Q1 2021 Teekay LNG Partners LP Earnings Call
Okay.
Welcome to the Teekay LNG partners first quarter 2021 earnings results conference call. During the call all participants will be in a listen only mode. Afterwards, you will be invited to participate in a question and answer session at that time. If you would if you have a question participants.
Will be asked to press Star one to register for a question for assistance during the call. Please press Star zero on your Touchtone phone as a reminder, this call is being recorded now for opening remarks, and introductions I would like to turn the call over to the company. Please go ahead.
Before Mark begins I would like to direct all participants to our website at www Dot Teekay LNG.
<unk> com, where you'll find a copy of the first quarter of 2020. One earnings presentation. We will review this presentation during today's conference call.
Please allow me to remind you that our discussion today contains forward looking statements actual results may differ materially from results projected by those forward looking statements additional information concerning factors that could cause actual results to materially differ from those in the forward looking statements is contained in the first quarter of 2021 earnings release and earnings presentation available on our website.
I will now turn the call over to Mark Kremen, Teekay gas group's president and CEO to begin.
Thank you Scott.
Good morning, everyone and thank you for joining us on our first quarter earnings conference call for Teekay LNG partners.
Hope that you and your families are all safe and healthy.
I'm joined today by Scott Gayton, Teekay gas group's CFO.
Before getting into our results, we will take a moment to thank all our staff for their continued dedication to maintain business continuity during the COVID-19 global pandemic.
We're especially proud on how our seafarers and dry dock supervisors have continued to respond to ongoing restrictions, while maintaining consistently safe and efficient operations.
Turning to slide three of the presentation.
We will review some of Teekay Lng's recent highlights.
The first quarter of 2021 was another solid quarter for us generating adjusted net income of $65 million million dollars or <unk> 61 per unit, just slightly higher than last quarter's results and higher than the same quarter one year ago.
In March and April we secured charters for three of our LNG carriers as we will detail on the next two slides.
Overall, we are now 98% fixed for the remainder of 2021 and 89% fixed for 2022.
Currently LNG shipping markets are enjoying counter seasonal strength for numerous reasons, but primarily due to fundamental demand.
Gives us confidence that this strength should continue.
Importantly, we are still months away from the lead up to the winter seasonal demand period that has caused upward momentum and volatility in LNG LNG shipping rates in previous years.
Later in today's presentation, we will take a moment to highlight the long term strength expected for natural gas and more importantly LNG.
It's well noted trend has been already happened for many years and we expect continued strength for multiple decades as the world is transitioning to a more sustainable energy mix.
Before moving on there are few other teekay LNG highlights to note.
First.
Ggp's distribution increased this quarter by 15% to $1 15 per unit.
Per year.
Announced on last quarter's earnings call.
This marks the third annual consecutive double digit increase to our distributions and reflects the continuation of the balance capital allocation approach, we have implemented for Teekay LNG over the past few years.
Second.
We refinanced the tango LNG joint ventures $190 million debt facility.
Advantage of strong demand from the lending markets and lower base rates to reduce the overall cost of this financing from approximately 6% to just under 3%.
The lower cost to service this new debt facility will contribute to higher earnings going forward.
Over the past year, we've reduced our total proportionate net debt by over $200 million and this delevering along with lower base rates has helped to reduce our total proportional interest expense by over $9 million year on year.
Finally, and perhaps most importantly, we continue to operate COVID-19 free across our fleet.
To date, we have not had a COVID-19 case on board any of our vessels and this is contributing to our high uptime and ability to service our customers.
We continue to follow strict safety protocols and we are proud of the diligence diligence shown by our seafarers to keep everyone on board safe.
We now look to slides four and five.
With summarized Teekay Lng's long term contract coverage, which we believe sets us apart in our space.
As mentioned in the highlights our LNG fleet is now 98% fixed for the rest of 2021 and 89% fixed for 2022, thanks to great work by our commercial team to adapt to a rapidly evolving market.
As shown on slide four the charter of the 52% owned or with spirit.
Recently exercised their option to extend by one year to May 2022, adding to our industry, leading 8.8 billion dollar forward revenue book and $6 3 billion.
Dollars or total forward adjusted EBITDA.
Moving to slide five.
The Creole spirit completed its five year charter in late February and immediately preceded to its scheduled five year dry docking.
Our commercial team was able to secure a floating rate chart, which ensures 100% utilization, while retaining potential upside to an improving spot market, which is actually what we've been seeing recently on a counter seasonal basis, because we will detail in a moment.
Finally, as the term market continued to strengthen in late March and into April we were able to secure a forward starting fixed street charter for the Oak Spirit, which is scheduled to complete its current charter and five year dry dock later in the third quarter of this year.
It's unusual to secure charters five or six months advance, which speaks to the current strength in the spot and term markets.
Turning to slide six.
We have witnessed a substantial rise in spot and term LNG shipping rates over the past few months, which continued to demonstrate counter seasonal strength as shown in the graph at the top left of this slide.
Although recent spot LNG shipping rates moderated from the seasonal Spike last winter is the Red line shows.
It began to increase again in March and remained elevated compared to the rates experienced during the previous four years.
The spot risk spotless spot based charter of the Creole Spirit, which commenced mid March was well time for us to benefit from a strengthening spot market.
This recent spot market strengthening has also had a positive impact on the one year time charter rate as can be seen in the graph at the top right of the slide which is different from the previous winter spike where spot rates increased significantly while the term charter market stayed muted.
We were able to take advantage of this increased demand from term charters by securing the one year charter on the yolk spirit nearly six months ahead of the actual charter commencement date.
There are many factors supporting this recent accounts with seasonal strength in LNG shipping spot and term charter rates, including the rebound in global gas demand with the easing of COVID-19 restrictions in many parts of the world.
Growth in LNG trade as export projects are starting up.
An increase in ton mile demand as long haul U S exports are being directed to Asia.
And the impact of stronger Asian, LNG pricing contango.
Increased global demand and a colder spring in Europe had contributed to a drawdown in European inventories to levels well before that of the last couple of years as seen in red on the bottom right on the slide.
This dynamic has led to increased demand for LNG carriers to rebuild inventories ahead of the summer when LNG prices have historically been higher.
Only time will tell if these positive demand dynamics are enough to fully offset the elevated vessel deliveries in 2020 one.
But LNG carrier Newbuild deliveries in 'twenty two.
<unk> are expected to be less than half of this years, which gives us confidence that much of this strength should be maintained.
Turning to slide seven.
We will touch on some of the longer term dynamics, which give us confidence that demand for natural gas and LNG in particular will continue to grow meaningfully over the next two decades.
According to the forecast provided by shell at the top left of slide.
Global gas demand is expected to grow by over 40% over the next 20 years outpacing all other energy sources.
As this chart indicates renewables are expected to grow by 33% during the forecast period, and we will make up a sizable share of the growth in LNG demand by 2040.
However, gas is expected to grow by even more in part because it can function as a reliable backup to renewables, which can be interpreted.
As we reviewed with you last quarter during the same period coal demand is expected to decline as it is replaced by cleaner burning fuel sources such as gas.
The operating opportunity to displace coal is massive.
For example, Japan currently uses coal for 30% of their power generation needs.
Korea is up to 40%.
And China is over 50 at.
At Teekay LNG, we are excited to be part of this transition to a cleaner future.
Looking at the chart on the top right.
LNG demand growth is expected to outpace gas by almost two to one between 2020 in 2040.
Gas transported is LNG is more flexible for the buyer and.
And really the only solution that addresses gas supply security and diversification issues.
As such a larger percentage of natural gas is expected to be transporting seaborne in the future.
Looking at the bottom of the slide.
Global imports of LNG are expected to nearly double by 2040, reaching 700 million tons per year.
This will be mainly driven by demand from other Asia depicted here in Red, which is primarily made up of China, India and other South Asian countries, which are expected to increasingly transition to LNG as a feedstock for power generation and industrial processes.
We bridge to a cleaner future.
We will walk through this on the next slide.
Turning to slide eight.
Our final flights a day, we have summarized the main uses of natural gas today and how each is protect projected to grow over the next 20 years.
Power generation is expected to grow the most at 35% of overall growth.
As we said earlier gas as a fuel for power generation is expected to grow as it displaces. The many dirty coal fired plants still in operation and even continuing to be built today.
Due to its reliability and flexibility gas will also serve as a complement to the growth in renewables as a power source.
In addition gas is expected to continue growing as a fuel for both industrial processes and in residential and commercial heating, particularly in China, India and other countries that are seeking to reduce air pollution from energy intensive industries.
With many countries now having adopted net zero emission policies gas must increase as a share of the energy mix.
Colby to decrease for these targets to be achieved.
The other main sector, which we see a growing use of natural gas is transportation.
For Teekay LNG. This is nothing new given that we've given.
Given that nearly all of our ships RB burn LNG as fuel.
However, it is encouraging that many other types of recently ordered vessels, including container ships and oil tankers are being constructed and converted to burn LNG.
We think this trend will only continue as our industry moves toward more stringent environmental regulations.
Wrapping up.
We have been actively taking advantage of the strengthening market to benefit all our shareholders.
We're glad to see that vaccines have been rolled out at a good pace in many countries around the world and net positive knock on effect of higher demand for natural gas has translated into higher demand for LNG transportation services.
However, we acknowledge we're not out of the woods, yet with COVID-19, especially in countries like India, which had been grappling with devastating third wave the virus and we will continue to be vigilant to ensure the continued health and safety of our crews and partners around the world.
Looking ahead <unk> unique portfolio of long term fixed price contracts position us positions us to.
Can you to generate consistent cash flows further reduce our leverage and return capital to our shareholders.
The unique tail winds in the global LNG industry provide a strong outlook for our business in 2021 and beyond and we believe the steps we are taking today to further strengthen our financial foundation position us well for the future.
Thanks for your time today, operator, we are now available to take questions.
Thank you Sir.
Our first question comes from Randy Gibbons Jefferies.
Okay.
Howdy gentlemen, how's it going.
Hi, Randy.
Hey, I guess first question just looking at the distribution growing it to a $1 15.
Was there some kind of a formula involved the methodology there and then just thinking about the distribution going forward is it contingent on further charters further growth like how should we think about growth trajectory from here.
Randy I'm glad you asked that question because I'm Scott got out of prepared remarks today, So Scott I'm going to hand, it over to you.
There you go.
[laughter] chief Thanks, a lot Mark.
Yeah, Randy it was.
We said on the prepared remarks, our third year of <unk>.
Double digit increases the first ones, we're off of a pretty low base and as we start to get up the percentages are just going to decrease due to the laws are bigger numbers.
I think really we look at a lot of things given the fixed rate nature of the business I wouldn't say, they're just contingent on.
Certain charters, we have so few rollovers that we have such a stable business debt.
That one or two are rollovers is really not going to change things I think it just has to do with that balance capital allocation plan that mark talked about earlier and I know we're going on.
Bang on that triumph for the last couple of years, but it really does we just look at what else is available what other uses of capital that we have.
And what do we think is a reasonable return and importantly for US we look at our payout on a percentage up.
Net income.
As well as cash flow generated not on it you know on DCF basis kind of views on the older MLP.
Economic so I know, it's not much of an answer, but we try and put a whole bunch of things in and figure out what is a return that we think is reasonable and we really don't want to set ourselves apart from other other LNG companies as well as other mlps and really other other companies out there that we can look back and say that we've been able to increase it.
A reasonable return over the last number of years and then people start to count on that and I think that's will add new ships, maybe we add cash flow over the next number of years here that will provide incremental growth for us to be able to.
Increase our payouts as well so there's a lot of things we deal in and hopefully that bind on answered or is that start off for you.
Satisfactory yeah, yeah, there's the one sitting feels right. That's fair and then I guess second question, just looking at debt capital allocation and growth clearly theres a lot of scuttle in the markets cutter with all the all the tenders theyre going apparently there were 37 shipping companies that put in tenders for them.
Net how active are you all in maybe that deal or other deals.
Participating in growth that way.
Yes, Randy we have expressed interest in that that tender as you say there are a lot of ship owners and fighting I think ultimately, we'll see a fair amount of those ship owners.
Perhaps joining or bidding as the sore shoots.
So the actual number of bidders might be less in those invited and I'm not sure that even all invited will day, so it'll certainly be more.
Selective I think.
Then what you've said that the tender in particular areas is an interesting one in debt.
Landed cost is almost unbeatable, which had planned LNG should land around $5.
And that's after if we understand things correctly.
Carbon in the.
I really carbon conscious price process.
The carbon capture and sequestration of the project looks good.
And then I guess the third thing that's interesting about that project.
Not only with their their.
They are buying power, but also their timing it looks like the qataris have reserved slots setup at.
At a decent price and so if they do know baked those two successful bidders that debt debt.
Debt price side.
It should reflect reduced residual risk for the for the owners. So yes, it's something we expressed interest in.
But the bids wont be for a couple of months.
Got it makes sense, so that's pretty much it from me great job Steadying the ship after craziness last year and good to see the stock price on strong. So thanks again.
Thank you.
Our next question comes from Ben Nolan Stifel.
Great I've got a few.
First of all real quick just on the charters I'm curious if you.
Can you maybe give a little bit of context, I know you don't give specific numbers, but on the fixed rate contracts.
Any sense of sort of what is an appropriate range at least for where those might be but also especially for the Maggie battle.
Uh huh.
Any any ability to cool that you're able to charter them in advance of that re delivery, but any ability or what's the appetite of the market to do anything longer duration than that or was it from your choice to keep it short.
Yes, just kind of from speaking to the <unk>.
As per our rate indications, we have another analysts you may have seen US report. This morning that he said that T. T. T. G. P did not disclose the rate there.
The prevailing rates in April suggest the rate of at least $60000 a day and he's definitely he's definitely right in terms of what the.
The rate should be at least so that's on the on net on the term market. We we.
We didn't see longer if you're talking about longer term anyway in terms of if you were thinking five or more years, then that wasn't something that we saw available to us right now I'm not sure we wouldn't be necessarily wanted it.
Our view Hasnt changed much in that 'twenty, one 'twenty two should be meaner years, but when you start to get into COVID-19 recovery for sure startup re startups in 'twenty three 'twenty four 'twenty five.
Visit rebalanced market, so I'm not sure if we would've gone longer even if we had seen opportunities to go longer on on the ship at this point.
Okay.
And.
For I guess from my next question.
If its okay ive two more so my next question sort of on the macro side.
There there is a lot of things that have to happen even this week.
Chevron turning on became our field in the Mediterranean like obviously reduces gas flow to Israel and Jordan in the other areas there.
Curious if you think that that's a big deal from an LNG perspective, and then.
Probably even a bigger deal would be the the Sino Aussie.
Relations on the threat of potentially the Chinese not buying Australian LNG curious if that happens what do you think it looks like from an LNG shipping perspective.
Even down too.
A lot of the lot of the shifts that may move.
Argo from Australia to China are tend to be the little bit older ships, and I assume you'd need bigger more efficient ships I believe.
If you are coming from further away, but any color just sort of on.
What's happening right now I mean, how high.
And how much of that is.
Maybe already reflected in sort of what we're seeing in the market.
Yeah, maybe maybe I'll touch on sort of a last question, which comes into this one you asked about the fixed rate on and you were alluding to the the Oak Spirit. We also have a a spotty right on spot rate charter on the creel.
And if we look at the Baltic forward curves as of last night.
Have basically $60000 or so in an upwards in Q2 that goes into the Seventy's in Q3 and Q4.
The bulk Baltic.
Our forecast is in over $100000 a day.
The reason I bring this up number one will give you an indication of what we might get on the spot rate, but more to your question about what's impacting this is as of last night, how is LNG being affected.
I think we're not we're still seeing something that has both physically and cyclically.
Good year, despite all the COVID-19 if we look at to your question about Australia in general and specifically I should say.
My understanding that you need to do more research on this but it looks to be only.
Affecting two small importers in China, which China's indicated that these guys should hold back a little bit on their exports out of Australia, I must say that if it affects them or others. That's not bad news for LNG at all what that is is a short term trade.
I should say a short haul trade and we are we get far more rate uptick and you set of vessels on a longer tree. If it does turn out and again, it's at this point a machine only potentially two small importers in China. If it does turn out to be something larger and I think China imports about 30% of their day.
LNG from Australia at this point, we would be seen much longer ton miles, presumably from wherever else, they're going to get that LNG from and so I think it could be a positive but I'm not we're not betting on it.
Okay.
And then last from me and then I'll get back in the queue items when I'm Overstaying My welcome but.
You may have heard in the.
The Gaslog conference call one of the things that they brought up.
Related, but they're seeing power chips, which are.
The new regulations that aren't haven't been signed off on yet, but the E side on the carbon intensity stuff and that that those may have detrimental impacts on a useful lives on the residual values of their steam powered ships potentially you guys also have steam powered ships curious.
If you have any thoughts on that or if that's something that.
You know it is would be meaningful or material at all to your business.
Sure so.
The first thing we have to see that the parties will reconvene next month and what's been happening. So far is that the industry is sort of on the E side. The operational aspect of this it taking a broad brush and I think when we D D.
Delegates mitigating June perhaps youll see a carve out for LNG and the reason I say this because we have a certain amount of boil off gas on shifts and net.
The slowdown you can slow down that's fine, but at some point, you're just going to bust debt and burn net LNG without using it for fuel. So I think when you take a tighter look in June perhaps the LNG space will get a some type of event sooner dispensation from starting 2023.
Anything postini below boil off or service peak rate boil off gas rates I should say so that's one thing when you look at all of our contracts currently at least.
The the slow steaming net might be requested.
<unk> body charter is not going to be for our accounts. So we're really only looking at potentially if there is not a carve out it would be the residual after the E charters roll off and I think it's going to be relatively insignificant for us getting the debt.
Fixed portfolio, we still have on our steam frankly.
Okay, great well like I said out I'll get back into queue, but I. Appreciate you taking the questions. So far.
Our next question comes from Chris Tsung Webber research.
Hey, Mark Hey, Scott how are you guys.
Hi, Chris.
Hey.
On it to just kind of ask if you can expand just a little bit more on the extension for the our spirit is this at the same rate when the charter was originally Pittsburgh slightly above below or.
Provide a little color there.
Yeah. My recollection is just slightly above where we were before.
Okay cool and second neat.
Noticing your sustainability report there was a mention of installing liquefaction systems for vessels with.
With the goal of helping improve efficiency per policy is kind of.
Yeah, I guess, a little bit related to the previous question and I kind of wanted to ask you is there like a cat.
Capex number that you're willing to share for this program is.
And also the timing of this rollout because.
Based on that chart. It seems like you guys are just a bit away from the <unk> 2030.
Oh I target.
Kind of on cash.
Could you touch on debt.
Yeah, we do have a capital upgrade program going on right now. It's basically just started we have from while we're doing scheduled dry dockings.
We're upgrading some of our ships on the first one is from your ex which is drydocking right now, it's reflecting a little bit, but why you might see a slightly a slight dip in earnings next week.
Next quarter because of the the dry docking, but we are where we're improving the re liquefaction.
On on some certain of our vessels and this will occur both this year and next year on the schedule Drydocking.
Dates I don't know Scott, whether what we've disclosed in terms of capital sorry Capex.
The figures yet.
We've got a roughly $60 million is what we're assuming for the capex upgrades on those vessels and importantly from the shipyard, we actually did receive a warranty payment of around 45 million. So it's about a 15 million net to us and we recognize and receive that 45, I think a year year and a half ago.
And just go on for those Capex upgrades now so like Mark said we are.
We do expect to get through that over the next number of months here and then those ships on being.
Some of the most efficient with our fleet.
Great Alright. Thanks, that's it from me thanks, guys.
Thank you.
Our next question comes from Liam Burke of B Riley.
Yes. Thank you good afternoon.
When you look at the fleet is there any thought as to with asset values continue to rise to sell assets into the strength or do you want to continue to drive the cash flows entirely through a longer term charters.
We're always interested in we look at acquisition and divestment. We're open to both things, we're not married to any steel frankly, but the.
Where do you really not maybe not unique but a good situation debt our asset prices are very often times.
Correlated to long term charters, so you might see the steam ship going down in price or are on.
Some other type of vessel type going up the bottom line is we have roughly 10 years of contract behind me. So we're not really asset players. So much in terms of the divestment unless someone wants to pay for the backlog on the contract backlog, which makes up much of tgt's value. So yes, we would.
Look at that it's great that debt values would be increasing.
But there's still contract value on on most of our ships, which is it's more dear to us.
Great. Thank you.
Yes.
Our next question comes from Ben Nolan Stifel.
I thought I'd get back.
So I actually I have a couple more believe it or not.
I wanted to ask a little bit about.
On the on the capital side, maybe for you Scott first of all.
You talked a little bit about her.
It was talked about may be participating in the pits are.
Tenders and I assume that you're sort of gradually looking at other things but.
With respect to the debt repayment, you know $200 million last year.
What how do you think about as sort of the right cadence, what's the what's the right amount of debt and sort of when you begin to mix in <unk>.
Growth that we should think about just sort of debt the debt balance going down on a go forward basis.
Yeah, we are going to continue to Delever and most of what we would delever with does that suggest.
Mandated amortization payments.
Have a little bit around the edges that we can maybe put on too.
Paying down some of our revolver. So if we had had excess cash or maybe not renewing them.
On a one of our bonds that mature for maybe the same dollar value you want or not renewing at all so we can we can manage that absolute value of debt a little bit but the majority of it is.
It's just mandatory amortization and then I think looking out to some of the growth that mark talked about earlier, that's going to be deliberate again in 'twenty four 'twenty five I think that that delay helps us.
Because we will continue to delever through that regular amortization as I talked about the absolute dollar value of debt will continue to decrease.
And also on leverage basis, whether it's on our capital on a.
On an EBITDA basis to the point, where we would be adding in debt and then obviously the cash flow at a point when we had continued to delever and really built up a fair amount of flexibility I'd say just to put it in context. If there was an asset that place if we're tendering today for a ship that delivers tomorrow.
And we still were out a leverage target that was above what we want it to be I'd say that would be a significantly different and probably tougher discussion that we would have to have compared to something that will deliver in a few years' time. Once we have built up that flexibility through about delevering.
Okay. So.
Put that all in our numbers.
200, maybe $2 50, a year is sort of the how are you.
Yeah.
It creates increases over where it was a little bit last year, but still sort of in that context is that fair yeah.
Yeah, we've talked about before that it's around $300 million are a regular amortization that we had a few things.
That went the other way some of the dry dock upgrades that Mark talked about we got a swap pay.
Payout that we made this quarters to enjoy that lower rates on the Tango for example, so.
This quarter compared to a year ago.
It shows 200 on absolute terms, but I think on a normal run rate basis. It's in that 275 to 300 range that we would continue to.
To recognize over the next number of years on a realm.
Okay, Perfect and then last and this time I mean it for.
For me is.
One of those preferreds.
Preferreds that comes due or where it doesn't from David It's callable later this year.
I'm curious, where and it's trading above par I think on 9% preferred but I'm curious where you see that as part of your capital structure.
Is that something that maybe you would look to refinance debt something that you think is more permanent capital and kind of kind of like it there or Conversely, when if there is capital available.
To put out.
Any context there.
Sure Yeah. So we do have a redemption right at par that comes up in October of this year. So that that is the redemption rate that we have.
Debt to breakout in at $25 on unit and if we don't exercise that it stays so it's not like something that we have to do it on the day or we lose it and I think that you're right. We look at it as a pretty expensive debt at 9%. It was it was great at the time and we issued it.
And it saved us from issuing common equity at prices that we chatted on attractive.
But if I had to look on my Crystal ball I, probably would prefer not to have that.
As a piece of our capital structure I think debt that we would prefer to have the unsecured bonds, particularly in Norway, where we've got a pretty good following.
Regular way.
Mortgage debt sale leaseback type debt.
Common equity I think the cleaner that better.
And then right now we could probably issue in Norway under six per se.
The last deal that we did was around 575, and obviously, there's been some movement in base rates since that time, but I think we can still do under 6%. So there is an arb that we can definitely pick up.
And I think what Youll see US do is continue to monitor the market, we have great relationships directly with the investors in Norway.
As well as with a lot of the banks that helped us to issue.
And as we get towards the end of the summer and really into Q3 closer to maturity I think we'll have to really analyze all of those all.
All those rates and see where we can best.
Maximize the potential and just reduce our overall cost of capital, which is is really key for us, especially as we're looking at tendering on new vessels, where you really got to make sure that we're optimizing our balance sheet wherever possible.
Alright that does it I appreciate it thanks.
We have no further questions in the queue at this time I would now like to turn the call back over to company for closing remarks.
Well on behalf of Scott myself, and the entire Teekay LNG team. Thank you very much pretty support we look forward to updating you next quarter.
Thank you ladies and gentlemen. This concludes today's teleconference. You may now disconnect.
Yeah.
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