that can be pool to give you a competitive advantage with it so I'm a little bit older ships.
Yes, there are certain extent, we kind of have that competitive advantage. If you look you know the 50% of the fleet. The steam ships were right at this sort of more modern ending the larger and so.
Quite effective shifts compared specially compared to the sort of first generation steam ships.
We have we haven't continue to look out potential ways to.
Enhance those vessels, but when we do a cost benefit analysis, it doesn't necessarily make sense for as Ben the thing we're focusing on really with those ships are saying, okay. What we need to do is to make sure that we have the the lowest cost if you like in terms of.
Breakevens for those vessels and therefore, you know can be competitive in the market I think as Alex talked about you know, we're really looking at somewhere in the mid thirtys at the moment with those vessels and continue into full so I think thats. How we look we look at those steam vessels at the moment you know just ensuring that we keep the cost base down and part of that has been around the continue.
Our focus we have as a company around our cost initiatives to make sure. We are the company get the opex as low as possible and get the GE and as long as possible while continuing to deliver this very you know I think safe and reliable service to the customers.
Okay, and then and then last one for me. This you Paul you mentioned earlier that you're you're preparing the balance sheet in the event there may be a little bit of a weaker market and the that.
Introduces M&A opportunities, there's not been much traditionally M&A activity outside of individual assets. They are is that something you think will develop I mean again, you read caveat that it's market dependent but.
There has been a number of new owners that have ordered LNG ships that are you know.
Yeah, I don't know as it is that.
Process do you think actually starting now where where there could be some further consolidation any industry and you know a actual M&A activity not just talk about it.
Yeah, I mean, you're absolutely right, Ben there's been very little M&A and consolidation activity historically in the market, but I think you'd also right in pointing to the trend of a you know if you'd like.
Great and number of of owners coming in especially a lot of new orders coming in I think when we saw the last if you like round all new orders coming in a lot of them very very strong financially.
And potentially not necessarily using other people's money to do it as well.
This time around I think it looks a little different I couldn't put my hand them out and say, we definitely going to have more M&A activity, but I think that sort of if you like increased number of players in the market in the way that some of those will be funded et cetera.
My sense is that we'll likely see more M&A activity through the next cycle.
Okay very helpful. Appreciate it thanks Paul.
Thank you.
Thank you and I'm not showing any further questions. At this time I would now like turn the call back over to Paul Wogan for any further remarks.
Oh, Thank you Josh and thank you.
To everyone today for listening and for your continued interesting Gaslog limited we certainly appreciate it and we look forward to speaking to you next quarter in the meantime, if you've got any questions. Please feel free to contact the Investor Relations team. Thank you very much for your time.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
[laughter].