Q3 2019 Earnings Call

2019 earnings Conference call, all participants will be in listen only mode should do you need assistance. Please cignal AI conference specialist by pressing the Starkey followed by zero.

After today's presentation, there will be an opportunity to ask questions.

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Please note this event is being recorded.

I'd like to turn the conference over to stuff in four ride CEO and CFO . Please go ahead.

Thank you Kerry and good morning, ladies and gentlemen, and welcome to hear Gonna do you partner screening cool for the third quarter 2019.

For your convenience.

Webcast presentation are available on our website.

Before we start please take note of the forward looking statements on page two and a glossary on page three.

Now turning to page for the highlights.

I'm pleased to report that all units and that leads to formed according to contract and a 10% availability in the quarter.

This resulted in told the revenues so 36.9 million.

Segment EBITDA of 36.3 million.

The coverage ratio of 1.2 times in the quarter.

The partnership distributed 44 cents per common unit for the quarter.

Equivalent to an annualized distribution of $1.67 cents per common units.

Turning to page five.

Pitching more numbers to the quarter.

Excluding unrealized losses on derivative instruments and foreign exchange segment, EBITDA was 36.3 million in the quarter.

She is in line with the same quarter last year.

Well operating income was 25 point Sixmillion the border, which also is in line with the same quarter last year.

After the said adjustments limited partner interest in adjusted net income was 12.5 million quarter.

Which is down from the same quarter last year.

Mainly due to higher net financial expense and distributions to preferred unitholders.

Based on a different <unk> cash flow 18 million and the distribution of 44 cents per common unit.

The coverage ratio for the quarter was at 1.2 times, which is up from 1.6, sometimes in the same quarter last year.

Turning to page six we're showing the development in key measures over time.

And as you can see from the graph spoke that segment EBITDA adjusted net income and the coverage ratio at back at more normalized levels.

As you will recall the previous quarter was adversely impacted by dry docking and maintenance expenses relating to hook along.

The Arctic survey Oh, let's say years would have to be done every five to seven years.

And this year, both they've been on MPG, an FSRU lot pool were subjected this extensive partnership.

[noise] turning to page seven.

Yes, Joe into income statement in more detail.

Well the revenues of 36.9 million in the quarter is down slightly from the same period last year.

Mainly due to the recognition of revenues in the third quarter last year relating to the reimbursement or prior period expenses.

Vessel operating expenses of 6.6 million in the quarter.

From the same period last year.

Mainly due to maintenance expense relating to PGM assess that you don't.

Connection of it appear Arctic survey.

Equity in earnings of joint venture, So 621000 in the quarter.

It's impacted by unrealized losses on derivative instruments in the joint ventures.

Okay true unrealized gains in the same period last year.

Excluding unrealized gains and losses on derivative instruments.

Equity earnings of junk went just would have been 2.8 million the quarter.

And increased from 1.4 million the same quarter last year.

The improvement is mainly due to lower operating expenses in the quarter.

Well to finance expense of 7.6 million in the quarter is from the same quarter last year.

Mainly due to higher amortization of debt issuance cost and commitment fees this quarter.

Finally preferred unit holders interesting that income all 3.4 million ended the quarter.

He is up from the same quarter last year due to a higher number preferred units in issue.

During the quarter the partnership graced approximately 8.6 million net proceeds under the ATM ATM program.

Issuing preferred units only.

Turning to page eight.

And the balance sheet has not changed much since year end 2018.

The total liabilities liquid understanding just over 1 billion at the end report.

The only thing I would like to mention is that in addition to 32 million in cash cash equivalents.

The partnership had approximately 91 million an undrawn amounts under the two revolving credit facilities at the end of the quarter.

Taking total equated to approximately 123 media.

Turning to page nine.

We are showing the partnership's <unk> thermal of modern assets, which have an average remaining contract length of approximately 10 years.

As already mentioned all units operating according to contract during the quarter.

Sitting claims that three continents in let's say, you and LNG carrier mode.

In regard to hook I got on the partnership will exercise the option to lease the unit back to her goninety.

For appear to five years from April 2020, and less attractive long term employment is available.

If you will recall the leaseback auction was granted the partnership in connection with the acquisition of belong back in 2015.

Activities during his tenure plumbing horizon for the unit at that point in time.

Turning to page 10, and the business development activity at Duke energy level.

As already reported.

Google and he has been selected STFC you provider.

And or it's an exclusive negotiation for three potential FSRU projects.

Two of which are located in Australia, and one in South Asia.

Well the AG project in Australia in time charter negotiations between whose LNG and declined is making progress.

Any parallel decline is seeking concept for high input capacity did you increased demand from investors from some customers sorry.

Well the gel project in Australia, the agreement between vigilant GE and decline has already been side.

And decline is now in the process of seeking the environmental permit for the project.

Yeah. So your project number three mentioned on this slide is located in South Asia, and he's with an energy major.

It's in the process of seeking permits and off take agreements.

All three projects mentioned are subject to final investment decision as mentioned previously.

Furthermore.

Good idea is involved in official tend to process. It's for two additional gone true FSRU projects. So 10 years some more.

At whether award it's expected to take place sometime in 2020 .

And it's also involved in several other early stage processes around the walls.

Turning to page 11.

We are showing the projected development in the energy supply mix through 2050.

50.

Taken from Dnbi is report from September this year.

The trend and this illustration is clear.

Namely a de carbonization of the energy mix.

Which is shown by the substantial growth in renewable sources of energy and the kids ahead.

Illustration further shows that natural gas is expected to play an important role, making the transition happened.

And this is important because it represents opportunities for whom LNG and the partnership.

Especially you solution is a cost efficient way of opening up new markets to disappoint, LNG and thereby facilitating a quickie translates into more sustainable energy mix.

When natural gas is serving us back up for renewable sources of energy.

In certain markets for renewable sources of energy is less available.

Turning to page 12, ER and the LNG supply, we are showing that the strong build out in new liquefaction capacity.

Continues.

With record high liquefaction volume's sanction so far in 2019.

A trend that is expected to continue.

Into next year.

This is expected to bring the Andrew liquefaction capacity up to approximately 470 million tons by 20 to 25.

An increase of approximately 40% from 2018.

And it's important to remember that this supply growth is coming from capacity that has been decided.

It's under construction.

So with this backdrop on the supply side, how is that LNG demand side reacting.

Turning to page 13.

We are showing the monthly development in global LNG trade.

And as you can see the growth in demand continues.

Year to date, the global trading LNG is 15% compared to the same period last year.

35 million tons, which is a high number.

The interesting part of this development is that good man growth from Europe is so strong year to date.

Great into Europe result, 97% compared to the same period last year.

Equivalent to approximately 31 million times.

Why is that well, it's mainly due to the availability of input capacity into Europe .

But also because demand from Maine Asian markets, that's Japan.

In Taiwan, and South Korea has been soft impacting LNG prices.

At the same time, we see continued strong growth from the Chinese markets, where the growth year to date year to date is around 19% equivalent to approximately 7 million to us.

The this less than what we saw last year, but still represents a solid growth.

The overall situation of the market is that it is the market is long LNG.

When prices are there for expected to remain competitive.

This means that demand for LNG from new markets is expected to continue to be strong.

Driven by environmental and cost arguments, which is good for if it's a huge amount.

So how is then FSC you demand looking.

Turning to page 14.

On the less left hand side of this slide we are showing the development in FSRU contract awards year by year.

Over the last decade also.

As you can see the number of awards peaked in 2018 at 10.

If it's.

This concludes project subject to if I'd and projects, where FSRU negotiations are exclusive.

So far this year there has been three awards.

Well the rights outside we have listed the potential efforts are your project pipeline by region.

As you can see a major portion of this is located in Asia, and middle East, but mainly in Asia.

That is also the region, where Hogan and he currently is focusing its activities now where the business development of its both in China in Singapore.

The potential project pipeline is based on information from.

External sources, where curricula GE has removed mutually exclusive projects.

However, it's worth mentioning that project have varying likelihood of realization and no time constraints anymore.

Nevertheless, the list of potential FSRU project is substantial.

And with that spectral let's turn to page 15.

Andy if that's a U sleep.

At this page we are showing an overview of the.

Current FSRU fleets and the employment status of this.

And as you can see the fleet count 35 units.

Which 26 operating under FSRU contracts.

The order book comprise eight assets series for delivery through 2022, and as far as two LNG can see five of these.

Connected and long term FSC contracts.

That should leave 12 units that available for FSRU employment.

Because the long list of potential FSRU projects identified.

Driven by environment, then and cost arguments.

That's true LNG skew that yes, that's a huge supply demand situation will balances as new projects make if I'd.

And over time potentially move into a short position.

And with that I would like to turn to page 16.

For a summary.

And open up to.

Questions from the from the audience.

We will now begin the question and answer session to ask a question even press Star then one on your telephone keypad, if you're using speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to at this time, we will pause momentarily to assemble our roster.

The first question will come from Chris Wetherbee City.

Hey, great. Thanks, Good morning, I guess I wanted to start on slide 10, where your run through some new potential projects there I guess.

You have the schedule started updates there, which we appreciate I guess could you give us a little bit of seven so maybe the timeline between now and when those scheduled start ups or expected.

To understand maybe what the benchmarks, we should be looking for between now and to get us sort of grow confidence that they're beginning to kind of come through and.

You guys will be able to potentially participate in though so I guess anything that you can kind of help us in terms of realistic timing is there. Some point 2020 that maybe there's better indication of how these are developing that would be very helpful.

No I first.

For the are you project and the schedule startup.

It's 2021, that's the show's Skechers startup line by the project I.

I think this is the project that is already has the permits but it is in the process of modifying that and so when that's modified approval is obtained I guess, that's it's a data point.

We also this is also a project that and what we are in discussions and former liking the the it TCP. So why would that is completed that would also be.

Data points so.

I think it's fair to say that these projects it's the its the.

The progress on the modification, albeit the treatment that will be a data points.

And also reports from the client on securing the the offtake from from this project.

Well the HL.

Don't take their basic secured as such but there I think keep the progress in obtaining the.

Environmental impact and the states that process it will be a data point.

We have already signed the TCP. There. So this is it. This is for then the for the project you obtain the necessary permits.

And I think you should expect to see good progress on on both.

Both projects are you know by mid next year sometime.

Each project has a schedule startup then as we stayed here in a 2022.

No one else.

So so I think that's the kind of the.

I think projects also will will issue information that's that May progress both on the environmental Andy and Offtake site for these projects.

Okay. No that's very helpful. I appreciate that and.

You know assuming sort of a normal course, where the parent would potentially participate again, the sort of the business development for those new projects and then there could theoretically be a dropdown.

Candidates identified by the partnership at some point and the future I guess, it's been a while since we bought a little bit about that so could you sort of give us it sounds and how you might think about sort of the funding of any potential dropdowns you know willingness for incremental debt capacity. How do you think about sort of you know the equity valuation as it stands right now just want to get a rough sense. How you guys your thing.

Going about potential funding I know, it's early but just sort of structurally or or conceptually would be helpful.

Yes.

First of all I think on all the next couple of.

Drop Downs you were probably this year.

Likely high leverage following the S is from the parents on that debt to EBITDA basis, then and you have seen in the past that means that there is you know starting part there is less.

Equity needed for.

For the next few dropdowns than what we have seen in the past.

I think the the plan would be too for the partnership to raise equity and <unk> for the equity portion.

And then.

And we could access both the common and preferred equity market hopefully at that point in time.

But it would have to be equity Adnan butt.

But I think well.

Further considerations that round, which markets to approach, we would have to make closer to the.

Good transaction, and where would that see where how the various instruments are priced.

Again again to big picture.

It's like anymore.

Leverage from the assets, which means that it's less equity needed then what like we have seen in the past.

Okay. That's very helpful. I appreciate the time, thank you very much.

HM.

The next question will come from Greg Lewis with B T G.

Yes, Thank you and good afternoon.

I guess I just had you know just following up kind of on that thought.

You know it as you look at your preferred so I mean right now they are yielding 6% <unk> as you look at the common equity Amit it's definitely been a tough couple of months here for for MLP is the yield is now it at over 12% it looks like.

On the equity so on the equity side.

How should we be thinking about.

Cash flow and I mean should we be thinking about buybacks here I'm, just trying to get a better understanding of capital allocation and when we when we try to balance the ability to adapt to drop down assets and grow the fleet versus.

You know potentially buying back some stock.

Yeah, I think yeah.

As a good question.

I think yeah.

I think that's the main source so for allocation of the capital. We have is it's likely to be be used for a gross I believe.

There's obviously at a point in time, where we would consider using it more for four maybe for buying back, but so far at least we have for sure.

No capital for growth purposes.

And that but we are continuously evaluating a fair you know if we should use any fines for other purposes, but at the moment. We have we have not taken any actually in that direction and and I think as a starting point at least as I said.

With the plan is to to use.

Right to use the capital available for growth purposes.

Okay, Great and then just probably on a little bit I guess easier you know as we think about the total FSRU fleet FSRU fleet, Yes, I mean about two thirds of the fleet ISC is committed to you know traditional FSRU work all the units that are not.

Operating as FSR use or or any of those on multiyear contracts that that potentially keep them out of the market in bidding on some of this work that you know looks like it's gonna be.

Bid on in 2000 over the next few quarters.

Are those vessels all pretty much all just trading spot I guess is my answer.

No that's well some trading spot, but we forgot you had some of them and they are medium term contracts. So so what we have done, but what who get idea has done is to enter into between one and a three year.

One than a two year contract incarrier remote.

So I think it's a mixture of.

Medium term.

And spot contracts Uh huh.

And I'm, sorry, I was thinking more beyond beyond what's inside owed I mean like is it do we have like any kind of.

You into the competitive landscape in terms of you know the non Hogan FSRU, Okay yep okay.

Okay. So so they they are I.

I think there might be one that's either but the rest is on one short to medium term LNG carrier contracts. So so as far as we know none of them all and long term carry contract its spot to medium term a LNG.

Contracts for.

All of those those units, except maybe one that's that's idle.

Okay perfect. Thank you very much.

Yep.

The next question will come from Ben Nolan Stifel.

Hi, good morning.

I I wanted to follow up a little bit on they go on which obviously comes off contract with Egypt.

And.

You said you've exercise your option.

With H. LNG, just just curious as you as you look forward it.

Obviously, h. LNG, we'd be trying to go out in fine.

Alternative employment on that but is in your view is there any is there any way that.

At 90% number.

Never deviates from being 90% without a subsequent contract on the back into sort of make up for it.

Hi, Hi, Ben I'm, no I I see a.

Let's see either it's it's a.

Executed as its.

At War.

It's a employed on let's turn to employment I think from the partnership perspective, we have the five year.

No option to listen to the path to five years and its then they alternative would then be.

Let's turn to long term employment.

But I can see rights that we exercise this and then that the latest states. We then converted from from a time charter contract for the pair and to a time charter contract that third party.

But in terms so our relationship with the parents.

I kind of what do you foresee 90% of the current rate and nothing else than that.

Okay, and if let's say the parent we're able to go to alternative employment, but it was.

Perhaps below that 90% threshold you could maintain your contract with the parent.

You know they just make up the different.

Yeah, I mean the situation then.

It would be that we listen to the parent than the apparent but then employed in the entry markets, maybe yes carrier and then it's likely that it different will you know.

Right and lesser amount that they are paying the partnership.

Because the rates that you can earn in every market at the moment is less than 90%.

The current rates.

Right well in that sort of gets me to my next question, which is.

Based on the tenders and some of the the.

Work, that's being done primarily the parents, who get contracts long term contracts as fs or use a on the vessels.

Can you maybe guide as to sort of at least maybe give a range as to where the market is.

Relative to maybe the carrier fleet for long term business.

What kind of a premium is available for an FSRU relative to.

Two carriers.

<unk>.

Yes, it's a.

What we have seen as you know over the last.

Yes, the rating the FSRU market has been declining due to the competition.

But it's a it's still above or you know the long term.

Carrier rates.

We <unk>.

We expect that we have a you know hit the.

The low claimed in the in this high school and that we going forward there was he.

Increasing yeah FSRU race.

Much.

And Oh, it's difficult to say, how much premium we will get but.

You know it is more expensive.

Vessel that a carrier.

So we are getting premiums today compared to the.

Carry right and we expect that to treat increase going forward.

As the FSRU market is getting more imbalance.

Okay. So if maybe if let's say NFS or use F 30% more expensive than a carrier can you capture that 30%.

Premium and cash flows do you think or it's it's somewhat below that.

Well I think we were not doing that today, we're not doing that today.

But I think yeah longer term, we which should be able to do that okay. Perfect and then lastly, just for me.

As it relates broadly speaking to the FSRU market.

You mentioned in the slides that last year 2018.

The big year in terms of EPS are you awards.

It's it's been Threed, thus far this year, but there's a very big backlog give any sense just from your conversations with clients and those being done at the parent.

Yeah, if the cadence of contracts if we're if we're reaching some sort of a tipping point or something such that.

There might be a.

A lot of activity in the near term or is this in your view just going to be a little bit more staggered and spread out maybe than it was last year.

Well you know a lot of PV projects, we're working on we have been working on for quite some time <unk> I think Barry I think.

Yeah, we think there's a lot of things got to happen next year and projects that.

Where there has been activity for some time and project that has come to market. So I think we are.

We are positive to two at high level of activity.

Next year.

But I don't want to predict by giving numbers.

So where it's difficult things takes time, but we are certainly positive that there will be a good progress on an existing and and.

And you projects.

Going into 2020 .

Okay. That's it I guess another way of saying it feels like the pace of activity is speeding or it's not materially different than ones I don't know three six months ago.

No I think yeah. Good progress is being made there is a there's not a material change in activity. It's it's high it's good.

And so and we have have good hopes for four F.I.D.'s being made a several F.I.D.'s being made also to Hagen undies advantage in 2020.

Sure.

All right well I appreciate the time thanks.

Thank you.

The next question will come from Liam Burke with B. Riley FBR.

Thank you good morning Stephan.

Good morning.

I think we're talking about this will pass your existing projects require redundant capacity.

If I look at existing projects is there any need or demand to increase capacity, where you could probably two could generate some more operating cash out of the projects that are currently up and running.

Yeah, I think the a there is potential for you know increased activity relating to the existing feet, but that would to a large extent beat to the benefit of our client.

Okay Fine kids make agreements bid small scale operators.

To use.

Our fleets to provide services in that respect.

No.

We might have to change slightly our commercial agreement without client then but that would only represents.

Marginal I think increases in revenues on the pet partnerships hat.

So I think.

The upside relating to providing.

[noise] incremental services relating to.

Small scale activities for instance at least for the currently it is it's more at the end of the of our client but.

And only traded lesser extent two to two our benefits, but we could see.

Small changes small improvements in earnings.

Great. Thank you Sir.

And this concludes our question and answer session I would now like to turn the conference back over to stuff in four IDE for any closing remarks.

Well that I would like to thank everyone for for dialing in for asking questions or and if there's any follow up questions don't hesitate to contact us many thanks.

Thank you. The conference is now concluded. Thank you all for attending today's presentation. You may now disconnect your lines have a great day.