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Teekay LNG Partners L.P. (NYSE:TGP)
Q1 2019 Earnings Call
May 23, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Teekay LNG Partners First Quarter 2019 Earnings Results Conference Call. During the call, all participants will be in a listen-only mode. Afterwards you will be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Mr. Mark Kremin, Teekay Gas Group's President and Chief Executive Officer. Please go ahead, sir.

Unidentified Speaker

Before Mr. Kremin begins I would like to direct all participants to our website at www.teekaylng.com where you will find a copy of the first quarter of 2019 earnings presentation. We will review this presentation during today's conference call. Please allow me to remind you that our discussion today contains forward-looking statements and actual results may differ materially from results projected by those forward looking statements.

Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the first quarter 2019 earnings release and earnings presentation available on our website. I'll now turn the call over to Mark to begin.

Mark Kremin -- President and Chief Executive Officer

Thank you, Scott. Good morning everyone and thank you for joining us on the first quarter 2019 earnings call for Teekay LNG Partners. I'm joined today by Scott Gayton, Teekay Gas Group's CFO.

Turning to slide 3 of the presentation, we'll review some of Teekay LNG as recent highlights. Similar to last quarter, we continued to improve on our quarter on quarter results. We generated total adjusted EBITDA, which is equivalent to what we used to call cash flow from vessel operations or CFVO, of $158.2 million, which was up nearly 5.5% over last quarter; adjusted net income of $33.4 million, up 2%; and adjusted EPU of $0.34 per unit, up 6%.

Our first quarter results were up primarily due to the delivery of LNG carrier new builds and the commencement of shorter term charters at higher rates for two of our LNG carriers. Since reporting earnings in February, we have been active in the term charter market as we will detail on the following slide. Importantly, the fees for new charters we have secured over $70 million of total adjusted EBITDA. Because of this increased visibility, we are comfortable with our previously provided adjusted EBITDA and earnings guidance and we expect we will likely come in firmly within these ranges as Scott will discuss later.

We have continued to increase returns to shareholders with a 36% increase in our first quarter distribution such that our units now yield roughly 5.3% and we intend to continue to opportunistically repurchase units in the open market under a $100 million buyback authorization, of which we have approximately $87 million remaining. We intend to buy when we see the market dips which will allow us to continue to de-lever while making attractive returns for investors during times of market dislocation.

We have also been active with the multi gas vessels we repossessed last year. These seven vessels are now trading within the Lauritzen Kosan ethylene pool and we are confident that they will be able to improve the chartering results from this segment. However, the final vessel only joined this commercial pool a couple of weeks ago. As a result, the full benefit of the new pool will not be realized until the third quarter's results.

Looking at slide 4, we have been actively terming out our spot vessels thereby locking in attractive charter rates and further enhancing the stability of our earnings and cash flows. Also the Yamal newbuildings are delivering as expected with some of them delivering even earlier than the previous delivery schedule, which was also move forward.

The four charters in the red dotted box were fixed over the past few months with high quality charters, including Petrobras, Cheniere and Petronas. The 52% owned Arwa Spirit and Marib Spirit have been chartered for one year around $80,000 per day to around May of next year. We were also able to successfully extend the charter for the smaller 1993 built Polar Spirit to Petronas for three years, primarily servicing the needs of regas projects in China at a charter rate about 20% higher than the previous rate. This charter extension commenced on May 7.

And we were able to extend the in-charter from our MALT JV of the Magellan Spirit to match a new three-year charter at a similar rate to those for the Arwa Spirit and Marib Spirit. All told, these attractive charters have locked in total adjusted EBITDA of over $70 million. With that we now have only two LNG carriers, the Wilforce and Wilpride that are scheduled to come off charter over the next year. They're scheduled to leave our fleet later this year pursuant to pre-agreed purchase obligations.

All told, our LNG carrier fleet is now 100% fixed for the rest of 2019, 97% fixed for 2020, and 92% fixed for 2021. And for your reference, we have included detailed slides on our charter portfolio in the appendix to this presentation.

We are happy to have locked away our LNG fleet through the middle of next year and we are confident that our relatively small exposure to the mid-sized LPG segment through our joint venture with Exmar and our multi gas vessels now commercially managed by Lauritzen-Kosan will provide us with some upside to the recovery we are currently seeing in those markets. And the Yamal project is progressing well. In early June, our China LNG joint venture expect to take delivery of the Nikolay Yevgenov ARC7 which will service the Yamal project on a fixed rate contract through 2045. As can be seen in the chart at the bottom, we expect the other ARC7s to deliver on time or even a few days earlier than previously expected.

Turning to slide 5, we will now look at developments in the LNG shipping market in the first quarter of 2019. After a surge in short-term LNG vessel charter rates at the end of 2018, rates returned to lower levels in the first quarter of 2019 due to typical seasonal weakness and an oversupply of vessels. LNG demand in Asia was weaker than expected in the first quarter of 2019 due to unseasonably warm weather in Asia and high LNG inventories.

This contributed to weaker LNG pricing in Asia and as a result arbitrage trading was limited with the reduction in European LNG reloads and an increase in Atlantic Basin LNG cargoes landing in Europe instead of long haul to Asia. While global LNG trade growth was minimal in the first quarter of 2019, at the same time the LNG fleet grew by approximately 2.6% in total cubic meter capacity. This combination of moderate fleet growth and minimal trade growth resulted in LNG vessels spot charter rates of approximately $30,000 per day for a 160,000 cubic meter vessel in the first quarter of 2019. Despite weakness in the spot LNG carrier rates during the quarter, the one-year time charter rate remained firm at approximately $86,000 per day at the beginning of Q2 2018 according to Clarksons.

Turning to slide 6, we will turn our attention to the fundamentals for the remainder of 2019 and 2020. Despite rates softening in the first quarter we have recently seen rates turn the corner with broker reported rates increasing to $55,000 per day. We anticipate that the second half of 2019 will be good for LNG charter rates. We predict another year of LNG export growth due to the ramp up of new trains that started in late 2018 such as Yamal Train 3 and the (inaudible) project in Australia, and start up of new projects in 2019, including Cameron, Corpus Christi, Elba Island, Freeport and Sabine Pass Train 5 in the United States.

Overall, we expect global LNG export growth of approximately 30 million tonnes per annum in 2019, leading to another year of healthy LNG fleet utilization on average. We anticipate this balance will continue into 2020 as new export projects continue to come online. With our fleet now fully fixed through mid-2020, we (inaudible) coverage at attractive rates and utilization. However, looking ahead we see a potential risk of rates softening starting in the second half of 2020 as the rush of LNG newbuild orders placed since the start of 2018 will start to deliver in advance of the next phase of strong LNG export growth expected to commence around 2023.

In summary, we are starting to see the LNG shipping market come up from the seasonal bottom and we expect an overall positive year for 2019 with an attractive LNG fleet utilization continuing into 2020.

I will now turn the call over to Scott to run through the rest of the slides.

Scott Gayton -- Chief Financial Officer

Thank you, Mark. We presented slide 7 last quarter and based on investor and analyst feedback we have added select debt details of our joint ventures which will hopefully allow everyone to more appropriately value this significant part of our business, which based on the book value of our investment in each of our joint ventures is roughly equivalent to our current unit price.

Our joint ventures are more or less capitalized similar to the consolidated Company and are also expected to de-lever rapidly as can be seen on slide 9, which increases their capacity to pay dividends up to Teekay LNG. On slide 8, as Mark mentioned earlier, we remain comfortable with the financial guidance we provided last quarter and with the recent charters completed at firm rates we are confident that our actual 2019 results will come within the guidance ranges provided last quarter.

And while TGP unit prices up 31% since the start of the year, we still believe TGP is undervalued as illustrated by the trading multiples we've provided on this slide. I'd like to finish today on slide 9. This chart is a visual depiction of the scheduled debt reduction we expect over the next few years, decreasing from a total debt balance, including our proportionate share of JV debt of approximately $5 billion currently, down to $4 billion by the end of 2021 which equates to a net debt-to-total adjusted EBITDA ratio of approximately 5.5 times or net debt-to-book cap ratio of around 50%.

This de-levering profile is important to today's unitholders because debt pay down equates directly to equity value. We expect to make total amortization payments, including our proportionate share of joint ventures, of approximately $300 million per year or approximately $900 million over the next three years. This represents approximately $11.30 per TGP unit of equity value that will be built just through de-levering our balance sheet. Importantly, with more than 95% of our LNG fleet locked in over the next few years, we are confident in our de-levering plans and excited about the impact this will have on our equity value.

I'll now turn the call over to Mark to conclude.

Mark Kremin -- President and Chief Executive Officer

Thank you, Scott. We are encouraged by the results we were able to generate this quarter and proud of the team for all the charters we were able to secure, which not only locks in firm rates and cash flow for us, but also allows us to maximize utilization across our fleet.

Operator, we are now available to take questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from Michael Webber with Wells Fargo.

Michael Webber -- Wells Fargo -- Analyst

Hey, good morning guys, how are you?

Mark Kremin -- President and Chief Executive Officer

Hi, Mike.

Michael Webber -- Wells Fargo -- Analyst

Hey, I just want to touch on the chartering activity first and foremost and just to make sure we've got this right. So, you've got the deferral agreement with Yemen for three years, that gives you the ability to go out and charter those assets in the market. And then you fixed them out on a one-year basis. I'm trying to rectify that with I guess the commentary within your prepared remarks around expecting maybe some weakness in kind of back half of 2020. When does that -- redelivering in May of 2020 and I know that there are a bit of a special situation, just given the situation with Yemen. But maybe if you could give a bit more color and context around why you would choose to put those away for a year versus maybe seeing what you could earn in the winter period here.

Mark Kremin -- President and Chief Executive Officer

Thanks, Mike. I guess when we look at the overall picture for it, we're starting right now. So right now the rates are not at the rates we've been able to achieve on the time charters here which as I said is around $80,000 per day. So we're very focused at TGP on earnings for our charters which is the time charter equivalent rather than the headline rates and starting right now, when we have that utilization, it's back to back from the charters that are redelivering, we'll get excellent utilization. Even with a strong charter rate, it's hard to beat that type of utilization.

And in terms of the strong charter rate, I think you will agree that there's some uncertainty in the markets. We have although the trade war between China might not be impactful on short-term charters, there is the arbitrage issue we have. We have low prices in Asia and we're not quite sure how that works out yet. So I think we have -- we're able to take two birds in the hand here rather than whatever was in the bush over the winter and I think we're pretty happy with how this is going to look on a time charter equivalent basis.

In terms of our redelivering in 2020, I guess if we could redeliver in 10 years later that be great, but this is what's available right now, it's one year charters and I'm not sure how many available, but we've decided to take in and if we can extend those, we will. But that's just what was available and that's when we'll end up delivering.

Michael Webber -- Wells Fargo -- Analyst

Yeah, I know that there's a lot of nuance in context for different ships you've got there that are available. But if I think about that with this new three-year deals and the Polar Spirit and the Magellan, can you maybe talk about why three-year deals are available there versus for the Arwa and Marib, was it basically just there were two deals in the market that were three years you can put your hands on and those are the two vessels that got them.

Mark Kremin -- President and Chief Executive Officer

The Polar Spirit is a bit different. That is a niche trade that we do there. As we said, we deliver to China on exclusively basically. And so that's a term deal because it's not necessarily -- it's a niche business. In terms of the the three-year deal, the Petrobras, that was again just what was on the table. It's not necessarily that we wanted longer or shorter, whether it's the two we did for the Yemen ships or the one we've done to Petrobras. It's just that that was available at the time and that's what we've taken.

Michael Webber -- Wells Fargo -- Analyst

Yeah, got you. Okay. That's helpful. So there's a lot going on there. So the color is helpful. I guess, as it pertains to the market in general we've always seen rates pick up a bit here. To what degree do you think we started to see seasonal cargo program start to get fixed earlier and earlier or do you think there's something else going on in the market. I mean obviously you had kind of a shifting in destination maybe a bit away from Europe, but not really. Just curious to whether you're seeing -- what you're seeing in terms of strength is program-oriented versus maybe something a bit seasonal?

Mark Kremin -- President and Chief Executive Officer

I suspect it's program-oriented as you say. I think things are getting a bit done a bit earlier than they used to. That was the same last year. As you know a couple of years ago, China got caught up buying LNG too late for instance and they had to pay more as a result. I think a lot of the Asian countries are programming a little earlier, but the uptake -- Q2 was not a great quarter for anyone. So the uptake is taking a little longer than folks might say and I think it'll still be Q3 before we see the program really starting to come into play.

Michael Webber -- Wells Fargo -- Analyst

Got you. Okay. And then just one more, I'll turn it over. In terms of new business, you've been particularly successful with your Yamal exposure Arctic 2 despite the Saudis backing out. It certainly seems like that's moving forward, the ARC7s. Any thoughts on early stage feed work there or any idea as whether or not you would love to participate there and then I guess along within the context of that question, do you buy into the idea that you would need to see more local content associated with those ARC7s for Arctic 2?

Mark Kremin -- President and Chief Executive Officer

Well, we have mentioned previously Mike, we have a fair amount of exposure already to the Arctic project and Yamal. So for us to participate further, it's lower on our priority list, not just because of the local content issues but because of just the general exposure we have. We typically don't like to exceed 20% of our revenue on any particular customer. And that would be the case here. So we'd be focused on more projects elsewhere whether it's the Mozambique or Qatar or whatever else is going to pop up over the next hopefully over the next couple of quarters.

Michael Webber -- Wells Fargo -- Analyst

Got you. Okay. Thanks, I'll turn it over.

Operator

(Operator Instructions) And at this time, I currently have no questions in the queue. I'll turn it back to today's speakers.

Mark Kremin -- President and Chief Executive Officer

Thank you very much for your continued support and we look forward to talk to you next quarter. Thank you.

Operator

Thank you ladies and gentlemen. This does conclude today's teleconference. You may now disconnect.

Duration: 21 minutes

Call participants:

Unidentified Speaker

Mark Kremin -- President and Chief Executive Officer

Scott Gayton -- Chief Financial Officer

Michael Webber -- Wells Fargo -- Analyst

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