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Edited Transcript of QGTS.QA earnings conference call or presentation 21-Apr-20 10:30am GMT

Q1 2020 Qatar Gas Transport Nakilat Co Ltd QPSC Earnings Call

May 1, 2020 (Thomson StreetEvents) -- Edited Transcript of Qatar Gas Transport Nakilat Co Ltd QPSC earnings conference call or presentation Tuesday, April 21, 2020 at 10:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Fotios Zeritis;Head of Investor Relations

* Hani Abuaker

Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO

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Conference Call Participants

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* Jonathan Milan

Al Waha Capital PJSC, Research Division - Analyst

* Maya Bou Kheir;Schroders;Middle East Equity Analyst

* Nikhil Arora

Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst

* Ramzi Sidani

HSBC Funds - HSBC Frontier Markets Fund - Portfolio Manager

* Santosh Gupta;Drewry Maritime Financial Research;Advisory Coordinator

* Ahmed Hazem Maher

EFG Hermes Holding S.A.E., Research Division - VP of Industrials, Materials and Small and Mid-cap

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Presentation

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Operator [1]

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Good day, and welcome to the Nakilat 1Q '20 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Ahmed Hazem. Please go ahead.

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Ahmed Hazem Maher, EFG Hermes Holding S.A.E., Research Division - VP of Industrials, Materials and Small and Mid-cap [2]

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Hi. Good morning and good evening, ladies and gentlemen. Hope you and your family are safe and healthy at these times. This is Ahmed Hazem from EFG Hermes Research, and we are pleased to host today Nakilat's 1Q 2020 Conference Call. Today's conference will include a brief on the 1Q '20 results, market updates and will be followed up by a Q&A session. We have with us on the line today, Mr. Hani Abuaker, CFO of the company; Mr. Fotios Zeritis, Head of Investor Relations. And with that, I'd like to hand over the call to Mr. Fotios. Please go ahead.

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Fotios Zeritis;Head of Investor Relations, [3]

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Hello, everyone. Good afternoon, and welcome to Nakilat's First Quarter 2020 Conference Call. For your convenience, the transcript of this call and presentation will be available on the Investor Relations section of our website.

Many of our remarks contain forward-looking statements. And for factors that cause actual results to differ materially from these forward-looking statements, please feel free to refer to the Slide 2 on our Investor Relations presentation. In addition, some of our remarks contain non-IFRS financial measures. A reconciliation of this is included in the note of the presentation that we have published.

Now I would like to hand it over to the CFO of Nakilat, Hani Abuaker.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [4]

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Thank you, and welcome to Nakilat's first quarter earning results for 2020. As always, we appreciate your participation. And we are committed to continuously improve our investor relation initiatives to strengthen our communication and improve our transparency with all of our investment community. As Ahmed stated at the beginning, I wish that all of you guys are safe and staying safe and healthy through this unprecedented challenging time. Today, together with our Head of Investor Relation, Mr. Fotios Zeritis, I will guide you through this presentation.

The world is confronting one of the greatest health challenge of our generation that profoundly impacted the global economy and all of its citizens. Our thoughts remain with the communities and individuals, including health care workers and the people who first respond to the needs of different impacted individuals. And these individuals who will help the health care services, our thoughts and our [all] goes with them.

The COVID-19 has disturbed the global markets, including here in our region, and Nakilat's performance during the quarter of 2020. For this reason, our Investor Relations department had numerous calls with different global investors. Our aim was to ensure that consistent communication with capital markets during this challenging time, so we can really spread the Nakilat equity story and [play] our defensive business model against such events that has impacted the global economy.

As of today, we are happy to state that Nakilat doesn't have any or have been negatively or significantly impacted negatively due to -- for its operation availability due to the COVID-19 challenge. Our entire fleet safely continues to sail across the world. And we delivered our carrying LNG cargoes as per our charter need and instruction. It goes without saying that Nakilat has taken COVID-19 extensive measures to ensure safe and reliable operation, we just remark that there has been no known cases of COVID-19 infection amongst our group of seagoing crews or shore-based personnel.

The company established a dedicated COVID-19 task force to constantly review and amend our business continuity plan as required. Other measures include, as every other company, working from home policy, and we have a very strict guidelines for our crews when they're dealing as they -- from -- as they start to really interact and to come forth. Charter parties for all of the group term chartered vessels remain in effect with revenues as per the contract terms.

Since the current situation is still too fluid, it's our duty to closely monitor the development of coronavirus pandemic and its potential impact on the global shipping of LNG. COVID-19 is one of these extraordinary times. First and foremost, we are prepared to operate under extremely adverse circumstances. We as a company are operating 24/7. We have already, even from before, our own resilient business continuity and crisis management policies and procedures that is developed over the years and tested since the inception of this company. The significant economic fallout of this crisis reinforced the critical needs to keep our plans, again as I said, resilient against every other potential events, whether it was pandemic or cyber attacks or other issues.

I hope I'll just give some high-level overview of COVID-19 implication on Nakilat and the global market. I will begin the call just to go through our financial highlight for this first quarter 2020. And then of course, as per usual, we'll take you through the LNG shipping market overview. And I will try to finalize our call with question and answers at the end.

As you can see, the quarter has been good for Nakilat in terms of delivering sustainable bottom line growth to our shareholders by executing our very well-planned business strategy. Following the strong operating performance through Nakilat sustainable business model with a steady stream of cash flow that we have managed through this volatile market. I'm delighted to report a good company performance both for EBITDA and net profit for the first quarter. Again, this has emphasized our ability to deliver the required results over time.

Now as you can go to slide -- you can see from Slide 18, our profitability has increased by 18%, very impressive on a quarter-to-quarter. That was mainly due to 2 main factors. One is what we -- that with the acquisition that we have done for Q-Flex through our -- the joint venture with INSW. And also what helped us very well is the strong VLGCs or the LPG vessels rate in the first quarter of 2020 compared to what has been the rate in 2019. Our EBITDA was up by 13.1% and was close to QAR 802 million.

Now if I go to Slide 10 and 11, we can see a healthy balance sheet. We are reaching QAR 32.4 billion, a cash balance of almost close to QAR 2.4 billion. We can see that we have paid a lot of debt over the time, since 2014, almost close to QAR 4.7 billion. However, our debt shows an increase. And that's again due to the accounting treatment for the consolidation of the acquired 4 vessels and moving from equity method to full consolidation of the group. And our net borrowing as of end of Q1 is at QAR 21.2 billion. Our current ratio is 1.11. Our return on equity is tracking 11.84%.

Now after taking you through this high-level financial highlight, maybe I will hand it over back to Fotios to provide us that high level, also going through a review of the LNG shipping market outlook.

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Fotios Zeritis;Head of Investor Relations, [5]

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Thank you, Hani. Hello, everyone. And the most important is, as the 2 speakers previously said, to stay safe and to take all the precautions to avoid any kind of contact with this COVID-19.

Now as Nakilat's Head of Investor Relations, I would like to emphasize that Nakilat's stock is owned by large institutions, special funds, mutual funds and individual investors. It is important to remember that in almost all cases, the ultimate beneficiary are individual in our local (inaudible). Approximately 44,000 shareholders worldwide hold Nakilat stock. Many of these shareholders are teachers, police officers, firefighters, retirees; or those saving for home, for school or for retirement. As management, we are committed to go to work every day recognizing the enormous responsibility that we have on our shoulders to maximize the returns for our shareholders.

While we do not run the company worrying about the stock price in the short run, in the long run, our stock price is a measure of the progress we have made all over these years. Throughout our history, Nakilat has built its reputation of being there for our customers and communities in the most critical times. In this unprecedented environment, it is not different. I will brief all of you of how COVID-19 has affected the global LNG shipping market in the first quarter of 2020. And after, I will take you through the LNG shipping market overview that you can see our presentation from the Slides 12 to 15.

During the first quarter of 2020, the spot LNG shipping rates [collapsed] as coronavirus outbreak had an adverse impact on LNG shipping segment. As a result of this situation, in the near term, the disruptive impact of the COVID-19 outbreak on the economies of importing countries will exert downward pressure. Over time, the lower LNG prices should stimulate the demand. And eventually, it will increase the shipping requirements in the long term.

Now if you turn to the Slide 13 of our presentation, you will see that the global LNG trade has grown rapidly over the last few years. This happened because it was driven by the ramp-up of new liquefaction projects in Australia, in the United States and the surging demand in Asia. According to Wood Mackenzie, the LNG supply is expected to grow by around 25 million tonnes in 2020. The current LNG output has not been affected. But in the long term, it's uncertain how these changes could impact the production. Wood Mackenzie expects the global LNG trade to increase by 12% until 2022. China remains a major source of global LNG demand in the following years. As per Wood Mackenzie, China's LNG demand is estimated to increase at 127 million tonnes in 2040 compared to 60.6 million tonnes in 2019, which implies an increase of 110% in the next 20 years.

Please look the Slide 14. You can see a high-level summary of LNG shipping market update for the first quarter of 2020. In combination with already soft LNG pricing as a result of higher production, COVID-19 and OPEC-driven low oil prices, the LNG shipping rates have softened and market expects the charter rates to remain soft throughout the summer, possibly experience some uplift in the next half of the year. We should mention that Poten & Partners shipbrokers currently assess the 1-year LNG shipping charter rate at $62,000 per day for the MEGI or XDFs, $52,000 per day for DFDEs and $30,000 per day for Steams themselves. This is a very helpful benchmark when we're discussing term charter opportunities.

Please turn to the Slide 15 of our presentation. After showing strong newbuild ordering momentum in 2019, we can see that the new LNG ship orders have dried up in the first quarter of 2020 with only 9 LNG vessels on order. In the first quarter 2020, the LNG's newbuild cost averaged approximately at $186 million. As of March 2020, only 4 vessels have been delivered with a further 35 scheduled for delivery this year. Furthermore, you can see that the global LNG fleet has 510 vessels in operation and another 125 vessels on their order book as per Clarksons. These numbers implies an increase of 25% of total LNG fleet in terms of number of fleets as of March 2020. Only the 40% of the order book are charter-free vessels and available to be absorbed by the market. The current LNG fleet age profile is approximately 11 years old.

We have to mention here that, as a final note, that market participants believe that the market may be balanced in 2020. But with limited arbitrage opportunities around the world, there could be a tonne mile compression leading to some excessive supply. As always, we encourage transparency with our shareholders in terms of what they should expect regarding the LNG shipping market in 2020 and afterwards. For this reason, we want to mention, of course, we do not know how this crisis will ultimately end, including how long it will last, how much economic damage it will create or how fast or how slow the recovery will come. However, we as the world's largest LNG shipping company have tremendous market intelligence and numerous tools in our hands to navigate through this unprecedented storm.

Now I would like to hand it back to Mr. Hani Abuaker, our CFO, to give you an insight into Nakilat's business outlook. Hani, please go ahead.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [6]

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Thanks, Fotios. Okay. Now if we move to Slide 17, I will take you through our business outlook for 2020. But I will keep it short in order to move on with the questions because I think we have already given you a full overview of Nakilat's financial results for Q1 and the explanatory picture of COVID-19's implication on our operation and/or potential performance of our company.

In 2020, as of today, we expect that we should really be able as a company with the strength of our balance sheet and with the operational excellence that we have that we're going to be able to weather this unprecedented challenging period and hopefully, potentially by (inaudible), we should really have another successful year for Nakilat. And this is, for sure, due to the management focus to expand its own core LNG shipping business and what we have done over the last couple of years and also how we really monitor and try to really mitigate any potential impact on our operating expenses due to COVID-19. Also all the challenges that we are facing currently in our shipyard due to COVID-19, we have already taken and started implementing some measures to minimize the negative impact from slower activities in our shipyard group or segments.

What you should expect over the next 3 quarters? First, as of today, you should really expect that the full impact of our acquisition that we had in October 2019 and also our new jointly-owned vessel that's going to be delivered in the second half of this year. Other than that, I think it is going to be more about for us to manage our costs and to optimize as much as we can to ensure that if potentially any negative impact that comes in the future as being really -- we're being ready for it.

Before we open the floor for question, I would like to raise a point about that we have added an extra slide in our IR presentation (inaudible) clearly illustrate what was the impact of our OSG acquisition and revaluation of the assets as per the International Financial -- as per the International Accounting Standards and what are the write-offs and -- that we have taken and how this one-off gain was kind of neutralized with the other contingency that we have taken. The reason we have added that one is because of some of you guys, who after discussions with them, they told us they need a further elaboration. And we felt this is prudently good measures that for us to really present it to you, so at least you can see the impact from all.

With that, I'll open the floor for questions. So please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll go first to Jonathan Milan with Waha Capital.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [2]

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Just a few basic questions on my end. How much of your revenue from wholly-owned vessels would you say are based on a floating rate? Because from my understanding, it is 90% maybe is 25-year fixed charter. Are any of these 25-year fixed charter expiring anytime soon? The second question is -- I mean again, from my understanding that you've fully acquired 4 of these jointly-owned vessels, which is why revenue from wholly-owned vessels is up so much. But how come share of results of JV is also up? I would have thought it would drop by a similar amount.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [3]

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Okay. Let me make sure that I really captured your questions. First of all, our wholly-owned vessels, actually all of them are on a long-term charter contracts of 25 years. And we started with these vessels back in 2007 and '08. So there's still around 12 to 13, 13 vessels, depends when the delivery has happened. Other -- we have some even on our jointly-owned, also they are most of them in the long-term contract, some with international customers, not with Qatar Gas, also in the medium- to long-term contracts, which is, you can say, between 7 to 10 years. And we have some maybe 1 or 2 or 3 vessels that usually own like a couple of years or 3 years' contract. The question that you have asked basically is about how come the jointly-owned results are looking good. I think the main contributor to that is basically the LPG rate. Last year, the LPG rate was almost -- you can generate around $30,000 to $50,000 per day rate on average. But the quarter is about [$50,000 to $60,000].

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [4]

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Sorry. The line broke off a bit. So LPG rates were seen very low last year. And sorry, can you please repeat that?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [5]

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Yes. The LPG rate last year were very low. So basically, we had almost -- we have moved actually from losing on that segment, okay, to actually making almost 200% of the loss of that amount that we've done last year. So let's say if we were losing, let's think, between [QAR 5 million to QAR 10 million], this year, we made actual profit, almost QAR 5 million to QAR 10 million , so significant improvement in the LPG rate. And that's what helped us in the joint venture level to show better results and offset what was taken out of the joint venture level because of the INSW acquisition.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [6]

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That's the 50-50 JV with Milaha?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [7]

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Exactly, yes.

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Operator [8]

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We'll go next to Sameer (inaudible) with [Amwal].

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Unidentified Analyst, [9]

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Just a couple of questions on my part. On the debt side, would you -- can you please tell us what the percentage of your debt that is fixed versus floating rate?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [10]

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Okay. So we have to ask, you have 2 questions. But I will answer this question first. I can say, on average, between 75% and 80% for the whole group, whether the wholly-owned or jointly-owned, are fixed debt.

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Unidentified Analyst, [11]

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Makes sense. Okay. But would you mind paying up what the -- so it's around 4% cost of debt perhaps at a...

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [12]

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Sorry. Can you say that -- can you repeat your question, please?

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Unidentified Analyst, [13]

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What's the cost of debt on it on average?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [14]

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Okay. On average, it goes between 4% to 5% of the (inaudible).

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Unidentified Analyst, [15]

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Okay. It is 4%, okay. Just another question. The fixed rate you have on your contracts, is it linked to an inflation index, where you can increase it every year? Or how is this going to pay back?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [16]

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Yes. Just in simpler terms, our time charter contract has 2 elements. It has the CapEx element, which is usually we target some rate of return, internal rate of return over the life of the contract to achieve something close to between 11% and 14% IRR. We have another OpEx element, okay? And that OpEx element is being inflated on an annual basis based on an agreed inflation rate, whether it's U.S. inflation or it's a fixed percent among the ventures or the entities or companies. So this is all the 2 -- this is the only part that is being inflated on an annual basis.

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Unidentified Analyst, [17]

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Okay. Just 2 small -- 2 more small questions from my part. Any -- does your contracts also include like some force majeure clause in them?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [18]

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Clause?

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Unidentified Analyst, [19]

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Payment from force majeure. Yes, force majeure.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [20]

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Yes, yes, yes, I understand. Yes. Any contract in the world, definitely it has a force majeure clause. However, for -- we foresee as a company or as a management that it is -- our force majeure is not really relevant for us in the time being. And also, we do not foresee any potential (inaudible) as of today (inaudible).

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Unidentified Analyst, [21]

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And one last question from my part. On maintenance CapEx, how should we look at it from your side, excluding any acquisition? How -- what's your guidance on maintenance CapEx?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [22]

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Yes. Maintenance CapEx, you should really think about it, if we exclude the acquisition that we usually announce on it, usually every 5 years, because we have a big fleet, we have a number of vessels goes through the dry dock, usually these large vessels, where dry dock could range between $4 million to $5 million each. And that's all of it. It's also taken into the economics when we lock in into this long-term charter contracts. So that usually is a CapEx of what we call it a 5-year cycle of a dry dock or we call it the repair and maintenance -- the major maintenance CapEx item in our balance sheet, which is also, I would like to highlight something, that this cost, it's a kind of -- has been already gone through the first cycle. So you should -- usually, you won't see that impact because now it's really capitalized, depreciated. So once it's depleted, it goes back again into sort of being capitalized and being depreciated. So all the impact has really -- has been gone through the first and second cycle. So you should not really usually see this kind of difference in the amount.

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Operator [23]

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We'll go next to Santosh Kumar Gupta with Drewry.

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Santosh Gupta;Drewry Maritime Financial Research;Advisory Coordinator, [24]

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I think last time, when we -- during the last quarter's presentation, you had suggested that we are expecting delivery of 2 newbuild vessels in second half of this year. So I just wanted to understand if -- are we still on schedule to receive those vessels in second half, keeping in view the COVID-19 crisis that we are foreseeing?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [25]

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Yes. Fotios, do you want to take that or should I take?

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Fotios Zeritis;Head of Investor Relations, [26]

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Yes. As we have discussed -- hopefully, you stay safe. So based on your question, we are expecting actually one vessel to come in the few months, by May, the next 2 months, let's say. And the second one will be at the end of the year. It will come December, January. So in other words, Santosh -- yes, in other words, it's basically we're still on expected schedule of delivery of these vessels, such that you have to understand our nature of business, we always -- as I always tell people, we work on a 24/7 anywhere in the world with a moving target, goal or vessels. So we are very well prepared for -- to weather such unforeseen challenge or incidence such as this COVID-19. So we have our own measures in place. We have our own business continuity plan in place. And these ones was already there regardless whether it was a COVID-19 or any other incident. So yes, we're still on plan. And on this -- maybe on plan, that means assuming no other internal factors, let's postpone it a couple of weeks, 3 weeks, 4 weeks. But we're still on plan to take these ones, and we have taken into consideration the impacts of COVID-19.

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Operator [27]

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We'll go next to Jonathan Milan with Waha Capital.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [28]

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If I may please ask just a follow-up question, on the breakdown of borrowings, you said senior bank facilities of QAR 11.4 billion. Supposedly, they expire December 2025. And just looking at the cash flow, it seems like the repayment per year is QAR 0.5 billion or so. So is there a bullet payment at the end of December 2025? And are you most likely going to refinance it with the banks or a sukuk or something of that sort?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [29]

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Yes. That's what we do if we have any of these contracts or any of these loans that are about to expire and we still have years left in our charter party contracts. We have some of our joint ventures, we had some of the -- one of the joint vessel that we jointly owned had similar refinancing with a bullet payment. And we were able to really achieve a very strong and competitive rate, and we're very [much anticipating] that long-term contract we have. So yes, we will do that if the payment is coming due on any of our facility and we are having our contract that is still there. So yes, we will do that.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [30]

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And for -- from now until then, your yearly payments, the payments are going to peak at around QAR 1.1 billion, QAR 1.2 billion? Or could it be more? And I mean is there a risk to dividends, I think, is the ultimate question that I have.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [31]

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Okay. Great. No, I don't foresee any risk for dividend due to our ability to deleverage our balance sheet. I think we believe that we can service the debt. And when this debt comes in, we can really refinance it for the remaining terms of the contract. So I really don't see any reason. And also, you have to notice something. Now we're almost -- I mean, in 2025, these vessels will be almost around 17 years. We still have 8 years for the -- remaining of the contract. But after that, these vessels still have additional 10 to 15 years life. And they are very important to our charter.

So I think I do not foresee any potential risk that we are running short of cash because the banks will, as we have seen in the last -- this year, that they were very happy to finance our vessel, supported by the current contract. So -- and the financing will be to match the maturity of our time charter party contract. So I don't see any reason or any risk for us not being able to refinance on the backdrop of our contract, so -- yes, so I believe there's no dividend -- there's no concern about the dividend from that angle.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [32]

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Okay. You're saying the vessels could last another 10 to 15 years after the end of the life of the contract, so for a total life of 40 years for the vessel?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [33]

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Yes, yes. But however, our loan, the debt that is built up for that vessel is only for 25 years. So basically, when we refinance the bullet point, it's really built on the economics. And we still have another 15 years that we can leverage these vessels.

So we have a lot of flexibility in ensuring that we have the right liquidity in place for us. And again, not only just because of the life of the vessels that 15 years after the finish of the contract, it's because, in 2025, when we have a bullet payment, the portion that is going to be left on this contract is going to be almost about 8 years' worth of debt that we can finance against the contract that we have with our charterer.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [34]

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Okay. Excellent. And you said you expect more -- to have more vessels delivered this year? Can you please elaborate on that? And are they also with the Qatari entities? Or are they with multinational entities, the contracts? Are you expecting...

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Fotios Zeritis;Head of Investor Relations, [35]

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I will take that, Hani.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [36]

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Sure, sure. Go ahead.

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Fotios Zeritis;Head of Investor Relations, [37]

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Yes. As we have announced in the previous conference call, that we said we have actually total 4 vessels newbuilds, but 2 vessels who are under construction will come at the second half of 2020. 1 vessel of this 2 will come in the next few months, 1, 2 months; and the other at the end of the year. We are committed. We are collaborating with our construction yards. We have taken all the precautious actions to make sure that this vessel will be delivered safely with all the required crew, et cetera. So yes, hopefully, that will come in the second half.

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [38]

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Are they already constructed with an entity? And is it Qatar -- a Qatari entity or a non-Qatari entity?

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Fotios Zeritis;Head of Investor Relations, [39]

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We are the owner with Maran. And however, if you mean who is -- do you mean who is the charter or what?

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Jonathan Milan, Al Waha Capital PJSC, Research Division - Analyst [40]

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Yes, with the charter, I meant, sorry. Yes, I meant the charter.

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Fotios Zeritis;Head of Investor Relations, [41]

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Okay. We are currently under commercial negotiation with charterers, but we cannot disclose further on that because it's our responsibility to keep confidential, commercial issues.

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Operator [42]

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And at this time, there are no further questions. I'll turn the call back to the speakers for any closing remarks -- I do apologize. We do have a question. We do have one question from Ramzi Sidani with HSBC.

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Ramzi Sidani, HSBC Funds - HSBC Frontier Markets Fund - Portfolio Manager [43]

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Just on the new vessels, is there -- can you share any information? Or can you help us think of the rates that you would be achieving? How should we think of the rates versus the current contracts you have in place?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [44]

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Yes. Go ahead.

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Fotios Zeritis;Head of Investor Relations, [45]

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Look, as you understand, there is an international market about the LNG shipping. So you can see how the market indicates the long-term contracts, how it indicates the short-term contracts. You have to understand that, however, the company always looks to a specific -- has a specific investment criteria. And always, it looks at vessel not only for now, it looks at vessel for -- that we can trade for 35 to 40 years, and the expected IRR, as always have said, is between 11% to 13%. Obviously, this thing, it depends on many factors. It depends how long was the duration of the contract. It depends on the credibility of charterer. It depends on the trading routes, the size of the vessels. So we cannot give you a kind of specific economics on that. But I believe that what you really need to look is that the expected IRR for this vessel for the next years, in long term, it will be 11% to 14% leveraged IRR. I hope I answered your question?

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Ramzi Sidani, HSBC Funds - HSBC Frontier Markets Fund - Portfolio Manager [46]

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Yes, yes. And has the JV already been formed? Or do you need to invest any equity in the JV?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [47]

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The JV has already been formed. This -- as the vessel is being constructed and delivered, there's a lot of milestones kind of payment that we do pay and fund the JV to pay this vessel. And yes -- so I hope I answered your question?

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Ramzi Sidani, HSBC Funds - HSBC Frontier Markets Fund - Portfolio Manager [48]

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So no payments have been done already?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [49]

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No, there was -- there are some payments that has been done already for these vessels, because they are -- we fund them as our equity contribution area, as in, like an equity contribution. And that's what has been done so far. But remember, they're coming in a staggered way. Like they're coming one in towards maybe June or May end of May or June, and one is almost end of December and the other 2 coming on 2021.

Just to answer your question about the rates, and I think Fotios has really elaborated, I always -- these are the expected -- we always look for a leveraged rate of return, something that we target between 11% and 14%. That's what we say. And that's exactly -- if the market -- and that's what has been the case when the rate was almost $150,000 and $200,000 per day. Everybody was locking the vessels at a rate of -- a long-term rate to generate sort of that rate of return. If you want to go into the spot, yes, you might be exposed for a couple of months, 3 months, whatever it is. But usually, when you lock it, usually, you lock it at a rate that's supposed to be sustainable. So I hope we answered your question.

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Operator [50]

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We'll go next to Nikhil Arora with Franklin Templeton.

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Nikhil Arora, Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst [51]

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A couple of questions from my side. First one is a continuation of the last gentleman's question. So you said leveraged IRR of 11% to 14%. Can you help us understand what kind of leverage are we assuming here versus equity contribution for these vessels? And secondly, can you tell us what kind of vessels are these? I see that you are saying these are newbuild LNGCs, but which ones exactly, like MEGI? Or is it XDF or is it a bit like a Q-Max?

And so third question that I had is if you can elaborate something on the North Field expansion because we have been kind of reading that it has been delayed by 1 year. So what does that mean for you guys? And when can we expect that leg of the expansion to begin?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [52]

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Okay. I'll take question #1 and question #3 and then leave that one in the middle for Fotios to elaborate. Usually, for any shipping -- LNG shipping, you can really do something called 20-80, 20% equity, 80% debt from the bank. If you have a longer contract, you can even go 10 -- like 90-10, so basically 10% equity and 90% debt. So this is why your leverage usually will become better and move from 10% to 14%. So -- however, we have seen some vessels on the low end, maybe they go into 75% debt and 25% equity. So it really depends. Usually, we would like to target something around 20-80. That's the number.

In regards to North Field Expansion, I think this is something usually Qatar Petroleum and Qatargas comments on from time to time. For us, basically, as our customers, we would like to always serve them, and we have a long-term relationship with them. So it's up to them to really decide and to plan their time and their schedules. We are a global shipping company. And over the last 5, 6 years, we've been -- even through some of our joint ventures, we were able to let international capacity to ensure we have sustainable growth for our company.

Fotios, you can take the second one.

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Fotios Zeritis;Head of Investor Relations, [53]

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Yes. Can you please repeat the second one? I'm sorry about that. Because it was long question, so I missed it. Can you repeat the question?

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Nikhil Arora, Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst [54]

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Sorry, yes. The second question was -- so what I was trying to ask you is on the new vessels again. So you said that the commercial terms are under negotiation. So we understand the confidentiality part. But can you at least tell us whether these vessels are kind of in anticipation of new business? Or are you quite certain that you will get this business?

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Fotios Zeritis;Head of Investor Relations, [55]

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As we discussed also previously, as the world's largest LNG shipping company, we have a strong relationship with our current charterers and potential new ones. We are currently under negotiation with our charterers, maybe to more than one. So we don't actually like to disclose specific items, how we compete for these businesses because there is a kind of sensitivity with our charterers or the companies who are willing to charter these vessels. So we try actually to keep -- or it's a practice in shipping actually to do not disclose confidential issues with our charterers. So we still keep it ongoing, and we'll inform you when we have something firm.

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Nikhil Arora, Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst [56]

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Okay. And sorry, what's the kind of vessels these are, like based on the propulsion method. Is it an MEGI?

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Fotios Zeritis;Head of Investor Relations, [57]

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We actually -- all 4 of the vessels are the new technology, are 2 MEGIs and 2 XDFs.

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Operator [58]

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We'll go next to Maya Bou Kheir with Schroders.

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Maya Bou Kheir;Schroders;Middle East Equity Analyst, [59]

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I just wanted to confirm. You mentioned that 75% to 80% of the total debt is fixed. But the debt on the balance sheet is mostly fixed, right? Hello?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [60]

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Sorry. Yes, I will take that. The debt at the balance sheet should be also trending between -- around that range of 75% to 80%. Usually, when we quote about the number of up to 80%, that's also including our jointly-owned vessels. So I hope I answered your question?

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Maya Bou Kheir;Schroders;Middle East Equity Analyst, [61]

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Yes. Great. Just also wanted to get the outlook on LPG for the rest of the year. Do you see this trend in Q1 continuing, within everything we discussed?

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Fotios Zeritis;Head of Investor Relations, [62]

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Look -- sorry. Hani, I will take it or you will take it?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [63]

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No, you can take it.

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Fotios Zeritis;Head of Investor Relations, [64]

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Okay. Look, Maya, generally speaking, with this COVID-19 and all these things that's happening around the world, nobody can be certain with anything. And whoever tries to actually forecast something or to take the terms to say something, for sure, it will be very challenging and not certain. I can tell you that until now, the LPG has improved from last year. However, we have to see how it will continue, this trend.

And many things around the world changed. COVID-19 has influenced Europe, has influenced the price of oil. So we cannot be certain. I can tell you that we will see a kind of volatile market in LPG because the arbitrage opportunities will be, let's say, tighter for the next quarter, but the long-term picture is favorable if you see the long term. Hopefully, I answered your question?

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Maya Bou Kheir;Schroders;Middle East Equity Analyst, [65]

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Yes. That's very clear. Also, one more thing to ask about is the shipyards activity. I mean has this seen any disruptions from the COVID-19 crisis? I mean I do know that, last year, we had a drop in activity due to increased insurance premiums on tankers being in the region. So year-on-year, probably that would mean lower impact. But I mean are we going to turn into another loss with the shipyard this year?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [66]

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Okay. I will start on a good note about the LPG rate. If you look at the LPG rate as of today, it's still strong numbers despite of what's happening around the world and even about COVID -- or COVID-19. So we keep our fingers crossed and hopefully think (inaudible).

For the shipyard, it is -- we are negatively impacted of this COVID-19 due to the ability of the vessels to visit and for the service engineers to come in and to do that. But as we have said before, we've been -- I think, the contribution, we will try to minimize that exposure from that segment as we've done that before. We were expecting, hopefully, this year to become even better performance. But again, shipyard business, as always, it's something that can contribute 2% to 3% up or down or even sometimes being neutral to our performance. So we will continue to do what is best for us in that segment. And hopefully, let's hope that the LPG rate will continue or at least be as strong for the next couple of 2 quarters, then they should really offset all the potential impact -- or negative impact of that shipyard to our performance as a group.

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Maya Bou Kheir;Schroders;Middle East Equity Analyst, [67]

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Great. I guess I'll just ask the last question. I know you've discussed this over many other questions. But I understand you're currently in negotiations for the new vessels. But I'm thinking, in case you do not reach an agreement before the time the vessel gets delivered, would you -- I mean what alternatives do you have? Would you be placing these vessels in the spot market?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [68]

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All options are open. Because you have to understand, like even sometimes potentially, the expectation for us about the delivery to a specific charterer, you might be -- there might be a difference of a couple of weeks or 1 month of the delivery of that vessel to that specific charterer. So usually, we try to do what's best for us during that time.

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Fotios Zeritis;Head of Investor Relations, [69]

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I would like to add also to understand, Maya, that these assets are a -- have a very long life, 35 to 40 years. So always, when we invest in this type of assets, we'll look at the long-term value. It's not something that we look only for now. That's it.

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Operator [70]

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And at this time, there are no further questions -- I do apologize. We'll go next to Nikhil Arora with Franklin Templeton.

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Nikhil Arora, Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst [71]

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Sorry, it's me again. If I may ask a couple of more questions. So on the slide show again, on the last -- new slide that you have added where you have shown some contingency provisions taken for Gulf LPG, NKOM and NDSQ, I mean going into 2020, could we expect more of these? Or were these like completely one-offs? Because I think these kind of relate to your shipyards which are not generating probably enough ROE.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [72]

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Yes. No, you shouldn't really expect any of these things in the future. We are -- actually, we were, to be honest with you, very conservative because when we did the acquisition and the revaluation of the current assets of OSG, even we looked at some of the transition costs of the infrastructure that we have built for our own LNG and to transfer the operation. And so the ones from the shipyard, we ensured over time that if there's any sort of impairment to some of the machines because of the [life science], so I think it was more of being conservative. If any potential things could happen in the future, we brought it down to 2019 and we really let it go. So if things are -- it's still being used. If things are still performing very well, you're still going to see and reap that benefit in the future coming by having lower depreciation.

So for instance, LPG rate is doing phenomenal, phenomenal results for a shipping company. However, due to maybe some of the people who doesn't understand the segment, the value of these vessels sometimes go below the expected market. But no, we don't foresee anything potentially happen in the future. This is just like what I said. It's made our balance sheet stronger. If we are -- we're quite conservative by really reducing potential future depreciation expenses, that's all what we're going to do, to be honest with you, if I see it, from kind of economical point of view.

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Nikhil Arora, Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst [73]

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Okay. All right. And I think you've mentioned this during the call, but it wasn't very clear to me. So you said that the wholly-owned vessels are all on 25-year charters, so which means that the first expiry of those will be somewhere in the 2030s. And then you also said that on the JV front, some of the vessels are on 7- to 10-year contracts. But could you tell us like what's the kind of weighted average, let's say, tenure on the JV side? And if you can confirm if I'm right on the wholly-owned vessel side.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [74]

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No. Let me elaborate a little bit more, and then Fotios can even elaborate further the ancillary part. When I'm saying 25 -- okay, we have 25 wholly owned with Qatargas, Qatari -- with Qatargas as charterer. Then we have...

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Fotios Zeritis;Head of Investor Relations, [75]

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That is 29...

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [76]

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We have 25 wholly owned. Now there are 29 assets for INSW vessels. And we have now another 25 jointly owned that's also chartered to Qatargas over 25 years. However, we have almost like 5 to 6 or 7 vessels that is being chartered to different international charterers and they are not Qatari charterers. And these are the ones that I'm talking about that we have 7 to 10 years, and we have some for 5 years and some 1 or 2 or 3 that they are now on a -- they are on -- been on a 3-year charter contract. So I hope I really elaborated better at this time.

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Nikhil Arora, Franklin Templeton Investments (Middle East) Limited - Senior Research Analyst [77]

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Yes. That's very clear. And just one last question from my side is that -- I see in your 2019 annual report that you mentioned something called NSQL managed vessels. And then you write them separate to the wholly-owned vessels. So can you just elaborate what's the difference between the 2? And what does NSQL management really mean?

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [78]

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Okay. The NSQL basically is our operating shipping arm company. So we have Nakilat Inc., which is a legal structure that owns the company, but we have our operating arm, which is called Nakilat Shipping Qatar Ltd. Nakilat Shipping Qatar Ltd is operating currently all of our wholly owned -- I mean not all of them, but just around 14 vessels. And now we're going to receive another 7, and the new ones and one of the assets we view in the future. Plus, they operate 4 LPG vessels that we jointly own with Milaha. So it's our operating company, because in shipping, you always have an owner, ship owning company and ship operating company. So I hope I explained this very well.

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Operator [79]

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And at this time, there are no further questions.

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Ahmed Hazem Maher, EFG Hermes Holding S.A.E., Research Division - VP of Industrials, Materials and Small and Mid-cap [80]

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Okay. Thank you, operator. I think we don't have any further questions. Mr. Hani and Mr. Fotios, if you'd like to close with some closing remarks for the call.

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Hani Abuaker, Qatar Gas Transport Company Limited (Nakilat) (QPSC) - CFO [81]

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Okay. First of all, thank you all. And please, if you have any further questions or clarifications, Fotios and myself always are reachable, and please feel free to talk to us.

So thank you again for taking the time and participating in our conference call. Once again, please stay safe and healthy. And we are looking forward in the near future to see you again in person, hopefully in a very near future. All your question and concerns, usually, as we said before, we discuss it with our management and we highlight with -- even with our CEO to understand how better we can address your recommendation or concern. And again, at the end, we think we're going to all go through this unprecedented situation. And hoping for you guys to see you in the near future.

And I leave it for Fotios.

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Fotios Zeritis;Head of Investor Relations, [82]

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Thank you so much, guys, for participating during this challenging time. Please stay safe. Try to take care of yourself and your families.

Definitely, we highly appreciate your attendance in this call. We always encourage you to reach us through calls, telephone, whatever you can, to us. All your question was well received, and we will make sure that we'll communicate the capitals market feedback to Nakilat's top management.

Thank you so much for taking your time to join us, and please stay safe. Have a great afternoon.

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Ahmed Hazem Maher, EFG Hermes Holding S.A.E., Research Division - VP of Industrials, Materials and Small and Mid-cap [83]

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Thank you, Mr. Hani, and thank you, Mr. Fotios. With that, we'll end the call.

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Operator [84]

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Thank you. This does conclude today's conference. We thank you for your participation.