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Edited Transcript of GMLP earnings conference call or presentation 29-Aug-19 3:30pm GMT

Q2 2019 Golar LNG Partners LP Earnings Call

HAMILTON BERMUDA-NA Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Golar LNG Partners LP earnings conference call or presentation Thursday, August 29, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brian Tienzo

Golar LNG Partners LP - CEO & CFO

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Conference Call Participants

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* Frank Galanti

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

* Jonathan B. Chappell

Evercore ISI Institutional Equities, Research Division - Senior MD

* Randall Giveans

Jefferies LLC, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Golar LNG Partners Q2 2019 Results Call. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Brian Tienzo. Please go ahead, sir.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [2]

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Thank you, moderator. Good afternoon, and good morning, to all of you. Welcome to Golar Partners' 2Q 2019 results presentation. My name is Brian Tienzo, I am joined here by our Head of Investor Relations, Stuart Buchanan.

Without further ado, let's start the presentation, and I would urge participants to read through Page 2, our forward-looking statements, in their own time.

And so with that done, let's jump over to Slide 3 for the main highlights. With full quarter contributions from Golar Igloo and Golar Freeze, we report increased operating income of $36.2 million for the second quarter of 2019 as compared to first quarter operating income of $25.9 million. And this result does not however include our interest in the operating result of Hilli Episeyo.

During the quarter, charterers of Golar Grand declared their option to extend its employment for another year at an increased rate. As a result of the foregoing, the partnership achieved a distribution coverage ratio of approximately 1.12x and declared a unit distribution of 44 -- $0.4042 for the quarter. The partnership also took the opportunity to initiate a common unit buyback by taking back approximately $1.5 million worth of units. More recently, and as expected, charterers of Golar Igloo issued a tender process for an FSRU for a 2-year firm employment plus 1-year option period. And we will, of course, bid into that competitively.

On that note, let's now turn over the page to go through our income statement highlights. Net results for the second quarter was a loss of approximately $5.5 million as compared to a loss of $15 million in the last quarter. And this improvement is mainly due to the following factors: the Golar Igloo was on-hire throughout the quarter compared to 57 days of no earnings in Q1. After a successful commissioning period in Q1, Golar Freeze commenced its 15-year employment with NFE and contributed a full quarter's earnings. Golar Maria was also on-hire for most of the quarter, and the vessel is now in firm employment until the end of October. Disappointingly though, Golar Mazo remained on commercial waiting time for the entire quarter. All other vessels within the fleet performed efficiently and without unplanned off-hire.

Earnings were also positively impacted by a decrease in both operating and administrative costs. Whilst all of the foregoing points toward a positive net income for the quarter, a decrease in 2- to 5-year interest rates created a net noncash interest rate swap loss of $23.8 million and resulted into a $5.5 million net loss.

One point worthy of note is that the way we're now accounting for Golar Freeze. A modification for the Golar Freeze charter agreement on May 15 resulted to that contract being reassessed under lease account rules. From that date onwards, Golar Freeze's contract is accounted for under a finance lease rather than an operating lease.

Income recognized from the operations of Golar Freeze will be split into 2 categories, income that mimics operating cost of the vessel will still be accounted for as revenue. In the quarter, this amounted to $600,000. However, capital hire revenue will be accounted as interest income and the amounts that are presented in the income statement going forward will be based on a rate implicit in the contract. In the quarter, this amounted to $1.4 million.

Of course, this change does not have any impact on cash flow and it also does not change how we arrive at our quarterly distribution coverage. During the early years of the lease, difference between Freeze's contribution to income as an operating lease versus finance lease is actually not material.

Turning over to Page 5 for the balance sheet assets. Cash and cash equivalents as of the end of the quarter was at $62.1 million. This is lower than previous quarter mainly due to $14.2 million of hire, which were due by the end of June but were only received post the quarter.

To augment cash even more, we are now working towards securing a $25 million revolving credit facility. Whilst not immediately required, this will at least give us some flexibility and can be made available to be used for general working capital purposes. Alternatively, debt buyback, opportunistic buyback of outstanding common units and CapEx programs that could materialize from our various commercial discussions.

You will also note from our balance sheet that the vessel and vessel under capital lease line has decreased materially compared to previous quarter. This is also because of the way we have changed how we are accounting for Golar Freeze as mentioned in the previous slide, such that Golar Freeze has been derecognized from vessel and vessel under capital lease line and is now represented in the net investment in leased vessel line.

Going over to Slide 6, balance sheet liabilities. At the end of the quarter, our net debt was $1.57 billion. This includes $439 million associated with Hilli Episeyo. As of the quarter end, the percentage of debt swapped to fixed rate was approximately 98%, and average fixed interest rate of swaps related to bank debt is approximately 2.2% with an average remaining period to maturity of approximately 4.1 years. So the partnership remains pretty well protected from interest rate variability.

With an improved EBITDA, our net debt-to-annualized EBITDA ratio has improved from last quarter's level of 5.9x to now 5.0x. This is, of course, a better ratio and we hope to continue to improve in this as we go through the year.

Turning over to Slide 7 now. As expected and previously communicated from our last call, distribution coverage ratio for the second quarter improved from 1.01x to 1.12x. Our life-to-date distribution coverage remains at a respectable level of 1.12x.

Looking a little bit ahead with the Golar Grand extended charter and increased rate applying throughout and the Golar Maria on-hire throughout the quarter at higher rate than those achieved in the second quarter, and of course, assuming all vessels operate as effectively as they did in second quarter, which we fully expect them to, then we expect distributable coverage ratio for 3Q to improve further.

Jumping to Slide 8, which highlights the partnership's revenue backlog. As we've ended 2Q, this level was at $2.16 billion. The vast majority of the MLP fleet remains contributive to earnings on a long-term basis. Of the partnership's fleet, the Golar Spirit remains the only asset not to contribute to earnings over the past few quarters.

Golar Maria's employment has been extended to the end of October, and we're also engaged in long-term charter discussions for the vessel. Similarly, whilst Golar Mazo was idle throughout 2Q, long-term employment discussion are also happening in the background. Of course, there is no guarantee that such long-term charters will materialize but the nature of these discussions point towards an improving shipping market.

Golar Igloo's firm contract with KNPC ends at the end of the year. KNPC have recently publicly issued tender documents inviting FSRU owners to bid for a 2-year firm plus 1-year option contract. As the incumbent service provider with existing good relationships with them, we will be bidding competitively to secure the contract and to add to the already strong revenue backlog.

Turning to Slide 9, which shows the revenue breakdown at the partnership's earnings. Equally important, our revenue backlog is the nature of -- and source of that revenue. The graph above highlights the point that the vast majority of our revenue are secured by way of long-term contracts. These form the basis of strong financial foundation from which growth can be achieved organically or by acquisition. 61.3% of our income is contributed by FSRUs, excluding charter options. Decent of our average contract term of approximately 7 years. 32% of our income is from Hilli Episeyo, whose contract runs for another 7 years also. And then 6.1% of our income is from shipping and is mostly represented by the long-term contract, which Methane Princess is currently servicing. This contract remains in place until 2023.

These have been represented without taking account of any potential option extensions or earnings contribution from ships not currently in employment. So our ambition is, of course, to improve on this already strong revenue backlog. We have already said that organic growth is possible through the deployment of the Golar Spirit, which by the way is making good progress vis-a-vis of the Brazilian opportunity. Further, there remains various acquisition possibilities available to the MLP in the form of FSRU Nanook, for the trains in the Hilli and in the longer term, from FLNG Gimi. However, for these to be viable options, we need to have a more efficient equity currency than what we have today.

So to summarize then as most of you will know, opportunities within the world of LNG, whilst plentiful, can be quite slow to develop. Whilst in the face of it, the second quarter seemed to be a quiet quarter, a hub of activity is actually happening in the background. These activities include progression of commercial discussions, take advantage of an improving shipping market as well as advancement of various FSRU prospects, and we will continue to work hard towards maintaining and growing the partnership.

Nevertheless, in any challenging environment, such as that which most MLPs find themselves in today, making sure the day-to-day operations remaining flawless is critical. Our operational team have been achieving this quarter-on-quarter. And with this, as well as strong revenue base and an improving balance sheet position, we have a solid foundation from which we can build our growth.

That, ladies and gentlemen, concludes the presentation. I will now turn over the call to our moderator for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first one comes from the line of Randy Giveans from the company of Jefferies.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [2]

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So other than the small contribution by the LNG carriers, the only asset with, I guess, revenue uncertainty for the next few years is the Golar Igloo, as you mentioned. So when does the Igloo have to sign that new 2-year extension, either with you or with the third party? I know the current contract ends in December. Is it December? Or is it much sooner than that?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [3]

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So what we gather is that the tender process has kicked off, that will continue throughout September. And so the likelihood and expectation of the existing charter is that, that gets finalized sometime in Q4, obviously before the commencement of that 2-year contract, which currently is estimated to be 1st of March 2020.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [4]

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Perfect. Okay. Now I guess just switching to the distribution coverage, like you said, 1.1-plus in 2Q, expect to be higher in the coming quarters. Just trying to think about distribution sustainability. I guess what would cause the distribution to be increased going forward. And then on the other hand, with the 16% yield, I think there's fears of cuts. So what are the chances it gets decreased in the coming quarters?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [5]

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Well, I mean, it is a good question. I think clearly, we've been pointing towards some positive progress that we're making in terms of contract -- securing contracts with the various vessels that we have. But clearly, the distribution ratio in itself is not without risk. When we set the current level of distribution, we made some prudent assumptions in terms of the earnings capability of the vessels, particularly, the ones that are open. Those assumptions remain intact today. But as we have seen over the past 6 months or so, the shipping market has a way of not necessarily meeting people's expectations. So that is one risk that we have looked at, and we've built in some security. But clearly, if it remains quite a challenging environment to be in, then that will have a negative impact on the potential distribution going forward.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [6]

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All right. I guess one point is the shipping rates for the LNG carriers don't really add much in a way in terms of, kind of, distributable cash flow. So for the Igloo, could you sustain the distribution at current levels without winning that tender?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [7]

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So for the Igloo, we have assumed that the vessel would continue to earn certain amount of earnings. Not necessarily sort of an FSRU-type level. But clearly, you can't have -- you can't -- not to have the Igloo earning anything. It's contribution today is quite meaningful. But we also made sufficient security to not expect necessarily the same level of earnings that it's achieving today.

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Randall Giveans, Jefferies LLC, Research Division - Equity Analyst [8]

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And still maintaining the distribution?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [9]

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And still be able to maintain a certain amount of distribution, correct.

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Operator [10]

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Our next question comes from the line of Jon Chappell from Evercore.

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

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Brian, you said yourself that despite the pipeline, it's hard to envision further growth with the equity trading where it is today. It's hard to kind of see that changing, it almost seems like you're kind of stuck here in this range, and maybe a rising market helps that. But kind of given what you just mentioned about how the shipping market always kind of disappoints. What's the strategy going forward if the cost of capital remains prohibited from doing drop downs or anything else? I mean you mentioned that the Mazo is in warm lay up? Do you start disposing assets? Do you think about winding the company down? Let's start with that. I mean, just how do you kind of think of it? You're stuck in this mid-teens yield and you can't grow anymore, what are the next steps?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [12]

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Yes. Thanks, Jon. I mean, clearly, it's -- I mean it's frustrating when you have set dividends to a level, which we believe is sustainable. We gave ourselves 1 year to see how that would create, hopefully, a positive reaction in terms of the equity value of the company. Initially, it did. But unfortunately, that wasn't sustained and we face ourselves with -- I think it's actually touching close to 20% yield at the moment, which is why we took the opportunity to start buying back some of our shares. But to your point, clearly, if it remains along those lines, it's very difficult to look at opportunities out there that would be able to maintain that yield growth. It's not -- it's almost not an impossible.

So 2 things will have to happen. One, clearly, we would continue to be opportunistic and look at share repurchase. We do have some certain limitations there in terms of cash that is available to us. We have to make sure that we find the right balance between being able to do that, deploying cash outside of servicing potential CapEx program that may have occur as a result of securing long-term contracts. And making sure that we use, that we deploy that cash properly. As far as strategy is concerned -- well, unfortunately, to the extent that the yield continues to be where it is, the best that you could potentially do is continue to look at the buybacks. That is the most useful way of utilizing the cash.

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Jonathan B. Chappell, Evercore ISI Institutional Equities, Research Division - Senior MD [13]

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And look, to the extent you have, like, the Mazo or -- I mean, I get that you'll never make what you should on the Spirit vis-a-vis what it could actually generate if it did get an FSRU project. But there's no really NAV here, but would you sell off maybe some of the older assets that have been in lay up for a period of time and maybe don't have a real feasible path towards a long-term project to accelerate the buyback?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [14]

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Well, I think the good thing is -- so we haven't completely lost faith in our ability to recontract those. And I think clearly, on the side, while it's looking like -- it's taking a long time to secure long-term employment for those vessels, there is actually quite good progress being made, particularly, for the Golar Spirit. And actually, similarly on the Mazo as well. And of course, we would only consider that if in the long term, it looks -- it's not an impossible putting them into long-term contracts. But we are quite far away from that at the moment. There is -- for each of those opportunities mentioned just now, there is a potential for us to have to spend a little bit of money for -- to get into a position where they are in -- to service those long-term contracts, which is why we're trying to position ourselves as best as we can by having this discussion, $25 million revolving credit facility. To be able to meet those CapEx requirements in the event that they arise. But we're not quite there yet in terms of, sort of, obliging to start looking at getting rid of those assets.

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Operator [15]

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And we've got one more question come through from the line of Ben Nolan from Stifel.

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Frank Galanti, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [16]

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This is Frank Galanti on for Ben. To kind of follow up on Jon's question in terms of strategy for the partnership should yield, kind of, not compress, is there discussions or talks about potentially rolling up the partnership into the parent?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [17]

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Well, I think this is something that we've discussed previously. We are looking at a variety of strategies that would allow in some way making that equity currency more efficient for the MLP. I think currently where we are today, as I said, we gave ourselves at least a year to try and see where the level of distribution would take us -- the new level of distribution would take us. We're not quite there yet in terms of giving up on that, but clearly there comes a point in time when we have to look at other strategies that would make that -- make the MLP a bit more of a currency for GLNG again. We've had a look at various strategies, roll up is a possibility. We are seeing a lot of activities in the MLP space where the GP is rolled back up the MLP. There's a certain amount of consolidation that could be had potentially making good use of the longer-term contracts to FSRUs within the fleet. But as I said, I think we need to give the remaining time we have on GMLP to see where that takes us and make a strategic decision before we go ahead and jump into other boxes.

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Frank Galanti, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [18]

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Okay. That make sense. And then going back to the Golar Spirit and Igloo, the 2 FSRUs that are a little bit of a question mark. You'd mentioned on the Golar Spirit there's some good optionality. Is that just the Brazilian projects that the parent are working on, or are there other potential contracts for that? And secondly, the Igloo, if it doesn't -- if it's not able to be rechartered, are there other potential opportunities for either those 2 vessels?

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [19]

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Sure. I'm taking those in turn. On the Golar Spirit, I mean we talk about Golar Brazil simply because that's the most progressed. But obviously, we've been looking at opportunities in Europe as well as Asia. But we are more prominently talking about Brazil simply because that's where we can ride in the back of good work that Golar Power has been doing in Brazil as part of their widening portfolio. And of course, let's not forget, in arriving at the level of distribution we have today, we had completely discounted any earnings from Golar Spirit. So to the extent we're able to secure earnings for the Golar Spirit is actually a huge positive, both to GMLPs earnings and to the distribution coverage ratio.

As for the Igloo, as I mentioned earlier, I think when we set the dividend level to where it is today, we took a prudent approach as to what it could possibly end up earning post its KNPC charter. And we said that, well, okay, it may be a possibility that we are able to redeploy the Golar Igloo in the shipping space, particularly, as the shipping market is looking to improve now. And so that's one possibility. But what is sure is that as we join in, in the bidding process for securing those 2-year contract plus 1-year option, the assumption we've put in the earnings of the Igloo suggest that we can be very competitive in the way we approach that bidding process.

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Operator [20]

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There are no further questions at this time.

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Brian Tienzo, Golar LNG Partners LP - CEO & CFO [21]

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That's great. Thank you, everyone, for your participation. And yes, see you next quarter.

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Operator [22]

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Thank you. That does conclude our conference for today. You may all disconnect.