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Edited Transcript of GLOG earnings conference call or presentation 1-Aug-19 12:30pm GMT

Q2 2019 GasLog Ltd Earnings Call

Monaco Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of GasLog Ltd earnings conference call or presentation Thursday, August 1, 2019 at 12:30:00pm 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

* Gregory Robert Lewis

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

* James Monigan

Citigroup Inc, Research Division - Senior Associate

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Ltd.'s Second Quarter 2019 Results Conference Call. (Operator Instructions)

As a reminder, this 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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Good morning, or good afternoon to everyone, and thank you for joining GasLog Limited's Second 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. The factors that could cause actual results to differ materially from those forward-looking statements, please refer to our second 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, Chief Executive Officer of GasLog Limited.

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

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Thank you, Bill. Good morning, or good afternoon, and thank you for joining our second quarter earnings call. I'll begin by outlining the drivers of GasLog's value proposition and how we delivered against them in the quarter. I'll then discuss our recent commercial successes, before handing over to Alastair to take you through our financial position and outlook. And finally, I'll review the current trends in the LNG and LNG shipping markets before opening the call for questions. Turning to Slide 3 and the factors which we expect to positively impact our investment case and share price. Firstly, our fleet continues to grow through our chartered newbuild program, driven largely by fleet growth, our Q2 EBITDA was 15% higher year-on-year. Our 7 newbuilds delivering through 2021, will underpin further growth in our revenues, earnings and cash flows and augment our fleet's efficiency and competitiveness.

Secondly, we expect the growth in our core term charter business to be complemented by a tightening spot market, with average headline rates during the third quarter to date, 25% ahead of the second quarter's average.

Thirdly, following our recent long-term charters with JERA and Endesa, we continue to diversify our customer base with Gunvor becoming our latest high-quality counterparty.

Fourthly, during the quarter, we eliminated our IDRs in exchange for both common units and new Class B units that convert into common units over time. The IDR elimination will reduce GasLog Partners' cost of capital and simplify our financial reporting.

And finally, we continue to offer an attractive dividend, which has grown at a compound rate of 5% since our IPO. If our forecast of substantially tighter spot market is correct, it should provide additional opportunities to reward our shareholders above and beyond the common dividend.

Slide 4 shows the commercial success we delivered in the second quarter. Just yesterday, we took delivery from Samsung of the GasLog Warsaw, our fifth vessel with XDF propulsion. She immediately commenced a 22-month charter with Cheniere, from which she will redeliver in May 2021, straight into the 8-year charter with Endesa.

This combination of charters represents a continuous higher period of almost 10 years and delivers attractive returns for our shareholders. And I've just mentioned, we also chartered the GasLog Shanghai and GasLog Salem to Gunvor, a leading commodity trader with an established and growing presence in LNG. The charters have a variable rate of hire within an agreed range, with 100% utilization for both vessels during the charter period. These innovative charters were enabled by our decision to exit The Cool Pool and demonstrate our ability to create value for our customers and shareholders.

We are excited to be working with Gunvor and look forward to demonstrating our operating capabilities to them. With that, let me now 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'm pleased to report another strong quarter in terms of our operating and financial performance. Please turn to Slide 5, where I'd like to take you through our second quarter results. The chart on the left of this slide illustrates our trailing 12-month time charter equivalent revenues, split between our term business and our spot vessels. During the quarter, our revenues were underpinned by the operational performance of our fleet, which continued to be excellent, with uptime of 99%. Our term revenues have seen stable growth over the period as we are growing our fleet against long-term charters and rechartered some of our open vessels with high-quality customers.

Year-over-year, our Q2 2019 trailing 12-month term charter revenues grew by 8%. This growth trajectory will continue with the addition of the GasLog Warsaw and the delivery of our 7 further newbuilds through mid-2021. You can also see from this chart, the significant improvement in our trailing 12-month spot revenues, which have more than doubled year-on-year and more than tripled compared to 2017 levels.

We continue to make good progress on reducing our unit OpEx and unit G&A. This is illustrated by the chart on the right of the slide, which shows that during the first half of 2019, our unit OpEx and unit G&A fell by 7% and 9% year-on-year, respectively. While we did benefit from a more favorable U.S. dollar-euro exchange rate, we are also making good progress towards our underlying cost-reduction target. As a result, we now expect to deliver unit OpEx below our previous guidance of $15,000 per vessel per day for 2019, excluding one-off IMO 2020 related costs and subject as always to movements in exchange rates.

Turning to Slide 6. The underlying growth in revenue, coupled with our success in controlling unit costs have delivered continual and meaningful increases in EBITDA over time.

Trailing 12-month EBITDA was $476 million in the second quarter, and we had 30% increase on the comparable Q2 2018 figure of $368 million.

Turning to Slide 7, which discusses our strengthening balance sheet. At the end of the second quarter, our net debt-to-EBITDA stood at approximately 6.1x, slightly down from the end of the first quarter and significantly lower than the 7.6x at this time last year. While our newbuild deliveries over the next 2 years will lead to temporary increases in our leverage on a trailing 12-month basis, we anticipate a significant reduction once our fleet is fully delivered. On the bottom of this slide, we've illustrated how our amortizing debt builds balance sheet capacity and equity value in our fleet using the recent delivery of the GasLog Gladstone as an example. Our debt amortizes at roughly twice the rate of ships depreciated. And as the chart displayed, by the time the initial charter expires in January 2029, the vessel would have been depreciated by 26%, while we will have amortized 67% of the vessel's debt. As a result, the vessel's debt-to-EBITDA ratio will be just over 2x, and the loan-to-book value ratio was a pull in to approximately 34%.

Moving to Slide 8. 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 $277 million, assuming 70% loan-to-value for the financing of each new vessel.

We plan to fund this from unrestricted cash balances of approximately $167 million, represented by the thick green line, future free cash flow generation from our growing on the water fleet, a stronger spot market, further drop-downs and if required, our available RCF capacity.

Moving to Slide 9, where I'll cover near-term guidance and summarize the key financial takeaways from today's presentation. The availability of our spot vessels during the third quarter will be impacted by unscheduled dry-dockings for the GasLog Chelsea, the GasLog Singapore and the GasLog Savannah, which we have decided to carry out now to maximize their availability and performance in the winter trading season. The combined dry-dockings are expected to result in approximately 100 off-hire days in the third quarter.

As concerned, the TCE revenues of our spot vessels, I would remind you of the rule of thumb that we set out last year: when average headline spot rates are below $50,000 per day, we expect to capture approximately 40% to 50% of average headline rates with a slight lag; when rates averaged mid-cycle and above on a sustained basis, we expect to capture closer to 90% to 100%; in between $50,000 per day and mid-cycle rates, we would expect to capture some 50% to 70% of the average headline rate. Using this rule of thumb, we currently expect the third quarter TCE for our spot ships, excluding the off-hire days mentioned above, to show a noticeable improvement on Q2, but to be clearly below mid-cycle.

This guidance includes the GasLog Salem, which, as we discussed earlier, is on a 9-month charter at a variable rate of hire, but excludes the GasLog Shanghai, I see it on a multiyear charter, and we hope that it will provide analysts and investors with more visibility on this part of our business. I would also remind you that we have 3 scheduled dry-dockings in the fourth quarter of 2019. The Methane Jane Elizabeth, the GasLog Saratoga and the Methane Lydon Volney, each of which are expected to take 30 days.

I'd like to leave you with 3 key messages: firstly, the elimination of our incentive distribution rights during the second quarter will significantly improve GasLog Partners' cost of capital and reduce the complexity of GasLog's financial structure and reporting; secondly, our newbuild program and focus on long-term charters underpin our continued growth in EBITDA and cash flow, and cushion us against spot market volatility, while still retaining meaningful exposure to a tightening LNG shipping market; and finally, while leverage will increase periodically as we take deliveries of newbuilds, once all these vessels are on the water, our scheduled amortization will lead to a significant deleveraging of our business over time.

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

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

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Thank you, Alastair. Slide 10 examines some of the macroeconomic headwinds that we believe have recently been driving sentiment towards LNG shipping. Reasons behind weather and additional new supply has led to a weakness in LNG prices. However, we believe that low prices are already creating additional demand with coal-to-gas switching in Europe being just one example. There have also been concerns that slowing global growth along with trade disputes could potentially delay investment decisions for new LNG supply, particularly in the U.S.

However, LNG consumers continue to sign up for long-term supplies, and we remain hopeful that LNG can be part of the solution to the China-U. S. trade dispute. Newbuild ordering has slowed down this year compared to 2018, and we are hopeful that this discipline will be maintained.

And finally, gas remains the most valuable partner for renewables with a substantially better emissions profile in coal and heavy fuel oil. LNG-fueled ships have the lowest emissions of any form of commercial shipping and in concert with slow steaming, provide a way to meet the 2030 emissions targets, creating further LNG demand. We believe these factors will lead to increases in both short-term and long-term demand for LNG vessels over and above the current operating fleet and order book.

Slide 11 shows LNG imports by country on a trailing 12-month basis. Year-over-year, LNG demand grew by 38 million tonnes or 13%. China posted the largest increase in absolute volumes, importing over 31% more LNG year-over-year, as gas continues to increase its share of the overall energy mix.

In addition to strong Chinese demand, LNG growth was broad-based. For example, European demand grew by 68% year-over-year, bolstered by declining indigenous gas production and continued coal-to-gas switching for power generation.

Slide 12 shows Wood Mackenzie's expected net LNG demand growth of nearly 150 million tonnes between 2018 and 2025. It's important to note that Asia, excluding China, plus Europe, together account for nearly 2/3 of the projected LNG demand growth through 2025.

Turning to Slide 13. Over 21 million tonnes of new LNG capacity is scheduled to begin production in 2019, primarily from U.S. projects, which are expected to have a significant impact on ton-mile demand. Overall, approximately 107 million tonnes of new capacity is scheduled to start production from 2019 through 2024, including Sabine Pass Train 6 and Mozambique LNG, both of which took FID in the second quarter of 2019. The LNG supply picture continues to be dynamic and growing. Wood Mackenzie forecast that, including projects already sanctioned, approximately 80 million tonnes of LNG capacity will reach FID in 2019. Slide 14 shows how U.S. exports have positively impacted shipping demand. Since 2016, an average of 1.8 ships have been required for 8 million tonnes per annum of U.S. exports, a positive development for shipping demand, particularly considering the significant amount of U.S. liquefaction capacity expected to be online by the end of 2020, approximately half of which has been sold on a multiyear basis to Asian buyers.

Slide 15 illustrates our view of shipping supply and demand through the end of 2020, based on Wood Mackenzie and Poten data. As you can see, the market is expected to be structurally tighter through at least the end of 2020, based on Wood Mackenzie's latest quarterly LNG supply and demand estimates and the underwater fleet -- shipping fleet, plus scheduled vessel deliveries.

Slide 16 compares weekly average headline spot rates for TFDE carriers with a number of immediately available spot ships. It shows a natural and inverse relationship, where spot rates rise as shipping availability declines. The chart indicates that over the last 2 years and following seasonally weak months in early summer, the number of available prompt ships in the spot market declined as demand for shipping increased to meet seasonal demand for LNG ahead of and during the Northern Hemisphere winter.

On Slide 17, the left panel shows the monthly average headline spot rates for TFDE carriers during 2018 and 2019, while the right panel shows the monthly average from 2011 through 2018. While the absolute values may differ, the trend in 2018 and '19 has closely followed previously observed seasonal patterns, with headline spot rates generally bottoming in early spring and peaking in the fourth quarter.

As the historical data on this chart suggests, we can expect the market to return to higher LNG shipping activity levels and stronger spot rates as we move into the heating season in the Northern Hemisphere winter, new large LNG projects, especially in the U.S., and to production.

Slide 18 shows how periods of spot market strength and weakness have historically influenced activity for multiyear charters. Last year was no exception as a record number of charters greater than 6 months were reported, while spot rates for LNG carriers set all-time highs.

More recently, 13 charters between 6 months and 3 years in duration, were reported in the second quarter of 2019, despite spot rate weakness. Additionally, brokers currently assess the 1-year time charter rate at approximately $85,000 per day, in contrast to the current headline spot rates of $65,000 per day, indicating expectations for a tighter market over the coming quarters.

We anticipate that there will be ample opportunity to recharter our ships on attractive terms as the LNG carrier market improves during 2019 and 2020.

Slide 19 revisits our target to more than double consolidated EBITDAR over the 2017 to '22 period. This target encapsulates the key themes from today's presentation, in-build growth from our new buildings, recent commercial successes, cost control and an expectation of a tightening spot market. With trailing 12-month EBITDA of $476 million in the second quarter, already 34% ahead of 2017's EBITDA, we are making good progress towards this target to the benefit of all our stakeholders.

So finishing on Slide 20. Let me reiterate the key points of the GasLog investment case. While several headwinds weighed on the LNG shipping market in the first half of 2019, the long-term fundamentals for the LNG commodity and shipping market remain robust. We believe that the recent signs of increased activity in the spot market are evidence of tightening supply and demand for LNG shipping. We will use this anticipated improvement and our strong customer relationships to fix some of our open ships' on multi-month and multiyear year charters. This along with in-build growth from our newbuild program should allow a meaningful deleveraging of the business over time, whilst the simplification of our investment case following the IDR elimination should appeal both to existing and new investors. We will continue to focus and execute on those items that are within our control, such as operational excellence, customer diversification, commercial innovation, cost reduction and access to cost-effective financing, all of which underpin our ambition to reward our shareholders with enhanced returns as and when market conditions allow. With that, I would like to ask the operator to open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Greg Lewis with BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [2]

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Paul, I just wanted to talk a little bit more about the decision to leave the Cool Pool and now that we're out of the Cool Pool, how does that -- or does that have any impact in how you think about chartering the spot vessels? Like has this changed the strategy at all? And with that, there's clearly a lot of other LNG carrier companies, not in the Cool Pool, would you consider partnering with some other LNG ship owners to form a new pool?

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

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Yes. Thanks, Greg. Yes, leaving the Cool Pool was a tough decision. We've had a very good relationship I think we've build in the Cool Pool. I think some of the well-publicized moves that they want to make -- helps us to make that decision. But it also coincided with what we feel is going to be a stronger period in the market. And as we've always talked about, we would like to have a large proportion of our fleet on longer-term charters. Whilst we may keep 1, 2, 3 of our ships in the spot market at any given time, most of the ships we'll put on long-term charter. Having our ships outside the Cool Pool allows us to have negotiations with charters from -- right from spot market, right through to long-term charters.

And I think you saw evidence for that with the Gunvor charters, we put one ship on to them for 9 months, and we put another ship on to them for 3.5 years. Now if we've been in the Cool Pool, we wouldn't have been able to have both those discussions with them. So it allows us that freedom to sort of to put some period charter on the ships, which wouldn't necessarily have been there within the Cool Pool. And as opposed to pools, we -- as I said, we had a very good relationship with Golar and with Dynagas, when they were partners in the pool. And certainly, I do think pools continue to play an important part in shipping. So we would certainly never say never in terms of partnering up with people in the future. But that right now is not on our to-do list.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD and Energy & Shipping Analyst [4]

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Okay. Great. And then just one more for me. I mean you kind of talked a little bit about the, I guess, the medium-term outlook with strong 1-year charters. I think clearly, there's some excitement about as we move into the back half of the year in terms of improving rates. In the event that we see a similar environment to what we saw last year in the back half of the year, what do you -- have your thoughts changed around the special dividend? I have realized you paid one in late Q4. Is that something we should think about as being sort of core to the strategy? Or just kind of how you're thinking about that?

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

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Yes. I think as we look at it, Greg, we want to be in very good skews of capital. As we look at how we allocate our capital in the business, certainly, we want to continue to fund the in-build growth that we have already in the business. We also want to continue to delever the business over time. But also, we do want to be able to reward our shareholders when we see good spot markets. And as we showed, we've got a very strong underlying business and the spot market revenues, if you like the icing on the cake. And if see those pushing ahead, then, yes, we would like to continue to reward our shareholders, but we would -- we do need to see that market improving, and we are hopeful we'll see the market sort of follow as we were saying in the remarks just now that we'll see the market following a similar pattern to last year, where we do see an increase in rates going into the fourth quarter in the Northern Hemisphere winter.

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Operator [6]

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And our next question comes from the line of Jon Chappell with Evercore.

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

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Going to start with an industry question is because I think it's pretty topical right now. So it's going to be multi-part, hopefully, it's pretty simple. So starting with Slide 16, that chart on the left, kind of '19 following the path of '18, I think is super interesting. First part, is there any reason to think that it wouldn't follow the same path? Not necessarily the same magnitude because I think each season is different, but anything you're seeing that would make you think that, that '19 wouldn't look with the same type of trajectory as '18?

And then the second part then is, if you go to slide on 18, that spread between the 1-year time charter and the spot also looks pretty odd in the rest of that chart, prior seasonal patterns followed right on top of each other. What do you think is causing that? And can that be either a leading indicator to '19 following '18? Or could it also be maybe a canary in a coal mine that '19 may be different than '18?

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

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Yes. Thanks, Jon. Great questions. I don't think there is -- the one thing I think that's different this year than last year is the kind of absolute pricing of LNG right now. We're seeing lower prices, which I think has been one of the factors restricting some of the arbitrage and restricting some of the ton miles. We do see the forward curve for LNG prices, both in Asia and in Europe increasing quite markedly. And I think that will definitely stimulate the buying trend again. So we do think that it's going to follow the same pattern as last year. I think what has kept the spot rate -- headline spot rates down so far has been the lower pricing that we've seen in the summer and the lack of arbitrage, I don't think that continues into the winter.

I do think there is the demand there for the shipping. And I think that's why you're starting to see the disconnect between the 1-year time charter rate and the spot rate because our customers are also seeing that and saying, actually, we want to make sure that we are covered because we don't believe that this market is going to stay low. We do believe it's going to pick up, and we do want to get that coverage over what we think is going to be a busy period. So I think overall, we are optimistic that we do see a similar pattern. Another good question after that, of course, is, does that continue into 2020? I think with our supply and demand graph in there, we do think that there is potential further tightening in 2020 over 2019, which we hope will help to maintain shipping rates through the year.

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

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That makes a ton of sense, that's super helpful, Paul. The second question then is, it ties more directly to GasLog. The sale on charter is really interesting, not because it's locked in a rate but because it guarantees the utilization. And I think like sometimes it feel to tail wag the dog with your 5 ships exposed to the spot market kind of overwhelming the backlog that you've created with the long-term contracts on the rest of your fleet. So you made mention to maybe looking at multi-month or multiyear contracts with the remainder of the fleet. As you think about the ships exposed to the market today or to be exposed to the market maybe in the next 9 to 12 months. In the past, you said you'd like to keep a finger in the spot market. But do you think that maybe you could lock in more of those at this part of the cycle just to get a little bit more visibility and stability of the cash flows across the entire fleet?

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

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Yes. I mean I think the really interesting construct for us at this point in the cycle, I mean -- and the great thing is it works for both us and the customers. So we have a view that this cycle is going to strengthen. And so keeping an ability to have some upside on that shape up or take the upside is really attractive. But as you say, getting the 100% utilization, which is one of the things that can affect your earnings quite a lot, is also good. So we like those that construct for both those reasons. The great thing for the customer, of course, is they do get locked into the shipping. They're paying more or less the same rate than their competitors are paying on the spot market. But you have locked in ship. So they're not taking a risk around a fixed rate, which could or could not prove to be a good move. So it works I think for both parties and certainly for us at this point in the cycle, we see this as a nice part of our portfolio to have.

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

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Yes. Okay. That makes sense too. And one more, if I may. It sounds like these calls might be getting a little bit shorter going forward. The Strait of Hormuz headline. Just explain to us how you can go about your normal course of business, meeting your charter obligations, whether it's for Shell or Centrica or Cheniere, if your ships are avoiding that region.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [12]

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Yes. So I think it's a fairly fast-moving situation at the moment. Obviously, with what happened with the Iranians taking out the Stena Impero, gave I think a lot of pause for -- a lot of concern within certainly what's called the Red Ensign Group, which is a group of flags which sort of come under the British influence, if you like, of which Bermuda is one of them.

So we very much follow the Bermudan flag advice. And for a few days, the Bermudan flag advice was not to go into the Gulf. That has since changed, and they have told us that yes, you can go to the Gulf and the British Navy will provide escorts, not just for British flagships, but also Bermuda, Isle of Man, et cetera, which again, is very helpful. So we can now work with our charters. As long as we give 72 hours' notice, we are able to take a convoy in there.

So it's become, I think, more manageable for us. We don't have any ships at present in the Gulf or due to go in the Gulf, so it's not a situation that is affecting us right now. We remain hopeful that it resolves itself quickly, but we are also looking at reflagging options if we think this continues to be a long-term problem and putting the ships into alternative flags, which don't have this issue because, of course, we want to continue to be able to be as flexible and as responsive as possible to our customers.

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Operator [13]

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Our next question comes from the line of Chris Wetherbee with Citi.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [14]

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James on for Chris. I wanted to ask about storage for a second and understand what level of inquiries around storage you're receiving relative to last year. And you had mentioned lower prices, just trying to get a sense if it's really the case for sort of the lower LNG prices causing more volatile piece than last year.

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

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Yes. This -- thanks, James. Right now, we have literally, in the last, I would say, weeks started to have questions around charters for spot voyages, but with the option of having up to 60 days additional time on the back end of it. And the chartering guys here are very much thinking this is linked to people starting to take a look at the ability to have floating storage.

What's interesting right now is if you look at the pricing, both in the JKM in Asia, NBP in Europe, it is a quite a discount to the forward prices in the Northern Hemisphere winter. So it looks as though people are starting to take a look at that.

To be honest, though, if you're going to really take advantage of that, that's probably something that starts as sort of more in September time because you don't want to have the ships there storing for too long because of the boil-off issue. One to 2 months is probably -- as long as you'd want to do it.

So certainly, appears to be some interest. It looks as though that is feasible given the difference in the forward curve to the pricing now. But we're probably more likely to see that kicking in, in September.

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James Monigan, Citigroup Inc, Research Division - Senior Associate [16]

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Got it. And then also wanted to get a little bit more detail around OpEx. Per day, you're doing a good job with it. I just want to get a little bit color -- more color on what you're doing precisely, and how much of that improvement is effectively due to the change in vessels year-over-year?

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Alastair Maxwell, GasLog Ltd. - CFO [17]

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James, it's Alastair. Yes, so the principal factors that have had some impacts are, first of all, the growth in the fleet and the benefits of scale because you're spreading the OpEx over a larger number of operating days, and that particularly applies to the vessel management side of things as we're able to manage a growing fleet but without growing our vessel management headcount accordingly. The second factor is around maintenance and trying to conduct our maintenance in as efficient a way as we can. And that includes things like again the benefits of scale in terms of purchasing lubricants and spare parts, et cetera. Thirdly, we've had some benefits -- and we mentioned this in the fourth quarter results. We've had some benefits from a change in the tonnage tax arrangements in Greece, which is not insignificant. And then lastly, we had had a tailwind from the currency, as I mentioned.

But if you add the first 2 of 4 factors together, those are the things which are leading to us to continue to be able to move towards the OpEx targets that we set out in the Investor Day.

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Operator [18]

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And our next question comes from the line of Randy Giveans with Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [19]

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So looking first at the GasLog Warsaw multi-month charter with Cheniere. Looks like it's almost 2 years in duration or so. What is the rate on that? Can you give us a range? $50,000, $60,000, $80,000 a day?

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Alastair Maxwell, GasLog Ltd. - CFO [20]

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We can't give an actual rate, Randy, because it's obviously confidential. What I would say is, we really like that charter. Literally taking the ship out the yard and deliver it right into our contract with Endesa. So as we said, gives us basically a 10-year charter.

The one thing I would say is, we use the mid-cycle rates as a sort of a guide which gets you into sort of mid-70s. The rate that we've got in this instance is well in excess of mid-cycle rate, so we're very pleased with that. And what's great is Cheniere got a very attractive ship with great unit freight cost.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [21]

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Got it. Okay. And then, recently, there have been a few kind of announced delays from liquefaction facilities to ramp up the Cameroon and Freeport, a few of these other smaller ones. How big of a risk is this to kind of your LNG shipping demand story if those delays, instead of go 3 months, maybe they go 6 months? Is that a trend you think continues over the next year or 2?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [22]

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Yes. I mean I think it's always an issue. It is, I think, one of our mantras in the business is that the ships deliver on time and the projects get delayed, unfortunately. I think this as we get closer to the delivery of those projects, especially the U.S. projects, the chances of dropping back does diminish.

It happened, in fact, this year. I think we started off the year expecting something like 32 million tonnes of new LNG production. I think because of what's happening in Cameroon and Freeport, that's gone down into sort of the low 20s at the moment. And I think that has been one of the factors affecting the supply and demand.

But we do have a slowing order book next year. I think you'll see those volumes coming through next year. Most of the production that's due to come on is very close to being completed, so probably it has less chance at this point in the cycle of dropping back. So I think we're hopeful that where we are on the supply and demand next year is quite a positive for us.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [23]

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Okay. And then I guess, I'll ask one follow-up to that. So on Chart 15 -- or sorry, Page 15 of your presentation, you have the vessel supply line, and you took out the line that usually incorporates some kind of scrappage. Are you now expecting kind of no scrapping on those smaller, older steam vessels? Or is this just a simplification of the chart?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [24]

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Absolutely, Randy, it's a simplification. We just thought actually having less lines in there was helpful. I think you will over time see scrapping, especially on the older pre-2000-built steam ships. But it's very hard for us to forecast what that is, and so it was really just a simplification.

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Operator [25]

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And our next question comes from the line of Ben Nolan with Stifel.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [26]

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I was sweating that Randy was going to get my questions there. The -- I do have a few though, actually, that -- first, curious if there's any update on the Alexandroupolis project. And you guys have sort of been mentioned as a potential candidate for maybe other FSRU projects. Any update on how you're thinking about those type of things?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [27]

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Yes, Alexandroupolis continues to make progress, Ben. Thanks for the question. The -- there was a slowdown because of the Greek elections, which have just taken place. A very pro-business party has just taken power in Greece, which we think is positive for the project in terms of pushing it forward. We continue to make progress, and we continue to be hopeful that we'd take FID on that project. But that will certainly be, we believe, a 2020 FID rather than 2019.

And so as we've said a couple of quarters ago, rather than keep reporting on where -- how that's progressing and the FID, in general, we'll just come back to the market as and when we have some really concrete news to give. But certainly no news doesn't mean it's bad news. No news means that we continue to progress well with that.

And yes, we have been looking at a couple of other potential projects. I know we were reported to have been offered into a couple. I think what we have said is that we will continue to look at projects where we think we can add value from an early point. And we're not going to be competing just on price because I think people who have some cost into this business are going to be very competitive because they need to deploy those assets. We are lucky, we didn't sink capital into it. We can be selective. And if we can find the right projects that allow us to convert our existing ships, then we will continue to do so. So yes, interesting space, but I think some of the projects just continue to take longer to come to gestation.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [28]

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Okay. Helpful. I appreciate that, Paul. And then moving back to the LNG shipping side of the business. I know that in the past you've mentioned that maybe on calls, but certainly in other forums that the way you're sort of viewing your growth profile is absorbing the existing ships that are already on order and pretty much being limited to just additional growth if the options are exercised by your several charters that have options for additional newbuilds and not really looking to reach beyond that, at least at the moment.

Curious if that's still the case. I know that there's been some noise about some tender offers and that kind of thing, so there are at least seemingly potential opportunities. Are those things that you're looking at or sort of sticking with kind of where -- what you said in the past?

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

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No, I mean in general, I think we're sticking with what we were saying, and we really want to bring in the -- in-build growth we have like right now the 7 new buildings, bring those into the fleet. With a lot of new ships coming into the market, making sure we get the right crews for those, making sure we got everything integrated well, I think, is very important for us.

We do continue to have discussions with our existing charters and customers on new vessels, but we're not actively in the market right now looking for new buildings. We think there will be a huge amount of opportunities with the growth and the build-out of new production in '23, but probably more into '24. And we think we'll be in a very good position to take advantage of that.

So we're not in a rush -- or in a hurry to rush into further new buildings, unless it's with existing customers where we can grow the relationship. And obviously, at good returns for the company.

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Benjamin Joel Nolan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [30]

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Sure. That's helpful. And then lastly for me, we've heard a little bit that some of the charters are somewhat sensitive to the new lease accounting and having to show long-term charters on their own balance sheet. And as a consequence of that, there's been some new different types of structures with options and other things that sort of enable utilization or usage of the assets by the charters but don't necessarily require the same balance sheet implication.

So curious if you're seeing that sort of thing. Are durations, contract durations, you think, going to be shortening or changing? And also as it relates to sort of non-newbuild, what are the implications there for a 5-year-old ship or something like that, that's coming off-contract?

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Alastair Maxwell, GasLog Ltd. - CFO [31]

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Yes, Ben, it's Alastair. So you're quite right. We have had some inquiry and some conversations on this topic, and obviously, it became a real issue from 1st of January of this year. And I would say that we've -- some of those discussions have been a little bit more serious than others.

I think nothing immediately on the horizon. It certainly depends on each individual customer and how much priority they put on the impact on the balance sheet of these things. And even though for some of our customers their commitment to LNG shipping are reasonably large in terms of dollar numbers, they can be relatively small in terms of the total size of their balance sheet. But certainly, we have had some of those conversations, but nothing's come out on them yet. And we do have some ideas around solutions to deal with this issue.

I don't think we've noticed any impact on contract durations. And in fact, if you look at our recent charters, particularly with JERA and Endesa, 1 for 12 years and 1 for 8 years. And I'm not sure we're seeing that having -- exerting a lot of pressure, particularly for newbuild ships, for charters to be of shorter durations. And I don't think either in our conversations with customers around on the water ships, I'm not sure this has really come up. But I think it's more of a topic around newbuilds just because of the length of the charters and, therefore, the size of the obligation that goes with them.

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Operator [32]

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(Operator Instructions) Our next question comes from the line of Chris Snyder with Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [33]

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So first question on the variable rate contract structure. Could you provide any color around the floor or ceiling on that contract? I mean I know that's kind of sensitive of information or -- but can you at least maybe compare to the 1-year rate of $85,000 you guys are quoting in the release?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [34]

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Yes, Chris, I'd love to be able to give more guidance on that, but unfortunately, whether it be a contractor with a counter-party, they want to keep that to themselves.

But what I would say is, to give a little bit of help on it, the floor, I think, is well in excess of where we've seen some of the low points in the spot market. And the ceiling is well in excess of the mid-cycle rates. So in that sense, we feel very happy in terms of where that floor and ceiling sits and especially given the fact that we get the 100% utilization through that.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [35]

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Okay, fair enough. And the term length on the 2 variable-rate contracts with Gunvor are quite different. Do you guys prefer more of a multi-month term on these variable-rate contracts, so that will maybe allow you to look for fixed-rate next year in what's expected to be a pretty good shipping rate environment? Or are you kind of happy to take as much term as you can get out of those?

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

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I think it depends on a case-by-case basis. So we'll be happy on some of them to take multi-month. We'll be happy to take multi-year potentially on others. I think what we really want to do is to make sure that we have a kind of balanced portfolio, where we have ships coming off in a ratable way rather than a clump of ships coming off together. I think that's always much easier to manage. And to sort of have different durations, and it means that we can be a bit more -- keep a bit of optionality in the portfolio. So I think we'll keep open mind, but those two, taking a longer term and a shorter term, with Gunvor worked very well for us in this case as well.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [37]

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Okay. And then just lastly. So we're going to see a huge ramp in liquefaction capacity in the back half of this year. Now much of this production has vessels earmarked for transportation, but how should we think about the amount of that supply that could drive spot shipping demand?

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

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Yes. I think the great thing is -- you're absolutely right that most of the production that's coming on have shipping earmarked, right? That's shipping that it's earmarked for is actually appearing in the spot market right now. So what happens, as the new production comes on is that, that shipping gets absorbed, which brings down the number of available ships in the spot market. And I think we had one of the graphs in there. We showed, as you see, the amount of available ships coming down, inexorably the rates in the spot market go up. So I think that's going to be a factor.

And of course, of the production coming on, a proportion of that isn't sold on long term and is available into the market, and we will, I think, see more spot volumes coming from that. So you get like a double whammy from the effect of those ships being taken out and that new production coming on.

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Operator [39]

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Thank you, and that does conclude today's question-and-answer session.

I would now like to turn the call back to CEO, Paul Wogan, for any further remarks.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [40]

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Thank you very much, Chris, and thank you to everyone today for listening and for your continued interest in GasLog Limited. We certainly appreciate it. And we look forward to speaking to you all next quarter.

In the meantime, if you do have any questions, please contact the Investor Relations team. Thank you. Bye-bye.

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Operator [41]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect.

Everyone, have a great day.