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Edited Transcript of GLOG earnings conference call or presentation 6-Nov-19 1:30pm GMT

Q3 2019 GasLog Ltd Earnings Call

Monaco Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of GasLog Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alastair Maxwell

GasLog Ltd. - CFO

* Paul A. Wogan

GasLog Ltd. - CEO & Director

* Phil Corbett

GasLog Ltd. - Head of IR

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Conference Call Participants

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* Benjamin Joel Nolan

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Espen Landmark Fjermestad

Fearnley Securities AS, Research Division - Equity Analyst

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD and Energy & Shipping Analyst

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Michael Webber;Webber Research & Advisory LLC;Analyst

* Randall Giveans

Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping

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Presentation

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Operator [1]

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Good morning. My name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2019 GasLog Ltd. Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. Today's speakers are Paul Wogan, Chief Executive Officer; Alastair Maxwell, Chief Financial Officer; and to commence the call, Phil Corbett, Head of Investor Relations.

Mr. Corbett, you may begin your conference.

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Phil Corbett, GasLog Ltd. - Head of IR [2]

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Thank you, Josh. And good morning, or good afternoon, and thank you for joining GasLog Ltd.'s third quarter 2019 earnings conference call. For your convenience, this webcast and presentation are available on the Investor Relations section of our website, www.gaslogltd.com, where a replay will also be available.

Please now turn to Slide 2 of the presentation. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our third quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the appendix of the presentation.

I will now hand over to Paul Wogan, CEO of GasLog Ltd.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [3]

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Thank you, Phil. Good morning, or good afternoon, and thank you for joining our third quarter earnings call. Before I begin, those of you who participated in our previous calls may have noticed our new presentation format. This is part of a larger re-branding initiative at both GasLog Ltd. and GasLog Partners to emphasize our priorities of safety, operational excellence and customer focus. And we are delighted to be sharing this with you, today.

On today's call, I'll begin with our highlights for the quarter, including our recent commercial successes. Alastair will then take you through 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 3. During the third quarter, we continued to see the positive financial impact of our charter pact newbuilding program, as well as an improvement in the earnings of our vessels operating in the spot market.

For the 9 months ended September 30th, our revenues increased 7% year-over-year. For the same period EBITDA was 9% higher, driven in part, by continued good progress on our cost reduction initiatives. Notably, the earnings of our vessels trading in the spot market were enhanced by market linked charters on both the GasLog Shanghai and GasLog Salem.

In late July, we took delivery of our fifth XDF vessel, the GasLog Warsaw, which immediately commenced a charter with Cheniere ahead of her long-term charter with Endesa.

We were also successful in signing a 10-year charter for one of our TFDEs to act as a floating storage unit for a gas to power project being developed in Panama.

We declared an unchanged dividend of $0.15 per quarter, note the shares are for the quarter. I am also very proud to share with you that the crew of the Methane Alison Victoria was awarded Crew of the Year at this year's IHS Markit Safety at Sea awards for their excellent safety performance over a number of years.

And finally, following our planned transition Paolo Enoizi assumed full COO responsibilities in September. And he is already a great addition to the senior management team. I am also pleased to report that our outgoing COO Richard Sadler 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.

And Slide 4 provides detail of our Panama FSU charter. In September, we announced a 10-year charter award with a Chinese company Sinolam, which is developing a gas to power project in Panama. The power project has signed long-term power purchase agreements with leading Panamanian utility companies, as well as a 15-year energy purchase agreement with Shell.

We expect to fulfill the time charter through the conversion of the GasLog Singapore, one of our 2010 built TFDEs. Since September 2016 this vessel has been trading in the LNG carrier spot market. The 10 year FSU contract will deliver 100% utilization and fixed rate of hire for the duration of the charter, resulting in approximately $20 million of EBITDA per annum over the life of the charter. The conversion will take place during the vessel's scheduled 5-year special survey in the third quarter 2020. Enabling both time and cost synergies with the vessel's regular dry docking. The charter commences on delivery of the FSU in Panama, which is scheduled for November 2020. We are looking forward to working with Sinolam on this project to displace coal and oil products in Panama's energy mix, with cleaner burning natural gas.

Now, let me hand over to Alastair.

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Alastair Maxwell, GasLog Ltd. - CFO [4]

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Thank you, Paul. And good morning or good afternoon to you all. I am pleased to report another strong quarter in terms of our operating and financial performance.

Please turn to Slide 5. Our quarterly and 9 month financial results were underpinned by the operational performance of our fleet, which continued to be excellent with year-to-date up time of 98%. As you can see in our 6-K for the quarter, following our exit from the Cool Pool, we now segment our fleet and our revenues into 2 categories.

First, those vessels operating under multiyear charters at fixed rates, regardless of the remaining duration of their contracts. And second, the remainder of the fleet, comprising vessels operating in the spot and short-term markets, and vessels which are chartered under the variable rate contracts.

For completeness, we have 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, as the last of our vessel exited the Pool early in the quarter.

While total year-to-date revenues were $463 million, increased by 7% year-on-year. Our fixed rate net revenues increased by 9% as a result of the growth in our fleet of underwater vessels with multiyear charters. While 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 and previously disclosed unscheduled dry dockings of around 100 days.

While OpEx increased in absolute terms, as a result of new vessel deliveries, unit OpEx and unit G&A in the first 9 months of 2019 declined by 5% and 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 at $50,000 per vessel per day. Cost control and revenue growth combined to deliver a 9% increase in year-to-date EBITDA.

Turning to Slide 6, on further information on our variable rate earnings. As I mentioned on the previous slide, we now segment our fleet and our revenues into variable rate vessels and fixed rate vessels. During Q3, we had 7 variable rate vessels including the GasLog Shanghai and the GasLog Salem, both of which are on term charters but at market linked rates.

During the quarter our variable rate vessels earned time charter equivalent net revenues of just over $36,000 per day.

Looking forward to the fourth quarter, and based on current booked revenues and expenses, as well as our remaining open days, we expect that our variable rate vessels will deliver TCEs net revenues of $60,000 to $70,000 per day. This estimate reflects the fact that the ceilings in our market linked charters; while at very attractive levels, compared to historical mid-cycle rates are below current headline rates. As well as the fact that the charters on 2 of the vessels were fixed prior to the recent strong recovery in headline rates.

On the other hand, a number of the fixtures on our 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 7, which discusses our balance sheet. We continue to amortize our debt at twice the rate our vessels depreciate, deleveraging the balance sheet and creating equity value over time. In 2020, we expect to amortize $220 million of debt, equivalent to the average debt of 2 of our vessels.

Furthermore, we are practically managing our upcoming maturities. We have already commenced planning for the refinancing of the 2 secured debt facilities, which mature in 2021, as well as the NOK 750 million bond, which matures in the same year. And we expect to complete these refinancings well in advance of their final maturities.

During the third quarter, I am also pleased to report that we made very good progress on the financing of our 7 remaining newbuilds. We have seen strong interest from our banking partners, resulting in the proposed new facility being significantly over subscribed. We are currently in the documentation phase and plan to close the financing later this quarter.

In parallel, we have been working on improving the financial and commercial covenants across all of our debt facilities along the lines of the financing of the GasLog Warsaw and at the GasLog Partners level the new $450 million facility, which closed in March of this year. We will provide further information in due course.

Moving to Slide 8, we set out the average growth secured debt per vessel for our different classes of ships. As you can see our steams and 155 TFDEs have considerably lower average debt per vessel than our more modern vessels, all of which operate under long-term charters. As a result the steam vessels also have the lowest breakevens in the fleet in the mid to high $30,000 per day and trending down over time.

Moving to Slide 9, we've updated the chart illustrating our capital commitments. We currently forecast cumulative future cash payments for the equity and the remaining newbuilds represented by the light blue tranches at the top of each column to be $93 million, assuming 80% loan to value, which is the most likely outcome of our newbuilds financing. On this basis, our current unrestricted cash balances and available RCF capacity, plus operating cash flows from our growing on the water fleet and a stronger 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 activities this year, including new charters with JERA, Endesa, Gunvor, Cheniere and most recently Sinolam, 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.

I will now hand back to Paul to discuss the LNG and LNG shipping markets.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [5]

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Thank you, Alastair. Turning to Slide 11, which shows the increase in LNG import by country on a trailing 12 month basis. LNG demand grew by 43 million tonnes year-over-year, an increase of 14%. China posted the largest increase in absolute volumes importing 11 million tonnes more LNG, a 22% increase year-over-year. Natural gas continues to grow its share of the country's overall energy mix.

And recently Sinopec 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 tonnes 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 and the future outlook for LNG demand by geographic region. In total, Wood Mackenzie expects net LNG demand to grow by 150 million tonnes between 2018 and 2025. Although China's imports have increased significantly in recent years it's important to note that other countries in Southeast Asia together with Europe account for nearly 2/3 of projected LNG demand growth through 2025.

Turning to Slide 13, which shows new LNG supply. Next year, over 22 million tonnes of new LNG capacity is due to begin production, mostly from project in the U.S., which should have a significant positive impact on tonne miles. In particular, the second and third trains of both Cameron and Freeport are expected to begin production and ramp up throughout 2020 and into 2021. Further ahead, 94 million tonnes of new capacity is scheduled to start production in 2021 through 2024, including Venture Global's Calcasieu Pass in Louisiana and the Arctic LNG-2 project, both of which took FID in the third quarter 2019.

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 tonnes of LNG capacity to reach FID prior to year end. Followed by another 61 million tonnes in 2020 and 21 million tonnes in 2021. These proposed supply expansions have been supported by continued momentum in new long-term LNG sale and purchase agreements, with over 170 million tonnes per annum having been signed since the beginning of 2017.

Slide 15 shows how U.S. exports have positively impacted shipping demand. According to Poten 119 cargos were exported from the U.S. in the third quarter, 40% of which were delivered into North Asia and the Middle East. Destinations that require more than 2 ships per million tonnes of LNG exported per annum. 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 tonnes of LNG exported, positively effecting shipping demand. 79 million tonnes 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 of 2021, based on Wood Mackenzie and Poten data. This analysis implies a structurally tighter market through at least the 2020-2021 winter, with expected high levels of fleet utilization even at the lower end of the range.

On Slide 17, we discuss the rate trends in the LNG shipping market. The left panel shows the monthly average headline spot rates for TFDE carriers during 2019. And the right panel shows the average headline rate by month from 2011 through 2018. While the absolute values may differ from the historical monthly averages, the trend in 2019 has 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 from the figure, headline spot rates have risen sharply in recent weeks predominantly as a result of 2 factors. Firstly, increased demand for LNG as 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 how periods of strength and weakness in the spot markets have historically influenced activity for multiyear charters. Most recently 14 charters between 6 months and 3 years in duration were reported in the third quarter of 2019, the highest number since Q2 of '18. Of these 14 charters, 6 TFDEs and 6 steam ships were fixed on charters greater than 6 months. Poten currently assesses the 1-year time charter rate at $84,000 per day for TFDE and $50,000 per day for steam vessel, which are helpful benchmarks when discussing term charter opportunities although we would note there is presently limited liquidity for charters of 1-year or greater.

Turning to Slide 19, let me finish on why GasLog represents a compelling investment proposition. Around 20 years of experience in LNG shipping has allowed us to build a leading operating capability, founded up on an uncompromising approach to the high standards of safety. GasLog is continually recognized by our customers and industry bodies as best in class. We continue to modernize our fleet, when our 7 XDF 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 counterparties.

Our 7 newbuilds alone represent $144 million of annualized EBITDA growth on a fully delivered basis. We continue to work with our customers to develop innovative commercial structures that meet end needs and optimize the earnings of our fleet. The Panama FSU award is yet another example of this capacity, in turn pushing our fixed charter backlog to an all-time high of $4.1 billion.

We have a strong balance sheet with scheduled amortization leading to deleveraging over time. We remain confident that increasing demand for LNG will lead to structural tightness in the LNG shipping market, potentially increasing spot market earnings and providing opportunities to recharter vessels operating in the spot market.

And finally, we remain proud of our track record of paying a progressive dividend, which has grown at a compound rate of 4% since our IPO, not including the special dividend we paid in the fourth quarter of 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 Q&A. Operator, could you please now open the call for any questions?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Michael Webber with Webber Research.

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Michael Webber;Webber Research & Advisory LLC;Analyst, [2]

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I just wanted to first kind of touch on the spot market, as we're ramping into Q4. And I kind of wanted to think about it kind of within the context of kind of just a year-on-year context. Last year, we saw a big ramp in storage early a big seasonal draw, and then we had a hard landing in Q -- in the middle and back end of Q1 and it took the market a little while to recover from that. Just curious, as you see the marketing -- the markets developing into the back end of 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 just different market dynamics?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [3]

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Yes. I think, certainly if you look at the way the markets reacted this year, it has been following the trend of 2018. And yes, there is storage. The storage, I think, is quite interesting, because I think the way that people are looking at storage is not only vessels, which are just sat there, waiting to discharge somewhere off a port, but also, vessels that are taking longer to reach their destination. And I think, what we're seeing in this market is 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, what's the best place to put them? Let's put them, if you like, on a midpoint route between 2 areas, while we decide to go or let's slow steam. So there's a lot of that going on, which is trying to maximize the arbitrage opportunities to maximize the pricing on the vessels. So, I think some of it is out and out storage, but I think some of it is just people trying to optimize their trading portfolio.

The second thing I think that's happening is, we are seeing now -- and there was I think it has been slower than we would have liked. We are seeing this ramp up in new projects. We talk now about Freeport and Cameron coming on stream, those projects coming on. So I think there is an underlying drive of a demand for ships in the market, which we hope will not lead to a falloff in the rates that we saw last year. But the final thing I would say is that we have announced the ships which we're trading in the spot market. And you should always remember it's a small part of our fleet, with a fully deliver (technical difficulty) 35 with 7 at the moment. But a number of ships are due for dry docking next year. And so what we've done is looked to try to fix those ships through until their dry dockings in the sort of first, second, third quarters next year, and lock into the rates that we can see now to make sure that if there is that fall off, which I'm not saying we're expecting, but there are obviously is always a possibility that we maintain our earnings at a higher rate.

So we're hopeful we don't see that return. We think there are some factors, which mean it isn't going to be a play out of 2018 going to 2019. But I think we're also making sure that we position ourselves if there is that fall off, to maintain good earnings on our ships, Mike.

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Michael Webber;Webber Research & Advisory LLC;Analyst, [4]

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That kind of leads into my next question. And Paul, you've been pretty clear about kind of looking at 2021 with a pretty big question mark and just happened to be staring at Slide 16, which I always liked that you guys put out in terms of different projections in terms of supply and demand. And it looks like there's -- there are scenarios in 2021, where we've got a bit of excess capacity. I'm just curious, as we inch closer to 2021, you guys put in place a pretty tactical dividend policy around potentially paying out specials, depending on what you're seeing in the market and where rates are. Obviously, we're entering a pretty firm environment. I'm just curious, has your thought process and math around that changed as we've gotten closer to 2021, or should we think about, in a pretty similar context, to 2019?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [5]

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Yes, I mean, I think as we said, Mike we are very focused on making sure that we can create good value for our shareholders. And I think, as we look at this market, and the strengthening that we think is potentially there in the short term and medium term. We would like to reward our shareholders. We will though make sure that we're in a good place in '21, '22 if we do see that market coming off, so it's balancing those 2 things. But certainly, if we continue to see strengthening the market, we think that's potentially there for the longer term, we would like to reward our shareholders.

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Operator [6]

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Our next question comes from Jon Chappell with Evercore.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [7]

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Paul, if I could follow up on one of Alastair's comments, Alastair yourself, I appreciate the breakdown of the fixed rate and the variable rate. And I understand the reasoning behind the 60 to 70 that you gave for this year given kind of the spiky nature of the market and booking some ships ahead of that, I mean, for this quarter. But you also mentioned the ceilings on 2 of those contracts. And we've talked before about how the 100% utilization on those floating rate 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 in 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 -- kind of overestimate when the market gets as hot as it is today?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [8]

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Yes, I mean, unfortunately, Jon, I can't because of the commercial sensitivities. We did in the prepared remarks though talk about the fact that it is well in excess of the mid-cycle rates, which we've always talked about in the mid 70s. It is well in excess of that. But it is go not up on the sort of $130,000, $140,000 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 guiding commercially sensitive with the people we have those ships on charter too.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [9]

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Okay. Then let me ask about the other 2 ships. You said, or Alastair said, you had booked 2 kind of right before the rate movement, which is why maybe the 60 to 70 range, is a little bit lower than what people who've been tracking the market would have thought. What's the duration of those voyages? And what we're getting at is, can you be able to -- do you think you'll be able to reach out to them at some point in the fourth quarter, where at least in the past 2 years, the market has been seasonally at its peak, and then create that buffer, as Alastair mentioned in the 1Q?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [10]

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What we've been trying to do on those ships, Jon, is we have a number of ships, which is going to be dry docking next year, we've been trying to -- because the thing that kills you in any of these markets is utilization. When you add a factor in there, which is the dry docking, what that does is create uncertainty around the voyages you can take, you often have an inability to take the ship close to the dry dock and then try and take you get them a month before, you suddenly find you can't charter them. So what we've been trying to do is to fix our ships through to the dry docking. So, when we're talking about the sort of lower rates is because we've locked those ships into rates, which take them through to dry docking, which I got from memory take us into sort of the end of the first into the second quarter of next year. But as we said also, if we did see a falloff in the rate -- seasonal rates, those -- earnings on those ships will be quite strong.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [11]

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Okay. Final one for me. Maybe we thought going into this winter couldn't be as strong as the last 2 and maybe not as peaky as last year's winter, but as strong as maybe last year's average in the winter before. Last year, you pleasantly surprised with a pretty robust special dividend. So given where you kind of sit today with the financing, the rates that you think you'll achieve on the 4Q, but also given the fact that the stock price is almost 50% lower -- 30% to 40% lower than where it was in November of the prior 2 years, how do you think about capital return for this fourth quarter period if you do attain these very healthy rates, a special dividend on the table? Or do you think maybe you'd be more aggressive with the buyback given the valuation today?

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Alastair Maxwell, GasLog Ltd. - CFO [12]

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Yes, hey, Jon, I'm Alastair. I think that -- before talking specifically about one or the other, I think that we continue to have as our priorities in terms of capital allocation, first of all, making sure that the newbuild program is funded. And I think where we sit today, we're very confident about that, especially, given the stage that we're at, with the financing part as I talked about in my remarks. So I think having that as our first priority, we do continue to monitor the market and the cash flows that are coming from our ships that are trading in the spot market. As we look forward to where we stand in the fourth quarter of this year, now clearly, the market is seeing a significant pick up, although we're not getting as much a benefit from there if you like for the reasons that we talked about, and Paul was explaining earlier on.

So I think that as we think about the scope for enhanced shareholder return, it's something that we consider on a continual basis and are always looking to see if we can find ways to do it. But we are watching, in particular, the performance of the spot market. We're also looking at other elements of our strategy including, for example, capital raisings by GasLog Partners. Drop downs, those kind of things also play into how we think about shareholder returns.

And you will recall that last year, we had 3 things all at the same time. We had a drop down, we had the IDR adjustment modification, and we had a very strong market. And those were the 3 factors that together put us in a position, where we were able to pay that special dividend.

So I think again, as Paul said earlier, it's something that we monitor continually. We are always looking for ways that we can enhance shareholder returns. And too early to tell, at this stage, if we do find scope to do that, whether we would do it through share repurchases or through a special dividend. I think, we need to see where we were at the time.

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Operator [13]

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Next question comes from Chris Wetherbee with Citi.

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Unidentified Analyst, [14]

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It's James on for Chris. One did actually touch on the order book, there's still some speculative newbuilds out there, one you got a sense of market positioning going in or past peak going into next year and how might -- how the market's ability to handle some of that early season softness comps to last year unless you are trying to really get a sense of, if the industry evolving around its ability to handle some of the downside surprises that can happen?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [15]

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A very interesting question. I think we, for some time, have been saying we need to be careful in terms of newbuildings in the industry, because we see continued build out of LNG capacity, especially in the U.S. through 2021. But then there was that period between sort of 2015, 2018 when very little was – took FID. And all that just all moves forward to that '21, '23 period, where right now there's not a lot of new capacity due to come on stream.

And I think, one of the things as an industry we have to learn is that whilst 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 am pretty certain all the ships, which are on order at some time will be required, because this is a growing industry, LNG demand is really very robust. But if you get the timing wrong, you can have 2 or 3 years, where you are having new ships coming out, waiting for that 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 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, of course, is that there is another factor, which plays into this, which is tonne miles. And if you have a period, where we start to see a rebalancing, a strengthening, if you like, of the pricing of the LNG, which may, which create arbitrage opportunities. You could see a situation going into 2021, where you actually see the tonne miles increasing, albeit you haven't seen new production coming on. So there are some other factors playing -- at play here. But certainly, we in GasLog, would not be advocates of going -- rushing out and doing newbuildings at this point. We think, as an industry, we don't need those coming out in the sort of '21, '22, '23 period.

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Unidentified Analyst, [16]

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Just wanted to actually touch on some of the strategy that was laid out at your Investor Day then. How does that potentially impact what you might do in terms of like the next leg of growth? It seems like you’re little bit more conservative about the markets from 2021 forwards, so what makes you to think that your focus on there would be deleveraging potentially thinking about -- or increasing returns to shareholders. What will sort of be the next set of priorities?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [17]

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Yes, I think, both of the above. I think there's natural deleveraging, as Alastair talked about, in the business through the amortization. I think that continues and it is very positive for us in the future years. I think, returns to shareholders, we've talked about as very important to us as well and we want to make sure that we are in a position to return money to our shareholders as and when we are able. I think the other thing the -- or that happens if you have a strong balance sheet, good cash flow is it gives you opportunity for M&A -- of new 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 are thinking about as we look 2 or 3 years down the track.

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Unidentified Analyst, [18]

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And then just one quicker one. With all the influx -- with all the refinancing occurrence, how should we think about potential interest savings here some of the other advantage you might get in terms of financing costs?

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Alastair Maxwell, GasLog Ltd. - CFO [19]

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So interest savings or what, James, in terms of financing costs?

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Unidentified Analyst, [20]

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Interest basically just the cost financing, the financial cost one, should we just think about that moving down slowly over time as a percent of that or you hear anything from a modeling perspective that we just need to be aware of, as these refinancing years occur, particularly anything around fees, or anything around that side?

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Alastair Maxwell, GasLog Ltd. - CFO [21]

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So the biggest driver of our financing costs the total debt -- the total amounts of debt. And we will see that on the one hand we continue to amortize it away today but by $220 million that will go up as we take delivery and roll down on financing for newbuilds. So our total amounts of debt will increase during the quarter of 2020 as we take delivery of those ships and then they will clearly contribute to EBITDA over time. So that's the first driver, which is offset by scheduled amortization.

The second driver is obviously LIBOR because all of our mortgage debt, secure debt is on a margin basis to LIBOR. We have had some success in reducing our margins, our spreads over LIBOR. I don't think there is a significant scope for further reductions in our margins. I think we already borrow at extremely competitive levels. The third factor is, it's clearly the impact of the derivatives, which is obviously non cash, but that has had a significant impact, both positive and negative, positive during the quarter 2018, negative during the quarter 2019 and it's very subject to the behavior of LIBOR and the LIBOR curve over time.

So I don't anticipate, other than movements in LIBOR, which clearly you have as good as you want, as I do, and the total amounts of debt. I don't imagine that there are any other factors, which have significantly impact our financing costs going forwards.

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Operator [22]

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And the next question comes from Greg Lewis of BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [23]

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Just following up on the last question. I guess, there a preferred debt that comes due in April of 2020. That's probably some of your more expensive debt in -- however you treat it, whether you treat it exactly your debt but some of your more expensive, I guess, access to capital, relative to some of your bank debt.

How should we be thinking about, I guess, that piece of debt and how you think about going forward? Is that something that we think we are going to maintain inside the capital structure? Just given all these things that you're talking about, yes, you are taking on a lot more vessels, the balance -- or the amount of debt on the balance sheet is going to be going up. Just kind of curious how you think about trying to position the balance sheet over the next, call it, 1 to 2 years and what you expect the primary sources to be?

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Alastair Maxwell, GasLog Ltd. - CFO [24]

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So the [prac] there's obviously permanent capital and we can call the -- we can call the prac from second quarter of next year but it is not a maturity. And so my thought there is what, do we leave that prac in place for the time being. As I said in my prepared remarks, I think, our next priority after putting in place the financing pool current newbuild program and working on the covenant amendment so I -- that I spoke about. I think, our next priority is going to be dealing with the 2021 maturities, which is 2 bank facilities, and the NOK bond. And we're already working on those in terms of proprietary work. And we expect to, as I said, to complete those re-financings well ahead of maturity. And that will some time in sort of middle to early second half of 2020 is when I would expect to have those re-financings completed.

I think those are our initial priorities. And as I said earlier in the background we have continual scheduled amortization underway, which runs at roughly, as we've said often in the past, roughly twice the rate at which the ships depreciate.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [25]

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And then just thinking about the FSU contract, with the, I guess, the Singapore. I guess, as we look at the timing of that, it looked 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 are we now in a market, where, when we think about infrastructure type LNG assets, is it 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 3 to 5 years, could we see more tri-fuel diesel electric vessels sort of become sort of the infrastructure of storage for LNG, where maybe if you were to ask it maybe 2, 3 years ago I think the expectation was that was primarily going to be where all the steam vessels were going to go, kind of, for their final days.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [26]

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On this one it's simply a factor of size. Even though there is not a huge amount of difference in the size between the 2 vessels, the steam -- our steams on this were just slightly too small for the requirement. So it fitted into our TFDE. But we are in early stages looking at another couple of FSU projects, which actually fit -- would be fit for our steam vessels. So, and I don't think I would read too much into what happened in the Panama. I think it was just the size requirement for that particular project.

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Operator [27]

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Our next question comes from Randy Giveans with Jeffries.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [28]

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A few follow-up questions on the FSU. So what is the kind of 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 that I found it interesting that the FSU contract is for 10 years but the power project has a 15-year LNG sale and purchase agreement with Shell. So is there a 5-year action after the initial 10 years?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [29]

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Taking your last question first. Yes, they have -- there are options to extend the vessel for a longer period. We only talk about the firm period that we have on the vessel rather than talk about the options but there is that opportunity. In terms of the cost of the conversions, I think, we've talked about before you're looking there somewhere in sort of $15 million to $20 million range in terms of the costs. And then we haven't given a lot of talk -- we haven't got into detail around the OpEx because what we'd really talked about there is just what's the EBITDA that you get from the ship? And the EBITDA comes out at around $20 million per annum for the vessel.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [30]

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Or in the off hire days for the conversion?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [31]

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So the off hire days, yes, it's -- you're looking at something like 50 to 55 days in total, you normally for a dry docking have something like a 25 day, 25 to 30 days. So it's an additional sort of 25 days on top of that.

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Randall Giveans, Jefferies LLC, Research Division - VP,Senior Analyst & Group Head of Energy Maritime Shipping [32]

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And then 1 more question. So the one reason, obviously, GasLog joined the Cool Pool was to improve utilization, improve scale. Now that you've left the Cool Pool, 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 for the fourth quarter?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [33]

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Yes, so at the present all our ships are presently employed, we do have a couple coming open in the fourth quarter, which is 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 1 advantage of not having the ships in the Cool Pool is that, that gives us that opportunity to have discussions, which charters about spot charters, which often kind of rolled into discussions about longer-term charters. And not the 2 ships that we have on the floating rate with utilization were 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 we're 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 other people around, how we could maybe pool together to improve the service to the customers, things like that. But at this moment that's not something that we, as a company, are looking to sort of be proactive on.

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Operator [34]

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Our next question comes from Espen Fjermestad with Fearnley.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [35]

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I just wanted to go back on the slow thing in storage. I mean, Paul, you mentioned there are some differences this year with the kind of degree of slow steering into this as well. And I guess another difference from last year is that more vessels are actually storing in Europe versus mostly Asia last year. So I mean, should we see different dynamics around the floating storage just this year or do we need a cold winter and a steeper tag on the curve for it not fall off by mid-November again?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [36]

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A very good question, Espen. Yes, I think you've 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 across the world and I think that affected the demand for LNG -- interesting to see this year, does that pattern repeat or in a cold winter does demand for LNG continue to be the high level through? As I talked about a little bit earlier I think - -we think there are more structural factors, which are playing in, especially with the new production coming on. We don't think the strength in the market is wholly dependent on floating storage. But of course, if we do get a number of ships coming back at one time into a market that does have a downward factor. But we do believe that there is more of a structural tightness given the production that's coming on stream than we saw last year. And we're hopeful of a cold winter.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [37]

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Let's hope for that. You are just putting 20 million more tonnes of LNG into the market next year. We have European inventories so -- already brimming. Are you at all worried that we'll see cargo cancellation sort of kind of re-worked uptake agreements from Asian buyers next year, maybe around the typical [shoulder] month?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [38]

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Yes, I mean, it's interesting the growth I think continues and the demand growth continues to be there certainly in Asia. A lot of it, I think, is infrastructure bottlenecks, which continue to be worked on. We've seen this year, apart from the fact that we've -- as you point out, in Europe, quite a large amount of storing. But actually, a huge amount of new demand for LNG as it -- the gas 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 that behavior across the globe but certainly in terms of Europe. So I think, my view is the low prices continue to stimulate up, once people have made that swap over from the coal into gas power generation and industrial use et cetera. And you don't often see that going back especially, if we see, continues to see competitive pricing, which we expect.

So given that and given the fact that, if somebody doesn't want to lift the cargo they have to make a -- may not clear 3 months ahead of time. The people who are producing the cargo then have the option to produce that cargo and sell it with very low variable costs, if you like.

We don't believe that we will see production being reined back on the basis of the market. We think, as we go through 2020 and into '21 that we will start to see that market rebalancing.

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Operator [39]

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Our next question comes from Chris Snyder with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [40]

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So you got into a midpoint of about, I think, $65,000 for the variable fleet in Q4. I know there is a lot of moving parts here, some still truly in the spot market, a couple on index win contract and you signed 2 contracts prior to the inflection. But it is disappointing, in my perspective, to see the variable rate come in below your average term rate, which I think is $75,000. And then the 1 year rate you quoted in the prepared remarks were about the mid-80s. Just given that we're in the seasonal peak and the spot market is very tight. So, in this context, what are the benefits of the variable contract structure and the broader spot approach relative to the fixed rate term market? Is it that these index linked contracts are allowing for longer duration, allowing you to potentially bridge a weak 2021, 2022 market?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [41]

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Yes. I mean that some of that, if you look at the one of the index-linked contracts that we've done is down for 3.5 years. We're also on looking at some longer-term index-linked contracts. But I think it also is a focus on optimizing the earnings in the vessels over both the longer term and, if you like, short to medium term.

And so I think, one of the things 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 a pull up in rates in the first and second quarter our earnings would be much more robust. And, if you kind of look at it over the period, we think that we've done a fairly good job of making sure that we have the robust settings.

And again, as you look at how do you want to reward your shareholders, having some certainty around how you see the market and how you see the earnings of the ship, it actually quite advantageous for us.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [42]

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And by my count, you have 4 vessels that are still truly trading in the spot market, excluding the variable rate contracts. So the spot market is 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 kind of talked about transitioning vessels out of the stop market and just given the tightness in the market it seems like a pretty good time to do so. Are you guys just maybe thinking that, hey the market is going to keep getting tighter and rates and term rates should get better, maybe or longer duration kind of. What's kind of the strategy there?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [43]

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Yes. I mean, we -- it's really around the liquidity of the market. And so, we saw a number of term deals. We talked about 14 in the third quarter this year consequent to the strength of the market. I think a timing market especially if it stays tighter for longer does allow you to fix ships for out -- potentially for longer periods as well. So a little bit around the earnings, but a lot of it is around duration as well.

I think, we as a company, have really sort of made our money out of our longer-term contracts. And so, our ability to lock 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 take advantage of that if and when we see those opportunities.

But to be -- on the other side then to be fair, Chris, that also depends upon the liquidity in that market, which does come and go and depending on the views of the charters and the strength of the spot market.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [44]

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And then just following up on that real quick. Has the recent spot rate inflection led to any sort of increased enquiry for time charters, whether it's a longer duration, better rates. Because 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 has gotten?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [45]

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Yes, it does without a doubt increase the charters' interest in those and the conversations that we're having around those opportunities. So yes that's definitely the case.

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Operator [46]

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Your next question comes from Ben Nolan with Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [47]

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So, I have a couple just last ones, but the -- as it relates to sort of the -- well, going over to Slide #9 where you kind of talked through that. You have the cash flows and the liquidity and the financing to be able to fund the remainder of the CapEx commitments. And so you have -- without, it appears needing any drop downs. How does that make you think about the drop down cadence or need and, if the GLOP unit price isn't good enough does that postpone or sort of along those same lines 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 a steam ship and in cash or whatever?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [48]

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Yes. And I think the nice thing. So there is 2 things I would emphasize. I think first of all we continue to be in the fortunate position, where our MLP is functioning well and does work for us. I think it's been active when others haven't and has shown its ability to access different parts of capital. So that's nice and -- but it also nice to be in a position, where you don't necessarily have -- to have that happen to be able to fund the newbuildings. So that just gives us optionality in terms of -- GLOP doesn't have to go out and raise capital and doesn't have, we don't have to drop ships down, but if that works for both parties then I think that works very well.

I think in terms of the support, if you like, and what we are talking about is GP support for GLOP, those are things that we continue to have discussions around. It has to work for both companies, but it's something that we continue to discuss, as I said, because it's advantageous for us to have a well-functioning MLP.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [49]

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Well, then sort of shifting gears a little bit. As it relates to the steam ships. And this should applies also for GLOP, but certainly even for you guys. Just in this market, where there is multiple tiers of ships and that it appears to be permanent, is there anything that you can do adding reliquefaction or something else to really set your steam ships apart. So that maybe, even if it's not necessarily better rates that you're able to sort of out earn in terms of utilization, other ships. Is there, I'm just curious, if there is any levers that can be pulled to give you a competitive advantage with those little bit older ships?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [50]

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Yes. To certain extent we can have that competitive advantage. If you look at the 50% of the fleet the steam ships we have a variety of sort of more modern end and then the larger end so, but quite effective ships compared, especially compared to the sort of first generation steam ships.

And we have and continue to look at potential ways to enhance those vessels. But when we do a cost benefit analysis it doesn't necessarily make sense for us Ben. The thing we're focusing on really with those ships is, saying okay what we need to do is to make sure that we have the lowest cost, if you like, in terms of breakevens for those vessels and therefore can be competitive in the market.

And I think, as Alastair talked about, we're really looking at somewhere in the mid-30s at the moment with those vessels and continuing to fall. So, I think that's how we look at those steam vessels at the moment just ensuring that we keep the cost base down.

And part of that has been around the continued focus we have as a company around our cost initiatives to make sure we as a company get the OpEx as low as possible and get the G&A as low as possible, while continuing to deliver this very, I think, safe and reliable service to the customers.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [51]

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And then and the last one for me, this. You Paul you mentioned earlier that you're preparing the balance sheet in the event that there may be a little bit of a weaker market and that introduces M&A opportunity. There's not been much traditionally M&A activity outside of individual assets. Are -- is that something you think will develop? I mean, again, with a caveat that it's market dependent, but there has been a number of new owners that have ordered LNG ships that are, I don't know is that process do you think actually starting now, where there could be some further consolidation in the industry and actual M&A activity not just talk about it?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [52]

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Yes, I mean, you're absolutely right, Ben. There has been very little M&A consolidation activity historically in the market. But I think you're also right in pointing to the trend of, if you like, greater number of owners coming in especially a lot of new owners coming in. I think when we saw the last, if you like, round of new owners coming and 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 on my heart 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 and the way some of those are being funded et cetera, my sense is that we will likely see more M&A activity through the next cycle.

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Operator [53]

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And I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Wogan for any further remarks.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [54]

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Thank you, Josh. And thank you to everyone today for listening and for your continued interesting in GasLog Ltd. We certainly appreciate it and we look forward to speaking to you next quarter. In the mean time, if you've got any questions, please feel free to contact the Investor Relations team. Thank you very much for your time.

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Operator [55]

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Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.