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Edited Transcript of GLOP earnings conference call or presentation 30-Jan-19 1:30pm GMT

Q4 2018 GasLog Partners LP Earnings Call

Jan 31, 2019 (Thomson StreetEvents) -- Edited Transcript of GasLog Partners LP earnings conference call or presentation Wednesday, January 30, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alastair Maxwell

GasLog Partners LP - CFO

* Andrew J. Orekar

GasLog Partners LP - CEO & Director

* Joseph E. Nelson

GasLog Ltd. - Deputy 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

* Fotis Giannakoulis

Morgan Stanley, Research Division - VP, Research

* Gregory Robert Lewis

BTIG, LLC, Research Division - MD

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Michael Webber

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

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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My name is Joelle, and I'll be your conference operator today. At this time, I would like to welcome everyone to GasLog Partners Fourth Quarter 2018 Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

Today's speakers are Andy Orekar, Chief Executive Officer; Alastair Maxwell, Chief Financial Officer; and to commence the call, Joseph Nelson, Deputy Head of Investor Relations.

Mr. Nelson, you may begin your conference.

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Joseph E. Nelson, GasLog Ltd. - Deputy Head of IR [2]

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Good morning, and thank you for joining GasLog Partners Fourth Quarter 2018 Earnings Conference Call. For your convenience, this call, webcast and presentation are available on the Investor Relations section of our website, www.gaslogmlp.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 fourth 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 Andy Orekar, CEO of GasLog Partners.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [3]

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Thank you, Joe. Good morning, and thanks to everyone for joining GasLog Partners Fourth Quarter Earnings Call. I'll begin today's call with our highlights for the quarter and 2018. Our CFO, Alastair Maxwell, will follow with a review of our financial performance and dropdown pipeline, after which I'll conclude with an update on the LNG and LNG shipping market as well as our distribution growth outlook. Following our presentation, we'd be very happy to take any questions you may have.

Turning to Slide 3, you can see our highlights for the fourth quarter. Following strong operating performance and continued fleet growth, today, I am delighted to report our highest ever quarterly and annual partnership performance results for revenues, EBITDA and distributable cash flow.

We declared a distribution of $0.55 per unit for the fourth quarter, or $2.20 on an annualized basis, an increase of 3.8% over the third quarter of 2018, and an increase of 5.1% over the fourth quarter of '17, meeting our guidance of 5% to 7% growth that we established for the year.

Our coverage ratio for the quarter was 1.17x or 1.22x when adjusting for the dry-docking of the GasLog Seattle.

During the quarter, GasLog Partners and GasLog Limited agreed to modify the partnership agreement with respect to GasLog's IDRs, permanently reducing our expected cost of equity capital at the partnership. In addition, we completed the dropdown acquisition of the Methane Becki Anne, with an attached charter to Shell through March 2024. In November, we raised $100 million of gross proceeds through the issuance of 8.5% Series C preferred equity, which positions the partnership to announce a further dropdown acquisition in the first quarter of 2019. And lastly, we are reiterating our distribution growth guidance of 2% to 4% for 2019. And today, our board has further authorized a $25 million common unit repurchase program over a period of 3 years. This buyback authority diversifies our means of returning capital to our unitholders, particularly during periods of market volatility as we've seen in the last few months. And repurchases of our common units offer the added benefit of improving our coverage ratio.

Turning now to Slide 4 for a look at our track record of growth during the last year and since our IPO in 2014. 2018 was an active and transformative year for GasLog Partners. We completed 2 vessel acquisitions, increasing our wholly owned fleet to 14 carriers. We were awarded 3 charters with new customers; 1 with Cheniere for the GasLog Sydney and 2 with a major commodity trader for the GasLog Santiago and 1 of our steamships. These recent announcements have contributed positively to revenues, EBITDA and distributable cash flow, all of which have now grown at over 40% per annum since IPO.

The charts on the bottom of the slide display the increases in our distributable cash flow and our cash distribution on a per-unit basis. The lower left chart shows the growth in our distributable cash flow per unit, which equates to approximately 9% compounded annually. The chart on the lower right displays our cash distribution paid per unit, which has also grown at a 9% compound annual rate, in line with our stated guidance and in line with the growth we've achieved in distributable cash flow, which we believe is an important discipline as we think about setting our distribution.

Please turn to Slide 5, where I will discuss the recent modification to our IDRs. Last November, the partnership and our general partner, GasLog Ltd., agreed to amend the partnership agreement with respect to the IDRs, reducing GasLog's IDR take from 48% to 23% for quarterly distributions above $0.5625 per unit. In addition, GasLog has agreed to waive IDR payments resulting from any asset or business acquired by the partnership from third parties.

The agreement delivers on a commitment we made at our Investor Day last April, and permanently reduces our expected cost of capital. Furthermore, we expect this modification to be immediately accretive to distributable cash flow per unit in 2019 and beyond.

With that as introduction, I'd now like to turn it over to Alastair to you take you through our financials.

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Alastair Maxwell, GasLog Partners LP - CFO [4]

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Thanks, Andy, and good morning to everyone. I'm delighted to report a record year and quarter in terms of the operational and financial performance of the partnership.

Please turn to Slide 6 for our financial and operational highlights. I'd like to start by saying that at the outset, 2018 presented a number of potential hurdles to our financial performance during the year. First the GasLog Santiago, the GasLog Sydney and the GasLog Shanghai, all ended their long-term charters with Shell. Second, we had 3 vessels undertake dry-dockings during the year, 2 of which were longer than normal as a result of the installation of reliquefaction facility. And third, equity markets were volatile for much of the year, presenting challenges in accessing growth capital.

Despite all of this, we achieved record quarterly and annual partnership performance results for revenues, EBITDA and distributable cash flow. Operationally, our fleet continue to perform exceptionally well, with uptime of 100% during the quarter and we rechartered 3 vessels with new customers during the year.

And actually, our EBITDA grew by 19% on a quarterly and annual basis as a result of our fleet growth and strict control of our operating expenses which benefited from lower accruing technical maintenance and insurance costs. Also contributing to our EBITDA growth was the performance of the GasLog Shanghai in the spot market, which improved significantly in the fourth quarter in comparison with the third quarter, primarily as a result of higher spot rates and higher utilization achieved during the quarter. Our distributable cash flow also grew strongly by 8% on an annual basis and by almost 17% on a quarterly basis. As a result, we were able to maintain our distribution coverage at healthy levels in the quarter at the same time as meeting our distribution growth guidance for the year.

Looking forward, we have 2 scheduled dry-dockings with year; 1 in the second quarter and 1 in the fourth quarter, both of which are anticipated to take 30 days to complete.

Turning to Slide 7 and the financial position of the partnership. Our financial position continues to improve as we amortize our debt on schedule. In 2018 as a whole, we repaid $185 million, leaving us with net debt to total cap of 44% at the end of the year and net debt to 4Q annualized EBITDA of 4.2x. We believe that this balance sheet strengthening will provide us with more options to fund future growth.

On the bottom chart, you can see that the partnership has continued to diversify its sources of equity capital, raising over $320 million during 2018, from a variety of sources, including $215 million in preferred equity, $45 million in common units issued to our parent and approximately $62 million from our ATM program, including $53 million in new common units placed with Tortoise, a leading energy investor.

As you will also know, our next debt maturity is in November of this year. We are in active discussions with a number of banks for its refinancing, and currently expect this to be completed in the first half of 2019.

Please turn to Slide 8, where I'll discuss our fleet developments over the last year. The chart on this slide shows the 14 vessels comprising the partnership's fleet. Over the course of the last year, we have successfully rechartered the GasLog Santiago, one of the Methane Jane Elizabeth or the Methane Alison Victoria and the GasLog Sydney all with new customers. In addition, the partnership has acquired 2 ships from our parent, the GasLog Gibraltar and the Methane Becki Anne. Taken together, these actions have increased the partnership's average charter duration to approximately 3 years.

On Slide 9, we discuss how our acquisitions and new multiyear charters this year have contributed positively to the derisking of future financial performance. On the left chart, you can see that our contracted backlog has increased to over $1 billion from $886 million at the start of the year as a result of our 2 acquisitions in 2018 as well as the rechartering of the GasLog Santiago, the GasLog Sydney and one of the steam vessels. On the right-hand chart, you can see that our charter coverage for 2019 has increased to 91% from 72%, while our coverage for 2020 has risen to 72% from 47%.

Turning to Slide 10, where I'll discuss our future growth opportunities. The top panel shows the 13 vessels with multiyear charters owned by our parent and includes the new 180,000 cubic meter carriers with exterior propulsion ordered at Samsung in December 2018, and secured by 7-year charters with Cheniere. The order follows up on the 3 newbuild charter awards [enacted] last summer, 2 with Cheniere and 1 with Centrica. Collectively, these new vessels with multiyear charters further extend the dropdown pipeline for GasLog Partners.

Together, the charter periods range from 2020 to 2029 and represent over $2.3 billion in contracted backlog and over $250 million in total annual EBITDA. These vessels provide visible future growth opportunities for GasLog Partners and will contribute positively to the average charter length of our fleet as well as to our distributable cash flows.

With that, I'll turn it back to Andy to discuss the outlook for the LNG commodity and LNG shipping market.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [5]

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Thank you, Alastair. Turning to Slide 11 and trends in LNG demand. This slide shows the increase in LNG imports by country on an annual basis. LNG demand grew by 25 million tonnes year-over-year in 2018, an increase of 9%. China posted the largest increase in absolute volumes, importing over 15 million tonnes more LNG or an increase of approximately 40% year-on-year as the country continues to increase consumption of natural gas.

While Chinese demand has been strong, LNG growth has been broad-based, particularly in Asia, as demand from South Korea, Pakistan and India has grown by a combined 16% year-over-year or approximately 10 million tonnes.

On Slide 12, we placed China's LNG demand and future growth in a historical context. The left panel shows China's monthly LNG imports during the period of 2013 through 2017, represented by the gray-shaded area as well as imports during the years 2017 in blue and 2018 in green. The clear trend is higher LNG imports over the last several years. However, it is worth noting that China's imports have a seasonal pattern, often bottoming in spring and peaking in early winter, in line with heating and cooling demand.

On the right panel, you'll note that China's LNG demand is forecast to be approximately 20 million tonnes per annum greater than it's contracted supply, implying that it must import the difference from the spot market or secure new long-term supply contracts. This combination of strong seasonal demand and under contracted supply has stimulated shipping inefficiencies such as floating storage and inner-basin trading, both of which contribute positively to shipping demand.

Turning to Slide 13 and the future outlook for LNG demand by geographic region. In total, Wood Mackenzie expects net LNG demand to grow by 150 million tonnes between 2018 and 2025. Although China's imports have been leading the pack in the last several years, it is important to note that Southeast Asia and Europe together account for nearly 70% of the projected LNG demand growth through 2025.

Turning to Slide 14, which shows the new LNG supply coming online. This year, approximately 32 million tonnes of new LNG capacity is planned to begin production, including the second train at Cheniere's Corpus Christi project and initial trains at large projects such as Cameron and Freeport, which are expected to have a significant impact on tonne miles as more gas is exported from the U.S.

Further ahead, there is approximately 41 million tonnes of new capacity scheduled to start production in 2020 through 2023, including the first 2 trains of Shell's LNG Canada project, which took FID late last year.

During 2018, a number of large projects across the globe took significant steps toward FID, prompting Wood Mackenzie to predict that 2019 would see record amounts of new liquefaction sanctions.

On Slide 15, we discuss how U.S. exports have positively impacted shipping demand. According to Poten, 318 cargos were exported from the U.S. in 2018, 141 of these cargos delivered into North Asia, a destination that requires more than 2 ships per each million tonnes of LNG exported per annum.

The average shipping multiplier implied by U.S. LNG exports was over 1.9x during 2018, significantly above the historical global average of 1.3x.

Since exports out of the U.S. began in 2016, 1.8 ships have been required for each million tonnes per annum, a positive development for shipping demand, particularly in light of the significant amount of new liquefaction capacity scheduled to come online in the U.S., over the next 24 months.

On Slide 16, we discuss how the demand for LNG and the current order book impacts the supply-and-demand balance for LNG carriers. This slide illustrates our view of shipping supply and demand through the end of 2020, using Wood Mackenzie and Poten data. The shaded area represents low and high vessel demand scenarios based on a range of 1.6 to 1.9 ships required per million tonnes of LNG for U.S. volume, an increase from our previous range of 1.5 to 1.7 ships, to more accurately reflect the last 3 years of export data. For the rest of the world, a multiplier of 1.3 to 1.4 ships is utilized. The solid dark blue line shows vessel supply based on ships in the water today and the current order book, with no assumptions made for scrapping or FSRU conversion. The dotted dark blue line represents a scenario where all older vessels built before 2000 and without charters are either laid up or scrap.

As you can see, the market is expected to be tight through at least 2021, based on Wood Mackenzie's latest demand growth estimates and the on-the-water fleet plus order book. As we've said previously, an absolute shortage of ships is not required for the spot market to be strong. When fleet utilization rises above 80% to 85%, freight rates and cash flows improve considerable as we observed in the spot market during the second half of 2018.

Turning to Slide 17, where we discuss the supply of LNG carriers. [53] ships were delivered last year, while 62 were ordered. Many of the vessels delivered in 2018 are intended for projects that have yet to begin production. There are approximately 107 LNG carriers on order today. However, nearly 2/3 of these ships have attached multiyear charters. When taking into consideration deliveries scheduled for 2019 and '20 and before any further ordering, the order book will decline as a percentage of the fleet to approximately 5% at the end of next year. It takes between 2 1/2 and 3 years to construct an LNG carrier, meaning a vessel ordered today will have an earliest possible delivery date of mid- to late 2021.

With this visible supply outlook, we expect demand for LNG shipping to strengthen as we move through 2019 and into 2020.

Turning to Slide 18, where we look at recent spot market developments. This slide shows the monthly average headline spot rates for TFDE carriers from the period beginning in 2011 through 2018 on the right panel as well as the monthly average headline spot rates during 2018 on the left panel. While the absolute values in 2018 differ from the historical monthly averages, the trend closely followed previously observed seasonal pattern. Last year, there were a number of factors that exacerbated the usual seasonality, including front-loading of China's LNG buying, shipping capacity being used as floating storage and an increasing number of multi-month charters being fixed for the winter season. Taken together, these dynamics led to record high rates in the spot market in Q4 2018.

As we now exit the winter heating season in the northern hemisphere, spot rates have moderated, with Clarksons reporting headline TFD rates for 69,000 per day. However, as the historical data on this chart suggests, we anticipate a return to higher LNG shipping activity level and stronger spot rates in 2019, as we move into the cooling season in the northern hemisphere and new large LNG projects, particularly in the U.S., enter production.

GasLog Partners' exposure to the spot market is limited to 1 vessel, the GasLog Shanghai. In light of the expected seasonal decline in headline spot rates, we anticipate the GasLog Shanghai's contribution to our results to be at TCU rates clearly below mid-cycle in the first quarter. However, our strategy remains to find multiyear employment for the vessel, and we anticipate a structurally improving LNG shipping market should create those opportunities for us in the months ahead.

Turning to Slide 19 and a recap of our growth history and distribution guidance. You can see on the far left panel, we've now grown our cash distribution by a 9% compound annual rate since IPO. Today, we are increasing our quarterly distribution to $0.55 per unit, or $2.20 annualized, which represents an approximately 5.1% increase on a year-on-year basis, meeting the guidance we established for 2018, while delivering strong coverage in the fourth quarter.

As shown on the far right of this slide, we are reiterating our guidance of 2% to 4% year-on-year distribution growth for 2019. This guidance is supported by our 2 vessel acquisitions in 2018, our current liquidity and balance sheet capacity to fund fleet growth, while also reflecting our dry-docking schedule for the year and 1 vessel coming off charter in the fourth quarter.

In addition, today's announced $25 million buyback program diversifies our means of distributing capital to unitholders and underscores our focus on total unitholder return.

Now turning to Slide 20. In summary, in the fourth quarter, GasLog Partners continued to execute its strategy, increasing our quarterly distribution and hitting our guidance for 2018, raising $100 million in growth capital, capping our IDR tiers at 23% and closing our 11th acquisition since IPO.

These quarterly highlights in addition to our other achievements in 2018, including rechartering 3 of our vessels, acquiring the GasLog Gibraltar and raising additional $220 million of common and preferred equity, have considerably strengthened the GasLog Partners' platform.

We continue to believe 2% to 4% distribution growth remains an achievable target for 2019, given our pipeline of visible growth opportunities and continued access to capital.

Finally, looking longer term, steady progress of new liquefaction and increasing LNG demand should result in strong fundamentals for LNG shipping and create additional opportunities to recharter our vessels.

With that, I'd like to open it up for Q&A. Joelle, could you please now open the call for any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Greg Lewis with BTIG.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD [2]

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I guess what I would say is clearly we're seeing a pullback in the spot market just as it pertains more to you as you think about positioning your fleet. Yes, you have the 1 vessel on spot. You have a couple vessels coming off contract at the end of the year. How should we think about you positioning the fleet in terms of chartering? What's the depth of the time charter market right now? And just sort of any kind of color you could give around maybe where we could see the ability to fix forward vessels on 3-plus-year charters.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [3]

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Sure. It's Andy. I think couple comments on that. As I mentioned in the remarks, the activity levels for both [bought] and term chartering activity right now have moderated since the fourth quarter. So I think we would expect the GasLog Shanghai to continue to trade in the spot market here for the next little while. We have a great degree of confidence in the market becoming structurally tighter as we move through the year. And as people begin to take cover for next winter, our strong hope is that there'll be more multiyear chartering opportunities for the Shanghai, just like we saw last year for 2 of our TSEs and ultimately 1 of our steamships. So I think our strategy down at the MLP, [we continue] to have as much cash flow visibility as possible. So we will be seeking those term chartering opportunities, whether that's a year-plus or 3 or 3 1/2 years, as one of our deals closed last year, I think remains to be seen. But I think for the next quarter or so, I think we would expect the Shanghai to remain in the spot market.

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Gregory Robert Lewis, BTIG, LLC, Research Division - MD [4]

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Okay, great. And then just as I think about your dividend or distribution growth guidance, and realizing it's a fluid situation, right now, I mean, the company's done everything that it said it was going to do. It's grown its distribution. It's grown its asset base. It's really executed tremendously, yet, as we look at the implied distribution yield of the stock, it's 10%. How does the company balance the willingness to sort of just drive forward and push the distribution higher, even though you'd say, hey, we're yielding 10%, that's definite -- I would argue that's too high of a yield in the first place. But just trying to understand how the company's thinking about balancing the distribution yield with its willingness and want to increase the distribution.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [5]

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So excellent questions and, clearly, a topic we spend a lot of time thinking about. I think there's probably not an MLP in the market today who feels that they're fairly valued. And I think we certainly believe we're significantly undervalued. But I think we also believe it's important to demonstrate growth in both our assets and then ultimately in our distribution. What you've seen from us over time is, after going public with a10% to 15% growth guidance, we moderated that to 5% to 7% and now 2% to 4%, with continued strong coverage and today's buyback program being in addition to that 2% to 4%. So I think we'll continue to believe in growing the distribution as an important part of our story. But certainly hope that the actions we've taken and the execution that we've shown will result in a more appropriate value for the unit price. And in the meantime, if we can buy back some units and further improve the coverage ratio, that's what we're intending to do.

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Operator [6]

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And our next question comes from John Chappell with Evercore.

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

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First question on the buyback. Obviously makes a lot of sense in regards to kind of what you just spoke about with the yield and all the MLPs feeling the same way. Just like the ATM, though, trying to put the 2 of them together, I notice the average spend on the ATM was $23 and change, and there's some in the fourth quarter that were over $24. So maybe there's some of the ATM that was even in the low $23s or even $22s. And now a buyback's announced at over $21.50. So has something changed in your mind from a value perspective that $21-plus, even in the $22s, is an interesting time to be repurchasing units as opposed to issuing them just a little bit higher in the not-to-distant past?

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Alastair Maxwell, GasLog Partners LP - CFO [8]

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It's Alastair. I think the reason, the primary reason for putting the buyback program in place was the volatility that we experienced in the fourth quarter of last year and we saw the unit price go down well below $20, well below $22. And I think in some ways we wish we'd had the opportunity to be buying back units in the fourth quarter of last year, but, of course, we didn't have the program in place. And I think, really, it's an additional tool in the armory in order to be able to deploy capital opportunistically in terms of returning capital to shareholders and to benefit from the impact that a buyback, particularly at those kind of unit price levels has on coverage ratios and breakevens and so one. In terms of having an ATM and a buyback program running at the same time, I think the way that we think about, first of all, use of capital, the priority use of capital is to continue to grow the business, continue to grow the fleet and continue to grow the distributions. And as Andy said, that's what, [if you like] the mission of the company is. And we continue to believe we have a strong dropdown pipeline in terms of ability to grow the fleet and we continue to have access to capital and more diversified access to capital. We don't have any hard-and-fast numbers in terms of how we think about it. But I think you mentioned $22. I think that the further above $22 we get, then the more attractive it is to be issuing equity. And the further below $22 or either further above a 10% yield we get, the more attractive and the more impactful it is to be buying back units. So I kind of put it in that framework, if that answers the question.

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

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Yes. No, absolutely. I think that last point was exactly what I was looking for, kind of like a target yield or inflection point, if you will. So that's very helpful Alastair. Thanks. Second question, I thought one of the most interesting parts of the IDR reset was the opportunity to acquire third-party assets and not have that accrue to the IDRs. But just wondering, with such a rich pipeline at the GP owner, are their really third-party opportunities out there today? I know there's some speculative newbuilds that have been done with nontraditional players in the market. But for the most part, those probably don't have long-term contracts that fit with your structure. So are there third-party opportunities with long-term contracts with good counterparties that would realistically be put kind of at or even above some of the dropdown opportunities from the parent?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [10]

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Sure. It's Andy. Well, over time we've looked quite hard at several third-party opportunities along the lines of what you described, and just haven't found the right asset at the right value to reach agreement. And so I think that's something we have a very active effort on and will continue to do so. Having said that, I think, clearly, the first priority on our capital is dropdown, for all the reasons you mentioned, in addition to the benefits that it offers to our GP for recycling capital for additional growth. So I think they're both very much in the frame for the partnership. And I think it was a very thoughtful measure taken by our GP as part of the IDR restructuring, to waive IDR payments on those third-party transactions so we can be as competitive as possible. But I would expect it to be a all-of-the-above strategy rather than one taking precedent over the other.

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Operator [11]

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Our next question comes from Michael Webber with Wells Fargo.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [12]

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Andy, just to follow up on John's question around the buyback. We've had there are some comps maybe elsewhere in the shipping space that are very active, I guess, in kind of [RBing] their own capital structure, and often that kind of comes to the detriment of shareholders. Obviously, that's kind of the polar opposite of the way you guys tend to operate. And when I think about kind of the buyback and the ATM authorization kind of coexisting, is the right way to think about that kind of effectively like a collar, kind of just more of a stability mechanism as opposed to maybe a more active investment policy or kind of a sign you guys are going to be more active in terms of moving around your capital structure?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [13]

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Yes, it's a good question. And I think maybe to answer it, for context, I think in a 6-week period there in the fourth quarter, our unit price hit both a new 52-week high and then a new 52-week low. And so I think the collar, to use your terminology, was 31%. So I'm sure that in that range there's places where, as Alastair mentioned, we would have loved to have been buying units and maybe at a future date, there would have been an opportunity to raise some capital at a higher end of it. So as you say, I think it's really just having that functionality in place where if we're going to continue to see this volatility, which we've all lived through from 2015 and '16, now we have the ability to really take advantage of it and at some of those high teens prices, low $20s, it really is on a dollar-for-dollar basis quite accretive to DCF per unit, probably more accretive than damn near any acquisition we can come up with. So it's just something now that we have available to us to use.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [14]

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Okay, yes. So stability mechanism inside of some sort of slosh-buckling shift in policy?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [15]

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Good summary.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [16]

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Okay. Fair enough. Yes, also just to follow up on an earlier question around third-party growth. Obviously again, with the resetting of the IDRs and the, I guess somewhat of an incentive to kind of eventually look at the third-party assets, maybe kind of coming at that a different way, do you think, in terms of what you see in the market, are you closer or are you more likely to something now than maybe you were a year ago? And that maybe has less to do with your approach and more to do with where some of your competitors stand and where some of the different pools of assets kind of might be at the moment in terms of inbound inquiry maybe. Has that changed over the last 6 to 9 months?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [17]

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Well, I think generally speaking, there are, for all the reasons you're well aware with, we've got a growing market, an increasing number of contracted ships and, for a variety of idiosyncratic reasons, probably fewer entities with the same or equal -- or better -- excuse me -- access to capital that GasLog Limited and GasLog Partners have. But I do think the overall universe of opportunities is probably greater now than it's been in years past. I think, having said that, each third-party deal, of course, has a life of its own and requires a willing seller in a manner that it's harder for us, as a buyer, to control the timeline and process around versus a dropdown. So I do think there's more opportunity, but would want to manage expectations. We can only buy what's truly for sale, and that pool is probably larger today. But again, I think dropdowns will be very much a part of our story for a long time to come.

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Michael Webber, Wells Fargo Securities, LLC, Research Division - Director & Senior Equity Analyst [18]

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And I guess maybe when we think about those opportunities -- and this is probably just a question for the GasLog family as a whole. The idea of vertical integration has come up from time-to-time in the past few years. And I guess technically with the Alexandria project, you guys are working towards that organically. But either up or downstream, would you say there's any shift in the ability to maybe look at passive, either passive investments or passive participation in some degree of vertical integration where there just aren't that many well-capitalized players in the space that have expertise kind of up and down the supply chain. So as FIDs lag and as people look for either investors or buyers in the projects, I would imagine that the phone starts ringing for you guys. I'm just curious on a vertical integration basis, do you think that it's any more likely today than 6 to 9 months ago that you guys would seriously look at something like that?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [19]

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Well, I think you can say we're pleased with the progress with the FSRU in northern Greece. And I think we're big believers, generally, in the need for not just ships, but LNG infrastructure of all kinds, given the demand profile that we continue to see for the commodity. But I think not necessarily so much described as an integration strategy, but one just using this larger and reasonably successful platform to acquire similar assets with good counterparties, visible cash flows, multiyear contracts, I think we're certainly open-minded to that, and there does seem to be more of those to evaluate. So I think we're obviously a shipping company first and foremost, and will be, I think, for a very long time to come. But there are additional assets around that build out of LNG that we think could be quite attractive, too.

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Operator [20]

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And our next question will be from Chris Wetherbee with Citi.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [21]

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Wanted to ask about the 2% to 4% distribution growth and understanding that is essentially $0.01 between those ranges, right. But how do you think about sort of the low end versus the high end. I think you announced that range, and then after that did the IDR restructuring. I don't know if that gives you a higher degree of confidence towards the higher end of the range or how you sort of just generally think about it. I know you have a lot of things going on. There's a couple of dry docks there. But any color you could give on sort of how you think about that range. And maybe broadly, sort of growth beyond '19 would be helpful.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [22]

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Sure. It's Andy. I think, as I mentioned to an earlier question, we consciously moderated the growth range from previous years. And despite the pipeline that Alastair took you through, which is probably, in terms of dollar values as a contracted revenue backlog on EBITDA is probably bigger than it's ever been. So we don't lack for growth opportunities. As was mentioned earlier, trading at a roundabout 10% yield, additional growth on the distribution by a large factor, to us doesn't necessarily seem like it's being rewarded. But again, greater than 0 growth to us is extremely important. So I guess the answer to your question, I think we have the ability to grow the distribution in that range you mentioned, but it'll probably come down to the dynamic in the marketplace, where the units are trading and that balance between growth and coverage. If we feel we can get some incremental value for another 1% or 2% of growth, I think we feel quite capable of achieving that. But we wanted to give the market some confidence that it will be at least 2% growth.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [23]

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Okay. And in that context, do you think it makes -- or can you give us some color on how you would sort of perceive the cadence of increases as the year progresses? You have dropdown earlier in the year. Not sure if that's sort of the catalyst, potentially, for a distribution increase or it's something that you want to just continue to wait and maybe weigh market factors more than actual dropdowns and fundamentals.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [24]

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Yes, I think it will probably be a combination of them both. We do expect to do at least 1 dropdown in 2019, as we mentioned in our remarks. And as you mentioned, that's clearly, more contracted cash flow that we can use to grow the distribution. And then, depending on the nature of the 1 ship in the spot market and, as you say, there's the time and the final costs of the dry-dockings we have planned, those are probably the largest factors at play.

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Christian F. Wetherbee, Citigroup Inc, Research Division - VP [25]

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Okay, that's helpful. And then I just wanted to go back to the buyback for a second. And I appreciate, Alastair, the ranges; that's extremely helpful. It seems you're kind of right on the cusp right now, and I know it's difficult to commit to anything. But generally speaking, do you think you can put capital to work relatively quickly? You're below $22 a share right now. Seems like there's an opportunity to do that. In the context of everything you're saying, it still seems like it would fit to be active in the market kind of very near term. But just want to get your rough sense there. Or should we really be reading this as it's going to be that collar that was talked about in the answer to previous questions?

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Alastair Maxwell, GasLog Partners LP - CFO [26]

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Chris, I think the answer is it's more the latter. And as I said earlier and as Andy reiterated, I do think that we feel that the priority use of capital for the business is going to be to continue to grow the fleet and to grow the base of the distributable cash flow. And therefore, just because we're trading at below $22, I don't see us rushing into the market. As I said, I think it's more and more attractive the further above a 10% yield we get. And in particular, when we see market dislocations and volatility like we saw in Q4, I think that's when we would really like to have the ability to be flexible and to be opportunistic.

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Operator [27]

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And our next question comes from Randy Giveans with Jefferies.

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

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So for the next dropdown, how long do you expect the contract duration to be? It looks like the earliest expiration would be 2025 and maybe the latest 2029. And then looking at future dropdowns from GasLog parent, is an asset exchange a possibility; for example, getting back the Shanghai plus some cash maybe in exchange for a vessel, on a long-term contract?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [29]

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Sure. It's Andy here. I'll take the first part of that. So over our history, we've typically dropped down assets with a charter length of at least 5 years or more. And as you mentioned, we have several of those to choose from. So I think that will be the goal for the next dropdown, have a contract length of 5 years or more. And then on the second question, we, of course, have that optionality, given the tremendous pipeline at the parent and contracted cash flow, something that you mentioned, could be possible. I think at this point we wouldn't really see it as necessary. We've got 1 ship out of 14 in the spot market, and that 14 is hopefully soon to be 15. So given the structurally improving market as we move through the year, we think that that ship will continue to have good earnings and good prospects for rechartering. So I wouldn't rule out your concepts, but I don't really see it being necessary for us in the near term.

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

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Okay, perfect. And then one more question for me. Following the IDR modification in November, should we expect any additional modification this year? Or is the kind of current 25% split likely to remain intact for the foreseeable future?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [31]

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Yes. But I think as we mentioned at the time of the announcement, Paul Wogan in his statement, mentioned that we saw this as a very meaningful first step in the modification of the IDRs. I think it was quite substantial in terms of the impact that it has on GasLog Partners. We're now $0.01 or so away from where the 48% tier would have began. And so it's a quite significant impact for our next series of growth action. I wouldn't expect anything additionally on the IDRs in the near term. I think we're excited to put the new structure to work and grow within it, in a way that is at a lower cost of capital and, as I mentioned earlier, more competitive, potentially for third-party opportunity. So we're eager to put more assets through the existing structure, I think, before there's any further modification.

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Operator [32]

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And our next question comes from Fotis Giannakoulis with Morgan Stanley.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [33]

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Andy, I would like to follow up on Chris' question about post-2019 ability to grow your dividend, especially we see some number of vessels as they are coming off contracts in 2020 to 2023, which is the period that the liquefaction capacity growth starts slowing down. There is a gap until LNG kind of coming online. Where do you see the ability of growing the dividend coming from? And is the dividend, the model changes a little bit from long-term contracts to operating more in the spot market? And if you can also comment about the earning capabilities of steel turbine vessels versus the current vessels.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [34]

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Sure. So take those in order. And first of all, I wouldn't want to give any guidance on 2020 or beyond. But we'll just say that we, clearly, based on our supply-and-demand picture for carriers, see the market being a very attractive place from here through 2021. But during that time, again, particularly at the MLP level, our objective is to use that spot market strength as a way to fix more of our ships on multiyear charters, those that are ending their charters during that period, as you mentioned. So I think our view is, of course, a first priority on cash flow stability at the MLP. We have, I think quite consciously, moderated our growth rate. And I think that that trend has generally been well received. So I think it's something we expect to continue. As our fleet gets larger, having a ship or 2 in the spot market is less impactful in the good times and it's less detrimental in the weaker periods of the market. So we feel that fleet growth is important to continue to insulate potential future volatility in the out years as we look at our fleet's growth. And then over time, our breakeven rates, of course, fall as we pay down more of our debt. I think last year we paid almost $200 million of debt down, and expect that to continue. And so the ships that we own, sort of the steamships you mentioned, can be more competitive as they have lower levels of debt on them.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [35]

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And on your demand outlook, you have acquired a large range demonstrating on Slide 14. What are the developments of it can grow well that it can lead us to your upside -- your bull scenario on whether the element of it can disappoint and bring us to the lowest case scenario. And also, you have a scenario on the supply side excluding the pre-2000 vessels around 20 years old. Why you have -- do you see that the vessels beyond 20 years, they cannot achieve long-term contracts or they will be at disadvantage or they have to be scrapped? How do you see the useful life of LNG carriers?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [36]

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Sure. Maybe starting with your last question first, if I may. And the line on the chart you're mentioning references vessels who are built before 2000 and without charters, ultimately being laid up or scrapped. And as you probably know, Fotis, but for the benefit of others, the LNG carrier market has seen very little capacity taken out of the market due to scrapping. It's 1, 2, 3 ships a year, at most; some years, it's none at all. So we haven't had that yet, given the relative youth of our industry relative to other lines of shipping. But that's something that we expect could be helpful for the supply picture. For the upside case you mentioned, just looking at the U.S. export data, we've had periods, the average since being started up has been 1.8x in terms of the multiplier 1 million tonnes of LNG exported. We've had periods where that number's been over 2. And we're really just at the beginning of a significant wave of U.S. LNG coming online. In fact, if you just think about this year, between Cameron and Freeport, additional trains at the Cheniere project, Elba. But by this time next year, we might have doubled the amount of U.S. gas being exported. So we're really just learning what those trade routes and the call on shipping is going to be. So our chart shows a low and high vessel demand scenario. But there's certainly data that would support the high case fairly clearly. And again, we think our low case is really conservative, based on what we've seen today.

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Fotis Giannakoulis, Morgan Stanley, Research Division - VP, Research [37]

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One last question about your cost of capital and the cost of capital differential between GasLog and the parent and the MLP. First of all, do you see that there is any differential here, one or the other having a lower cost of equity or lower cost of debt? And you have been financing your recent dropdowns with preferred equity. Is the preferred equity market open? And are you planning to continue to issue preferred equity? Or are there other ways that you can fund dropdowns from [alternative] way?

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Alastair Maxwell, GasLog Partners LP - CFO [38]

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This is Alastair. In terms of cost of capital, what I think we've been saying for a while, particularly given how the MLP market has traded over the course of the last year or so, there's not a very significant cost of capital arbitrage between one business and the other business. And that goes up and down depending largely on where each company's own share price is at. It's still the priority for the GasLog group, I think to use GasLog Partners as the principal sort of equity to fund the continued growth of the business. And I think that will continue to be the case. But we don't see significant arbitrage, if you like, between one and the other today. As GasLog Partners grows and matures and the fleet grows, what we are seeing is that the creditworthiness and the way that banks and the capital markets price the GasLog Partners' credit, which I think might have been at a discount to GasLog a year, 2 years ago, I think that's definitely not the case today. I think the GasLog Partners is much more mature, much greater scale. And again, I don't see a significant difference in cost of capital on the debt front between one business or the other business. You asked about the (inaudible) market. I think that where we stand today is, we already talked about that there's a natural feeling to how much [press] you would want to have in your capital structure. And we always talk of that being roughly 15%. I think we're at about 14% today. And so I wouldn't see that as being our priority in terms of accessing new equity capital going forward.

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Operator [39]

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Our next question comes from Donald McLee with Berenberg.

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

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So there's been a lot of questions around growth opportunities. And in the prepared remarks you mentioned that a dropdown could happen in Q1 '19. But I was just curious about how we should think about the sequencing of your capital allocation for 2019, with the balloon payment coming due in Q4.

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Alastair Maxwell, GasLog Partners LP - CFO [41]

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So as I mentioned in my prepared remarks and as we also mentioned in the 6-K, we do have a maturity in November of this year. We've been working on that, actually since late last year. And we're in very active discussions with a number of banks about that. And again, as I said, I would expect that to be completed during the first half of this year, at the very latest. And as and when the time is right, we'll make a further announcement on that front. But I think that we won't be leaving that until the last minute.

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

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Okay. And then I'm just going to the supply/demand model on Slide 16. In Q4, there is a big pickup in LNG carrier orders, and then mostly [Celina] in some of the trade press headlines, there's been a more significant order for 60 LNG carriers. So just wondering how that's maybe impacted your intermediate to longer-term view of the supply dynamics for the LNG market.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [43]

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Sure. Like you, we've, of course, been watching the order book very carefully, and just would point out that 2/3 of the order book today, even with the new orders we saw last year, does have long-term contracts. Most of that 1/3 are ships that are delivering at the back end of the book. And so there is significant time for owners, like our parent and others, to put those ships on long-term contract, which I think most of them will. And even if you look at last year, splice the data more fine, roughly 50% of the ships last year, in fact, do have contracts already, and particularly those at the end of the year, as you mentioned. So it's clearly something that we're very focused on. I think I can speak for the GasLog group in saying that I don't expect us to be ordering any more ships without contract attached. But all the signs are that demand and supply of LNG are going to increase, and that will also be true for shipping intensity. So we think that these ships are going to be needed to serve the marketplace for demand and the supply that's going to follow.

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Operator [44]

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

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [45]

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My question's around the dropdown opportunities. So when you're pricing these dropdowns, how do you value or even just more broadly think about residual value, just given the significant volatility and rates and the limited visibility 5-plus years out when the dropdown candidates come available?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [46]

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It's Andy. I think we, obviously, take into account several factors when valuing dropdown, including the amount of cash flow the asset's going to generate during the firm period and our view of the market and the marketability of the asset thereafter. Clearly, the longer the contract, the more of that acquisition value is derisked. And so that's our preference. Generally speaking, based on our own rechartering experience, we have a sense of where vessels of a certain age can recharter; although, of course, the market 5, 7 years from now is difficult to predict. But in our view, it's really based on what the asset is generating in the firm period and then a reasonable estimate of rates thereafter and taken together with the asset itself and its flexibility is how we arrive at a valuation.

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

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Okay. Fair enough. And how have these pricing conversations changed over the last year? And I ask, because, obviously, the spot market has heated up. But if we're thinking about assets with 5-year contracts, the 2018, 2019 spot market doesn't matter. And in a lot of cases, it leads to higher supply growth in the out years when you're kind of trying to value that residual value. So have the prices changed over the last year kind of on these dropdown opportunities or just other acquisitions?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [48]

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I wouldn't say the prices have changed. Every asset's different, has a different age. When we buy it, some are assets that are a year or 2 out of the yard, some are a little bit older than that and have depreciated more. So you're certain right in that the spot rate on this day or week shouldn't really change that. Long-term rates for carriers that we envision in our model have not really changed much from that $75,000-a-day, plus or minus. So when we're living in a weak spot market or a strong spot market, it doesn't really change what the dynamic is for multiyear rechartering. Obviously, in a strong spot market, you have more customers who tend to book to take cover for rechartering of on-the-water ships, and we always welcome that. But the overall long-term rates for LNG carriers are really more of a return on capital discussion. And so with yard prices at $200 million, plus or minus 10%, long-term, mid-cycle rate, $75,000, plus or minus, in and around those parameters, those haven't really changed in recent years.

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

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Okay. Fair enough. And then kind of thinking, just kind of staying on the growth topic. So obviously momentum around pre-FID projects and contracting out these liquefaction terminals that's been building in recent months, it feels like this is going to start driving newbuild tenders. And we've heard reports of at least one very large such tender potentially on the horizon. Would partners be interested in ordering a newbuild on the back of one of these projects? Or do you guys expect that growth will always just come from dropdowns?

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [50]

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I wouldn't rule it out over time. I think today our model has worked quite well with the parent company contracting the ship, building the ship in the yard, taking delivery and then dropping it down over time to GasLog Partners. Could there be an opportunity where we do a new building directly at the partners' level? I guess so. If we had the right economics around it, I'd certainly consider it. But the benefit of our model is you're always putting capital against cash flowing assets at the MLP, and that seems to be a good fit with the high distribution payout model that MLP holders expect. So I think for now, that's what we would continue with. But I guess never say never.

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Christopher M. Snyder, Deutsche Bank AG, Research Division - Research Associate [51]

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Okay. Fair enough. And then just one real quick one on the balance sheet. Obviously you guys have brought down debt metrics pretty considerably over the past couple years. Do you expect further deleveraging in 2019, 2020? Or do you kind of think where you are right now is a good place to be going forward?

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Alastair Maxwell, GasLog Partners LP - CFO [52]

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It's Alastair. I think that where we are today, we feel more than comfortable. As I said in my remarks, I think that we've been building debt capacity as we've amortized the debt on the ships. And rough rule of thumb is that the debt amortizes twice as fast as the ship depreciates. And I think we have got ourselves to a position where we do have some incremental debt capacity over and beyond where we are today. Having said that, we're certainly not going to be relevering this business to any material extent from where we are today. But do we think that we have access to debt capital as well as to equity capital to fund growth? Given where we are today, I think we definitely do.

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Operator [53]

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I'm not showing any further questions at this time. I would now like to turn the call back over to Andy Orekar for any closing remarks.

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Andrew J. Orekar, GasLog Partners LP - CEO & Director [54]

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Thanks, Joelle. Thank you to everyone today for listening and your continued interest in GasLog Partners, we certainly appreciate it. And we look forward to speaking to you next quarter. Thanks very much.

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Operator [55]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone have a great day.