GasLog Partners LP (NYSE:GLOP) Q3 2022 Results Conference Call October 27, 2022 8:00 AM ET
Company Participants
Robert Brinberg – Rose & Company
Paolo Enoizi – Chief Executive Officer
Achilleas Tasioulas – Chief Financial Officer
Conference Call Participants
Benjamin Nolan – Stifel Financial Corp
Chris Tsung – Webber Research
Christian Wetherbee – Citi
Operator
Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the GasLog Partners Third Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded.
On today’s call are Paolo Enoizi, Chief Executive Officer and Achilleas Tasioulas, Chief Financial Officer, Robert Brinberg from Rose & Company will begin your conference.
Robert Brinberg
Thank you and good morning or good afternoon and thanks to all for joining the GasLog Partners third quarter 2022 earnings conference call. For your convenience this webcast and presentation are available on the investor relations section of our website gaslogmlp.com, where a replay will also be available. If you are participating via webcast, please note that the slide presentation is user controlled and we encourage you to advance to the presentation as you are prompted to.
Please now turn to Slide 2 of the presentation. Many of our remarks contain forward-looking statements for factors that could cause actual results to differ materially from these forward-looking statements. Please refer to our third quarter earnings press release. In addition, some of our remarks contain non-GAAP financial measures as defined by the SEC. A reconciliation of these measures is included in the appendix to the presentation.
Paolo will begin today’s call with a review of the partnerships third quarter highlights following with Achilleas, who will walk you through the partnerships financials. Paolo will then provide an update on the LNG shipping and LNG commodity markets. We will then take questions on the partnerships third quarter.
With that, I will now turn the call over to Paolo Enoizi, CEO of GasLog Partners.
Paolo Enoizi
Thank you, Rob and welcome everyone to our third quarter conference call. Please turn to Slide 4 for GasLog Partners third quarter highlights. The LNG market over the third quarter has continued to be volatile as the tragic situation in Ukraine continues to develop.
The natural gas market has suffered significant disruption of pipeline imports from Russia, with flows to Ukraine and approximately 30% of the five year average and flow to Northwest Europe [according] (pH) to zero, creating a significant supply deficit.
So far, the deficit has been met to increase LNG import controls by 63% year-over-year in the January to September period. The LNG shipping market has benefited from increased seaborne LNG volumes, despite the nearly 6% drop in thermal demand reflected the increased flow to Europe as charterer seek term coverage against price volatility and market uncertainty.
This has quickly drained the basket of available tonnage and supercharge both the spot and term markets. Today no independently owned vessels are open for periods requirements, and charters are hesitant to release vessels on their portfolio for any significant length of time.
Under these exceptional circumstances, we have continued to take advantage of the strength of the LNG shipping market and have secured term charters for three of our vessels at effective rates and duration as I will disclose shortly.
Including these new fixers our total contractor revenue backlog is of 616 million. Volume seen in the market clearly through the S&P has also completed the previously announced sale of the Steam LNG carrier methane, Shirley Elizabeth so net proceeds of approximately 20 million net of debt repayment.
We also agreed this in a leaseback the Methane Heather Sally with a financial institution with no purchase obligations or option at the end, which is expected to net a 17 millions of incremental liquidity in a great match with a charter we have fixed for her.
Including the debt repayment related to the vessel sailed with retired 69.3 million in aggregate debt and lease liabilities in the quarter. We repurchase another 20 million of a Preference Units in the open market, bringing the total repurchases to the first nine-months of the year to 38.7 million.
The results are at reductions in our all breakeven levels which further enhances our free cash flow generation potential and continued progress in our leverage ratio towards our target as a Achilleas will present shortly. With enhanced cash flow visibility to the balance of 2022 and into 2023, we plan to use a healthy cash flow to continue optimizing and derisking our balance sheet.
On Slide 5, we highlight the charters I referenced earlier. All of which are with high quality counterparts and at an aggregate EBITDA contribution of approximately 134 million during their contract terms. With each office in assuming the option declaration, we have significant near-term cash flow visibility, as well as a good deal of exposure in 2023 in seasonal strong periods.
Slide 6, shows our contracted revenues by quarter and highlights the enhanced visibility of our cash flow thanks to the simply conclude charts. As you can see from the chart on the left, we have manage our exposure to the spot market over the next 12-months while still maintaining exposure to the seasonally strong fourth quarter of the year.
This provides significant downside protection given the recent rapid rise in the market. For every 10,000 per day increase in the charter equivalent on an open days, will increase that adjusted EBITDA by approximately 12 million.
I will speak more about our market outlook shortly but first let me turn the call over to Achilleas who will review the partnerships are called the financial performance.
Achilleas Tasioulas
Thank you, Paolo. Turning to Slide 8 and the partnerships financial results for the third quarter of 2022. Revenues for the third quarter were 96 million and 19% increase from the third quarter of 2021 driven primarily due to an increase in revenues from our vessels operating in the spot market, as well as from no dry-docking of holidays in the third quarter of 2020 to compare to 59 of has a since the same quarter last year.
Adjusted EBITDA was 73 million, an increase of approximately 16 million or 28% from the third quarter of 2021 primarily due to a 15 million year-over-year increase in revenues and a decrease in operating expenses of 1.9 million.
The decrease in operating expenses was primarily due to the favorable movement of the Euro, USD exchange rate in the third quarter of 2020 to fully absorbing deflationary pressures on our costs, as well as the in-house management of the Solaris, following the vessels for delivery in April 2022 from Shell.
Finally, our adjusted earnings was $0.63 per unit, which increased by 85% compared to the first quarter of 2021. Overall, we are pleased with our performance in the quarter as we continue to successfully recharter our fleet at self rates, achieving an overall stable performance for the partnership with improved visibility on 2023 cash flows.
Turning to Slide 9 had a look at our cost base. Our daily operating expenses per vessel were $12,276 in the third quarter, a decrease of $2,130 compared to the first quarter of 2021 due to the factors I just described earlier.
General and administrative expenses increased by one million or $739 per vessel per day in the third quarter of 2022 compared to the third quarter of 2021. This increase was primarily related to an increase in the administrative service fees paid to GasLog entity that has been effective since January 1, 2022.
As a reminder, the changes in the vessel management, commercial management, and administrative service fees are aligned with our commentary in the previous quarters and are disclosed in detail in our [indiscernible] in March, 2022.
Our results were also impacted by a four million increase in indirect expense due to an increase in LIBOR rates compared to the third quarter of 2021, partially offset by the leveraging achieved during the last 12-months.
During the first quarter of 2022, we had a weighted average interest rate of 4.3% compared to average of 2.4 during percent during the third quarter of 2021. For the balance of the year, we maintain our previous guidance on costs and expect our unit operating expenses to average approximately 14,000 per vessel per day.
Actual operating expenses will be impacted by foreign exchange movements. Finally, our overhead expenses are expected to average at approximately 3,250 per vessel per day for the full-year.
Looking forward into 2023, we have four vessels that will undergo scheduled dry-docking, which will result in [indiscernible] days already factored into the evidence sensitivity analysis Paolo spoke to earlier on the call.
Slide 10, illustrate the progress the partnership has continued to make in its preference unit purchase program. During the third quarter, we repurchased an aggregate of 20 million of our Preference Units in the open market. Since the program was initiated in August 2021, the partnership has purchased more than 57 million in Preference Units in aggregate at an average price close to $25 per unit -.
These repurchases have reduced preference unit distributions by approximately 4.8 million or over $0.09 per common unit on a annualized basis, based on the number of Preference Units – as of today. We expect to continue opportunistically reassessing Preference Units in the open market as conditions dictate, and there are 88.7 million in Series B Preference Units as of today, which are callable annually or part in March 2023.
Slide 11 shows the progress we have made towards our level targets, which we first introduced in the third quarter of 2021. We have made good progress on these goals that in the last four quarters despite the impairment charges we took during these previous quarters on book values of our teams.
During the third quarter of 2022, we repaid $37.1 million of debt and leases on scheduled amortization and 94 million in the first three quarters of this year. In addition, we repaid 32.2 million of data study in relation to the sale of Methane Shirley Elisabeth in quarter three 2022.
As a result, our gross debt total capitalization, one of the two leverage targets we have said has been reduced from 53.1% as of the end of the first quarter of 2021 to 50.3% as of the end of this past quarter.
Furthermore, our net debt to trailing 12-months EBITDA activity has been reduced from 4.9 times to 3.3 times, which is currently below our long-term target. It is important to remember that our net debt to EBITDA may fluctuate based on the spot market performance in the future.
We expect to continue strengthening our balance sheet, beginning with a scheduled retirement of approximately 111 million of debt and lease principal payments in aggregate over the next four quarters, which is more than covered by our contracted cash flows over this period.
Reducing debt balances and making opportunistic repurchases of Preference Units will further reduce the partnership’s cash flow all in breakeven levels over time and increases our future free cash flow generation potential and passing the partnerships equity value.
With that, I will turn it over to Paolo to discuss the LNG commodity and the LNG shipping markets.
Paolo Enoizi
Thank you Achilleas. Turning to Slide 13. The forces that have impacted the LNG energy commodity market since the beginning of 2022 did not update this past quarter. The resulting volatility and uncertainty was a significant driver for charters, leading to a scarcity of independently owned vessels. This in turn led to the continued escalation in term charter rights and significant interest or charters one year or longer.
The same interest and risk aversion has caused charter for us to have a strong preference for being long shipping and keeping vessels under their control in order to ensure security for their cargoes and retain the ability to capture opportunities as they arise.
This sign continues to be reflected in fixing activities with term charters representing about 54% of the total activity compared to 33% last year. It is also reflected in the decline in the spot fixture activity, which is down 37% year-over-year.
Slide 14 presents LNG demand and supply within the third quarter of 2022. European demand continues at high levels and it is forecast increased by 56% in 2022. Asian demand continues to underperform and is forecasted to fall by 3% in 2022.
U.S. LNG supply remains static quarter-on-quarter despite the Freeport outage, small increase from other regions due to seasonal increase exports, or recovery from outages led to an overall increase of 6% in the LNG supply compared to the third quarter of 2021. For the full-year, overall supply is forecast to rise by 5.4%.
Slide 15 demonstrates more clearly the continued volatility in the LNG prices and a positive relationship between volatility and demand for term vessels. Despite the stop of flows by the North in one and much lower volume to Ukraine, Europe has managed to fill it inventories above 90%. This has led to a steep downturn in commodity prices. Thanks also impart to, high inventory levels in Asia as a result of more widespread use of coal.
Europe in the meantime, will continue to need high LNG flows throughout the winter and possible cold winter storage in Asia could increase competition, post current LNG. It is also worth noting that record levels of floating storage, particularly in the Atlantic, had tied up more than 30 vessels globally for the reducing vessels availability. This shortage is a testimony of how the need for energy security, combined with a lack of infrastructure development have created the extraordinary market condition we are all seeing.
On Slide 16, we show a constructive outlook for LNG carrier supply and demand to the end of 2023. Despite higher than historical flows forecasts from the U.S. to Europe, depressing the U.S. export multiplier. The market balance in 2023 is forecast to be tight, where normal seasonal supply deficit can be surpassed by the favor of term business driven by LNG supply security interests.
Slide 17 displays the LNG carrier order book and delivery schedule according to firm rates. The order book has risen to 255 confirmed orders as a result of continued high level of ordering and a number of vessels being awarded out to the – tender. The order book is mostly tied to long-term charters with only 14% being uncommitted.
New vessels are being contracted at prices more than 245 millions, and the earliest delivery dates are in the end of 2026. The impact of this ordering will not be felt until all the vessels are delivered and a number of factors could affect both the final number of vessels being delivered, and the date of delivery, including availability of financing and late completion of connected infrastructure projects.
Turning to 19 and in summary. We are hoping for the fast resolution of the situation in Ukraine. However, it is clear that European resilience on Russian energy has ended and alternatives are being sought in the immediate future, especially from new U.S. exports.
Viscosity of independently owned vessels and likelihood of continued uncertainty and volatility is likely to keep the LNG shipping market tight for the foreseeable future. The partnership has been able to monetize the strong market through profitable term charter and maintain spot exposure in the seasonally strong period next year.
Finally, we continue to execute well on our strategy target, building equity value to our shareholders. Managing our residual risk constant carriers and strengthening of balance sheets will position the partnership to enhance total unit holder return.
With that, I would like to open the call for question.
Question-and-Answer Session
Operator
Thank you sir. [Operator Instructions] Our first question will come from Ben Nolan of Stifel. Your line is open.
Benjamin Nolan
Yes, good morning. So I have a couple hopefully that is okay. The first relates to the vessels that you have coming open next year. Obviously the market is really robust at the moment and gives you the opportunity to contract things as they come due. But the first one on the list on page 22, there are the presentation is the methane, Jane Elizabeth, although there is an option on that. I’m curious how you think about that vessel, both in terms of how when you are talking about spot rate sensitivity and the table that is in there, but more importantly, whether it would appear as though that option is likely to be exercised or not?
Paolo Enoizi
Hi, Ben. It is Paolo. So addressing your question, the Jane has an option as you are seeing and actually has an option plus an option. And this is our that is a pre 2021 fixture that actually fixtures in the COVID period. So we consider likely that these options will be confirmed.
Benjamin Nolan
Okay. And so when you when you are talking about your spot rate sensitivity and the cash flows that could be associated. Is it assumed that the option is exercised or is that not that assumption?
Paolo Enoizi
Yes.
Benjamin Nolan
It is, okay. And then, I guess for my second question, you have obviously made really good strides on delivering the balance sheet. Is was noted and I believe that, you have even already reached the goal from a net debt to EBITDA perspective and are not too far away from the target on capitalization. So, certainly, you called out paying down $111 million, I believe it was next year, and in debt payments, which I would imagine would get you to below your targets. At what point, I guess, do you think pivot away from balance sheet oriented capital activities and more towards either replacement of ships or growth and I guess along with that do you feel like this is the time from a LNG shipping market and asset values, everything else to be doing that or are you better off irrespective of sort of the balance sheet to simply wait and find a better opportunity?
Paolo Enoizi
Good question, Ben. So let me start and then pass on to Achilleas. I think we are really happy that we have made important headways on our targets. And that really has been thanks for this Boyer market that we discussed. So I think that that is a definitely a much more comfortable position that we have been in the past years and quotas with the regards of replacement and growth.
I think the point we are in today is these where market has definitely not only affect that the childhood rates has a child, right, has affected the S&P market with a much more liquid situation than we have ever seen. It is far away from being liquid like other commodity markets, but it has probably never seen so much interest in transactions of assets like the one we have carried out for our steam vessels.
That trend you also see in the new buildings with price recording close to $250 million for standard LNG carriers and the hurdle of ordering an asset that will only generate cash basically into 2027. So I think the next step for us is we still believe that the partnership wants to look at taking advantage of this strength in the market from a asset management point of view.
I think we look with a bit of skepticism on the opportunity to jump on such high new building orders. But the beauty is that our cash position not only allows us to manage our priorities, which is achieving the target and, and strengthening our balance sheets and lowering our break evens, but also allows us to look at growth maybe also in different ways than just ordering new buildings or acquiring second end vessels.
Benjamin Nolan
Could you elaborate on that last point?
Achilleas Tasioulas
Well, I think, as we mentioned in the last quarter, we are looking very favorably at one FSAU development in the port of aide, then that is a very cash intensive project. So that is just one example following your question, Ben.
Benjamin Nolan
Okay, perfect. I appreciate it, thanks.
Operator
Our next question will come from Chris Tsung of Webber Research. Your line is open.
Chris Tsung
I wanted to just ask about the sale and leaseback. I know, it is usually a financing decision, but I noticed there is no repurchase option attached and seems like it is just a really smart way to offload and aging seems so. Future in the sale price and also a charter that you are able to get through your charter. Is that right and something that you would [multiple speakers]?
Achilleas Tasioulas
Thanks. I think you have a good well. It is a nice way to manage, this is residual value, these were the things. We did one direct sale, the S&P market on carriers is not very developed. So there are not plenty of opportunities and the sale and leaseback offers the opportunity practically to do affordable sale, there is no passage obligation at the end or option.
In this respect at the end of the leaseback, the vessel will go from our fleet we have matched this duration with a very good charter. So it is all back to back and it represents a different way of reducing our steam exposure.
Increasing also the liquidity today of course and without really changing our breakevens on the specific vectors because, the sale and leaseback and the debt repayment are pretty close in terms of breakevens.
Chris Tsung
So the bareboat charter rate. Is that kind of goes into the next question on slide five you guys are talking about the estimated EBITDA. I just want to confirm for the Methane Sally and all the estimating, but as a second firm, this is for the term right like 38 million in 34 months. It is not like an annual figures?
Achilleas Tasioulas
It is just for their full period. Yes.
Chris Tsung
And it is one more question on Slide 16. Also surprised to see the best in demand below supply. I wasn’t sure given all that were here, and I wasn’t quite sure I understand it. We can you probably take action on that a little bit.
Paolo Enoizi
Can you, what slide that you are referring to?
Chris Tsung
Slide 16. It shows the vessel demand and the vessel supply?
Paolo Enoizi
Yes. Well, I think what we are what we are showing here is. We still recognize that there is a seasonal shoulder month effect, as expected in the supply demand scenario for next year. And of course, this is the speculations on where flows of cargoes will go because, the biggest multiplier discussion nowadays is how much of this load will stay in the Atlantic and a much of this flow will go back to the Pacific and the Far East.
But in general, I think we see that there is an extremely strong market in the quarter one and quarter four expected and as we commented in the shoulder months. The effect that we have had today is that call it the shorter months have been covered by a general increase of term business rather than spot. We have seen inefficiencies in the trade with vessels waiting employed to the summertime, because of the uncertainty of what would have laid ahead for operator and traders.
Chris Tsung
Okay, thank you Paolo. Thanks for the color and I will hop back into the queue.
Operator
Our next question will come from Chris Wetherbee of Citi. Your line is open.
Christian Wetherbee
Thanks guys for taking the question. I wanted to come back to the earlier comments about sort of strategy, big picture strategy post deleveraging. So obviously, strong market, good progress on working the balance sheet back towards your target some cases better than your targets. I guess as we sit here and sort of thinking about the company who has been sent through some challenges over the course of the last several years, if we think out over a multiyear perspective. We’ll actually think about sort of the growth potential of this. What do you think your fleet could be in a few years from now? I guess, I think it would be helpful to sort of have a pretty clear picture of sort of step to pass the leveraging in terms of what the strategy for GasLog will be?
Paolo Enoizi
Yes. Thank you Chris. Look, I think the step two is what we have in mind. The step one is just to repeat again, and not for the sake of repetition but because it is an important point. I think what we have seen coming out of the 2020 difficulties, we definitely want to make GasLog Partners as sustainable through the cycle as we can. And that means that we need to be more competitive and more profitable every year and with a stronger balance sheet.
And I think that is exactly what we are doing now. And we take for granted that because of the growth and the steps we have taken so far, this is going to come very early. And we are very pleased to see that but we are still not there to where we want to be. So I think the immediate future is for us to continue on, let’s go at it step one, and take home all the advances and the progress that we want to make on these various steps, on these improvements.
Now, step two, as we mentioned before in the answer to Ben, it is one are we going to be in a position to execute, growth in or in whatever form or shape will take. And if the markets continue to like this, and if we are as in a way, call it as good as we have done so far than I believe there will be definitely room for us to execute on this how exactly this is going to take shape and form.
I think it is difficult for now to say we have conducted either comments on the new building market, we are definitely keen on infrastructure projects, because I think they match the step one of looking at some of our aging assets and developing long term infrastructure investments and it. But then, it will also depend on how the market will look like and what the other opportunities will come. So, unfortunately, that is all the color we are able to give you right now.
Christian Wetherbee
Okay. I appreciate the time. Thank you.
Paolo Enoizi
Thank you
Operator
Thank you. This will end the Q&A session for this conference. I would now like to turn the conference back to Paolo Enoizi for closing remarks.
Paolo Enoizi
Thank you, Chris. And thank you everyone today for listening and for your continued interest in GasLog Partners. We definitely appreciate it and we look forward to speaking to you next quarter, and travelling h as now become a much safer experience, we look forward to seeing again, many of you in person soon. In the meantime, stay safe, and if you have any questions contact the Investor Relations team. Thank you.
Operator
This concludes today’s conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.
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