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GasLog Ltd  (NYSE:GLOG)
Q3 2019 Earnings Call
Nov. 06, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, my name is Josh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 2019 GasLog Limited Earnings Conference Call. [Operator Instructions] Today's speakers are Paul Wogan, Chief Executive Officer; Alastair Maxwell, Chief Financial Officer and to commence the call, Phil Corbett, Head of Investor Relations. Mr Corbett, you may begin your conference.

Phil Corbett -- Head of Investor Relations

Thank you, Josh. Good morning or good afternoon and thank you for joining GasLog Limited third quarter 2019 earnings conference call. For your convenience, this webcast and presentation are available on the Investor Relations section of our website www.gaslogltd.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 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 is included in the appendix of the presentation. I will now hand over to Paul Wogan, CEO of GasLog Limited.

Paul Wogan -- Chief Executive Officer

Thank you Phil, good morning or good afternoon, and thank you for joining our third quarter earnings call. Before I begin, those of you who have participated in our previous calls, may have noticed our new presentation format. This is part of a larger rebranding initiative of both GasLog Limited in GasLog Partners to emphasize on priorities of safety, operational excellence, and customer focus, and we're delighted to be sharing this with you today. On today's call, I'll begin with our highlights for the quarter, including our recent commercial successes. Alastair will then take you through the quarter's financial performance. Finally, I will review the current trends in the LNG and LNG shipping markets before opening the call for questions.

Turning to slide 3, during the third quarter, we continue to see the positive financial impact of our charter-packed Newbuilding program as well as an improvement in the earnings of our vessels operating in the spot market. For the nine months ended September 30th, our revenues increased 7% year-over-year. For the same period, EBITDA was 9% higher, driven in part by continued good progress on our cost reduction initiatives. Notably, the earnings of our vessels trading in the spot market were enhanced by market-linked charters on both the GasLog Shanghai and GasLog Salem. In late July, we took delivery of our fifth XDF vessel, the GasLog Warsaw, which immediately commenced the charter with Cheniere ahead of her long-term charter with Endesa.

We were also successful in signing a 10-year charter for one of our TFDEs to act as a floating storage unit for a gas-to-power project, being developed in Panama. We declared an unchanged dividend of $0.15 per quarter -- per share, sorry, for the quarter. I'm also very proud to share with you that the crew of the Methane Alison Victoria was awarded crew of the year at this year's IHS Markit Safety at Sea Awards for their excellent safety performance over a number of years. And finally, following a planned transition, Paolo Enoizi assumed full COO responsibilities in September, and he is already a great addition to the senior management team.

I'm also pleased to report that our outgoing COO Richard Sadler has agreed to take on a new role as Head of Sustainability, as we focus on defining our sustainability strategy and reporting, and I look forward to providing further updates in 2020. Slide 4 provides detail of our Panama FSU charter.

In September, we announced a 10-year charter award with a Chinese company Sinolam, which is developing a gas-to-power project in Panama. The power project to sign long-term power purchase agreements with leading Panamanian utility companies as well as a 15-year LNG purchase agreement with Shell.

We expect to fulfill the time charter through the conversion of the GasLog Singapore, where we have [Phonetic] 2010-built TFDEs. Since September 2016, this vessel has been trading in the LNG carrier spot market. The 10-year FSU contract will deliver 100% utilization on fixed-rate of hire for the duration of the charter resulting in approximately $20 million of EBITDA per annum over the life of the charter.

The conversion will take place during the vessel's scheduled five-year special survey in the third quarter of 2020, enabling both time and cost synergies with the vessel's regular dry docking. The charter commences on delivery of the FSU in Panama, which is scheduled for November 2020.

We're looking forward to working with Sinolam on this project to displace coal and oil products in Panama's energy mix with cleaner burning natural gas. Now, let me hand over to Alastair.

Alastair Maxwell -- Chief Financial Officer

Thank you, Paul and good morning or good afternoon to you all. I'm pleased to report another strong quarter in terms of our operating and financial performance. Please turn to slide 5. Our quarterly and nine financial results were underpinned by the operational performance of our fleet, which continued to be excellent with year-to-date uptime of 98%. As you can see in our 6-K for the quarter, following our exit from the Cool Pool, we now segment our fleet and our revenues into two categories. First, those vessels operating under multiyear charters at fixed rates regardless of the remaining duration of their contracts. And second, the remainder of the fleet comprising vessels operating in the spot and short-term markets and vessels which are chartered under variable-rate contracts. For completeness, we have also included the Cool Pool net performance in the table where you will see that there was a very limited contribution to the Q3 financial performance as the last of our vessels exited the pool early in the quarter.

While total year-to-date revenues of $463 million increased by 7% year-on-year, our fixed rate net revenues increased by 9% as a result of the growth in our fleet of on-the-water vessels with multiyear charters. While not directly comparable with the historical net Cool Pool performance, our variable rate net revenue reflected lower on year-on-year earnings in the spot market and previously disclosed unscheduled dry-dockings of around 100 days. Although opex increased in absolute terms as a result of new vessel deliveries, unit opex and unit G&A in the first nine months of 2019 declined by 5% and 4% respectively compared to 2018, benefiting from our cost control initiatives and fleet growth as well as a favorable US dollar-euro exchange rate.

We continue to anticipate that full year 2019 unit opex will come in at or below our formal guidance of $15,000 per vessel per day. Cost control and revenue growth combined to deliver a 9% increase in year-to-date EBITDA. Turn to slide 6 and further information on our variable rate earnings. As I mentioned on the previous slide, we now segment our fleet and our revenues into variable-rate vessels and fixed-rate vessels. During Q3, we had seven variable-rate vessels including the GasLog Shanghai and the GasLog Salem, both of which are on term charters, but with market-linked rates. During the quarter, our variable-rate vessels earned time charter equivalent net revenues of just over $36,000 per day. Looking forward to the fourth quarter and based on current both revenues and expenses as well as our remaining open days, we expect that our variable-rate vessels will deliver TCE net revenues of $60,000 to $70,000 per day. This estimate reflects the fact that the ceilings in our market-linked charters while at very attractive levels compared to historical mid-cycle rates are below current headline rates as well as the fact that the charters on two of the vessels were fixed prior to the recent strong recovery in headline rates. On the other hand, a number of the fixtures on our variable rate vessels will extend well into the first half of next year, thus providing some cover against potential spot market seasonality.

Turning to slide 7 which discusses our balance sheet. We continue to amortize our debt at twice the rate our vessels depreciate, deleveraging the balance sheet and creating equity value over time. In 2020, we expect to amortize $220 million of debt equivalent to the average debt of two of our vessels. Furthermore, we are proactively managing our upcoming maturities. We have already commenced planning for the refinancing of the two secured debt facilities, which mature in 2021 as well as the 750 million Norwegian krona bond, which matures in the same year, and we expect to complete these refinancings well in advance of their final maturities. During the third quarter, I'm also pleased to report that we made very good progress on the financing of our seven remaining newbuilds.

We have seen strong interest from our banking partners, resulting in the proposed new facility being significantly oversubscribed. We are currently in the documentation phase and plan to close the financing later this quarter. In parallel, we've been working on improving the financial and commercial covenants across all of our debt facilities along the lines of the financing of the GasLog Warsaw and at the GasLog Partners level, the new $450 million facility, which closed in March of this year. We will provide further information in due course.

Moving to slide 8, we've set out the average growth secured debt per vessel for our different classes of ships. As you can see, our steams and 155 TFDEs have considerably lower average debt per vessel than our more modern vessels, all of which operate under long-term charters. As a result, the steam vessels also have the lowest break-evens in the fleet in the mid-to-high $30,000 per day and trending down over time.

Moving to slide 9. We've updated the chart illustrating our capital commitments. We currently forecast cumulative future cash payments for the equity and the remaining newbuilds represented by the light blue tranches at the top of each column to be $93 million assuming 80% loan to value, which is the most likely outcome of our newbuild financing. On this basis, our current unrestricted cash balances and available RCF capacity plus operating cash flows from our growing on-the-water fleet and a stronger spot market are expected to be more than sufficient to cover the equity funding requirement.

Finally on slide 10, we show the evolution of our contracted revenue backlog. Our successful chartering activity this year, including new charters with JERA, Endesa, Gunvor, Cheniere, and most recently Sinolam continue to add to our backlog, which reached a new high of 4 $1 billion at the end of the third quarter. This backlog underpins our future earnings and cash flow generation as well as our unrivaled access to cost effective capital at both GasLog and GasLog Partners. I will now hand back to Paul to discuss the LNG and LNG shipping markets.

Paul Wogan -- Chief Executive Officer

Thank you, Alastair. Turning to slide 11, which shows the increase in LNG import by country on a trailing 12-month basis. LNG demand grew by 143 million tonnes year-over-year, an increase of 14%. China posted the largest increase in absolute volumes importing 11 million tons more LNG, a 22% increase year-over-year. Natural gas continues to grow its share of the country's overall energy mix, and recently Sinofex [Phonetic] stated that it expects China's gas demand to increase by more than 80% from 2019 to 2030. While Chinese demand continues to be strong, LNG growth has been broad based. Europe's imports grew by nearly 36 million tonnes over the period, a 105% year-over-year increase driven by declining indigenous gas production, continued coal-to-gas switching for power generation, and available gas storage capacity.

Turning to slide 12 in the future outlook for LNG demand by geographic region. In total Wood McKenzie expects net LNG demand to grow by 150 million tonnes between 2019 and 2025. Although China's imports have increased significantly in recent years, it's important to note that other countries in Southeast Asia together with Europe account for nearly two-thirds of the projected LNG demand growth through 2025. Turning to slide 13, which shows new LNG supply. Next year, over 22 million tons of new LNG capacity is due to begin production, mostly from projects in the US, which should have a significant positive impact on ton miles. In particular, the second and third trains of both Cameron and Freeport are expected to begin production and ramp up throughout 2020 and into 2021. Further ahead, 94 million tons of new capacity is scheduled to start production in 2021 through 2024 including Venture Global's Calcasieu Pass in Louisiana and the Arctic LNG 2 project, both of which took FID in the third quarter of 2019.

Turning to slide 14 and the future supply growth, the LNG supply outlook continues to be dynamic and growing. While 2019 is already a record year for new project sanction Wood McKenzie expects an additional 7 million tons of LNG capacity to reach FID prior to year end, followed by another 61 million tons in 2020 and 21 million tons in 2021. These proposed supply expansions are being supported by continued momentum in new long-term LNG sale and purchase agreements with over 170 million tons per annum having been signed since the beginning of 2017.

Slide 15 shows how US exports have positively impacted shipping demand. According to Poten, 119 cargoes were exported from the US in the third quarter, 40% of which were delivered into North Asia and the Middle East, destinations that require more than two ships per million tons of LNG export per annum compared to historical global average of 1.3 ships needed for LNG exported from the rest of the world.

Since exports out of the US began in 2016, an average of 1.8 ships have been required for each million tons of LNG exported, positively affecting shipping demand. 79 million tons per annum of LNG capacity is expected to be online in the US by the end of 2020, approximately half of which has been sold on long-term contracts to Asian buyers.

Slide 16 illustrates our view of shipping supply and demand through the end of 2021 based on Wood MacKenzie and Poten data. This [Indecipherable] implies a structurally tighter market through at least the 2020, 2021 winter with expected high levels of fleet utilization even at the lower end of the range.

On slide 17, we discuss the rate trends in the LNG shipping market. The left panel shows the monthly average headline spot rates for TFDE carriers during 2019, and the right panel shows the average headline rate by month from 2011 through 2018. While the absolute values may differ from the historical monthly averages, the trend in 2019 has closely followed previously observed seasonal patterns with headline spot rates generally bottoming in early spring and peaking in the fourth quarter. As you can see from the figure, headline spot rates have risen sharply in recent weeks, predominantly as a result of two factors. Firstly, increased demand for LNG ahead of the winter heating season in the Northern Hemisphere and secondly, the continued increase in production from new LNG liquefaction facilities, particularly in the US Slide 18 shows how periods of strength and weakness in the spot markets have historically influenced activity for multiyear charters. Most recently, 14 charters between six months and three years in duration were reported in the third quarter of 2019, the highest number since Q2 of '18.

Of these 14 charters, six TFDEs and six steamships were fixed on charters greater than six months. Poten currently assesses the one-year time charter rate at $84,000 per day for TFDE and 50,000 per day for steam vessel, which are helpful benchmarks when discussing term charter opportunities, although we would note there is presently limited liquidity for charters of one year or greater.

Turning to slide 19, let me finish on why GasLog represents a compelling investment proposition. Our almost 20 years of experience in LNG shipping has allowed us to build a leading operating capability founded up on an uncompromising approach to the high standards of safety. GasLog is continually recognized by our customers and industry bodies as best in class.

We continue to modernize our fleet. When our seven XDF new buildings deliver in 2021, we will have one of the largest fleets of latest generation vessels, all backed by long-term contracts to high-quality counterparties. Our seven newbuilds alone represent a 144 million of annualized EBITDA growth on a fully delivered basis.

We continue to work with our customers to develop [Indecipherable] commercial structures that meet the needs and optimize the earnings of our fleet. The Panama FSU award is yet another example of this capability, in turn pushing our fixed charter backlog to an all-time high of $4.1 billion.

We have a strong balance sheet with scheduled amortization leading to deleveraging over time. We remain confident that increasing demand for LNG will lead to structural tightness in the LNG shipping market, potentially increasing spot market earnings and providing opportunities to reach out to vessels operating in the spot market.

And finally, we remain proud of our track record of paying a progressive dividend which has grown at a compound rate of 4% since our IPO, not including the special dividend we paid in the fourth quarter of 2018, and we continue to explore opportunities to enhance shareholder returns against the backdrop of a strong LNG shipping market.

With that, I'd like to open up for Q&A. Operator, could you please now open the call for any questions.

Questions and Answers:

Operator

Yes. [Operator Instructions]. Our first question comes from Michael Webber with Webber Research. You may proceed with your question.

Michael Webber -- Webber Research -- Analyst

Hey, good morning guys, how are you.

Phil Corbett -- Head of Investor Relations

Hi, Mike. Good morning Mike.

Michael Webber -- Webber Research -- Analyst

Paul, I just wanted to, the first kind of touch on the spot market is we're ramping into Q4 and I kind of wanted to think about it, kind of in the context of, it's going to be just a year-on-year context. Last year, we saw a big ramp in storage early, a big seasonal draw, and then we had a hard landing in Q, the middle or back end of Q1, and it took the market a little while to recover from that. Just curious [Phonetic] as you see, the marketing, market developing into the back end of Q4, how would you compare what we're seeing this year to what you saw last year, just given where we're at from a storage perspective and its different market dynamics?

Paul Wogan -- Chief Executive Officer

Yeah, I think certainly, if you look at the way the markets reacted this year, it has been following the trend of 2018 and yes there is storage. The storage, I think is quite interesting. I think the way that we people are looking at storage is not only vessels which are just sat there waiting to discharge somewhere off a port, but also vessels that are taking longer to reach their destination, and I think what we're seeing in this market is some storage, but some people doing what we've been talking about for a while, which is playing the arbitrage and saying, OK, where do we take these ships, what's the best place to put them. Let's put them if you like on a midpoint route between two areas. Well, we decide to go on less slow steam. So, there's a lot of that going on which is trying to maximize the arbitrage opportunities to maximize pricing on the vessels. So, I think some of it is out now storage, but I think some of it is just people trying to optimize their trading portfolio. The second thing I think that's happening is we are seeing now, and there was I think it has been slower than we would have liked, we are seeing this ramp up in new projects we talk now about Freeport and Cameron coming on stream, those projects coming on. So, I think there is an underlying drive of demand for ships in the market, which we hope will not lead to a fall-off in the rates that we saw last year, but the final thing I would say is that we have enough the ships, which we are trading in the spot market, you should always remember it's a small part of our fleet with the fully delivered big 35, we have seven at the moment...

Michael Webber -- Webber Research -- Analyst

Right.

Paul Wogan -- Chief Executive Officer

but a number of those ships are due for dry-docking next year. So, what we've done is, we've looked to try to fix those ships through until their dry-dockings in the sort of first, second, and third quarters next year, and locking to the rates that we can see now to make sure that if there is that falloff, which I'm not saying we're expecting, but obviously there's always a possibility that we maintain our earnings at a higher rate. So, we are hopeful we don't see that return. We think there are some factors which mean it isn't going to be a play out of 2018 on to 2019, but I think we are also making sure that we position ourselves, if there is that fall-off, to maintain good earnings and our ships, Mike.

Michael Webber -- Webber Research -- Analyst

Got you. That makes sense. That is going to kind of lead into my next question, and Paul, you've been pretty, pretty clear about kind of looking at 2021 with a pretty big question mark and [Indecipherable] slide 16 which always like that you guys put out in terms of different, different projections for supply and demand, and it looks like there is, there are scenarios in 2021 where we've got a bit of excess capacity. I'm just curious as we inch closer to 2021, you guys put in place a pretty tactical dividend policy around potentially paying out specials depending on what you're seeing in the market, where rates are, obviously we're entering a pretty firm environment. I'm just curious as your thought process and math around, around that changed as we've gotten closer to 2021 or should we think about, should we think about in a pretty similar context to 2019?

Paul Wogan -- Chief Executive Officer

Yeah, I mean I think as we've said, Mike, we're very focused on making sure that we can create good value for our shareholders, and I think as we look at this market, the strengthening that we think is potentially there in the short term and medium term, we would like to reward our shareholders. We will though make sure that we're in a good place in '21-'22 if we do see that market coming off, so it's balancing those two things. But certainly, if we continue to see strengthening the market, we think that's potentially that for the longer term, we would like to reward our shareholders.

Michael Webber -- Webber Research -- Analyst

Got you. Okay. Nice time, guys. I'll turn it over.

Phil Corbett -- Head of Investor Relations

Thank you.

Operator

Thank you. Our next question comes from Jon Chappell with Evercore. You may proceed with your question.

Jonathan B. Chappell -- Evercore Partners -- Analyst

Thank you. Good morning and good afternoon.

Paul Wogan -- Chief Executive Officer

Hi Jon.

Jonathan B. Chappell -- Evercore Partners -- Analyst

Paul, if I could follow up on one of Alastair's comments, Alastair yourself. I appreciate the break down of the fixed rate and the variable rate, and I understand the reasoning behind the 60 to 70 that you gave for this year given kind of the spiky nature of the market and booking some ships ahead of that. I mean, for this quarter, but you also mentioned the ceilings on two of those contracts, and we've talked before about how the 100% utilization on those floating rate contracts is incredibly important, but I guess we don't really have a true sense of what the ceiling is, so understanding the commercial sensitivities but also understanding the volatility of the market, is there any way you can kind of put us in the right range and where those things kind of top out, so we don't get kind of overestimate when the market gets as high as it is today?

Paul Wogan -- Chief Executive Officer

Yeah, I mean I unfortunately, Jon. I can't because the commercial sensitivities. We did in the prepared remarks talk about the fact that it is well in excess of the mid cycle rates which we, we've always talked about in the mid '70s. It is well in excess of that, but it is not up in the sort of $130,000-$140,000 a day rates that we're seeing now, but it's difficult for me to give any more kind of guidance on that unfortunately because it is I think commercially sensitive with the people we have those ships on charter to.

Jonathan B. Chappell -- Evercore Partners -- Analyst

Okay then, let me ask about the other two ships. You said or Alastair had said, you had booked to kind of right before the rate movement, which is why maybe the 60 to 70 range is a little bit lower than what people who've been tracking the market would have thought. What's the duration of those voyages and what we're getting at is, can you be able to or do you think you'll be able to recharter them at some point in the fourth quarter where at least in the past two years, the market has been seasonally at its peak and then create that buffer as Alastair mentioned in the 1Q?

Paul Wogan -- Chief Executive Officer

What we've been trying to do on those ships on this, we have a number of ships which are going to be dry-docking next year. We'll be trying to, because the thing that kills you and any of these markets is utilization. When you either factor in there, which is the dry-docking. What that does is create uncertainty around the voyages you can take, you often have an inability to take the ships close to dry-docking and then trying to, if you get them month before you suddenly find you can't charter them. So, what we've been trying to do is to fix our ships through to the dry-docking. So, when we're talking about the sort of lower rates is because we've locked those ships into rates which take them through to dry-docking which, from memory, take us into sort of the end of the first into the second quarter of next year, but as we said also, if we did see a fall-off in the seasonal rates, earnings on those ships will be quite strong.

Jonathan B. Chappell -- Evercore Partners -- Analyst

Okay. Final one for me, maybe we thought going into this winter, it can be as strong as the last two and maybe not as peaky as last year's winter, but as strong as maybe last year's average and the winter before. Last year, you pleasantly surprised with the pretty robust special dividend. So, given where you kind of sit today with the financing, the rates that you think you'll achieve on the 4Q, but also given the fact that the stock price is almost 50% lower or 30% to 40% lower than where it was in November of the prior two years. How do you think about capital return for this fourth quarter period if you do attain these very healthy rates, is special dividend on the table or do you think maybe you'd be more aggressive with the buyback given the valuation today?

Alastair Maxwell -- Chief Financial Officer

Yeah. Hey, Jon, Alastair

I think that, and before talking specifically about one or the other, I think that we continue to have priorities in terms of capital allocation first of all making sure that the newbuild program is funded, and I think where we sit today where we're very confident about that, especially given the stage that we're at with the, the financing [Indecipherable] as I talked about in my remarks. So I think having, having that as our first priority, we do continue to monitor the, the market and the cash flows that are coming from our ships that are trading in the spot market. As we look forward to where we stand in the fourth quarter of this year, clearly,the market is seeing a significant pick up, although we're not getting as much benefit in that if you like, for the reasons that we've talked about and Paul was explaining earlier on. So I think that, we think about the scope for enhanced shareholder returns, it's something that we consider on a continual basis and are always looking to see if we can find ways to do it, but we are watching in particular the performance of the, of the spot market, we're also looking at other elements of our strategy including, for example, capital raisings by GasLog Partners' drop downs. Those kind of things also play into how we think about shareholder returns, and you'll recall that last year we had three things all at the same time. We had a drop down, we had the IDR adjustment modification, and we had a very strong market and those were the three factors together put us in a position where we were able to pay that special dividend.

So, I think, again as Paul said earlier, it's something that we monitor continually. We're always looking for ways that we can enhance shareholder returns and too early to tell at this stage if we do find scope to do that, whether we would do it through share repurchases or through special dividends, I think we need to see where we were at the time.

Jonathan B. Chappell -- Evercore Partners -- Analyst

Okay, I understand. Thanks Alastair. Thanks Paul.

Phil Corbett -- Head of Investor Relations

Thank you.

Operator

Thank you. Our next question comes from Chris Wetherbee with Citi. You may proceed with your question.

James Zhang -- City -- Analyst

Hi guys. James on for Chris. I wondered, actually touch on the order book. There is still some speculative newbuilds out there. I wanted to get a sense of market positioning going in for past peak and going into next year and how it might, how the market's ability to handle some of that early season softness [Indecipherable] trying to really get a sense of, if the industry is evolving around its ability to handle some of the downside surprises that can happen?

Alastair Maxwell -- Chief Financial Officer

Yeah. Hi James. It's a very interesting question. I think we for some time have been Saying we need to be careful in terms of new buildings in the industry, because we see continued build-out of LNG capacity, especially in the US through 2021, but then there was that period between sort of 2015-2018 when very little was, took FID and not just all moves forward to that '21-'23 period where right now, there's not a lot of new capacity due to come on stream, and I think one thing as an industry we have to learn is that while we haven't overbuilt on the shipping side in the past, what we have done is have the ships arrive at the wrong time. So, I'm pretty certain all the ships, which are on order, at some point will be required, because this is a growing industry. LNG demand is really very robust, but if you get the timing wrong, you can have two or three years where you having new ships coming out, waiting for that new capacity to come on, and so I think from our point of view, to continue to order into a period where we don't see new production doesn't make, make a whole lot of sense for the industry. So, especially the people who are going out and ordering I think speculatively into that market, I think should be wary. The second factor though of course is that there is another factor which plays into this which is ton miles. And if you have a period where we start to see a rebalancing, a strengthening if you like, of the pricing of the LNG, which may -- which create arbitrage -- arbitrage opportunities, you could see a situation only to 2021[Phonetic] where you actually see the ton miles increasing, albeit you haven't seen new production coming on. So, there are some other factors playing, at play here, but certainly we in GasLog would not be advocates of going rushing out and doing new buildings at this point. We think as an industry, we don't need those coming out in the sort of '21-'22-'23 period.

James Zhang -- City -- Analyst

Got it. So, I just wanted to actually touch on some of the strategy that was laid out at your Investor Day. Then, how does that potentially impact what you might do in terms of what the next leg of growth, it seems like you're a little bit more conservative about the market from '20-'21 forward. So, what might be the things that you focus on there. Would it be deleveraging potentially thinking about increasing returns to shareholders. What would sort of be the next set of priorities?

Paul Wogan -- Chief Executive Officer

Yeah, I think, I think both of the above. I think there is a natural deleveraging as Alastair talked about in the business through the amortization. I think that continues and is very positive for us. In the future years. I think returns to share holders, we've talked about, very important to us as well, and we want to make sure that we're in a position to return money to our shareholders as and when we're able. I think the other thing that what it happens, if you have a strong balance sheet, good cash flow, it gives you opportunities for M&A -- M&A opportunities, consolidation opportunities, which going into a period if there is a softening market, we want to be in a strong position where we could possibly take advantage of those. So, those are the sort of things that we're thinking about as we look, look two or three years down the track.

James Zhang -- City -- Analyst

Got it. And then just one quicker one. With all the, again start with all the refinancing occurrence, how should we think about potential interest savings or some of the other challenges you might get in terms of financing cost? Thank you.

Alastair Maxwell -- Chief Financial Officer

So, interest savings or what James in terms of financing costs?

James Zhang -- City -- Analyst

Interest, basically just the cost of financing -- the financial cost one. Should we just think about that moving down slowly over time as a percent in debt or is there anything from a modeling perspective that we just need to be aware of, as these refinancings occur, particularly anything around fees or anything around that side?

Alastair Maxwell -- Chief Financial Officer

So, the biggest driver of all of our financing costs, clearly the total amount of debt, and we will see that on the one hand we continue to amortize at a rate today of about $220 million, that will go up as we take delivery and draw down on financing for newbuild. So, our total amount of debt will increase during the course of 2020, as we take delivery of those ships and then they will clearly contribute EBITDA over time. So, that's the first driver which is offset by scheduled amortization. The second driver is obviously libel because all of our mortgage debt secured debt is on a margin basis to libel. We have had some success in reducing our margins that spreads over libels. I don't think there is significant scope for further reductions in our margins. I think we already borrow at extremely competitive levels. The third factor is clearly the impact of the derivatives, which is obviously non-cash, but that has had a significant impact both positive; positive during the course of 2018, negative during the course of 2019, and is very subject to the behavior of libel and the libel curve over time. So, I don't anticipate other than movements in libel, which clearly you will have as good a view on as I do, and the total amount of debt. I don't imagine there are any other factors which would significantly impact our financing cost going forwards.

James Zhang -- City -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Greg Lewis of BTIG. You may proceed with your question.

Gregory Lewis -- BTIG -- Analyst

Yes, thank you and good afternoon. Alastair, just following up on the last question. I guess we would, there is a preferred that comes due in April of 2020 that's probably some of your more expensive debt in however [Phonetic] you treated or they treat as equity or debt, but it's some of your more expensive, I guess, access to capital relative to some of your bank debt, how should we be thinking about, I guess, that piece of debt and how you think about going forward, if that's something that we think we're going to maintain inside the capital structure. Just given all the things that you're talking about. Yes, you're taking on a lot more vessels, the balance sheet -- the amount of debt on the balance sheet is going to be going up, just kind of curious how you think about trying to position the balance sheet over the next, call it, one to two years, and what you expect the primary sources today.

Alastair Maxwell -- Chief Financial Officer

Greg, thank you. So, the practice obviously permanent capital and we can call PRAC [Phonetic] from second quarter of next year, but it is not a maturity, and so my gut feel is we leave that PRAC in place for the time being. As I said in my prepared remarks, I think our next priority after putting in place the financing pool, current newbuild program, I'm working on the covenant amendment that I spoke about. I think our next priority is going to be dealing with the 2021 maturities, which is two bank facilities and the the north[Phonetic] bond, and we are already working on those in terms of preparatory work, and we expect to, as I said, to complete those refinancings well ahead of maturity and therefore some time in sort of middle to early second half of 2020 is when I would expect to have those refinancings completed. I think those are our initial priorities and as I said earlier in the background, we have continual scheduled amortization under way which, which runs at roughly, as we've said often in the past, roughly twice the rate at which the ships depreciate.

Gregory Lewis -- BTIG -- Analyst

Okay.

And then just thinking about the FSU contract with the I guess the Singapore, I guess, as we look at the timing of that, it looks like there was the potential to slip in the steam vessel. So, just kind of curious if that was something that was thought about or are we going, are we now in the market where when we think about infrastructure type LNG assets, is it really, there is now just more advantages to using, the advantages are so great that it's just more as we think about the next three to five years, could we see more try fuel diesel electric vessels sort of, become sort of the infrastructure of storage for LNG where maybe if you were to ask maybe two, three years ago I think the expectation was that was primarily going to be where all the steam vessels were going to go kind of for their final days. Yeah, Greg it's Paul here. On this one is simply a factor of size. Even though it is not a huge amount of difference in the size between the two vessels, the steam -- our steams on this were just slightly too small for the requirement, so it fitted into our TFDE, but we are in early stages looking at another couple of FSU projects which actually would fit, would be fit for our steam vessels. So, I don't think I would read too much into what happened in the Panama or I think it was just the size requirement for that particular project. Okay, thank you very much.

Operator

Thank you. Our next question comes from Randy Giveans with Jefferies. You may proceed with your question.

Randy Giveans -- Jefferies -- Analyst

Howdy gentlemen. How's it going?

Paul Wogan -- Chief Executive Officer

Hi Randy good.Thanks.

Alastair Maxwell -- Chief Financial Officer

Hi Randy.

Randy Giveans -- Jefferies -- Analyst

A few of follow-up questions on the FSU. So, what is the kind of total time for conversion, total capex. I know you mentioned a new lower daily opex number, if you can give us kind of a more exact number around that. And then also I found it interesting that the FSU contract is for 10 years, but the power project has a 15-year LNG sale and purchase agreement with Shell. So is there a five-year action after the initial 10 years?

Paul Wogan -- Chief Executive Officer

Yeah, hi there Randy. Taking your last question first, yes, they have. There are options to extend the vessel for a longer period. We only talk about the firm period that we have on the vessel rather than talk about the options, but there is that opportunity. In terms of the cost of the conversions, I think we've talked about before you're looking there somewhere sort of $15 million to $20 million range in terms of the cost and then we haven't given a lot of talk -- we haven't gone to detail around the opex because what we've really talked about there is just once the EBITDA that you get from the ship and the EBITDA comes out at around $20 million per annum for the vessel.

Randy Giveans -- Jefferies -- Analyst

All right. And then the off-hire days for the conversion?

Paul Wogan -- Chief Executive Officer

I would say the off-hire day, you are looking at something like a 50 to 55 days in total. You'd normally, for a dry-docking, have something like a 25-day, 25-30-day. So it's an additional sort of 25 days on top of that.

Randy Giveans -- Jefferies -- Analyst

Okay. Now that, and then one more question. So yeah, one reason obviously GasLog joined the Cool Pool was to improve utilization, improve scale. Now that you've left the Cool Pool, do you expect to kind of partner with other owners to recreate that spot exposure scale next year and then also looking at your spot exposed vessels are all of them currently employed for the fourth quarter?

Paul Wogan -- Chief Executive Officer

Yes. So the present all our ships are presently employed. We do have a couple coming open in the fourth quarter, which is still going to be, which are open to the market. As we talked about, Randy, I think, I think you know our focus is very much around making sure that we take opportunities to put our ships away, and so one advantage of not having the ships in the Cool Pool is that, that gives us that opportunity to have discussions with charters about spot charters, which often kind of rolls into discussions about longer term charters, not the two ships that we have on the floating rate with utilization we're exactly that. So, at the moment, I think we're quite enjoying having that ability to have a discussion with our customers across the period, and we're finding, I think in terms of utilization, our ability to do that helps us to make sure that we lock in the utilization. So, I think we would be open to having discussions with other people around how we could maybe pool together to improve the service to the customers, things like that, but at this moment that's not something that we as a company are looking to sort of be proactive on.

Randy Giveans -- Jefferies -- Analyst

All right. That's fair. Thanks so much.

Paul Wogan -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Espen Landmark with Fearnley. You may proceed with your question.

Espen Landmark Fjermestad -- Fearnley -- Analyst

Hey, good afternoon. I just wanted to go back on the floating storage. I mean, Paul, you mentioned there are some differences this year with the current degree of slow steaming into this as well, and I guess another difference from last year is that more vessels are actually storing in Europe versus mostly Asia last year, I mean, should we see different dynamics around the floating storage just this year or through

You need a cold winter and the steeper contact [Phonetic] on the curve for rates not to fall-off by mid November again.

Paul Wogan -- Chief Executive Officer

Yeah, very good question Espen. I mean I think you kind of hit the nail on the head when you talk about the weather. I mean the weather is such a large factor in how that the market turns out. Last year we had a very mild winter, more or less across the world and I think that affected the demand for LNG. Interesting to see this year, does that pattern repeat or in a cold winter this demand for LNG continues to be at a high level through. As I talked about a little bit earlier, I think, we think there are some more structural factors which are playing in especially with the new production coming on. We don't think that the strength in the market is solely dependent on floating storage. But of course, if we do get a number of ships coming back at one time into a market that does have a downward factor, but we do believe that there is more of a structural tightness given the production that's coming on stream than we saw last year, and we are hopeful of a cold winter.

Espen Landmark Fjermestad -- Fearnley -- Analyst

Let's hope for that. You're just putting 20 million more tons of LNG into the market next year. We have European inventories already brimming. Are you a -- are you are all worried that we will see cargo cancellations or kind of reworked offtake agreements from information [Phonetic] buyers next year, may be around the typical shoulder months?

Paul Wogan -- Chief Executive Officer

Yeah, I mean it's interesting. The growth I think continues -- the demand and growth continues to be there certainly in Asia. A lot of it I think is infrastructure bottlenecks, which continue to be worked on. We've seen this year apart from the fact that with, as you pointed out, in Europe, quite a large amount of storing, but actually a huge amount of new demand for LNG as the gas becomes cheap and replaces coal in power generation, etc., especially in countries such as Spain and Germany, and I think the low prices are driving that behavior across, across the globe, but certainly in terms of Europe. So, I think my view is the low prices continue to stimulate that. Once people have made that swap over from the coal into the, into gas power generation and industrial use etc., you don't often see that going back, especially if we see, continue to see competitive pricing, which we expect, so given that and given the fact that if somebody doesn't want to lift to cargo, they have to make may not clear three months ahead of time, the people who Producing the cargo then have the option to produce that cargo and sell it with very very low variable costs, if you like. We don't believe that we will see production being rein back on the basis of the market. We think as we go through 2020 and into '21 that we will start to see that market rebalancing.

Espen Landmark Fjermestad -- Fearnley -- Analyst

Yeah. So it's interesting. Thank you.

Operator

Thank you. Our next question comes from Chris Snyder with Deutsche Bank. You may proceed with your question.

Chris Snyder -- Deutsche Bank -- Analyst

Hey, good morning and afternoon guys and thanks for squeezing me in. So you got into midpoint of about I think $65,000 for the variable fleet in Q4. I know there's a lot of moving parts here, some still truly in the spot market, a couple on index-linked contracts and you signed two contracts prior to inflection, but it is disappointing in my perspective to see the variable rate coming below your average term rate, which I think is $75,000 and then the one-year rate you quoted in the prepared remarks of about the mid 80s. Just given that we're in the seasonal peak and the spot market is very tight. So in this context, what are the benefits of the variable contract structure and the broader spot approach relative to the fixed rate term market. Is it that these index-linked contracts are allowing for longer duration allowing you to potentially bridge a weak [Phonetic] 2021-2022 market?

Paul Wogan -- Chief Executive Officer

Yeah, I mean there, some of that. If you look at the, one of the index-linked contracts that we've done has done for 3.5 years. We're also on looking at some longer term index-linked contracts, but I think it also is a focus on optimizing the earnings of the vessels over both the longer term and if you like short to medium term, and so I think one of the things that you'll see falling out of how we've been looking at structuring our portfolio of ships in the short term market is that if we did see a falloff in rates in the first and second quarters, our earnings will be much more robust and if you kind of look at it over the period, we think that we've done a fairly good job of making sure that we have those robust earnings and again, as you look at how do you want to reward your shareholders having some certainty around how you see the market and how you see the earnings of the ship, it is actually quite advantageous for us.

Chris Snyder -- Deutsche Bank -- Analyst

Yeah, OK, fair enough. I appreciate the color and by my count you have four vessels that are still truly trading in the spot market, excluding the variable rate contracts. So, the spot market is obviously very tight right now. Can you just maybe talk about the breadth and of opportunities in the time charter market for these vessels, I know you've kind of talked about transitioning vessels out of the spot market and just given the tightness in the market, it seems like a pretty good time to do so. Are you guys just maybe thinking that hey, the markets are going to keep getting tighter and rates -- interim rates should get better Maybe or longer duration, kind of what's kind of the strategy there?

Paul Wogan -- Chief Executive Officer

Yeah, I mean, it's really around the liquidity of the market. So, we saw a number of term deals, we talked about 14 in the third quarter this year consequent to the strength of the market. I think you know a timing market especially if this stays tighter for longer, it does allow you to fix ships potentially for longer periods as well. So, a little bit around the earnings, but a lot of it is around duration as well. I think we as a company have really sort of made our money out of our longer-term contracts and so our ability to lock into rates for longer periods is something that we find attractive, and we would like to make sure that we're in a position to take advantage of that if and when we see those, those opportunities, but to be on the other side and to be fair, Chris, that also depends upon the liquidity in that market, which does come and go depending on the the views of the charters and the strength of the spot market.

Chris Snyder -- Deutsche Bank -- Analyst

And then just following up on that real quick as the recent spot rate inflection lead to any sort of increased inquiry for time charters, whether it's a longer duration, better rates, remember last year there were some pretty good time charters signed over the winter. Have you seen any positive impact here just given how tight the spot market has gotten?

Paul Wogan -- Chief Executive Officer

Yes, it does without a doubt increase the charters' interest in those and the conversations that we're having around those opportunities. So, yeah that's definitely the case.

Chris Snyder -- Deutsche Bank -- Analyst

Got it. Thank you. I appreciate the time.

Paul Wogan -- Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from Ben Nolan with Stifel. You may proceed with your question.

Benjamin Nolan -- Stifel -- Analyst

Hey, thanks guys. So I have a couple, just a last ones but the as it relates to sort of the, well going over to slide number 9 where you kind of talked through that you have the cash flows and the liquidity and the financing to be able to fund the remainder of the capex commitments that you have without it appears needing any drop-downs. How does that make you think about the dropdown cadence or need, and if the globe unit price isn't good enough, does that postpone it or sort of along those same lines, does it make you a little bit more available to maybe some vessel swapping ideas where there might be a steamship down there that is coming off contract and you don't necessarily need the cash, so you can deliver a contracted vessel to them in exchange for steam ship? Yeah. In the cash or whatever?

Paul Wogan -- Chief Executive Officer

Yeah, I think the nice thing is, its first two things I would emphasize, I think. First of all, we continue to be in a fortunate position where our MLP is functioning well and does work for us. I think it's been active when others haven't and shown its ability to access different parts of capital so that's nice, but it's also nice to be in a position where you don't necessarily have to have that happen to be able to fund the new buildings, so that just gives us optionality in terms of, clock doesn't have to go out and raise capital and does not, we don't have to drop the ships down, but if that works for both parties, then I think that works very well. I think in terms of the support if you like [Indecipherable] GP support for Globe, those are the things that we continue to have discussions around. It has to work for both companies, but you know it's something that we continue to discuss, as I say, because it's advantageous for us to have a well functioning MLP.

Benjamin Nolan -- Stifel -- Analyst

Okay. We are sort of shifting gears a little bit. As it relates to the steam ships and this applies also for Globe, but certainly for you guys. In this market where there is multiple tiers of ships in that it appears to be permanent. Is there anything that you can do adding reliquefaction or something else to really set your steam ships apart so that maybe even if it's not necessarily better rates that you're able to sort of out earn in terms of utilization other shares is there, I'm just curious if there is any levers that can be pulled to give you that competitive advantage with those little bit older ships?

Paul Wogan -- Chief Executive Officer

Yeah, to certain extent, we kind of have that competitive advantage. If you look at the 50% of the fleet, the steam ships we are right at the sort of more modern end and then the larger end, so quite effective ships compared, especially compared to the sort of first generation steam ships. We have, we have been continuing to look at potential ways to enhance those vessels, but when we do a cost benefit analysis, it doesn't necessarily make sense for us, Ben. The thing we're focusing on really with our ships is saying, OK, what we need to do is to make sure that we have the lowest cost if you like in terms of break-even for those vessels and therefore can be competitive in the market and I think as Alastair talked about, we're really looking at somewhere in the mid 30s at the moment with those vessels and continuing to fall. So, I think that's how we look at those steam vessels at the moment, just ensuring that we keep the cost base down and part of that has been a and that the continued focus we have as a company around our cost initiatives to make sure we as a company get the opex as low as possible and get the G&A as low as possible while continuing to deliver this very, I think safe and reliable service to the customers.

Benjamin Nolan -- Stifel -- Analyst

Okay. And then the last one for me this you, Paul, you mentioned earlier that you're preparing the balance sheet in the event that there may be a little bit of a weaker market, and that introduces M&A opportunities, there's not been much traditionally M&A activity outside of individual assets. Is that something that you think will develop, I mean, again, the caveat that it's market dependent, but there has been a number of new owners, so that have ordered LNG ships that are, I don't know, is it, is that process, do you think actually starting now? Or there could be some further consolidation in the industry and actual M&A activity and not just talk about it?

Paul Wogan -- Chief Executive Officer

Yeah, I mean, you're absolutely right, Ben. There's been very little M&A consolidation activity historically in the market, but I think it also right in pointing to the trend of if you like a greater number of owners coming in, especially a lot of new owners coming in, I think when we saw the last, if you like round of new owners coming in, a lot of them very, very strong financially and potentially not necessarily using other people's money to do it as well. This time around, I think it looks a little different. I couldn't put my hand up and say we definitely going to have more M&A activity, but I think that sort of, if you like, increased a number of players in the market and the way that some of those have been funded, etc. My sense is that we're likely to see more M&A activity through the next cycle.

Benjamin Nolan -- Stifel -- Analyst

Okay, very helpful. Appreciate it. Thanks, Paul.

Paul Wogan -- Chief Executive Officer

Thank you.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Paul Wogan for any further remarks.

Paul Wogan -- Chief Executive Officer

Well, thank you, Josh, and thank you to everyone today for listening and for your continued interest in GasLog Limited. We certainly appreciate it, and we look forward to speaking to you next quarter. In the meantime, if you've got any questions, please feel free to contact the Investor Relations team. Thank you very much for your time.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Phil Corbett -- Head of Investor Relations

Paul Wogan -- Chief Executive Officer

Alastair Maxwell -- Chief Financial Officer

Michael Webber -- Webber Research -- Analyst

Jonathan B. Chappell -- Evercore Partners -- Analyst

James Zhang -- City -- Analyst

Gregory Lewis -- BTIG -- Analyst

Randy Giveans -- Jefferies -- Analyst

Espen Landmark Fjermestad -- Fearnley -- Analyst

Chris Snyder -- Deutsche Bank -- Analyst

Benjamin Nolan -- Stifel -- Analyst

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