GasLog Partners LP (NYSE:GLOP) Q3 2020 Earnings Conference Call February 6, 2020 8:30 AM ET
Peter Livanos – Chairman of GasLog Limited and Director of GasLog Partners
Paul Wogan – CEO of GasLog Limited
Andrew Orekar – CEO, GasLog Partners
Phil Corbett – Head of IR
Conference Call Participants
Mike Webber – Webber Research
Greg Lewis – BTIG
Jon Chappell – Evercore ISI
Chris Wetherbee – Citi
Randy Giveans – Jefferies
Ben Nolan – Stifel
Liam Burke – B. Riley
Marc Solecitto – Barclays
Good morning, my name is Sidney, and I will be your conference operator today. At this time, I would like to welcome everyone to the GasLog Limited and GasLog Partners LP Fourth Quarter 2019 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question answer session. As a reminder, this conference call is being recorded.
On today’s call are Peter Livanos, Chairman of GasLog Ltd and Director of GasLog Partners; Paul Wogan, Chief Executive Officer of GasLog Ltd; Andrew Orekar, Chief Executive Officer of GasLog Partners; and Alastair Maxwell, Chief Financial Officer. Phil Corbett, Head of Investor Relations will begin your conference.
Good morning or good afternoon and thank you for joining GasLog Limited and GasLog Partners fourth quarter 2019 earnings conference call. For your convenience this webcast and presentation are available on the Investor Relation’s section of our website, www.gaslogltd.com and 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 also contain non-GAAP financial measures as defined by the SEC. A reconciliation of these is included in the Appendix of this presentation.
During the presentation, Andy will cover the Partnership’s fourth quarter, and full year 2019 highlights and the revised capital allocation strategy announced today. Paul will then cover an update on the LNG and energy shipping markets before taking you through GasLog’s fourth quarter and full year 2019 performance. We will then be happy to take your questions. But before we commence today’s presentation, Peter Livanos will make some introductory remarks.
Thank you, Phil. As we enter the new decade, I wanted to take the opportunity to give you my perspective on the LNG industry and the outlook for GasLog and GasLog Partners. World today is keen to deal with pressing concerns regarding climate change, consequently, making the sustainability of any business a key value driver. The LNG transportation industry and GasLog in particular can and will play a key part in achieving this for an energy sector in transition.
Firstly, I remain confident in the outlook for natural gas demand and LNG’s key role in delivering supply to meet the consumption growth. This positive view is underpinned by the switching from coal to gas as a primary fuel source, as well as playing a critical role in supporting the fast developing renewable power sector. In addition to the power sector, LNG will have a vital role in the ability of the shipping industry to achieve the stated IMO targets of 25% reduction of CO2 emissions by 2030 by providing the most effective and readily available fuel on the path of this transition, thereby adding yet another demand driver to the LNG story. Must not forget that the LNG industry involves significant investment over long term horizons.
In any cyclical business, there may be a temporary mismatch between supply and demand, such as the one currently playing out in the global gas markets. However, as we have seen time and again, low commodity prices are the catalysts for new and structural gas demand growth, particularly when there is also a clear environmental benefit from doing so. I’m pleased to see the growing commitment to new downstream LNG infrastructure projects, in particular the significant capital commitments in China and India to increasing each country’s regasification capacity.
Against this backdrop, we are seeing LNG demand continue to increase. This is characterized by the growing role traders, emboldened by the greater liquidity in the spot LNG market. These changes are opening new markets and trade routes positive for LNG shipping demand with the potential to increase ton miles albeit one likely to result in shorter term charter durations. In shipping, we have seen significant new building ordering in the past two years.
This has been driven by historically low shipyard prices, coupled with improved propulsion and boil off systems. However, we expect further technological advancements will be minimal over the next several years. The rapid changes in propulsion technology, steam power to diesel electric engines to medium speed diesel engines, as well as a significant improvements in boil off rate from 0.15% to 0.07%, coupled with the structural changes in vessel carrying capacity over the last 10 years have reached levels where further optimization is either impractical or not cost effective.
Flattening technology curve when combined with shorter charter durations, inherent in a more liquid commodity environment leads me to believe that speculative new building ordering will abate relative to the levels of the last few years. Our track record of support from lenders and export credit agencies puts us in a preferred position relative to others in our industry, given the critical importance of capital cost to breakevens and returns.
At GasLog we remain committed to the two-company structure, maintaining strong and beneficial links between GasLog Limited and GasLog Partners, allowing each company the autonomy to pursue their own strategies. GasLog Limited once our new building program is fully delivered in 2021, will have a fleet of 20 ships of which 13 will be ultra-modern vessels with compelling unit freight cost economics. These vessels have the additional benefit of being fully financed and supported by long term charters that deliver attractive, committed revenue with strong counterparties.
I see this strategy as a key differentiator of GasLog Limited from our peers who may have uncommitted new building quarters. A portion of the GasLog fleet for TFDEs remain exposed to the spot market. And although somewhat less technologically advanced than other ships are very much in the upper half of the global LNG fleets technology cost curve.
We are mitigating this exposure by developing opportunities in the floating storage segment into which we will deploy uncommitted TFDE ships on attractive long term charters. Paul will be discussing two of these projects in his presentation. Our revenue growth is underpinned by our commitment to operational excellence and the ability to deliver our new ships into service on time and on budget.
This growth requires no incremental equity or debt. And as such, I take great comfort in having a fully funded program. Consequently, our strategy of GasLog Limited for 2020 and the next few years is simple. We are concluding a chapter of material growth for the business, delivering modern vessels onto long term charter to leading companies in the global LNG sector.
We will now focus on harvesting the fruits of this strategy while continuing to address our administrative and operational cost base. We will focus on deleveraging our balance sheet and use surplus free cash flow to reward our loyal shareholders primarily through common and special dividends.
Moving on to GasLog Partners, our [inaudible] Company in which we are by far the largest shareholder. After several years of successful equity generation for the Group. We are moving to a strategy that prioritizes the strengthening of our balance sheet through debt reductions.
Setting the stage Andy will talk to you about the book values of the steam fleet, and rebasing the level of distributions. Andy will shortly be going through both these events in more detail. But suffice us to say the rebased distribution will facilitate a further strengthening of the GasLog Partners’ balance sheet over the next several years.
This will position it as a cost effective provider of LNG shipping. GasLog Partners’ financial strength will act as a catalyst for growth when acretive opportunities appear in the coming years. GasLog Partners’ fleet of 15 ships will consequently benefit from lower cash flow breakeven levels as a result of debt reductions and optimization of cost.
Combined effects will allow GasLog Partners to prosper under the backdrop of an increasingly short term and opportunistic LNG transportation market. In conclusion, we are laser focused on balance sheet strength, commercial flexibility, efficiency and operational excellence. This will give us the ability to exploit changes in the LNG shipping market and to maximize the earnings and utilization of both GasLog and GasLog Partners’ fleets. At the same time there’s an emphasis on cost control across all levels to enhance competitiveness.
We believe that the changes already underway will deliver a leaner and more agile organization without sacrificing safety for our market leading operational standards. As the biggest single shareholder and against the positive but shifting outlook of our industry, as well as GasLog’s track record our share price performance has been deeply frustrating.
I do understand some of the drivers of our share price, global growth uncertainty, very weak gas pricing as well as a challenged MLP model. However, I strongly believe that the actions we have announced today provide a platform for all owners of our capital structure to benefit going forward.
I fully endorse the initiatives taken by management to reduce costs and prioritize balance sheet strength. I believe all these actions underpin the investment case for both businesses going forward. And with that, I will now hand over to Andy take you through the Partnership presentation.
Thank you, Peter. I’ll begin today with the Partnership highlights of the quarter and full year 2019, after which I will discuss the evolving commercial environment for our ships and the current challenges based in the MLP capital markets.
These two key issues underpinned our decision to take the conservative action of rebalancing our commenting and distribution in the first quarter of 2020 in favor of strengthening our balance sheet. In time, we expect this approach will improve the competitive positioning of our fleet and allow us to continue our acquisition growth strategy in future years.
Turn to Slide 5, for a review of our performance in the fourth quarter and full year of 2019. After a strong quarter of operational and financial performance today, GasLog Partners reported our highest ever annual results for revenues, EBITDA, and distributable cash flow. During the fourth quarter, we met the distribution guidance we established for 2019 declaring a distribution of $0.561 per unit. And we repurchased $3 million of our units bringing our totals for the year at $23 and $1.2 million of our common units retired.
Our strong financial performance enabled the Partnership to return a total of $130 million to our common unit holders in 2019 or $2.71 per unit and increase of 25% over 2018. Combining the capital we have returned in the form of common distributions plus the unit repurchases we executed over the last 12 months. GasLog Partners is currently trading at a 26.5% total return on yield.
We do not believe that continuing to pay such an elevated deal is the most long term value enhancing use of our capital, which I will discuss in more detail shortly. Lastly, as of December 31, we recognized the non-cash impairment charge of approximately $139 million related to our five theme ships built in 2006 and 2007, primarily as a result of lower expected utilization and earnings estimates for these vessels.
On Slide 6, you’ll see our track record of fleet growth since our IPO. Including our vessel acquisition in 2019, our fleet stands at 15 wholly owned LNG carriers with a revenue backlog of $945 million. Today, we are proud to say that the Partnership is one of the largest independent owners of LNG carriers with a scale platform. Although our fleet had 81% of its operating days fixed in 2020, the Partnership fleet is expected to be increasingly exposed to the spot market in future years. This creates an opportunity to capture cynical upside in a strong market for our ships, but also significantly reduces our cash flow visibility relative to prior years.
Turning to Slide 7. Despite our accomplishments in 2019, the backdrop for MLP capital markets has remained challenging. As you can see from the chart on the left, there have been nearly $5 billion of outflows from the MLP in mid-stream sector since January 2018. Issuance of common equity from the entire sector was just $2 billion last year, and only $5 billion in total over the last two years.
And lastly, the difficult environment for MLPs can be seen in the trading yield of the benchmark Alerian index, which is expanded by 300 basis points over the last several years and is now approximately 10% indicative of a higher cost of equity capital for the industry as a whole. As the Partnership has relied primarily on external capital to fund its growth, the challenging backdrop for common equity issuance makes funding additional acquisitions difficult for us to execute at this time.
Turning to Slide 8 and discussion of the recent industry wide trends for term chartering of steam vessels. As you can see on the right hand panel of the slide, only 16 levels were fixed under term charters of one year or more during 2019. A poor result relative to 2018, which saw a total of 12 stream 600 term deals. While this trend in the multiyear charter market has been disappointing, it is important to note that steam vessels continue to represent 42% of the global LNG shipping fleet. There remains a sizable spot market for steam as demonstrated by the total of 76 spot charters for steam vessels in 2019, representing more than a quarter of all spot fixtures reported for the year.
Slide 9 sets out our adjusted EBITDA guidance and capital allocation plan for 2020. In light of the capital markets and vessel utilization challenges I’ve just discussed, today, the Partnership is taking a proactive step to focus on further strengthening its balance sheet. While we did not take this difficult decision lightly, we believe our plan for 2020 will be in the best interest of our unit holders over the long-term.
This morning, we announced adjusted EBITDA guidance of $230 million to $260 million for 2020. In preparing our guidance, our assumptions are based on our fleet generating approximately $200 million of adjusted EBITDA from our vessels of fixed rate charters, with the remaining $30 million to $60 million subjects and charter rates earned by our vessels expected to operate in the spot market in 2020.
In addition, today, the Partnership declared a distribution of just over $0.56 for the fourth quarter of 2019. For 2020, beginning with the first quarter of this year, we expect to pay a quarterly distribution of $0.125 or $0.50 annually. Our rebased annual common distribution represents only 10% of our adjusted EBITDA guidance for 2020. And we can through this level to be a conservative and sustainable payout of our earnings per unit.
Our plan for 2020 will reduce the Partnership’s annual common distribution by $83 million and considerably decrease our cash outflows during the year. In the near term, we plan to prioritize debt repayment, while continuing to opportunistically repurchase our common units. In time, we expect today’s decision will create greater flexibility for the Partnership to continue growing of assets with reduce reliance on common equity markets.
Slide 10 sets our balance sheet metrics, plan debt repayment over the next several years and capital commitments. The Partnership’s credit profile is robust with net debt to trailing EBITDA of 4.6x. Our net debt to capital after the write-down of our steam fleet remains a strong 52%. We expect to further strengthen our balance sheet in 2020, beginning with the expected retirement of approximately $115 million of debt this year.
Lower common distributions and reducing debt balances will improve GasLog Partners’ cash flow breakeven levels overtime, which will enhance the competitiveness of our fleet. Lastly, it is important to note that the Partnership has no committed growth CapEx this year, but we’ll need to spend $20 million in maintenance capital expenditures related to four dry-dockings with one scheduled in each of the first two quarters followed by two in the third quarter. Our four dry-dockings are expect to cost the total of $13 million with an additional one-time cost of $6.8 million for the installation of ballast water treatment systems as required by regulatory compliance.
Turning to Slide 11 and a discussion of how our focus on debt repayment creates equity value for our common unit holders. On this chart, we demonstrate how our amortizing debt build balance sheet capacity and book equity using our most recent acquisition of the GasLog Glasgow as an example. This vessel has approximately $134 million of existing debt as of the end of 2019. All of Glasgow Partner’s debt is at the vessel level. And our debt amortizes at roughly twice the radar shifts depreciate.
As you can see from this slide our loan to book value ratio on the Glasgow declined by over 9% from the end of 2019 through the end of 2021. During the same period, our book equity for the vessels projected to increase by $40 million, a 10% compound annual growth rate in equity value. We believe that prioritizing debt reduction will support the Partnership’s future growth in book equity value per unit, which today stands at approximately $13 and well above the current trading price of our units.
Turning to Slide 12. In summary, in the fourth quarter, the Partnership delivered a strong operational and financial performance resulting in record annual revenues and adjusted EBITDA for the full year of 2019. We met our distribution guidance for the year returning a total of $130 million in capital to our common unit holders in the form of quarterly distributions and unit repurchases.
Our adjusted EBITDA guidance of $230 million to $260 million is supported by our 81% charter coverage for the year with approximately $200 million of adjusted EBITDA expected from our vessels operating under fixed rate charters. We have taken a more conservative approach to capital allocation for 2020 focusing on debt repayment, a well-covered common distribution and opportunistic share repurchases. We believe that strengthening our balance sheet today will position the Partnership for accretive growth in future years.
Finally as one of the largest independent owners of LNG carriers, our scale and continued focus on operational excellence, cost control and reducing cash flow breakeven will improve the Partnership’s competitive positioning in a growing LNG market. With that, I’ll now turn it over to Paul to discuss the LNG macro and shipping outlook.
Thank you Andy. Let me first provide you with an update on the LNG and LNG shipping market and then take you through GasLog’s fourth quarter earnings and outlook. Turning to Slide 14. LNG supply in 2019 totaled 364 million tons, a 7% compound growth since 2000. Capacity is set to continue growing strongly with a record 71 million tons per annum of new LNG production sanctioned in 2019. With McKenzie estimates at least another 50 million tons per annum of LNG capacity will take FID this year.
Slide 15, shows LNG demand growth forecast by region. Would McKenzie expect net LNG demand to grow by 90 million tons between 2019 and 2025 or a full percent compound growth per annum. While half of forecast demand growth comes from the Pacific basin nearly three quarters of forecast supply growth comes from the Atlantic basin which should drive greater tons miles and future demand for LNG shipping. Furthermore LNG is a marine fuel is forecast to grow quickly and account for approximately 9 million tons or 10% of demand growth through 2025. This trend is being driven by rapid growth in the number of LNG fuel ships which are expected to rise more than fivefold over 2015 to 2025 period.
On Slide 16, nearly 150 million tons per annum of new LNG production is expected over the 2019 to 2025 period. In tandem [ph.] reclassification capacity is expected to double in the high growth markets of India and China.
Slide 17 illustrates our shipping — our view of shipping supply and demand through the end of 2021. Our demand range is in part based on the number of vessels needed to export 1 million tons of LNG per annum expressed as the shipping multiplier. Our analysis supports a tight market through the 2020-2021 winter. However, recent headwinds in the global gas market, including the uncertainty caused by the Corona virus outbreak, could have a dampening effect on near term gas demand.
Moving to Slide 18 and here, I’d like to reiterate several of Peter’s earlier messages. Here I’d like to reiterate several of Peter’s earlier messages that embodied the GasLog investment case. We have seven medium speed diesel new buildings delivering through the third quarter of 2021 that are all on time and on budget, and they will join the five model medium speed diesel vessels already in the GasLog fleet.
These new buildings are backed by fixed rate charters to high quality counterparties with an average eight year duration, resulting in annualized EBITDA of $145 million was fully delivered. Currently, we have no further plans to expand our fleet beyond this new building program. As we enter this harvest period, we will focus on strengthening our balance sheet with over $1 billion of scheduled debt amortization during the 2020 to ’23 period. In parallel, we will also look to continue executing on our strategy of enhancing shareholder returns, which resulted in nearly $1 per share of common and special dividends announced during 2019.
While the gas market is presently oversupplied, we are seeing low prices incentivize further gas demand growth, particularly switching from coal. With many regions of gas demand growth also seeing indigenous production declines. We remain confident in the longer term fundamentals of LNG and LNG shipping demand.
Slide 19 shows the GasLog fleet, the majority of which are modern, medium speed diesel vessels contracted to high quality counterparties. As of December 31, 2019, the average duration of the GasLog Limited charter fleet is seven years delivering a backlog of approximately $3 billion. The bottom of the slide also highlights the FSU and FSRU opportunities we are currently developing.
And Slide 20 provides further details on these opportunities. In September last year, we announced a 10 year charter for the GasLog Singapore as a converted floating storage unit, supporting a power project be developed in Panama. The Singapore’s conversion will take place in conjunction with a vessel scheduled five years special survey later this year, enabling both cost and time synergies.
The charter is expected to generate approximately $20 billion of EBITDA per annum. We will also tender for the supply of an FSRU into the Alexandropoulos gas import project in Greece, for which we already hold the operating contract. If successful, we will convert an existing TFDE into FSRU before selling it into the project.
Recently, this project has made meaningful progress. Last month Gas Trade launched the binding bed phase for customers to take capacity and the project. The Greek utility Deepak agreed to acquire a 20% shareholding in Gas Trade whilst the Bulgarian government is also close to acquiring the same level of ownership. We expect both parties will provide anchor throughput commitments to the project.
Moving to Slide 21, we have a strong year operationally. We took delivery of two newbuild on time and on budget. Enjoyed an exceptional safety record, high vessel uptime and strong service delivery to our customers. We continue to develop new customer relationships through concluding long term charters with Jeri and Ends and the fixing of two vessels on multiyear charters to Guvnor at market linked rates of higher. Financially, we delivered our highest ever net revenues and adjusted EBITDA underpinned by our new building deliveries.
We secured a $1 billion newbuild finance, and we achieved significant improvements to our covenants across all our bank debt at both GasLog and the Partnership. We also took a strategic decision to relocate more of GasLog’s people and most of the senior management to our Piraeus office in order to enhance execution, improve efficiency and reduce administrative costs.
We expect that the restructuring will deliver annualized savings of approximately $6 million from 2021 onwards after one off costs of a similar magnitude over 2019 and 2020. These savings are equivalent to approximately 14% of our underlying 2019 G&A.
Slide 22 shows our financial performance for the year. Net revenues increased 4% year on year has initial contributions from the GasLog Warsaw and GasLog Gladstone charters offset lowest spot vessel revenues. With unit OpEx broadly unchanged year on year adjusted EBITDA increased 3% on 2018. The consolidated adjusted EBITDA figure excludes the $162 million impairment charge incurred in the fourth quarter on the consolidated fleet steam vessels, as well as restructuring costs of $4.7 million. The benefits of which will help expected unit G&A to average around 10% less than 2019 levels. By 2020, we expect unit OpEx to average around $14,500 per day, subject to movements and exchange rates.
Slide 23 shows the Q4 2019 performance of our variable rate vessels. These vessels earned approximately $66,000 per day in Q4 2019, which is in line with our guidance of $60,000 to $70,000 per day. To reiterate, our commercial strategy has been wherever possible to charter those variable rate vessels with scheduled dry-dockings in 2020, right up to those dry-docks to minimize both positioning costs and waiting time.
While this has resulted in a trade off on charter rate, we believe the strategy will optimize the earnings of these vessels through to the dry-dock. We’ve also favored multimode charters over Scott business to mitigate any seasonality in rates, falling the northern hemisphere winter. We expect that this commercial strategy will enhance utilization and reduce the volatility of variable rate earnings across quarters.
The second chart on this slide shows GasLog and GasLog Partners contracted an open days by quarter due in 2020. These figures exclude dry-dockings. The details of which can be found in the appendix of today’s presentation. For our variable rate charter TFDEs, we expect to earn a TCE of $50,000 to $60,000 a day in the first quarter. And again further information for the vessels on variable rate charters during the first quarter are included in the appendix.
Slide 24, illustrates the successful financing of our new building program over recent years. At the start of 2018, the expected GasLog equity payments on a new building program were close to $300 million. Today we’ve paid 75% of these commitments and have only $75 million of remaining equity payments.
We expect to fund these payments through our unrestricted cash balances, available revolving credit facilities and operating cash flows from our growing fleet. The deck component of the new built financing expanded through the ECA facility announced in December, which extends GasLog’s track record of accessing secured debt on highly attractive returns.
So turning to Slide 25. In summary, GasLog Limited has a young and increasingly important fleet underpinned by long term charters to high quality customers, which will deliver revenue growth through 2022 and average 70% charter coverage for the GasLog fleet over the 2020 to 2023 period. We have a clear commercial strategy to focus on utilization on charter cover for a variable rate fleet. As Peter advised, we have a laser like focus on cost control and operational efficiencies, and we will benefit from significant debt reduction overtime.
We believe there are two decades of experience in LNG shipping. Our reputation for high operating and safety standards, as a leader and more agile organization leaves us well positioned to capitalize on a growing but fast evolving and increasingly fragmented LNG shipping market. And finally, our investment case is underpinned by our focus on delivering shareholder value for fleet growth, deleveraging and cash returns.
Finally, on Slide 26, we invite you all to our upcoming Analyst and Investor Day to be held in New York on May 7, 2020, where we look forward to providing you with an in depth update on the Group’s strategy and outlook. With that, I’d like to open up for Q&A. Operator, could you now please open the call for any questions?
Certainly. [Operator Instructions] And our first question comes from Mike Webber with Webber Research. Your line is now open.
Hey guys, how are you? Good morning.
Good morning Mike.
So actually a busy quarter. And you take advantage to be on the call and pass some questions your direction. I thought that obviously. [Indiscernible] Yeah I’m sure you did. Starting up with the capital allocation decision. I know that was — I’m sure that is a complicated decision for you. And I just — as somebody gets an insight when I think about this within the context in the last eight to nine months, the MLP market has been challenged for a while.
You guys have been kind of above the fray for quite a bit to the point where you brought back the IDRs seven months ago. I’m just curious is just ultimately came down to the decision between support from the sponsor. And that’s why the current level versus a redistribution, what about that map specifically when you look at your ability to tap different markets over the next 18 months, and/or swap assets at the parent level? What about that math made you decide that this is a time to reconfigure the basis?
Well, Mike, Andy mentioned it. The 26% yield is not sustainable. And signals very clearly from market that they expect us to be rebalancing and rethinking the distribution levels. On the GasLog Limited side, having come to the conclusion that we should pause — we should pause our growth trajectory.
And there are no reasons why that’s makes very good sense for our growth trajectory. The whole concept around needing to do dropdowns to fund growth became somewhat less of a priority for us. And that gave us the opportunity to take drastic action to address the financial strength of both the companies.
And we feel that when times change, the people who change quickly with those times are the ones who will benefit most for it. And so we’re taking that step. And that’s why we’re doing it. I mean, it’s interesting because GasLog Limited actually has a very interesting revenues — committed revenue stream with our charters and our new buildings. GasLog Partners overtime becomes more opportunistic.
And Andy strengthening his balance sheet means that has his breakeven costs on those opportunistic shifts will be lower, so he’ll be more competitive and be able to trade them. And he’ll be able to use his balance sheet in the coming years to be able to pick up assets when accretive assets become available. And I have no doubt in my mind. There are some people who are going to find themselves in an uncomfortable position the next two or three years with some of these speculative new buildings.
So we’re getting ready, and we’re getting ready to take advantage of that. It’s not the most pleasant of things to do. But if I didn’t get ready for that, I wouldn’t be able to say that I had a sustainable business. Sustainability is not fixed, it means you change. And that’s what we’re doing.
Couple of more from my end and kind of bigger picture to Peter could those by your thoughts on this to be particularly thoughtful. You mentioned a flattening technology curve under the notion out there that [Indiscernible] doesn’t flatten in perpetuity.
But they’re good innovative came to it as it pertains to secondary proportion or some sort of fee change in terms of oil and gas and in terms of marine filling that goes beyond simply LNG bunkering. Is that something we’ll get or I would like to put some early seed work in or look into may need 2050 as opposed to looking at 2030.
Well, it’s interesting that you mentioned that. Because the LNG shipping space is somewhat unique and let me come back to that. We can meet the 2030 IMO targets as a shipping industry along types from container to bulk carrier tanker by shifting to LNG fuel and making some modest adjustments to the way we run these ships in terms of speed. There is no way that we will achieve the 2050 targets without a major change in propulsion systems.
So, if you then say, okay what’s the average asset life of a tanker or a king sized bulk carrier or potentially container ship. Now 15 to 18 years probably the commercial life of that ship. So I can order one of those today, and still see my way clear to meeting the 2030 targets with LNG fuel on the ship, which by the way is significantly cheaper today than diesel, but let’s not go there.
And then when I get to sort of 2030, by then I’ll have a clear line of sight on what the new technology will be. Is it going to be hydrogen, is it going to be ammonia is it going to be biofuels. And I’ll be able to order my next set of ships. The LNG fleet, on the other hand has a 30 to 35 year asset life. And then, and everybody who’s running the economics of buying these ships is running them on 30, 35 year level.
So we’re at 2020 today, put 35 years, we’re past 2050. That means that every LNG ship today gets to 2050 and probably is technologically challenged in terms of residual value. And that’s pretty unique. And I don’t think that the industry has picked up on that.
And when we start seeing ships being ordered in ’24 and ’25 for the projects that are coming out there, Mozambique, Qatar expansion, et cetera. The people who own those ships are going to have to run the math on a 25 year life and not a 35 year life. And that’s going to make those ships somewhat less economically efficient compared to the ships that are out there today. The technology curve. The boil off level. It’s reached pretty close to shoreside boil off levels.
It’s unreasonable to think that that’s going to get better. We might see some improvements in reliquifaction technology or some cost savings of that. But it’s pretty much there. We’ve seen the sizes go from, 138,000 cubic meters steams all the way up to QMax’s, and then back again. We sort of hit on the 174, 180 size as the long haul ship and the 155, 160 size as the short haul ship. And the same thing happened in tankers where we went from small ships to ULCCs, and then the ULCCs fell out of favor.
So I think the size of the ships have sort of reached the stability level. Propulsion systems, we talked about that earlier, went from steam turbines to tri fuel diesel electric to medium speed diesels. The next propulsion system is going to be something completely different. And it’s going to use a completely different fuel, and it’s not there yet.
So the technology curve is at — you are right to say, it’s a kink. It’s not flattened in perpetuity. But certainly one would be well advised to watch it very carefully as one looks at 2025 2026 deliveries around new projects, and the potential useful life of those assets in the changing environment. I hope that helps you get clarity on that.
Right. Just one more before I turn it over. And [indiscernible] with distribution cuts, and just the thought process of handling or individual value with the steam assets. The notion of placing assets into downstream projects and storage or building out every guest presence. We talked about that before several years. It’s been I guess relatively successful, but I would venture to say probably haven’t put as many assets into the downstream market as you would expect in several years ago.
When we talked to the World Bank, there seems to be a pretty big divergence between budget developers and a long list of people that are willing to put assets into these projects and relative people that can provide both. So I’m curious, when you talk about the downstream market and you got hours of operations which is going on for quite a while and your South American business.
What do you need to get an advantage, if you’re not going to sink the cost into local knowledge and really this on the ground, the boots on the ground that are required to actually develop one of these projects on your own on a large scale or several of them? What do you need to do to better differentiate GasLog from the long list of other potential asset providers and advisors, steam assets that are more than willing to put an asset to a project and take a strong…
Well, hang on a second. For many of these downstream projects, the steam doesn’t work, because you need massive power generation to run regas ship. And so having a Steam ship do that — is unless you’re getting short power connected doesn’t work. I think we’re going to focus — not I think, I know we’re going to focus on what we know how to do best which is the transportation of LNG as a commodity.
We think we have some interesting operational advantages in terms of the size of our fleet and flexibility and we’re working on some very interesting structures around how these ships will be chartered in future. And I think we’re focused on that to spend a lot of time and money and investment in developing downstream projects.
You said, I mean you quite rightly say we’ve been working a lot, Alexandroupolis for a long time. We certainly have been frustrating for all of us to see how long these things take. And the other thing that happens is, it’s very easy. The counterparty risk in these projects is not as attractive in many cases as one would need to get the proper financing in place. So, we’re going to be opportunistic about that. We got Panama. That was a great deal. We have a critical — we have a crucial position in Alexandroupolis.
So the shareholder there and we have the operating contract. But we’re not going to spend a lot of the Company’s resources on trying to develop more of these projects. So, with GasLog Limited, we don’t have that many open ships anyway.
At GasLog Partners, Andy’s going to get to the point where his breakeven levels are going to be low enough that that he will be able to trade these things opportunistically in the spot market and make money. And I think that’s a much more cohesive strategy for the two companies than trying to spend a lot of money trying to open up other market sectors in an area that’s clearly oversupplied at this point.
Thank you. [Operator Instructions] Our next question comes from Greg Lewis with BTIG. Your line is open.
Yes, thank you and good morning and good afternoon. I guess I’d like to touch a little bit more about strengthening the balance. I mean clearly this has been a theme on the call. Andy I mean, you mentioned the scheduled debt repayments, you highlighted net debt to EBITDA is 4.6 times.
Could you talk a little bit more about, how we should be thinking about that? Are their targets? Where do you expect to be maybe by, how are you thinking about that beyond ’20 in the ’21? Because it’s clearly it seems we’re going to delever in the near the opportunistic down the road. So, just kind of curious on any color around on how you’re thinking about that, and it does that involve, prepayments and things like that.
Hey, Greg. I’ll take that and I’ll ask Paul to take GasLog and GasLog Partners. So, clearly at the Group level, we will be taking on more debt as we draw on the new ECA facility for the vessels to deliver during 2020 and 2021. The peak will be at the end of 2020 and amoles and incremental debt for new deliveries in 2021 more or less balanced. And then after that Group leverage will start to fall at about $275 million per year. And as Paul said in his remarks at about a billion dollars over the period 2020 to 2023.
So, clearly in terms of leverage targets, as measured by net debt to EBITDA, it depends on what the variable rate shifts are going to be earning over that period of time at the Group level, but it’s very much our ambition to see net debt to EBITDA fall down towards five times and even below overtime. And we will provide more information on the financial framework for the Group at the time of the investor day in May. As far as capital partners is concerned.
As Andy said, we’re amortizing it about $110 million and $115 million per year that would take our net debt to EBITDA down and all other things being equal by point 0.5 or 0.6 times to EBITDA on an annual basis. Depending on how the market performs, what charters we are able to put in place, what our available cash flow is will then be a discussion on how best to allocate that incremental cash flow does it go towards deleveraging or does it go towards incremental growth in the future.
So that’d be really interesting opportunities. But that’s a sort of feel for how we expect leverage to behave overtime so that will provide a much more comprehensive framework for both companies in May.
Okay, great. And then just one follow up for me. Clearly we’re seeing the challenges for the steam vessels. If we were to go back I guess 12 to 18 months ago, when GasLog, not the steam vessels, but the other vessels were part of the cool pole. Maybe it was a function of the market. Just right place right time. But it seemed like those vessels performed very well or at least above kind of — above in line with market expectations.
Is there any thought about trying to partner with other steam owners and maybe starting sort of a steam ship pool just given, you know, given the fact that it’s a lot more spotty work, it’s, you know, you need to be in the right place at the right time. Just kind of curious, you know, you were once in a pool. Is that something that, that we should be thinking about maybe re-entering it and is there a value in that kind of in this kind of new environment?
Hi, Greg it’s Paul here. Yes, we have, as you said, had a very good experience being at pool with the partners that work well at the time for us. As sort of partners strategies diverged then that came back to us. I think pools in shipping have been very successful. I think the one we had with the, on the LNG side performed very well. So yes we’re very open to that in future on the steam ships.
But I think we’re also very confident and chartering those ships ourselves with the relationships that we have that we will be able to do a very good job, especially as the cash break of those vessels comes down, that will do a very good job in being able to generate cash flow. So I think we’ll be opportunistic rather than driving sort of a pull consolidation in the steam ships, but certainly always open to it.
Okay, great. Thank you very much.
Thank you. And our next question comes from the line of Jon Chappell with Evercore ISI. Your line is open.
Thank you. Good morning and good afternoon. Guys, I wanted to just say, I think you did a lot of right things here from the distribution cut proactively to Peter’s involvement on this call and support to the transparency in the appendix, which is incredibly helpful.
I think the one thing, I’m not fully clear about on the strategy, because it’s a pretty compelling investment call on GasLog Limited on why the need still for two companies now that the distribution has been cut and there’s no competitive cost of capital at the MLP. I get you’re trying to deliver there and there may be some opportunities in the future, but it almost seems like the weaker link here is dragging down the investment profile of the stronger link, which is GasLog.
So Peter, if you could just maybe dig a little deeper on why the need for two publicly traded entities at this point?
You asked an interesting question and we may yet come to the conclusion that we don’t want to have two publicly traded entities. And that could come in many different permutations, whether it would be combining the two or potentially, taking one off the stock market. That being said, I like the fact that we have two very clear, and easily explained strategies for each of those two entities.
So you’ve got GasLog Limited, which has an ultra-modern fleet with committed charter revenues and mineral exposures to the stock market. And we’ll be using that to get committed revenue to do deleverage. You’ve got GasLog Partners that’s going to become more and more opportunistic. It will also be strengthening its own balance sheet and financial position and then become the vehicle we use for accretive growth, through the acquisition of ships companies etcetera, whether it be from GasLog Limited or from others there.
And as I said to when Mike Weber asked question, I’m quite sure that we will see opportunities to acquire assets at significantly attractive valuation points going forward. And I’d like to have GasLog Partners in a position whether it can leap in and do that without complicating the GasLog Limited story, which is about delivering our new fleet and recovering our revenues as a result of our long term charters. It seemed to me clearer to keep the two pictures out there and easily explained than it is to try and slam them both together and then end up with two strategies in two companies. That’s at least how I see it from this perspective.
That makes sense. Thanks for that, Peter. The second question is on buyback for both entities then. So, GasLog Partners has a lot of liquidity now going forward, post the distribution cut. And it’s certainly going to open today at a much lower level. So maybe Andy’s, views on buyback. I get the de-leveraging as a focus but there is a lot of liquidity freed up.
And then for GasLog Limited, I mean you guys were kind of in a holding pattern because you had this major news coming in the distribution cut. Maybe Paul or Peter specifically from not even just the corporate buyback from an insider buying perspective, what you think the cadence will be on buyback across the GasLog Limited entity in the coming months and years?
Well, look, I think there’s compelling value at GasLog Limited. And we have been buying shares and we’ll continue to do so. I have a very strong belief in the sustainability and long-term future of this group, and like very much so why wouldn’t I do that.
In terms of corporate buybacks, I’m much more in favor in GasLog Limited distributing the money to shareholders, letting them go buy their own shares. I think that sends a stronger message to the loyal shareholders that we have and we have some — and we have some very loyal shareholders, not the least of which is my family, which is the largest shareholder and the Analysis Foundation has been with me since the beginning.
As opposed to deploying money into share buyback programs. Andy has a slightly different perspective on it. I know and I’ll let him answer the second. I know he is very focused and his board is very focused on debt and reduction of debt on the basis that it makes his entire fleet simply more cost effective. And that’s the right place to be when you’re in a more opportunistic sector. The lower you’re operating and costs are in terms of charter ships the more value you’ll have.
So I think that’s what his focus will be whether he opportunistically buys back shares, is going to be a decision that he and the board will look like overtime. But let me turn it over to Andy as he has some thoughts as well.
Sure. Jon, we’re very cognizant of the total return as a result of our new capital allocation plan is lower with a lower common distribution. We did repurchased what we would describe as a meaningful amount of units last year as an additional component of that return and we think it’s important to continue that.
And as you say, we expect that there’ll be some volatility in the unit price and hope that having an increased authority back to $25 million will allow us to take advantage of that on an opportunistic basis. But absolutely our first priority with our capital in 2020 is debt reduction.
Okay, thanks, Andy and thanks a lot, Peter.
Thank you. And our following question comes from Chris Wetherbee, with Citi. Your line is open.
Hey, great, thanks. Peter, could I ask you to expand a little bit more on the two Company strategy? I’m not sure I understand completely the nuance between the two public entities at this point until one in the picture it’s better understand sort of the reason and the strategy that differs between two companies at this point.
Okay, effectively, we will be maintaining two balance sheets and two strategies. So, the GasLog Partners strategy is around a more opportunistic fleet by virtue of where it sits with its fleet today and where it sits with its chart — long-term charter commitments running off. And the GasLog Limited strategy is around the delivery of the new ships into these long term charters and the recouping of the revenues from the successful performance with these long-term charters.
In a funny sort of way the two companies have flipped. And what GasLog Partners did in the past in terms of its strategy of long-term charters is now what GasLog is doing and GasLog Partners is now dealing with GasLog Limited which would be more opportunistic.
I’d like to leave a little bit more to say at the Investor Day on May 7th, which I hope you’ll have a chance to come and join us on, where we will be able to give you some very clear direction projections, et cetera in terms of how we see these two strategies playing out over the next several years. But it’s — in my mind, it makes complete sense to keep these two balance sheets separate and to treat them in different ways in terms of how we look at our strategy towards LNG shipping.
Okay. And if I think about the — I guess if I think about where GasLog Partners might trade in the market post the distribution reduction. How do you view the value potential of that group of assets in the context you talked about potential opportunistic M&A in the future people who might be in a scenario where they might need to sell, you would seem to me, with the equity value implied this morning, that that might be the most attractive set of assets on the market over the course of the next several months. I don’t know your perspective on that and how you think about that, if that’s even something you can consider after taking this action.
I’ll answer that and I’ll turn it over to Andy. I’m definitely looking at this over the next several years not over the next several months. I think the next several months will be a period of flux in terms of where the share trades. But as the situation stabilizes the value proposition for GasLog Partners is compelling in terms of its cost effective fleet. And in terms of its strength of the balance sheet, it should be in a position to be able to do the accretive purchases going forward. Andy do you want to add to that?
No, you covered it.
Thank you. And our next question comes from the line of Randy Giveans with Jefferies. Your line is open.
How are you gentlemen? How is it going?
All right. So following the selloff in GLOP shares and the distribution cut at GLOP [ph]. The GasLog Limited yield currently higher than GLOP. So how do you view the dividend that GasLog parent and ensure investors be comfortable that this will be maintaining at $0.15 per quarter going forward?
Very comfortable. Next?
All right. Next question. I know if you will move the slide showing the charter backlog at GasLog Partners. So, what is the status of the methane Allison Victoria and then looking at the methane Rita Andria, with the charter running off in the next I guess two months? Have you been in talks for maybe a one year time charter and against a lower rate than expected or just kind of put on trading then spot markets?
Sure. Hi Randy, it’s Andy here. The methane Allison Victoria’s has been in the spot market since January. She’s actually worked a couple quite interesting spot charters for work in the in the Pacific and there continues to be, as I mentioned in my prepared remarks a steady group of steam shifts that are being charted on a spot basis called less than one year.
So, they’re particularly for some of the older projects with smaller cargo sizes and things like northwest shelf in Australia and others. There’s absolutely a place in the market for the steam ship, but not on one plus term charter basis as I mentioned. So, we are continuing to examine both term and spot opportunities for both of those ships. And as you mentioned the next one, comes back to us in April.
And if I may just add a little bit to what Andy said, I believe that we will see a short sea market developing, where the steam ships will be less challenged in their competitiveness. Middle East India is a market that is going to start to move as India puts in more downstream infrastructure.
There’s actually currently a requirement interestingly going from, was it Abu Dhabi to Kuwait? Abu Dhabi to Kuwait, which is like a two day voyage. Now always short voyages play to the strengths of the steam ships in terms of their ability to move them without having too big a disadvantage on fuel consumption or size.
So, those markets will develop there are — 40% of the fleet is indeed steam. That simply cannot go away anytime soon. And so you’ll see a two tier market developing around steam and modern diesel, the electric and medium speed diesel ships and the rates will be lower for the steams. So, the key is to get the competitive level cost levels of the schemes down enough so that they can trade in these short sea opportunities.
Okay. That makes sense. And since the first question was already answered. Quickly a third question GasLog. Historically, the growth vehicle of GLOG the income vehicle. So, any thoughts on switching some assets from these spot assets from GLOG back up to the parent and then dropping down some longer term charters to the Partnership?
It sounds a little bit Rube Goldberg to me. We’re trying to keep it simple, I think there’s great value in having a very simple, easy to explain strategy for each of these companies over the next couple of years. And we’re certainly focused primarily on cost reduction and lowering breakeven levels. But we’re also focused on simplicity and transparency. And I think that’s really, really important, particularly in a world that is sadly lacking of simplicity and transparency.
That’s it. Thank you.
Thank you. And our next question comes from the line of Ben Nolan with Stifel. Your line is open.
Thanks. Actually, I was going to ask about the short sea LNG stuff and you addressed a little bit. But just to follow on with that a little bit as it relates to steam ships. Does a really low LNG price which obviously impacts the voyage often times but also the boil off? Is that creating something of a renaissance, perhaps for maybe some of these smaller older steam power ships, but that would not be the case if LNG parse it over $10?
Renaissance might be just a little bit too enthusiastic. However, what I would say that the delta on competitiveness shrinks obviously with the lower fuel cost the delta on competitiveness in terms of size shrinks with the relatively shorter distances. And so moving those assets into the most optimum area for them would be, again short sea short haul voyages. But the low gas price means what we’re really seeing is that we’re basically using gas to move these ships all the time. Because it’s cheaper than using diesel fuel.
And that’s, really interesting because it’s lowering the breakeven costs of running these ships on a day to day basis. So even when the ship is not on charter, we try to keep as much heel as we can and the ships so that we can burn that gas on our ballast legs while we’re looking for other employment. Every little bit helps and that has been a meaningful advantage of being able to burn gas at this stage.
I appreciate Peter. And I think the strategic part of it has been touched on as much as I think it can be. So I’ll stick to another sort of industry question. There’s a lot of noise in the market about tenders from Qatar, Exxon, et cetera on new projects. But currently, freight rates pretty low and I think the expectation is not going to pick up immediately. Is there any activity or are you guys potentially looking to tender some existing equipment into some of those companies rather than having — adding more to the new build order book.
To the extent that the tenders allow us to tender existing equipment. We look at it and we will be doing that. And we’re encouraging the people who put these tenders out based on the flattening technology curve to allow existing ships to come in. And if you, again, I think that we’re going to have to be very thoughtful about the useful life of the asset going into 2050.
And what does that mean in terms of the costs at which you can tender into a new ship and a new building delivery in 2026. There’s a difference. If you have to write the ship off in 25 years or like we are writing a ship off in 30 years where we have line of sight to its use.
Yeah. Alright. Well I appreciate that. I’ll turn it over. Thanks.
Thank you. And our next question comes from Liam Burke with B. Riley. Your line is open.
Yes. Thank you. Andy, one of your slides highlights the FSRU opportunity for GLOP. How do you look at this market vis-a-vis the traditional carrier market? Do you look at a better return or do you look at this as a way to change the direction of the fleet?
Liam I think it was actually when Paul — but I’ll comment first and Paul you can add on. We have seen some success as we have some limited level on the FSU market, which is developing. I think there’s only two or three projects in operation today globally, but there’s many more that are on the drawing board.
And the interesting thing about the FSU versus FSRU is there’s lots of capital required to convert an existing vessel and often there’s a short base power solution. So both themes and TFDEs can be applicable. And so that that market as Peter mentioned, I think we’ll look at opportunistically, I think our core business will be shipping under spot and term charters for a very long time. But it is a developing market for the types of assets we have. Paul, looking to add anything to that.
Yes. I think the other thing I would add is it’s very interesting. Having secured the Panama project, we actually got a couple of phone calls from people saying, oh, you’re in the FSU trade, how about helping us with x, y and z?
So what’s interesting is once you enter that market, it does start to open up some possibilities, but I wouldn’t know how to play that. I think like the FSIU there will be a limited number of projects around that probably will be able to move quicker than the FSIU which this permitting side of it et cetera will probably be a less onerous.
But even so I think we need to be — it’s pretty agile and opportunistic in that market to see where you can place your assets rather than basing your strategy on it. And I think we’re going to base our strategy, especially with the older variable rate shift on getting our costs down as far as possible, breaking down — bringing down as breakevens and having a commercial strategy, which really drives the best earnings from those ships.
Great. Thank you.
Thank you. [Operator Instructions] Our next question comes from Mark Solecitto with Barclays. Your line is open.
Hi. Good morning. Maybe asking one of the earlier questions a bit differently. Is there a minimum leverage level at the NLP that you would like to achieve before looking to resume drop downs? And is there maybe like a max level that you have in mind that you’d be willing to go to?
Mark, I don’t think that there is a — I don’t think actually there was a minimum or maximum, clearly the trend we see is heading downwards. I think if you look at what you might call best practice for this kind of business with this kind of operational and commercial profile, I think it’s probably in the 3s, sort of mid-3s something like that, which I think; a, it gets your costs and your breakevens down to where you’d like them to B2B competitive. B, it gives you a little bit of headroom to be opportunistic, give opportunities come along. So I don’t use any firm targets. But clearly with the direction of travel we’re on as a Partnership. I definitely see us heading down into the 3s.
Great. And then just to clarify is the plan to fund any of future acquisitions at the MLP with retain cash and balance sheet capacity or how should we think about the funding strategy going forward?
I think it’s a good question. I think it’s difficult to tell at this stage. It depends how the units trade overtime. We’ve always said in the past, and we continue to believe it’s true that we have access to multiple sources of capital. We are very established issuer in the prep market.
And as Andy said several times in his prepared remarks, overtime we will create additional financing capacity on the on the balance sheet. But I think it’s very difficult to say at this stage. What opportunities might arise and what might be the optimum way of financing them.
If I may add, I think it would be wrong to assume that the strategy is to rapidly get to the old model of dropdowns. GasLog partners is moving into a new world. And its ability to do creative acquisitions. May be for ships that do I have committed charters against them.
And that requires a strong balance sheet. And that’s what Andy’s objective is, is to be able to find value accretive deals, without the hindrance of having to look at clear line of sight revenue streams as he has had to do in the past.
Thank you and I’m not showing any further questions at this time. I’d like to turn the call back to your speakers.
Thank you, Sidney. Thank you to everyone for listening in and your continued interest in GasLog Limited and GasLog Partners today. It has clearly been a challenging period for all of us. And like Peter I’m similarly frustrated by our unit price performance.
But I very strongly believe the steps we have announced today will meaningfully secure the future success of our business. If you have any further questions, please feel free to contact our Investor Relations team. Thank you.
Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.