Teekay LNG Partners LP (TGP) Q2 2021 Earnings Call Transcript

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Teekay LNG Partners LP (TGP)
Q2 2021 Earnings Call
Aug 5, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Teekay LNG Partners Second Quarter 2021 Earnings Results Conference Call [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 the company. Please go ahead.

Scott Gayton -- Chief Financial Officer

Before Mark begins, I would like to direct all participants to our website at www.teekaylng.com where you will find a copy of the second quarter of 2021 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. 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 second quarter of 2021 earnings release and earnings presentation available on our website.

I will now turn the call over to Mark Kremin, Teekay Gas Group's President and CEO to begin.

Mark Kremin -- President and Chief Executive Officer

Thank you, Scott. Good morning, everyone and thank you for joining us on our second quarter earnings conference call for Teekay LNG Partners. I am joined today by Scott Gayton, Teekay Gas Group''s CFO. Before getting into our results, we will take a moment to thank all our staff for the continued dedication to maintain business continuity during COVID global pandemic. We are especially proud of how our seafarers and drydocking supervisors have continued to respond to ongoing restrictions, while maintaining consistently safe and efficient operations. Turning to slide three of the presentation, we will briefly review some of Teekay LNG''s recent highlights. The second quarter of 2021 was another good quarter for us, albeit down slightly from last quarter, primarily due to an increase in our scheduled drydockings in the second quarter. We generated adjusted net income of $57 million or $0.57 per unit and total adjusted EBITDA, which includes our proportionate share of EBITDA at the joint venture level of $184 million.

Looking ahead to the second half of the year, as was the case this quarter, we expect to undertake a higher than normal number of scheduled drydock days in the third quarter, which will impact for third quarter results. However, we are anticipating very few drydock days in the fourth quarter. As a result, we expect our fourth quarter earnings and cash flow will rebound accordingly. With over 98% of our LNG fleet fixed for the remainder of 2021 and 89% fixed for 2022, we are anticipating that Teekay LNG continue to enjoy fairly consistent results through the rest of the year and into next with upside from our one spot market into charter contract. As the last bullet of this slide states, the LNG shipping market is firm for reasons we will review in a moment. And while the vast majority of our LNG fleet is fixed, we do have exposure to this market, strength, which we anticipate will continue well into 2022.

Turning to slide four, being our consulting fleet and similarly on slide five, being our joint venture fleet. The bars toward the middle and the bottom of these slides indicate how our LNG fleet portfolio is largely fixed long term toward the first group of high quality customers with an average remaining contract term in excess of 10 years. However, as the red dotted circles indicate on these two slides, we have a few vessels available in 2022, which should be well positioned to take advantage of the expected strength in the LNG carrier market as we will review on slide seven. So, let's now skip past slide five, which we just discussed, to slide six, where we will discuss a few of the commodity and chartering dynamics, which we believe will impact LNG charter rates going forward.

Looking first to the left hand side of the slide, the demand for and supply of LNG is leading to much higher pricing than we typically see during this time of the year. The agent benchmark, JKM, has recently surpassed $15 per million BTU, a level we have experience during the cold season winter last year. And based on the forward curves as depicted by the dotted lines, much of the strength and pricing is expected to continue throughout the year. Strong industrial demand and low inventories have been supportive of higher gas prices with China accounting for much of the incremental demand over the past year. Just last month, China suppressed Japan as the largest importer of LNG. And as we will discuss in a moment, stronger international pricing and arbitrage trading opportunities are helping to support LNG carrier rates.

This calendar seasonal strength and pricing is also leading to an uptick in the number of term charges being entered into, as seen in the graph to the middle of this slide. As LNG carrier rates begin to firm [Technical Issues] seasonally in March, 13 time charters were completed, followed by 10 in April and another eight in June. As you can see from the chart, this three month total equals the number of term charters completed over the prior 20 months combined. We believe this rush to charter vessels is due in part to the LNG carrier rate spikes experienced last year when rates briefly surpassed $200,000 per day. Whereas this year, some charters are preferring to lock-in tonnage early to avoid another potential spike in rates this winter. These are just two of the factors that we do see having an impact on LNG carrier rates, which have been plotted to the right of this slide. The blue and gray lines plot average monthly [Technical Issues] rates experienced in 2019 and 2020 respectively. While the red line plot rates experienced to-date in 2021 with the dotted red line plotting out the forward rates according to the Baltics LNG curve.

An increase in private start-ups, low inventory, particularly in Europe [Technical Issues] only at 44% of being full and 25% below the average for this time of year, and long haul traits in the US and Asia, as we just mentioned, are all coming together to fundamentally support spot and term LNG carrier rates. Our last slide today is slide seven. We're not planning to review all the factors we see impacting rates into the future, whether it''d be increased volumes [Technical Issues] as you can see in the chart at the top left, strong demand out of Asia and South Asia, congestion in the Panama and Suez Canal or seasonal [Technical Issues] such as droughts in Brazil or the hot summer in the Northern Hemisphere. But what we think important is how all these factors are coming together to positively impact [Technical Issues] carry rates. And this positive sentiment is also shared by others.

If you look to the top side of this slide, we've plotted out important simply base case rate predictions where you will notice the most recent base case rates from the July 2021 report depicted by the dark blue line, a higher than their base case rates and their April 2021 report, indicated by the gray line, and the July 2021 buy case rates are even higher as illustrated by the light blue line. And before we turn it over to questions, the chart to the bottom right plots an average of the forward Baltic LNG Index rates as summarized by Affinity. These forward curve rates have similarly been increasing over the past couple of months. The end July rate indications for this year and next, as indicated by the dark blue bars, are the same or in most cases [Technical Issues] the indications they released in early June of this year, as depicted by the light blue bars.

Thanks for your time today. Operator, we are now available to take questions.

Questions and Answers:

Operator

[Operator Instructions] And we will now take a question from Ben Nolan with Stifel.

Ben Nolan -- Stifel -- Analyst

So I've got a couple. First of all, is it possible, Mark or Scott, to -- I know you said that there is a heavy dry dock schedule in 3Q relative to what would normally be the case. Is it possible to quantify that at all in terms of what the financial impact would be say relative to what we saw in the second quarter?

Mark Kremin -- President and Chief Executive Officer

I think the best place to look, unfortunately, my printout doesn't have slide numbers, but the best place to look is on slide 12 where we do lay out how we expect to see the various line items moving Q2 versus Q3. And then on the next slide, I guess it's on 13, we have laid out the incremental dry docks that we see. So we've got 97 off hire days in the second quarter and 131. So pretty close into the third quarter. So I'd say a combination of slide 12 and 13 are the best places to look at.

Ben Nolan -- Stifel -- Analyst

And then just thinking a little bit strategically. Obviously this has been -- you guys have been focusing almost all of your cash flow on debt repayments coming down, moving in the right direction. We have conversation every quarter about what are opportunities for growth or what have you. And I think you're still sort of in the process of getting to where you need to be and getting closer all the time. But I'm curious about maybe one of the areas possibly being taking a greater ownership stake in some of the partially owned vessels that you already have. And those are well-known. You're not sort of going out and competing against anything. I'm curious if that is something that is possible and if it is, it's something that you would look at? And then maybe along those lines, some of those assets might not be -- or they might not be XTF or whatever and they might be older steamships or TFTs. And is there any sort of reticence or hesitancy to look at something that maybe is not the latest and greatest with respect to efficiencies and so forth?

Scott Gayton -- Chief Financial Officer

May I'll take a shot at that, it's Scott and go from there. I guess, first of all, Ben, we are -- as you know, we're happy with our fleet as indicated by the buybacks we were doing previously. The more we have of our own fleet happy of our. With respect to the partially owned fleet, it's the same thing. We do look at opportunities to look -- to buy into opportunities if a partner want to sell out. I don't think we're as concerned about the balance sheet treatment as we used to be and how things are equity accounted. So to the extent that might shift things one way or the other, it's not a huge deal. I think we just haven't seen a lot of opportunities. Many of our partners are strategics, they're not sellers. In fact, if we -- just as we look at opportunities to buy were also opportunities to sell if they wanted to decide, we're not married to any piece of steel but we do look for contracts. But right now we are not currently seeing any opportunities to consolidate even within our own fleet, to be honest with you, Ben.

Ben Nolan -- Stifel -- Analyst

And just I guess to wrap it up. I mean you kind of hinted at it a little bit there. Asset values are higher for steel, prices being higher, as well as just sort of the underlying fundamentals and cash flows being better. I don't know -- is it fair to categorize you guys as perhaps a better seller than a buyer right now?

Mark Kremin -- President and Chief Executive Officer

When it comes to -- we're probably better sellers than a buyer, to be honest with you. But the thing that we look at for our fleet, we obviously enjoy -- we've got about $9 billion in revenues over about 10 years on average. So when we look at our opportunities to buy, it's sort of less related to the [Technical Issues] in those contracts, those contracts have a long way to play out steel, for the most part. So it's really about value the contracts, the steel. And if someone is willing to pay more than we think it's worth we're resellers and if they're open to paying less we're buyers. Through the cap this balanced capital allocation we've been talking about for a long time now. I mean, obviously, we're number one. We're focused on de-levering. That is for the case but we can see a path. Clearly, we can see a path and it's near than it ever was before on the de-levering side. So then, as you say, we've been look back into buying our own fleet. We've looked at return of capital to shareholders and a lot of that was through buybacks, but we've also been pretty aggressive on distributions. So as you know, we've been increasing every year and we were up over 100% over the last few years, I believe. So anyway, long story short, we are maybe interested as we'd be interested in both buying or selling and whatever we can get the rest.

Operator

We'll take our next question from Chris Tsung with Webber Research.

Chris Tsung -- Webber Research -- Analyst

I wanted to just touch on the reduced number of drydocking days. I noticed compared to the Q1 presentation and the Q2, it's down by nearly 60%. I just wanted to understand what kind of drove this?

Scott Gayton -- Chief Financial Officer

So you're saying you compare back to the presentation last quarter versus the days that we have now?

Chris Tsung -- Webber Research -- Analyst

Yes.

Scott Gayton -- Chief Financial Officer

It would look like a lot of that's just going to be the timing of when they're going to do, when they're actually go into drydock. And then we're going to push some of them out.

Chris Tsung -- Webber Research -- Analyst

So showing some updates pushed out to 2022?

Scott Gayton -- Chief Financial Officer

Yes, I think that would be right. That's correct.

Chris Tsung -- Webber Research -- Analyst

I may follow up offline, it seems -- 21 vessels last quarter and 20 less the number of days, it's come down. I'll move on to my second question. Just looking at your outlook and I think everyone's outlook on the spot market right, it's incredibly firm right now and the chance is that it will continue to firm through winter. How has that translated into term coverage and time charter, because looking at the forward curve it's kind of tapering down toward the end of Q1 of 2022, which is I think approximately when some of your charters are rolling off. So I guess at what point will you guys begin contract renewals and that kind of coincides with the timing or chunk of the market at that too, so hoping to get a little color there?

Mark Kremin -- President and Chief Executive Officer

I'm happy to try to fill that. I think we're fairly conservative typically in what in our earnings call in both to our peers. And with that context, I think we're seeing almost an unprecedented amount of term charter interest rate now for starting 2022. And it ranges anywhere from let's call it three years to 10 years and it ranges from Asian buyers to European buyers and others of LNG. So I think we're going to see more term charters get fixed by the market in Q4 or certainly Q1. But there seems to be -- as I said, we can currently a half dozen term charter requirements for next year.

Chris Tsung -- Webber Research -- Analyst

And just on timing on when you guys are beginning talk to the contract [Technical Issues]

Mark Kremin -- President and Chief Executive Officer

Well, as I said, it could be as early as Q4. Our first ship -- actually our first [Technical Issues] ship is same ship we own 60% of with Exmark called the Excalibur. That'll come off probably around Christmas or more likely in Q1. I think that ship gets a little fixed a little around that time, but it's not a term charter per say. You'd have to find the project and we will be competing for others to find projects for that first steamship we have that rolls off 50% of it. For the next ship, which I think we really anticipate being available, that's not available until February. And given the interest that we're seeing right now, I can possibly see us fixing forward and for history Teekay LNG is that we're not afraid to do that, if the [Technical Issues] will go forward. And so that's possibly -- we could possibly see a forward fixture in Q4 for that first ship that comes available in February of 2022. So fingers crossed. If the market's not there, that's fine. We have so much coverage as we've discussed today. We've got already 9% fixed in 2022. So we don't need to jump back at any charter and it's not going to impact us too much or strengthen the market [Technical Issues]. So we don't need to search but [Technical Issues] afraid to fix, so let's see what happens to Q4.

Operator

[Operator Instructions]. And we'll now take a question from Randy Giveans with Jefferies.

Randy Giveans -- Jefferies -- Analyst

I guess following up on that last question around the vessels rolling off charters. Are these likely fixed rate charters, are you kind of more interested in the market linked charters, like your recent one you did?

Mark Kremin -- President and Chief Executive Officer

They're more likely to be fixed rate. That said, we're happy with that floating rates charter. The Baltic is doing well. Right now, I think in August, the Baltic current curve in August is around $77,000 for the two strokes that we have, and that's after net of brokerage fees, etc. So we were definitely happy that we took the footing index on that one. And as you know, as you may have seen Randy, there are some Q4s is $100,000. So that's definitely been way to go versus when we fixed that ship. I think March itself, it's worked out. But as a general principle, Teekay and that is full utilization. So keep in mind, we still have 98% fixed on our LNG fleet. We're 100% fixed in terms of utilization. So this is that 2% that's floating around on, on the revenue side. So we lean always toward utilization over rate typically, because we think it provides a better time charter equivalent. So we'll be open to floating rates but that is not our plan at this point. We would hope to fix the rate, if we can, that is our preference even though, we don't pay out on full distribution or whatever, it's still that solidity that we have is a hallmark that people rely on. I think they like our stability in our business. So we will try to fix the rate is our preference, Randy.

Randy Giveans -- Jefferies -- Analyst

And then you mentioned this earlier as well, but just looking at consolidation in the industry it's happening pretty prevalent across some of your peers. And TGP interested in that in terms of secondhand consolidation [Technical Issues] focusing growth only on new builds, specifically with [Technical Issues]

Mark Kremin -- President and Chief Executive Officer

We're more focused on the latter for a couple of different reasons. Number one is consolidation is interesting but again, it's not so for much the steel we love, it's the contracts we love. So we have this huge amount to the portfolio. That's what we want to do and not just ship but to save the ships. And what's been available in the market typically doesn't come with long-term contracts. And I shouldn't say typically, we haven't been able to come with long-term contracts So those you have to originate yourself you have to develop yourself. And that's why we lean a little bit toward kind of those. The second reason is when we kind of discussed on an earlier Q&A, which is our first priority has been de-levering. And as I said, we're doing pretty well in my opinion here. But when we look at a newbuild that would be delivered today, it delivers in, let's, say 2024, 2025 by which time we have that de-levered. So that lines up more with our first priority goal of tracking of de-leverage to [Technical Issues] into long-term contracts commencing around those a little bit forward base.

Operator

And that will conclude our question and answer session for today. I would like to turn the conference back over to Mr. Kremin for any additional or closing remarks.

Mark Kremin -- President and Chief Executive Officer

I just like to thank everyone for their, as always, for your continued support and wish everyone a great afternoon. Thanks. Bye.

Operator

[Operator Closing Remarks]

Duration: 25 minutes

Call participants:

Scott Gayton -- Chief Financial Officer

Mark Kremin -- President and Chief Executive Officer

Ben Nolan -- Stifel -- Analyst

Chris Tsung -- Webber Research -- Analyst

Randy Giveans -- Jefferies -- Analyst

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