Cool Company Ltd

OSE:CLCO

Earnings Call Transcript 2023-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Cool Company Limited Q1 2023 Results Presentation. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Richard Tyrrell, CEO. Please go ahead.

[Richard Tyrrell, executive]

Thank you, Sharon and it's nice to have somebody hosting the call with whom I share surname. Good morning, America, and good afternoon to investors in Europe. Thank you for dialing into the CoolCo First Quarter 2023 Call. May I ask you first to turn to Page 3 and there, we have a history of CoolCo. It's not something that I'm going to spend much time on because I think most of the people on this call know the history well. But I do just want to draw your attention to the bottom right-hand box, which highlights the fact that this morning we published our 2022 ESG report and our strict plan for reducing emissions going forward.

Our emissions dropped by 4.5% last year, which brings the total fall to 18% since 2019 and that compares to the IMO target of 6.5%. So we've exceeded that by some margin. The report also highlights our plan to achieve a 35% reduction by 2030. The plan includes some upgrades that we'll get into later in this presentation. But let's get into the quarter first and turning to Page 4, we have a summary of the first quarter of 2023, which makes plain CoolCo's growth and the strength of its underlying market.

The performance includes a full quarterly contribution from the ING vessels, the crystal stepping up to a higher rate, the last contribution from the Seal and an extraordinary gain of $42.5 million on its sale. Offsetting this positivity is some negative impact from the spot linked charters that we had in the quarter. We had 2 spot linked charters in the quarter and this will drop to 1 in the second quarter 2023 since the NFE Celsius has departed the pool.

After the end of the quarter, we maintained our track record of winning industry-leading charters for our TFDE fleet with a charter, which will run from redelivery of the vessel in March or April 2024 until 2027. That's a 3-year charter.

Turning to the numbers on the chart at the bottom of the page. The TCE was up marginally in the quarter. The EBITDA was up to $67.8 million from $58.4 million, so a more impressive increase there. And if you look back to the first quarter of 2022 when the EBITDA was $29.3 million, this quarter's EBITDA represents a 2.3x increase.

The chart on the right shows how our backlog has increased and it's backed by our strong credit counterparties. It's now at almost 1 point -- or at over $1.5 billion, if you include the options, which are quite likely to be exercised given the prevailing market rates and we'll get back into the -- how that compares to some of our other metrics later on in the presentation.

Based upon these numbers, the Board approved a dividend for the first quarter of 2023 of $0.41 per share -- $0.41 per share, which is a slight increase on the last quarter. It will equate to $22 million in terms of payout and it's something that reflects the confidence that we have post the announcement of our 2024 charter. We will, of course, be losing the contribution from the Seal in the next quarter, and the fact that we are still able to increase the dividend, it reflects that confidence.

John will later show how this equates to our free cash flow to equity and how it amounts to a payout ratio of round about 75%.

So let's talk a little bit about the market and firstly, the spot market, which is what dragged down those variable rate contracts. The chart on the left shows what a miserable start it's been to the year in the spot market. That's because the winter finished early and a lot of sublets came available. The good news is that none of the owners of vessels are in that market as included. And we're much more focused on the term market, which has been holding firm as evidenced by our recent fixture. Of course, in the term market, seasonality and energy security remains the dominant themes.

Turning to the right-hand chart on Page 5 and the LNG price, well, it has come off, but it's still at a level that remains healthy by historic standards while being more sustainable in the long term. As of the last few weeks, it's traded back at the level of oil parity, which is at the level where substitution takes place and it's a level, which will reopen price-sensitive markets such as China, India and Pakistan. And we look forward to those markets reopening from a shipping perspective.

That reopening and the seasonal storage optionality that shipping brings is set to support the shipping rates going forward.

Page #6 have a few shipping trends for you. And it fundamentally shows how LNG supply is growing into the order book of LNG carriers. I have been getting the question a lot recently around the order book and how large it is relative to the existing fleet. And indeed, it has reached 50% of the fleet by volume and that's despite newbuild prices reaching $260 million today from around about $190 million back in 2021.

The good news about the increase in newbuild prices is that it's those prices that set the benchmark for other vessels in the sector including our own. The other good news about that newbuild price is that it compares with the $240 million options that we have from Eastern Pacific on 2 LNG carriers, the Kool Tiger and Kool Panther, that are marked on this chart by the yellow blob. I fully expect these will be exercised by the deadline for doing so at the end of June this year.

So where are these newbuilds going to go? Well, let's take a look at the bottom chart on this page and the bottom left chart shows LNG supply that's coming into the market. And as you can see, there's a big pickup in supply coming in 2025 and 2026, in particular. That's only half of the story. The source of this supply is predominantly the Americas. I say the Americas because it includes Canada and in particular, LNG Canada in 2025. But the reason why that's relevant is that those supply locations are a long way away from end markets and therefore, require greater numbers of ships to deliver the cargo. So that -- those volumes along with the location of those volumes is a big driver of shipping demand.

The other driver of shipping demand is the retirement of older vessels and specifically the Steam Turbine fleet. Trying to measure exactly when these vessels will leave the fleet is not straightforward. There are many, many factors. However, one of the best ways, I think, to anticipate the rate at which they might leave the fleet is by looking at the number of cubic meters of such vessels that are reaching their 20-year anniversary and then converting it into new vessel equivalents.

And that's what the table on the right-hand side, bottom right does. And there, you see an incremental demand for shipping of between 12 and almost 20 ships per year over the forthcoming period. So while the order book is big by historic standards, there are reasons for that, as demonstrated by those 2 charts and I'm more than happy to answer questions on those when we get to that stage later on.

Page #7 gets back to our business and our backlog, this time expanded over time. We are 2/3 fixed all the way until 2026. Our backlog days reflect both the firm floating option contracts that we have. As I mentioned, option contracts are likely to be extended given the prices at which their set at. Floating rate contracts, they decrease, which is a good thing given the spot market and we have that strong foundation of contracts underpinning our cash flows going out some distance into the future.

The other takeaway from this chart is exactly when we do have ships available and of course, you can see that by the quarters where the gray part of the bar increases in size, that's the reflection of a vessel becoming available over that period. All in all, that backlog equates, if you include the options, to almost $1.7 billion. And if you subtract from that the OpEx, you get to about $1.3 billion, which is about 1.5x our current level of debt. So clearly with these kinds of contracts, with these kinds of customers, CoolCo is very, very bankable and that's something, which we're looking to leverage going forward.

Clearly, it's a market where the picture is much brighter than maybe it was in some of our previous financings were put in place and therefore, represents upside.

The next few slides are more in the detail. So I'll ask John to take those before coming back at the end to wrap up and talk a little bit more about the upgrades that we have planned.

[Johannes Boots, executive]

Thank you, Richard. Good morning and good afternoon to everyone. Turning to Slide 8, where I will recap the first quarter income statement results. When this cutting and analyzing these results, we should note that the first quarter of '23 includes a full quarter of the 4 vessels that were acquired on November 10 in 2022. In other words, during the first quarter, we have an additional 51 days of revenues and expenses for these 4 vessels.

So overall, a very strong quarter with time and voyage charter revenues of $91.2 million and an average TCE rate of $83,700 per day. In addition, our revenues included approximately $4.1 million in noncash amortization of net intangible liabilities and approximately $3.4 million in third-party vessel management revenues, which resulted in the $98.6 million in total operating revenues.

This compares to approximately $90.3 million in total operating revenues and a TCE rate of $83,600 for the fourth quarter in '22. Again, this 9% increase in revenues was primarily driven by the contribution of the 4 newly acquired vessels. However, compared to last year's operating revenues were up on the 23% year-on-year.

Operating income included $18.6 million in vessel operating expenses, which is slightly above $17,000 per day per vessel, $20 million in depreciation and amortization. It also included $6.6 million administrative expenses, which comprise of third-party vessel management expenses, routine corporate overhead and some residual nonrecurring legal and audit fees of approximately $1.2 million related to the direct listing on the New York Stock Exchange in March of this year.

Adjusted EBITDA for the first quarter as a result was $67.8 million compared to $58.6 million for the fourth quarter. And compared to last -- to the same quarter last year, we more than doubled our adjusted EBITDA.

Turning to Page 9. Here, we're comparing the net income bridge from Q4 to Q1 in the chart on the left. Net income for the quarter was $70.1 million and earnings per share were $1.28 per share, which included an extraordinary gain of $42.5 million as a result of the sale of the Seal in late March. Net of this gain, the first quarter included an increased contribution of the 4 vessels and the Crystal stepping up to a higher rate, offset mainly with increased mark-to-market losses on the interest rate hedges and lower amortization of net intangibles in the revenue line item.

As we previously reported, this noncash amortization of net intangibles relates to the revaluation of the underlying charters that were attached to the vessels and the subsequent vessels acquired in November last year. Looking at the chart on the right, the first quarter net income adjusted for the gain on the sale and the noncash items was $29.5 million. So the dividend of $0.41 per share is a payout of approximately 75%.

Turning to the next slide, Slide 10. The cash flow bridge from the first quarter highlights the starting and ending cash, which resulted in $112 million in cash flow generation. This is mainly due to the Seal proceeds of $184 million, net of fees and net of $88 million in Seal-related debt, yielding $94 million in net cash proceeds. The remainder reflects the net of free cash flow from operations and debt service. This free cash flow to equity, excluding working capital in the circled area for the first quarter is approximately $29 million.

On our $520 million bank facility, we do not have quarterly, but semi-annual amortization repayments in the amount of $20 million in both May and November of each year. So therefore, if you adjust the Q1 free cash flow to equity for half of such an amount, the normalized free cash flow to equity would be effectively $19 million, meaning a dividend payout ratio of approximately 100%.

As mentioned here on the slide on the left, the ex-dividend date for the dividend will be May 31, and we expect to pay out a dividend to DTC registered shareholders on or around June 9 with a distribution to the Norwegian registered shareholders approximately 3 trading days later, which is around June 14.

Moving on to Slide 11, the balance sheet. This chart shows our simplified balance sheet position with our assets, contractual debt and book equity. Clearly, over the past 1.5 years, the markets, our earnings and our cash flow generation has significantly improved. This has brought down our net leverage from approximately 65% back in February '22, when we did the spin-off to approximately 57% today. We have a solid cash position, which allows us to exercise the newbuild option should the Board decide to do that without requiring us to raise equity.

The dual listing has allowed investors to move their shares to the U.S. So far, 63% of the shares are listed in the U.S. and the remainder in Oslo. We would like to reiterate that holders of the Oslo shares who wish to transfer their shares to the U.S. will need to instruct their broker to deliver their shares to DNB in the VPS system with the request to move the share to DTC and on the receiving end, instructed a broker to formally receive the shares in DTC to ensure that the transfer is not rejected.

We have spelled out the process in an FAQ section that we've added to our website under the Investors tab.

Now turning to Slide 12. Our debt maturities are well spread out. We have approximately 79% of our gross debt now locked in at fixed interest rates, while 21% of our gross debt is unhedged. However, including our excess cash beyond the cash that we would need to exercise a newbuild option, we are effectively hedged for approximately 89% as the yield on such excess cash and the floating rate pretty much moved in tandem.

The total interest rate across the board, which is the sum of the fixed rates, the floating SOFR rate and the various margins in the facilities is approximately 5.65%. And for the floating piece, this is based on a SOFR currently of 5% on the unhedged portion.

Moving to Slide 13, where we provide some selected second quarter guidance. Since most of our fleet is on medium- to-long-term charters, especially for the second quarter, we're showing a bit more revenue guidance detail in this slide. We're also showing the first quarter numbers to exclude the Seal results as a true quarter-over-quarter comparison. And to reiterate the $20 million in semi-annual principal repayments on one of our bank facilities, everything else being equal, effectively results in a $20 million free cash flow swing factor from 1 quarter to the other.

So that concludes my prepared comments. Turning it over back to you, Richard.

[Richard Tyrrell, executive]

Yes. Thanks, John and turning to Page 14. There's a bit more guidance going out into 2024 and 2025 that relates specifically to the drydock costs that we will incur as part of the scheduled drydocks in those periods. So we thought that would be helpful for modeling purposes. But what I'm really excited about are the upgrades that we're planning to certain of our vessels and these are the LNGe upgrades. It is sort of play on the original abbreviation of TFDE, which e, of course, electrical. And we are now most commonly burning LNG and turning it into electricity in our vessels.

So using the abbreviation LNGe is totally appropriate. It will reduce the emissions by 10% to 15% with these upgrades. And clearly, that's absolutely the right thing to do, even if it will require some investment. E stands for electric, as I mentioned. It also can stand for emissions. It can stand for environment, for efficiency, for economics and life extension.

So there are lots of good words that are relevant that begin with e. The economics will mean that our charterers could save up to $10,000 per day. And this is shown in the chart on the bottom left of the page. The amount of savings will depend upon the most operation of the vessel. But over the course of the year, if the ship is trading, as is typical, it will be $10,000 per day. And obviously, we'll look to make -- get paid for that by the charters. And if we can get paid for that, the return on this investment will be quite reasonable, well above 10%.

It will be made even the better for equity holders by the fact that we aim to fund it with an increase to the LTV on these vessels. So that is something of a guidance for the future and it's also a little bit of a pointer for where we're going with our fleet and how we're looking to improve it.

The Page 15 is a summary page and it really is what to watch out for over the next little period. We are now listed in the U.S. and we're going to have a program of investor outreach, targeting U.S. investors. We have the vessel, which is coming open in the third quarter of this year. And obviously, that will be something that we'll aim to fix well in advance of redelivery. We have the newbuilds, which are not actually coming out of the yard until the third quarter of 2024 and the fourth quarter of 2024 respectively. However, they are -- there are discussions being had in relation to fixing those vessels. And of course, we have the option to exercise, which as I mentioned earlier, we'd expect to announce on the day of its expiry, which is the 30th of June this year.

In association with that, we would also expect some news on the financings. We'll only be funding some of the vessels of equity clearly and we'll be looking to fund the remainder of the vessels with debt. And that's something which John, in particular, is working hard on as we speak.

So what have we got? We've got a strong platform and we're always going to be ready to act opportunistically as we have in the past. We've got a few near-term catalysts, which will drive our earnings and dividend growth. And we've reached the stage in our development where we've got access to the Oslo market, we've got access to the U.S. markets and we look forward to meeting more investors going forward.

So with that, I'd like to thank everybody for joining the call. We're going to have some Q&A now. If maybe I can turn the mic over to Sharon for that, please, Sharon.

[Operator]

[Operator Instructions] And your first question comes from the line of Fred Merkel from Clarkson.

[Unknown Analyst]

My first question is about the dividend. I assume the dividend policy is still a variable one based on free cash flow, but you also mentioned like 75% of EPS. So just checking what's the policy really?

[Richard Tyrrell, executive]

It's still based on free cash flow, but it equates to the 75% of EPS.

[Unknown Analyst]

Yes. That's good. I mean -- so when I look at the dividend for Q1, it's basically like $20,000 per day per vessel implied. That's quite $0.01. So is it correct -- in order to model it going forward, should we take whatever you have in TCE income per vessel daily minus a hurdle rate, and that's the dividend?

[Johannes Boots, executive]

Yes. I think you need to take your model revenues. You have a lot of guidance in terms of the expenses, the debt service. I think I've been very explicit about the semi-annual repayment character of one of the facilities. Obviously, free cash flow to equity has a bit of working capital impact. And then our dividend policy has been that we pay most of the free cash flow to equity -- to the equity holders.

[Unknown Analyst]

Yes. But can you provide any guidance on the cash breakeven, plus, let's say, margins in Q1? It apparently seems to be around $63,000 and you paid anything about that in dividends. So just looking for any guidance that you have for the second quarter?

[Johannes Boots, executive]

Yes. I think the guidance that you have is the prior 2 payments or the current payment and the prior payment plus the development of the revenues over the next several quarters. That's probably as far as we can go.

[Richard Tyrrell, executive]

And on the financing side, you got to just look at fleet. And I think it's correct in saying that -- that will have change a little bit going forward because obviously, the Seal will fall out. But you need to model out the older fleet based upon the facilities that are on those vessels. And the leverage is a bit lower and the glide path is still 20 years. And then on the ING vessels, the leverage is a little bit higher. I think John had the average leverage in his pack.

Once we acquire the newbuilds, of course, we'd expect the leverage on those to potentially be a little bit higher still because of new vessels after all. So I would think about building in the leverage in layers as the fleet develops rather than applying a sort of a rule of thumb to the overall fleet.

[Unknown Analyst]

Okay. Shifting gears, you just chartered out the vessel from Q1 next year at a healthy rate apparently. I find is interesting that you rechartered this was ahead of this Golar Bear in opening up in September this year. Can you talk about that a bit?

[Richard Tyrrell, executive]

Yes, me too in a way, I mean it's on cycle. However, that's when that particular charters have had its need. And of course, from our perspective, it helped derisk 2024, which was a good thing and it still leaves us with the 2023 vessel to play with.

[Unknown Analyst]

So do you think there's some type of discount implied when you brought the charter into next year? Just how should we think about this September vessel coming up? Would you consider similar rate or perhaps even higher?

[Richard Tyrrell, executive]

It depends on the period, Fred, I think the beauty of this vessel is coming up in September or Q3, that's obviously a good time to be chartering a ship. The vessel that we just announced that was coming back in the first quarter, which is typically not such a great time. So we do have this vessel coming back. It's coming back at a good time. Of course, it all depends on the market, but our hope and I think it's safe to say our expectation would be that we'll get a good rate on that vessel.

[Operator]

[Operator Instructions] There are currently no further questions. I will hand the call back.

[Richard Tyrrell, executive]

Thank you, Sharon for hosting and thanks to everybody for joining the call. If anyone does have any follow-up questions, having a chance to reflect on the call and the other information that's got out in association with the quarter, please do hesitate to get in touch. Many thanks.

[Operator]

Thank you. This concludes today's call. Thank you for participating. You may now disconnect.