GLOP - GasLog Partners LP (GLOP) CEO Paolo Enoizi on Q2 2022 Results - Earnings Call Transcript
GasLog Partners LP (GLOP)
Q2 2022 Earnings Conference Call
July 28, 2022 08:00 ET
Company Participants
Robert Brinberg - Investor Relations
Paolo Enoizi - Chief Executive Officer
Achilleas Tasioulas - Chief Financial Officer
Conference Call Participants
Chris Tsung - Webber Research
Presentation
Operator
Good morning. My name is Vanessa and I will be your conference operator today. At this time, I would like to welcome everyone to the GasLog Partners Second Quarter 2022 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 you begin your conference. Please go ahead, sir.
Robert Brinberg
Good morning or good afternoon and thank you for joining the GasLog Partners’ second quarter 2022 earnings conference call. For your convenience, this webcast and presentation are available on the Investor Relations section of our website, www.gaslogmlp.com, where a replay will also be available.
Please now turn to Slide 2 of the presentation. Many of our remarks contain forward-looking statements. For factors that could cause actual results to differ materially from these forward-looking statements, please refer to our second 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 this presentation. Paolo will begin today’s call with a review of the Partnership’s second quarter highlights, following which Achilleas will walk through the Partnership’s financials. Paolo will then provide an update on the LNG shipping and commodity markets. We will then take questions on the Partnership’s second quarter.
With that, I will turn the call over to Paolo Enoizi, CEO of GasLog Partners. Paolo?
Paolo Enoizi
Thank you, Rob and welcome everyone to our second quarter conference call from the very warm Athens. Please turn to Slide 4 for GasLog Partners’ second quarter highlights. The LNG market has become increasingly dynamic as demand for LNG and LNG shipping has been positively impacted by energy security concerns in Europe. Sadly, the tragic situation in Ukraine was a catalyst for heightened energy security concerns. While we are hopeful that a resolution will be reached soon, we believe the market dynamic has been permanently altered.
Spot rates in Q2 were volatile due to uncertainty on short-term supply following the fire at the Freeport LNG facility. At the same time, the term market has remained strong with 1 year time charter rates well above historical ranges throughout the first half of the year. Term fixing are supported by shrinking available tonnage as charters lock in available vessel in anticipation of winter demand. Now, against this backdrop, we recently secured 2 new charters, 1 for steam vessels and the other for the TFDE, both at attractive rates, bringing our total contract revenue backlog to $530 million. We previewed the upside to our contracted coverage during our last earnings call and we are realizing it. Further upside remains with 460 open or spot linked days in 2022.
We were also able to take advantage of an improved S&P market values through the agreement to sell the steam vessel, Methane Jane Elizabeth for the sale price of approximately $54 million. The vessel sale, if completed, will further enhance our liquidity and provide us with additional flexibility as we continue to execute our strategy. Our steam vessels represent both a potential source of revenues and liquidity and we are also pursuing a sale and leaseback for the sister vessel.
We expect to continue to generate healthy cash flow from a tight LNG market, which we are on using to optimize and did risk our balance sheet. In the second quarter, we retired $20 million of debt and lease liabilities and purchased another $8.7 million of our preference units in the open market, bringing the total repurchase to $37.1 million since the repurchase program was initiated last summer. The results are the reduction in all breakeven levels, which enhances our free cash flow generation potentials and continued progress in our leverage ratios towards our targets.
Turning to Slide 5, you may have seen that we recently published our 2021 Sustainability Report. Now you will be able to view the full report in the Gaslog Partners’ website. In the report, we provide all the ESG related KPIs in accordance to the SASB standards and we aligned three primary areas to focus on the partnership, which are decarbonization, safety, well-being and D&I. It is clear that the LNG shipping is being viewed favorably from an environmental perspective. And this is reflected in the decision made by the European Parliament to add natural gas to its green taxonomy starting in 2023. Setting aside the near-term focus on energy security, LNG remains one of the cleanest sources of energy and will definitely play a role in the clean energy transition for decades to come.
On Slide 6, we allied the two charters I referenced earlier. Both charters are with high-quality counterparts and adds an aggregated EBITDA contribution of approximately $52 million during their contract term. In the remainder of 2022 and full 2023, we have a good mix of contracted revenues and spot exposure to a market we expect to the main types.
Slide 7 shows the potential we have to enhance our free cash flow in 2022 and 2023 due to our market exposure. The cost of Partnership generated in the first half of the year, combined with our charter coverage through year end, more than cover the overhead and debt service obligation for 2022. As you can see from the chart on the left, we have approximately 17% of our remaining operating days open or on spot linked contract. In the fourth quarter, which is typically the strongest quarter of the year, we have market exposure on 21% of our operating days. For the balance of the year, every $10,000 per day increase in the time charter party equivalent will increase our adjusted EBITDA by approximately $4.6 million. And looking ahead in 2023, our spot market exposure is once again weighted towards the back half of the year.
I will speak about our market outlook shortly, but first let me turn the call over to Achilleas who will review the Partnership’s second quarter financial performance. Over to you, Achilleas.
Achilleas Tasioulas
Thank you, Paolo. Turning to Slide 9 and the Partnership’s financial results for the second quarter of 2022, revenues for the second quarter were $85 million, a 21% increase for the second quarter of 2021. This was primarily due to a net increase in revenues from our vessels operating in the spot market as well as from 82 off-hire days related to drydock in the second quarter of 2021. Adjusted EBITDA was $59 million, an increase of approximately $14 million or 31% from the second quarter of 2021, primarily due to a $14.5 million year-over-year increase in revenues. Compared to the quarter one 2022, our EBITDA was slightly reduced, because of the actual operating cost of managing Solaris that we took in-house following the delivery from Shell. Finally, our adjusted earnings was $0.37 per unit, which increased by 270% compared to the second quarter of 2021. Overall, we are pleased with our performance in the quarter as we continue to successfully manage our exposures in the spot market, but in chartering our fleet of GLOP rates and achieving an overall stable performance for the Partnership.
Turning to Slide 10 and a look at our cost base. Our daily operating expenses per vessel were $1,729 lower in the second quarter of 2022 compared to the second quarter of 2021 and slightly above the full year guidance we gave on our last call due to inflationary pressures we have started to observe in our expenses. This reduction quarter-over-quarter was primarily due to a $1 million decrease in technical maintenance expenses and the decrease in vessel management fees partially offset by an increase in crew costs was largely related to the in-house management of the Solaris after delivering into our managed fleet on April 6, 2022 as I mentioned earlier.
General and administrative expenses increased by $900,000 or $657 per vessel per day in the second quarter of 2020 compared to the second quarter of 2021. This increase was primarily related to an increase in the administrative service fees to GasLog Ltd. that has been effective since January 1, 2022. The changes in the vessel management, commercial management and administrative service fees are in line with our commentary in the previous quarter and are disclosed in detail in our 20-F filed with the SEC in March 2022. For the balance of the year, we expect our unit operating expenses to average approximately $14,000 per vessel per day, while we continue to evaluate the inflationary pressures in our full year estimate, as mentioned earlier. Finally, our overhead expenses are expected to average approximately $3,250 per vessel per day for the full year.
Slide 11 illustrates the progress the Partnership has continued to make in its preference unit repurchase program. During the second quarter, we repurchased an aggregate of $8.7 million of our preference units in the open market. Since the program was initiated in August 2021, the Partnership has repurchased more than $37 million in preference units in aggregate at an average price of slightly above $25 per unit at fair value. These repurchases have reduced preference unit distributions by approximately $3.1 million or $0.06 per common unit and we are not annualized second quarter distributions to preference unit holders and $0.07 per common unit based on the number of preference units outstanding as of June 30, 2022. We expect to continue opportunistically repurchasing preference units in the open market as conditions dictate and there are $95.6 million in Series B preference units outstanding as of today, which are callable annually at par in March 2023.
Slide 12 shows the progress we have made towards our leverage targets, which we first introduced in the third quarter of 2021. We have made good progress on these goals despite the $104 million non-cash impairment charge we took in the fourth quarter of 2021 on our steams and additional impairment of $28 million in the second quarter of 2022 in connection with the two steams that we have classified as held-for-sale, as mentioned by Paolo earlier.
Inclusive of $20 million of debt and lease principal repayments made in the second quarter of 2022, we have repaid $112 million in aggregate over the last four quarters. As a result, our gross debt to total capitalization, one of the two leverage targets we have said, has been reduced from 53.9% as of the end of the second quarter of 2021 to 52.3% as of the end of this past quarter. When combined with our $157 million of cash and short-term cash deposits on the balance sheet, our net debt to capitalization has been reduced from 48.6% to 44.7% over the same period. In addition, our net debt to trailing 12 months EBITDA has been reduced from 5.3x to 3.9x, which is currently marginally below our long-term target. It is important to note 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 $114 million of debt and lease principal payments in aggregate in 2022, which is more than covered by our contracted cash flow 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 that increase our free cash flow generation potential enhancing the Partnership’s equity value.
With that, I will turn it over to Paolo to discuss the LNG commodity and LNG shipping markets.
Paolo Enoizi
Thank you, Achilleas. Turning to Slide 14, market volatility uncertainty of supplies and the continued scarcity for independently owned vessels that are able to offer charterers, the duration and flexibility they require, has kept the term market at a premium to the spot market. This has allowed independent owners to secure multiyear deals at strong rates despite the current weaknesses on the spot market.
During the first half of 2022, a total of 146 term charters have been concluded and the market is on pace to surpass the 165 term charter record set last year. The dip in 1-year time charter rates in the second quarter, which has been as high as $120,000 per day was related to the fire at the Freeport LNG export facility that have used the number of cargoes available for export and increased the number of rebates. Now, this dynamic is not expected to persist as Freeport exports are scheduled to return to normal levels by the end of the year and absorbed the vessels tied to its contract and this dynamic do support the industry view for strong term market fundamentals.
Slide 15 presents LNG demand and supply during the second quarter of 2022. The LNG demand increased by 4% this past quarter compared to a year ago, with Europe making the largest increase at 35%. This came at the expense of imports into Asia as Europe continued to struggle to replace disrupted Russian pipeline imports. In addition to previous curtailments, Russia has recently reduced export via Nord Stream 1, which were previously stable. LNG supply grew by 6.9%, with the U.S. supply growing at 16.5%, narrowing the gap between the U.S., Qatar and Australia as the largest exporter of LNG. U.S. supply growth will be supported by the high number of FIDs anticipated in the next 2 years due to high prices and interest in the long-term contract. Thus far in 2022, Corpus Christi Phase 3 and Plaquemines have taken FID.
But as you can see in Slide 16, those two projects are far from the only ones we can anticipate to take FID over the next few years. In fact, we can expect nearly 95 million ton per annum of capacity to take FID just from the U.S. with an estimated commercial operation date in 2027 or before. This is driven by continuous efforts in signing long-term SBAs with equitable counterparts, a favorable price environment, a structural supply deficit as well as a constructive public and political climate as the world focuses more on both high energy prices and energy security. U.S. projects make up about 53% of the total universe of pre-FID projects.
The price volatility shown on Slide 17 supports healthy demand for vessels due to supply shortages in the LNG market as well as the recent impact of geopolitical events. Europe demand for continuous LNG imports, were mainly driven by plan to reduce dependence on Russian gas and inventories have largely normalized due to increased LNG flows. However, close to JKTC continues to dominate the energy market at about 48% of total energy imports, down 8.5% from the second quarter of 2021. The impact on LNG demand is not expected to be significant as the majority of flow to JKTC are contracted and therefore heavily in the money compared to spot prices.
On Slide 18, we show a constructive outlook for LNG carrier supply and demand through the end of 2023. To calculate the multiplier for U.S. exports normalized as exports to Europe declined from their peak and are expected to continue to be a smaller portion of global trade as Asia. Now, Asia will likely soon begin to actively compete for LNG cargoes, increasing ton miles in order to fulfill seasonal demand and restocking needs. This is expected to deliver a strong boost in demand into early 2023.
Slide 19 displays the energy carrier order book and delivery schedule according to the Poten. The order book has continued to expand to 219 vessels by the end of June, filling out increasingly scarce yard slots and diving places up to $240 million, $245 million. 86% of the order book is committed and few if any slots remain available for delivery in 2026 as many yards that are willing to take orders for delivery beyond 2026 due to currency and steel price risk exposure. In terms of fleet growth, the impact of these is not expected to impact the fleet before 2026 and 2027, assuming no slippage in production, delays and cancellation. This will give the market time to recalibrate, to better manage increased tonnage with LNG volumes from FID project.
Turning to Slide 21 and in summary, LNG is increasingly recognized as a reliable and flexible source of energy security and a stepping stone for energy transition. We are hoping for the faster solution to the situation in Ukraine. But it is clear that the energy market have been fundamentally changed by Russians invasion. Such focus on reliable sources of energy keeps driving LNG shipping demand, resulting in strong rates and generally a positive outlook as additional capacity gets sanctioned in the next 2 years. The partnership had been able to monetize the buoyant market through profitable term charters and keeps an upside to open and spot linked days in the seasonally strong period.
Finally, we continue to execute well on our strategic targets, build equity value to our shareholders by deleveraging our balance sheet, the purchasing of pref units opportunistically, and positioning the partnership to evaluate opportunities for fleet modernization in this dynamic market.
With that, I would like to open the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] And we have our first question from Chris Tsung with Webber Research. Please go ahead.
Chris Tsung
Hi. Good morning. Good afternoon. Paolo and Achilleas, how are you?
Paolo Enoizi
Hi Chris. We are good. How are you?
Chris Tsung
Good. Thanks. I want to just ask if you are able to expand on the decision to sale and leaseback the vessels compared to perhaps another option to choose converting to a necessary?
Paolo Enoizi
Sure. Thank you, Chris. We – I think we have to start from the fact that the Partnership has 5 sister vessels in the water. And I think the overriding comment is that we are taking a portfolio approach to manage residual value and the opportunity to employ the vessels in the different parts of the market. We are pursuing as we mentioned, infrastructure projects, like the FSRU project, the one that we are publicly following in Venice Energy in Adelaide. We are working on a few yet interesting opportunities for FSU. We have decided to monetize this tight market by fixing favorable charter rates as we reported. And at the same time, also take advantage of a more liquid and S&P market with higher valuations and sell Methane Shirley Elisabeth. So, I think we show that there are many avenues that we are following. And we believe all of them are really accretive to the usage of the steam vessels in the partnership.
Chris Tsung
Okay. Thanks. That makes sense. And just moving on to a couple of vessels that you guys have rolling off with an option, specifically the Santiago and the Methane Jane Elizabeth, at what point will the charter need to notify you guys adoption?
Paolo Enoizi
Chris, just to clarify, are you asking when does the charter need to declare their option?
Chris Tsung
Yes, take then.
Paolo Enoizi
Okay. So, on the Santiago, the next charter periods needs to be declared by the end of August. And on the Jane Elizabeth, the discussion is in the first quarter of 2023.
Chris Tsung
Got it. Thank you. And just one final one for me and I will jump back into queue if I have anything else. On Slide 18 of your deck, I was just curious how did you guys forecast your estimate to vessel demand or you said there is something from one of the sources?
Paolo Enoizi
Sorry, can you say that again, because you broke up a little bit.
Chris Tsung
Yes. Sorry about that. Just on your Slide 18, I was just curious how you guys were able to forecast or what you guys are thinking about forecast the vessel demand?
Paolo Enoizi
Yes. I think the world – the demand – we take the demand with different sources. As we mentioned, we use Poten, we use Wood Mackenzie, and we use Kpler and then we overlaid with our own estimates. Our own estimates, however, is mostly connected to the supply side. But we also take a view on the amount of projects that will be sanctioned and we apply some filters on to it.
Chris Tsung
I see. Just curious thinking about like the ton mile multiplier where if you are absorbing a lot more of the LNG it’s much shorter distance than going to Asia and I am just curious on that, but that’s fine. I can take that offline. Thanks a lot.
Paolo Enoizi
No. But I think if you go to Slide 15, I think you will see that the U.S. shipping multiplier in Q2 still remain quite high at 1.97x. I apologize, I don’t have the previous ones. But I remember that we are – in our forecast we normally use as a reference, a number that is close to 2.13, 2.15 for multiplier that take most of the cargo to East. And one thing that I can comment on is that we have seen really a modest drop in the multiplier, even though more volume has flown into Europe, because still a lot of volume goes to the China. And the volume that doesn’t flow from Russia to Europe is automatically creating an additional need for tonnage, because it actually flows into much farther distances. So, it’s not a simple model and more than happy to take it offline with you at any point in time.
Chris Tsung
No. Thanks. Thanks for the color. That’s helpful. Thanks guys.
Paolo Enoizi
Thank you.
Operator
Thank you, sir. And thank you, sir. I am standing by for further question. [Operator Instructions] At this time, I see no questions in queue. Presenters, do we have any closing remarks?
Paolo Enoizi
Thank you. Well, if there are no other questions, thank you, Vanessa, for assisting us. And thanks everyone today for listening and for your continued interest in the GasLog Partners. We really appreciate it. We look forward to talking to you in the next quarter. And in the meantime, stay safe. And again, if you have any further questions, please contact the investor relationship team and Rob at Rose & Co. Have a nice day. Bye.
Operator
And thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating. You may now disconnect.
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GasLog Partners LP (GLOP) CEO Paolo Enoizi on Q2 2022 Results - Earnings Call Transcript