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Edited Transcript of GLOG earnings conference call or presentation 1-Nov-18 12:30pm GMT

Q3 2018 GasLog Ltd Earnings Call

Monaco Dec 13, 2018 (Thomson StreetEvents) -- Edited Transcript of GasLog Ltd earnings conference call or presentation Thursday, November 1, 2018 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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* Christian F. Wetherbee

Citigroup Inc, Research Division - VP

* Christopher M. Snyder

Deutsche Bank AG, Research Division - Research Associate

* Donald Delray McLee

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Espen Landmark Fjermestad

Fearnley Securities AS, Research Division - Equity Analyst

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Magnus Sven Fyhr

Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst

* Max Perri Yaras

Morgan Stanley, Research Division - Research Associate

* Michael Webber

Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst

* Noah Robert Parquette

JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst

* 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 Delem, and I will be your conference operator today. At this time, I would like to welcome everyone to GasLog Ltd.'s Third Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

Today's speakers are Paul Wogan, CEO of GasLog Ltd.; Alastair Maxwell, CFO of GasLog Ltd.; 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, and thank you for joining GasLog Ltd.'s third quarter 2018 earnings conference call. For your convenience, this call, 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 this 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 to you all and thank you for joining our third quarter earnings call. I'll begin with the highlights of the quarter. Alastair will then take you through the financial review and an update on Project Alex and our wider FSRU strategy, following which, I'll update you on current trends in the LNG and LNG shipping markets, and on GasLog's strategy before opening the call for questions.

Turning to Slide 3, I'm happy to report what we believe is a significant shift in the LNG shipping market. For some time, we've been talking about how shipping markets reach inflection points, where rates move higher very quickly. We believe that we have now reached just such an inflection point with Clarksons assessing headline spot shipping rates at around $150,000 per day. Against this favorable backdrop, we delivered record quarterly revenues and EBITDA in the last quarter, due in large part to the highest ever earnings from our spot vessels.

We also continue to grow our fleet through the ordering of two newbuildings, backed by seven-year charters to Cheniere. Last week, we announced the sale of the Methane Becki Anne to GasLog Partners for $207 million, which continues our successful strategy of raising equity through GasLog Partners to fund our fleet growth.

There's also been a marked increase in multiyear off-take agreements and we believe it is no coincidence that we have started to see the sanction of new projects such as LNG Canada. We remain confident that this trend will continue.

We have declared a dividend of $0.15 for the quarter, unchanged from Q2 but a 7.1% increase on the same quarter last year. Having reached this inflection point, we believe the LNG shipping market is in the early stages of an up cycle with the coming 2 to 3 years looking especially strong.

This backdrop should strengthen even further the ability of the GasLog group to execute its strategy. If we are correct in our assessment of the cycle, we believe that the future financial performance of the business creates the potential for the delivery of additional value to our shareholders above and beyond ordinary dividends through either special dividends and/or share buybacks.

I will now hand over to Alastair to take you through the financials.

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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. Please turn to Slide 4, where I'd like to take you through our third quarter and year to date results.

As Paul has mentioned, we reported record results with significant improvements in quarterly and year to date revenues, EBITDA, and adjusted EPS due to the growth in our fleet and to strong results from our spot ships. Sustained cost control also played a meaningful part and I am pleased to report that year-over-year, quarterly unit OpEx and unit G&A declined by 5% and 11% respectively. This demonstrates the operating leverage in our platform as our fleet continues to grow.

As a result, while our revenues increased by 21% year-on-year on a quarterly basis and by 10% on a year to date basis, our EBITDA increased by 27% and 14% respectively.

We continue to expect that unit OpEx for full year 2018 will be broadly in line with 2017. And as a result, we anticipate that Q4 2018 absolute OpEx will show an increase on the quarterly run rate so far this year, primarily due to the timing of maintenance and our one scheduled drydocking later this quarter.

Turning to Slide 5, we currently anticipate that the TCE revenues for our spot vessels in Q4 will be in excess of mid-cycle spot rates and this slide gives further insight into our leverage to a tighter LNG shipping market. The left column shows our total EBITDA in Q2 of 2018. The next column shows our Q3 EBITDA with the delta being largely due to the performance of our spot ships in the quarter.

The columns to the right show what our EBITDA would have been and an even stronger market for our spot vessels, all else being equal. In essence, each incremental $20,000 per day would have increased our EBITDA by $11 million on a quarterly basis. That's $44 million on an annualized basis or just over $0.50 per share on a consolidated basis.

Slide 6 provides the detail of the drop down of the Methane Becki Anne, which was announced with the GasLog Partners third quarter results last week. The sale price is $207.4 million comprised of $113.5 million in cash and $93.9 million in debt, which will be transferred to the partnership. We are working hard to close this transaction later this month.

We will have recycled nearly $180 million in equity from the two dropdowns to the partnership this year, and in total, equity recycled to GasLog and debt assumed by the partnership now exceeds $2 billion. Since its IPO in 2014, GasLog partners has recycled an average of $140 million per annum of equity to GasLog.

Moving to Slide 7, we've updated the chart illustrating our future capital commitment to incorporate the Cheniere newbuilds enacted in August. We currently forecast cumulative cash payments for the newbuild program at around $280 million and we plan to fund this from current, unrestricted cash balances of around $160 million, free cash flow generation from a growing on the water fleet, and the strongest spot market, and further drop downs to GasLog Partners. Moreover, scheduled debt amortization continues to free up balance sheet capacity.

Slide 8 provides an update on the FSRU market as well as encouraging recent progress on the Alexandroupolis FSRU project in Northern Greece. On the broader FSRU market, a significant overbuild has resulted in an overhang of tonnage, depressing the returns below -- returns achievable for new charters.

As a result, we will continue with our disciplined approach to capital allocation in the FSRU space. Considerable progress was made in the third quarter on project Alex. Firstly Gastrade, in which we own 20%, launched the tenders for the procurement of the FSRU and associated pipeline and onshore infrastructure. This procurement phase is expected to take around 4 to 5 months and will result in the purchase of an FSRU vessel by Gastrade.

Earlier this week, Gastrade also announced that the market test was launched. The initial phase is opened for a minimum of 45 days, and during this phase, parties are invited to express a nonbinding interest in committing to take capacity in the project.

In tandem with the progress on the project, DEPA and BEH continue to work towards the formalization of their respective shareholdings in Gastrade, as was confirmed by the Energy Minister of Bulgaria just yesterday. A final investment decision is targeted in the first half of next year. Now, let me hand back to Paul.

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

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Thank you, Alastair and turn to Slide 9. As I said earlier, we believe that the LNG shipping market has reached an inflection point with current LNG market dynamics being strongly supportive of the GasLog equity story.

LNG continues to experience the fastest growing demand of any fossil fuel, which in turn is leading to increasing cargo volumes and voyage distances. This has resulted in a significant increase in the utilization of the global LNG fleet and a drastic reduction in prompt vessel availability, pushing spot rates to multiyear highs.

And this positive dynamic is not only a near-term phenomenon. In recent months, increased interest in long-term offtake contracts has stimulated the sanctioning of new production facilities, such as Corpus Christi Train 3 and LNG Canada, with these two projects expected to deliver almost 20 million tonnes per annum of incremental liquefaction capacity.

This new LNG supply will require incremental shipping capacity, creating an opportunity for GasLog's fleet growth to continue, secured by long-term charters.

Slide 10 shows the increase in LNG imports by country on a trailing 12-month basis. LNG demand grew by 23 million tonnes over the 12-month period ending September 30, an increase of 8%. China posted the largest increases in volumes, importing over 15 million tonnes more LNG, up 44% year-on-year, as the country continued to expand its usage of natural gas.

While Chinese demand has been strong, growth has been broad-based, particularly in Asia, as demand from South Korea, Pakistan, India, and Taiwan has grown by a combined 14% year-over-year or approximately 11 million tonnes.

Slide 11 illustrates the significant increase in offtake agreements during the quarter. In particular, Qatargas and PetroChina signed an 18-year SPA for 3.4 million tonnes per annum. PetroChina secured additional new supply through its ownership interest in the recently sanctioned LNG Canada Project and also has an interest in Mozambique's Area 4 LNG Project, which continued to make good progress in the quarter.

Recent news reports suggest that both the Golden Pass Project in the U.S. Gulf and the Tortue LNG Project offshore Mauritania could be sanctioned before year-end, which would deliver a combined 20 million tonnes per annum of capacity. Around 75 million tonnes per annum of LNG supply contracts have either been signed or agreed since the beginning of 2017 with a broad base of buyers.

Slide 12 shows the updated trade flows from U.S. liquefaction terminals, which are a key driver of increasing tonne miles. According to Poten, during Q3, 77 cargos were exported from the U.S. Thirty of these cargos delivered into North Asia, a destination with a shipping multiplier significantly above two times.

During Q3, the average shipping multiplier implied by U.S. LNG exports was 1.8x, a slight decline from levels seen earlier in this year following seasonal trends, but still significantly above the historical global average shipping multiplier of 1.3x.

Slide 13 shows recent Goldman Sachs and DNB forecasts, which support our view that continued U.S. LNG supply growth combined with an increasing Pacific Basin demand will drive further expansion in tonne miles, a positive for LNG shipping demand.

Slide 14 shows both TFDE spot rates from 2011 and the number of reported spot fixtures quarterly from 2015 through to the third quarter of 2018. The green shaded areas highlight the peak years of 2011 to 2014 and the recent significant increase in spot rates. The chart highlights the dramatic move upwards in spot rates since the beginning of September. Clarksons are now reporting headline TFDE rates of $150,000 per day compared to $58,000 per day at this time last year, an increase of approximately 160%.

This has been driven by a combination of high cargo volumes and the very limited pool of available prompt tonnage. The table in the top right corner shows there were 76 reported spot fixtures in Q3, down from the record 110 in Q2. Many of the Q2 fixtures were for multi-voyage and multi-month charters commencing in Q3 and Q4, as charterers move to lock in tonnage ahead of an anticipated strong winter market.

As a result of which, there are a limited number of open ships available to take advantage of the current high headline rates. Given the strengthening rate environment, we expect the earnings of our spot vessels to be above mid-cycle in the fourth quarter. We also expect continued strength in the shipping market to create attractive opportunities to find term employment for our open, on the water vessels, and uncommitted newbuilds during 2019 and beyond.

Slide 15 plots the TCE of our spot ships against the Clarksons' average headline rate assessment on a quarterly basis since the start of 2017, lagged by 45 days to reflect that vessels in the spot market are usually fixed forward. And you can see the strong relationship between the two. We turn the ratio of time charter equivalents to headline rate as the capture rate, which incorporates utilization, balance bonuses, positioning fees, and offhire days between fixtures.

In both Q4 '17 and Q3 '18, the two best quarters for the spot market in recent years, the capture rate has been around 70%. We believe the capture rate can move significantly above this level if we see a ratably tighter market over a sustained period of time.

Slide 16 uses Poten data and shows 96 LNG carriers on order. Given expected deliveries in 2018 and 2019, and assuming no further orders, the order book would fall to 9% of the underwater fleet by the end of next year, a relatively low level by historical standards. Thirty-four of these vessels, or roughly 1/3, are currently uncommitted with a majority of these due to deliver from Q2 2020 onwards, providing further evidence of a tighter spot LNG shipping market this winter and next. Only five unfixed LNG carriers are scheduled to deliver in 2019, one of which is a GasLog vessel.

Slide 17 provides our view of shipping supply and demand through the end of 2022 based on Wood Mackenzie and Poten data. As you can see, the market is expected to be extremely tight between now and 2021, based on Wood Mackenzie's latest demand growth estimates and the underwater fleet plus current order book. As a reminder, a ship ordered today will now deliver in 2021.

Looking out to 2022, we estimate that the market still requires incremental shipping capacity. However, in a tight market, it is unlikely there will be much of any scrapping and any marketable ships will be pulled out of layup. Therefore, we believe that there is more than sufficient time and yard capacity for vessels to be delivered and owners need to be careful not to overbuild the market.

Slide 18 shows our progress towards our Investor Day target of more than doubling consolidated EBITDA over the 2017 to 2022 period. There are four building blocks that these target. The first is a recovery in TCEs to midcycle levels. Q4 spot earnings are expected to be above midcycle levels with a prospect of a ratably stronger market for at least the next 2 to 3 years.

The second is the contribution of our newbuilding program. This now includes the Centrica newbuild announced in May and the Cheniere newbuilds announced in August. Furthermore, our two highly competitive uncommitted newbuilds are expected to deliver into a tight market and we should be able to charter these out at attractive rates.

Third, the incremental market share capture target has already been reduced by some 40% following the fleet growth announced this year. And finally, we are making good progress towards delivering a 1,500 per vessel per day reduction in combined G&A and OpEx.

So let me finish on Slide 19. We used this slide to conclude our Investor Day in April and we've updated it to summarize the delivery on our strategy since then. We have continued to grow and modernize our fleet through ordering newbuildings, backed by multiyear contracts to Centrica and Cheniere, demonstrating our ability to win new business and new customers.

We've continued to deliver high levels of safety and operational performance. And in particular, I'd like to take this opportunity to congratulate our team on the recognition they received at the recent Safety at Sea Awards, demonstrating again that safety means the world to us and that our standards are recognized as being industry leading.

We have accessed new pockets of capital, as evidenced by Tortoise's recent investment in GasLog Partners, enabling the partnership to continue recycling capital back to GasLog.

The strong LNG shipping outlook provides the backdrop for a sustained period of higher spot rates. In addition, we believe it will provide opportunities to find term employment for our on the water vessels and our uncommitted newbuilds at attractive rates.

If we are correct in our assessment of the cycle, we believe that the future financial performance of the business creates the potential for the delivery of additional value to our shareholders above and beyond ordinary dividends through either special dividends or share buybacks.

And 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) Our first question comes from Michael Webber from Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [2]

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Paul, just around rates, we've obviously -- we hit a point where the improvement in rates is no longer linear and kind of moved to an exponential improvement pretty quickly. It seems like, at least from what we're hearing in the market, that anyone with an open vessel can effectively strip the majority arb away from somebody with a physical short position that's uncovered.

Is that something you guys are seeing? And if we're really talking about spot rates on a one-off basis that are in the $190,000 to $200,000 a day range and 3 to 3.50 or more per mmbtu, how long can that kind of tight market persist? We've hit these highs very briefly in the past. It got extremely tight very quickly. Just curious -- just any historical context in how you think about this kind of situation continues for a while?

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

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Sure, Mike. Obviously, as the rates go, as you put it, exponentially higher, it does have an effect. We talked about this previously and we talked about it in the prepared remarks about hitting this inflection point where you get this tight market where the rates move very, very quickly.

I think those rates come into an equilibrium, which allows the cargos to move. But we did some work on this quite a while ago and these rates can easily be into the six figures and keep the ability to move cargo certainly from the U.S. Gulf and potentially from Europe into the Far East. So there's that side of it.

The other side of it is part of the strength of this market I think has been driven by the arbitrage opportunities. But part of it is now being driven simply by the new cargos coming on stream. So in fact, this market, unlike the previous ones we've seen, was led by the Pacific market tightening up as we just saw more -- the ramp up of volumes coming out of Australia.

So I think the shipping rates do find an equilibrium that allows those arbitrage cargos to move. I think that equilibrium rate is pretty high, but I think there's just -- as well as that arbitrage, there's just that very strong underlying cargo -- need to move cargo, which is underpinning this market.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [4]

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That's helpful. And then as a follow-up, you guys always do a good job of laying out the order book and your thoughts on forward dynamics. We're always seeking some new entrants and it seems like there's less ability there to go out and place big orders on spec but they're rather kind acting as a bit of a drag on the near term charter market, kind of 2 plus 2 plus 2 type vessel strings.

I'm just curious, one, do you think that's -- how much of a drag do you think those new entrants are actually having on the near term, kind of the immediate long-term charter market? And is that more of kind of a pain trade that you're taking up front rather than having someone come in and put an order in for 10 or 15 spec vessels that you'll pay for 10x over in a few years?

And then in terms of the order book in general, how many more orders over the next six months would you need to see for your outlook to get significantly more cautious?

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

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I think the great thing is, of course, when we look at the short-term market, Mike, it takes 2.5 years to build these vessels. So we're really talking about vessels ordered now coming in 2021. We signaled it a bit in our prepared remarks. We still believe that there is a need for additional ships in 2021 but the ability to -- there's certainly the shipyard capacity and certainly the ability of owners to overbuild the market.

If you look at the last three years, actually, what happened was ship owners didn't actually overbuild the market. They built the ships too early and they've been waiting for the production to come online. And I think our concern is you could have a similar effect here where we haven't seen much FID taken over the last 2 to 3 years and there won't be a lot of new production '21, '22, '23.

And so what people shouldn't be doing, in our opinion, is building ships into that period hoping for expanded demand for vessels. I think we need to be very sort of disciplined in building ships into the new production, which is undoubtedly coming. LNG Canada, Corpus, 23, et cetera just being the first -- the start of it. So I think you'll see us being very disciplined around our ordering.

Now, in terms of the market, I don't think we're in a situation yet where we have overbuilt the market. I think there are still opportunities for companies such as us to get the returns that we need for newbuildings.

But certainly, again, we'll be disciplined and I think that if people are coming in and undercutting the market with newbuildings at rates which don't make sense, you won't see us competing with them as we've shown in the past. We like to be disciplined with our capital and we've signaled that we're willing to -- very much willing to return capital to shareholders as well as look at growth.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [6]

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And that mechanism of maybe coming in and undercutting the market for long-term charters, would you think that's more efficient than, say, last cycle where you saw just a lot of spec orders too early they kind of to wait in the market for a couple years before they could find employment?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [7]

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I think it's difficult, especially for new entrants, to take long-term contracts. That's still the case. The operational expertise, having that operation in-house, having a good reputation I think is very -- all very important factors.

I don't think those have lessened since the last cycle. So I think some of the new entrants coming in will struggle to find long-term contracts. And of course, if that is the case, then of course that makes their financing more expensive. It means that they have to put more equity into those ships and puts them at a disadvantage. So I don't think those barriers have fallen at the moment, Mike.

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Operator [8]

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Our next question comes from Jon Chappell from Evercore.

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

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I thought this capture rate chart was very interesting because I think a lot of people see the headline numbers and apply 100% utilization of that, and maybe have some expectations that are a bit -- setting the bar a bit too high.

So is there any way you can kind of give us -- I think you put in the press release 82,000 was the Clarksons' average for the third quarter. I understand there's some commercial sensitivities around what the cool pool does and what your ships earn. But thinking about things sequentially 3Q to 4Q, kind of where were you on your open ships on an effect TCE? And I know you said above midcycle for 4Q, but how much above midcycle if we're assuming 100% utilization on their ships in (inaudible)?

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

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I think if you look at the slide that we put in -- on Slide 15, we sort of showed there the returns in the Q3 for the vessels, which has got us into a sort of low 50s for those vessels. We have seen the market being very much stronger. There is the time lag that we talked about but when -- we're pretty confident to say we're going to be above midcycle levels, Jon, because at this point, we're beating that fairly comfortably.

But I think we have to not get ahead of ourselves because when a shipbroker shows you a rate, they're usually saying what do we think the next fixture is going to be at? How do we see this market? It's not saying the last 10 fixtures have been done at $150,000 a day so to speak. So again, there's a little bit of -- we use the headline rates to give some guidance but they're actually sort of more of a forward view of what's going to be fixed.

And you may only get one or two ships fixed at those type of levels in a quarter. And that's where we talk about the sustainability of it. Because if you get the market up to a level and it's sustained over a longer period, then your capture rate becomes higher.

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

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Completely understood. Just didn't want to get the expectations too high and cause some undue volatility. So my follow-up -- probably talked about increasing return of capital to shareholders before but it seems just a lot more prevalent in this market or in this press release, which is obvious given the strength of the market.

So can you talk about the timing that you're thinking about? I mean do you need to see, to your point of sustainability, 2 to 3 quarters of real strong above midcycle levels before you start thinking about introducing either one of those levers that you talked about, the special dividend or the share buyback? Or do you feel confident enough in the near term outlook that it's a bit more imminent than that?

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

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Yes, you're right. I think how we're seeing this market develop has certainly given us more confidence, but it was a message that we used at our Investor Day as well, Jon, where we started to talk about this because we were anticipating that we were going to be going into this stronger cycle. And it's something, even going back to our IPO in 2012, where we talked about wanting to be a good steward of capital for our shareholders.

I think our shareholders have been very patient over the last 2 to 3 years of a bad market. So I think it was important for us today to sort of say we see this market moving. We see the sort of changing dynamics and that we're going to be very thoughtful about being able to then enhance our shareholders' returns.

In terms of the timing, I think I have to defer to the fact that that's actually a Board decision for us, something that they kind of look at and will take these things into consideration. So I wouldn't like to go into detail on when and how much at this point. But certainly, I think the dynamics that we're seeing in the market are all very positive right now.

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Operator [13]

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Our next question comes from Chris Wetherbee from Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [14]

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Wanted to pick up on that last question. If presumably you're talking dividend increases I guess in terms of returns to shareholders, but maybe you're not. I guess I just wanted to maybe get a little bit more specific when you think about that. Is there other avenues you could take. I'm just kind of getting sense of what exactly you're thinking.

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

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We wanted -- in the prepared remarks and the presentation, we talked about the fact that we see special dividends and share buybacks in particular as the way that we could enhance shareholder returns. We've had ordinary dividends and we've managed to pay through the vicissitudes of the market and sort of slowly increased that.

But we see, I think, the share buybacks and the special dividends as the way that we would be able to sort of do this in the coming market.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [16]

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Any one of those have a particular preference from a management perspective, understanding that the Board obviously has got to approve it as well?

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

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No.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [18]

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Fair enough. One question I guess about the order book and, as you look out over the course of the next couple of years, what would you expect the sort of progression of new orders coming into the market to look like?

Should we see sort of a flood of new orders as we turn the page into 2019, presuming we can see sustainability of the current strength in the market? Do you think it kind of gets layered in a little bit more gradually to try to time with upcoming projects in the out years?

I'm just trying to get a sense of maybe how we should expect to see that. Because clearly, we're going to need more vessels, particularly in those out years.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [19]

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I hope, Chris, that we would see this done in a measured and thoughtful way. You're absolutely right. There's a lot of new production we believe is going to come on stream, but let's say that someone is saying it's going to be 2023. We should learn from history and then sort of factor in that's more likely to be 2024.

And so to rush out and order ships in 2019 to deliver in '21 just when we may be seeing a plateauing until the new production comes on I think risks us getting into the same situation we got into in 2013-2014 when a strong market lulled people into going out and over ordering.

So I think that's where we see a measured approach. You're absolutely right. There will be certain need for some ships and there will be the ability to put those -- for people to come in and put long-term contracts against ships. But that I think is going to be very important that we're disciplined in that.

I think the other thing that's interesting as well is yard prices have started to move up. I think as yard prices start to move up, the returns that you need for those ships obviously start to increase. So I hope again people are thoughtful about that as they're looking at their newbuilding plans.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [20]

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Okay, that's helpful. And one last one here, just as you think about the strength in the market. Is there any opportunity -- and I apologize if I missed this in previous remarks because I was jumping between two calls. Is there any opportunity for some of the open ships? Would you consider potentially putting anything away? I'm not sure if there's the opportunity to do that now but do you think that this is the right mix of spot versus contract currently?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [21]

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We have 6 ships in the group currently trading in the spot market. I think as we've said before, we would very much like to have access to ships in the spot market because that gives us the ability to have an understanding of what's happening in that market and gives us the ability to showcase what we hope is our operational excellence to new customers.

So we'd like to do that but I think as we work through this cycle, I think there will be a lot of opportunities to term ships out, to put ships on multiyear contracts. And I think you would see us doing that with some of our open ships. Probably in an ideal world, keeping, say, 2, 3 of our ships open to the market so that we have that window, if you like, on what's happening.

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Operator [22]

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Our next question comes from Espen Landmark from Fearnley.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [23]

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On the spot market, people tend to talk down the turbines but they're actually doing 100,000 a day now, which is not bad for these vessels with typically little depth on it. But the GasLog, 50,000, 75,000 a day towards the TCE is kind of larger what the fuel and (inaudible) differences suggest. So I guess there's more focus on arbiters cargos are using, less interest in turbines despite the apparent cheaper economics.

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

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Well, we're not actually trading any steamships or turbines in the market at the moment, Espen. But I can give you my kind of view on this. As we've seen before, when the market becomes this tight then tonnage becomes the last ship off the block, if you like, and often, we get a higher rate.

So there's no reason why a steamship shouldn't be going at higher rates if people need to move the cargo. However, I think for people who have had steamships in the market for the past 2 or 3 years, I think they're a little bit gun shy of the returns they've been getting and probably are willing to accept the breaks, which are lower than the actual arbitrage to TFDEs would suggest.

But I think as we move into the higher market and people become more confident, you may well see that, if you like, the arbitrage between those two closing to a much closer difference in terms of the landed freight costs for each type of vessel.

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Espen Landmark Fjermestad, Fearnley Securities AS, Research Division - Equity Analyst [25]

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And then kind of sticking to this arbitrage, the freight I guess $3, $4 per mbtu for each cargos. But when you look at the spread, do you think the charters are treating the liquefaction cost as kind of a sunk cost or is it included in the delivered price? And I guess does that change for spot cargos out of the U.S. above the nameplate capacity?

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

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It seems a long time ago now when we were talking about potential shut-ins, in the U.S. gulf and we were talking about liquefaction costs being sunk costs. But for a lot of people, those are sunk costs.

But a lot of this product has been taken on long-term charters where people are going to move the cargoes, contract into the Far East. And so I think whilst the cost of the shipping is important, the fact that people need to move the cargo, need the cargo is also very important. And if you can't send that cargo from anywhere else, it's going to move longer distances.

But as I said earlier, I think what we're seeing now is both an arbitrage driven business, but also a business which has just been driven by the sheer weight of volume of cargos, which have been shipped from the ramp up of the new facilities. And I think the other thing is there are a number of ships which are on longer-term charters, et cetera, which are not necessarily costing their owners $3 or $4 and they're delivered cost.

So we go to capital, as I said, the spot fixtures that we're seeing are a very small percentage of the market right now.

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Operator [27]

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Our next question comes from Randy Giveans from Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [28]

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Two quick questions. So first, obviously, spot term rates rallying in recent months. Have you seen any impacts to either the multiyear time charters or asset values in the last 4 to 5 weeks?

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

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In terms of asset values, we haven't but it's a very liquid market. So you seldom see sale and purchase of the ships, which would give you sort of asset value. My guess is that if you wanted to buy an LNG ship now, you would pay a lot more but that's kind of only my view of it.

In turns of time charter rates on multiyear charters, then yes, I think there is definitely pressure on those. I think again, as you look at it from an owner's point of view, you're always looking, what can I earn in the spot market over the next few years against maybe going out for a longer period against the time charter market. And certainly, those rates move upwards.

But I think one of the things we have talked about in the past is that we do foresee, as we see this market tightening, that producers, traders, et cetera don't want to be short shipping and will come in to make sure they lock in. So I think we will see more longer-term business coming available. And I think it will go at higher rates.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [30]

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And then as you noted, spot rates and capture rates are both increasing. With that, are all the vessels in the cool pool currently employed or any of them currently looking for cargos?

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

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No, they're all currently employed.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [32]

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I guess I'll throw one more quick one in. So 20% shareholder in Gastrade. You've already secured the operation and maintenance contract. So I guess how do you feel about your chances for securing the FSRU contract? And then with that, is the FID likely in the first half of '19, is that when they announce who has won that FSRU tender or will that come before FID?

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Alastair Maxwell, GasLog Ltd. - CFO [33]

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Randy, hi. It's Alastair. So, important to point out here that we're obviously, if you like, on the other side of this. We are a 20% shareholder in Gastrade but we are a participant in the procurement process to secure an FSRU for the project. And so we're not privy to the information on how that process is going and who is participating and so on and so forth. But we are participating in it actively and we're hopeful that it might be one of our ships that is selected.

I think that that process will clearly end before FID is taken and so I would expect that an announcement on that will be made ahead of FID being taken.

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Operator [34]

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Our next question comes from Max Yaras from Morgan Stanley.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [35]

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I want to dial in a bit on the special dividends or share buybacks. Paul, this slide 5, you talked about what an uplift in rates would mean for EBITDA. I'm just wondering what would the mechanism be for dividends and buybacks and could it potentially be based off of that, let's say we do see $20,000 a day uplift over midcycle. Could it be a percentage of that or how are you thinking about what that would be based on?

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Alastair Maxwell, GasLog Ltd. - CFO [36]

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It's Alastair. So what that slide does is it tries to illustrate the leverage that we have to a stronger spot market. And as we said, for each $20,000 a day increment in TCU rate spread across the six ships that we have trading in the spot market at the moment results in that $11 million on a quarterly basis.

As Paul said earlier, I think what we're doing here is we're signaling clearly our intent to consider enhancing shareholder returns going forward. I think what we're not doing is tying that to any particular spot rate or any particular target in terms of cash flow generation. But we do feel confident given the backdrop for the industry and confident in terms of the execution of our strategy that we will be able to increase returns to shareholders over the coming quarters.

But there's no intention in that slide to tie the two together. It's really to illustrate the leverage that we have to a stronger market.

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Max Perri Yaras, Morgan Stanley, Research Division - Research Associate [37]

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Then just any color on where 1- to 3-year rates are at, where 5-year rates are at? And are you still just kind of waiting for those five or longer rates to be over midcycle before you fix? Or kind of how should we think about when you fix long-term vessels?

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

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I think there's quite a lot of discussions going on in the market at the moment in both -- anywhere from 1 to 5 years and I think it also depends upon the ships as well. If you're doing it with steamships, you're probably talking -- you are talking lower rates and TFDEs and the XDFs.

But if you took the TFDEs, I think certainly at this point, anybody talking around multiyear charters are talking at or above midcycle rates. If we talk about midcycle rates in the 70s, people are talking above that. Now, we're still waiting to see those deals actually be consummated but just to give you some sense of where people are looking at it.

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Operator [39]

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Our next question comes from Donald McLee from Berenburg.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [40]

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The first one is just around growth. In terms of growth potential, how has the recent rate strength for the LNG carrier market maybe impacted your view on incremental FSRU opportunities?

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Alastair Maxwell, GasLog Ltd. - CFO [41]

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Don, say that question again.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [42]

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Yes, I was just wondering as the LNG carrier market has picked up from a rate perspective, has that impacted your view on maybe additional opportunities in the FSRU space?

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

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I think we've always sort of made it clear that how we allocate our capital, we want to put our capital to work in the best sort of risk-reward area that we can. I think we're very much believers in the FSRU market in the longer-term. But as we talked about earlier, the overhang of tonnage, which is in the market, which needs to work through, is pulling down returns in that market. And of course, the opportunities and the returns in the LNGC market are improving.

So when we look at either potential projects to either convert our ships into FSRUs or keep them as LNG carriers, we'll obviously be taking that into account. So I think you're correct. The LNG market, if you like, puts the hurdle up a bit for the FSRUs and in addition, the FSRUs need to work through the overhang at the moment. But I think longer-term, I think the FSRU space is still one that would be attractive for GasLog.

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Donald Delray McLee, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [44]

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And then just one more on growth. What are your views on the small-scale LNG market and is that something that you've explored as a potential avenue of growth?

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

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I think as we see in the growth in LNG and the take up across the world, I think there's going to be a lot of opportunities, both in the small LNG space and in the bunkering space as well. I think it's something that's interesting, something that we would be very interested in talking to our customers about.

I think right now, we have a lot of opportunities in the larger carrier space, which I think plays to our strengths and we're happy to do that. But certainly, I think as the market develops, you will see us showing a keen interest in other areas of the LNG transportation chain.

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Operator [46]

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Our next question comes from Chris Snyder from Deutsche Bank.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [47]

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So I'm just trying to differentiate between the capture rate and just the natural lag that you always see in a rising spot rate environment. So for example, if headline rates were to stay where they are now at, say, $150,000 a day every week through the end of Q1, could we expect that Q1 '19, your cool pool vessels to earn that $150,000 rate or will it still come in below that?

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

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I think as we talked about, there's two things probably on this, Chris. One is, as you say, this is the sustainability of it. So if you saw it, or I would say -- suggest it would be out 2, 3 quarters, then any historic fixtures are finished. You're fixing into that market. You would be fixing in at that rate.

The second is the actual headline TCE rate that's been quoted. Is it actually the rate at which fixtures are being done on a regular basis? Or is it, for example, the broker's view of what the next fixture would be? But certainly, if we saw it staying at $150,000 for a long period and there were a number of fixtures done at those rates, then yes, you would expect the capture rate to be that.

But that's the thing, you need those two things to happen. You need a number of fixtures done at the rate that's actually being said and you need them done over a period of time so you'd catch up on that lag effect.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [49]

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Thanks. I was just trying to get a feel for when that capture rate approached 100%. So then just a follow-up. Obviously, everyone is pretty bullish on rates for 2019. But when you guys look out to next year, what gives you the most concern? Like maybe, hey, what could potentially go wrong here in 2019? And then just kind of excluding just continued elevated newbuild ordering because that won't hit the market until 2021.

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

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It's a very good question. It's difficult to see right now, what stops that market being strong. As we look at the demand -- supply and demand forecast of the ships, it actually tightens further in 2019. And in theory, from our slide that we show, actually the shipping supply goes into a deficit, which is obviously a very theoretical thing.

So I suppose the only thing that would stop that is somehow if we had some kind of demand disruption that somehow there wasn't the demand for the ships. But it's difficult to see something given the fact that we're seeing the supply coming from a large number of areas. We're seeing demand globally increasing across the board. It's difficult to see anything in particular that could do that.

So I suppose that then you're really looking at very large macro trends. Is there a big recession, which cuts down on energy consumption or something like that? But certainly, in terms of the micro where we have some view, some ability to affect it, it's very difficult to see what makes this market weaken considerably in 2019.

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Operator [51]

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Our next question comes from Magnus Fyhr from Seaport Global. Please go ahead.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [52]

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I just had a question on Slide 17 on your supply and demand balance. Looks like 35 to 63 vessel shortage by end of 2022. With new vessels impacting 2021 deliveries, it only looks like you need to build between 18 to 35 vessels a year to meet that shortage. Do you have any idea what the annual capacity is now from the yards to deliver LNG vessels in that timeframe?

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Paul A. Wogan, GasLog Ltd. - CEO & Director [53]

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It's difficult to put an exact figure on it, Magnus, but I would say it's somewhere around about 50 vessels give or take 5 years, 45, 55 kind of vessels. So that's kind of our point. There isn't a shipyard shortage of availability which can affect this. It really does come down to the owners being very disciplined in terms of their ordering. The shipyards have enough capacity to be able to build the vessels to meet this demand, without a doubt.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [54]

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So discipline we always know is somewhat questionable. Is there anything different this time around, besides potentially pricing moving higher? But you're also seeing higher spot rates, so it doesn't seem like that would be a deterrent to order more ships.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [55]

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No. I think in terms of -- the pricing does I think help in terms of being a bit of a deterrent, as we talked about earlier. Unless you're very confident you can put the ships on long-term charters when they deliver, especially for a new entrant, you're going to be looking at higher financing costs. You're going to be looking at a larger slug of equity into the ships.

That is a problem I think for new entrants. We saw it the last time around where the new entrants ordered ships and then struggled to put them on long-term charters and found themselves in a spot market which was not particularly a happy place to be for 2 to 3 years. And so I just hope people learn from history.

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Magnus Sven Fyhr, Seaport Global Securities LLC, Research Division - MD & Senior Shipping Analyst [56]

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All right, just one last one. You guys have done a good job on getting the cost down here in the last couple of quarters, both on OpEx and G&A. Is there anything left there to do or are these kind of good run rates going forward?

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Alastair Maxwell, GasLog Ltd. - CFO [57]

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It's Alastair. So no, we think we have got more to do. We're working very hard on the cost base in terms of the absolute level of cost across all the areas of OpEx and G&A. In addition to that, particularly as far as G&A is concerned but also as far as a not insignificant piece of OpEx, which includes vessels management is we do have the scope to leverage the platform we have and to achieve economies of scale as the fleet grows without their being substantial increases in OpEx and G&A, at least those aspects of OpEx.

So I think we're working hard on both of those fronts in terms of delivering the targets that we set out at the Investor Day, which was $1,500 per day between OpEx and G&A over the horizon of the Investor Day.

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Operator [58]

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Thank you. Our last question comes from Noah Parquette from JPMorgan.

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Noah Robert Parquette, JP Morgan Chase & Co, Research Division - Senior US Equity Research Analyst [59]

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Paul, I know in the past you talked about how traders would look to optimize cargo value. Has that changed at all? Have you seen any difference with the move up in spot rates or in a sense optimized freight? I know SSY mentioned it briefly last week but would love to hear your thoughts and what you see.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [60]

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It's a very good question. I think it does -- once you get to the point where the market gets very tight, you are obviously trying to optimize your earnings on your cargo. But there does come a point where you say, well, actually, I do need to try to optimize on my freight either because there are no ships available, therefore how can I get around that. Or is there ability to sort of swap out. So I think the higher prices do push the charters to try to do that.

The ability to do it though, I think, especially in a short time frame is not always achievable. But certainly, I think they'll be looking at it. But fundamentally, what they're looking at is where's the best price for their cargo and how do they somehow extract that best price.

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Operator [61]

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Thank you. This concludes our Q&A session. At this time, I'd like to turn the call over to Paul Wogan, CEO of GasLog Limited, for closing remarks. Please go ahead.

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Paul A. Wogan, GasLog Ltd. - CEO & Director [62]

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Thank you, Delem. 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 in the next quarter. And in the meantime, if you have any questions, please contact the Investor Relations team. Thank you very much.

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Operator [63]

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Thank you, ladies and gentlemen, for attending today's conference. This concludes the program. You may all disconnect. Good day.