Cool Company Ltd

OSE:CLCO

Earnings Call Transcript 2023-Q2

[Operator]

Good morning ladies and gentlemen, and welcome to the Cool Company Limited First Half 2023 Business Update Call. [Operator Instructions]. This call is being recorded on Thursday, August 31, 2023.

I would now like to turn the conference over to Richard Tyrrell, Chief Executive Officer. Please go ahead.

[Richard Tyrrell, CEO]

Good morning or good afternoon, ladies and gentlemen, depending on where you are, and thank you for joining and thank you for moderating.

And turning to Page 3. I'd first like to welcome you to CoolCo's second quarter earnings

presentation, where I'll take you through the highlights and comment on how we see the current market before handing over to Johan, who will take you through the quarter in more detail. The slide provides a snapshot of the quarter, and we'll get into what's behind these numbers as we move through the presentation. I'm pleased to confirm another $0.41 per share dividend for the quarter and an outlook that we're really quite excited by. Just like last year, European storage is full, and we're starting to see charters use LNG carriers for floating storage once again.

The heating season is around the corner, and the contango trade is in focus. Gas markets have normalized compared to last year but remain volatile because of the threat of strike action in Australia, the possibility of what remains of Russian gas supplied by pipeline to Europe being cut, and uncertainty over winter weather. LNG carrier spot rates are responding and as per the plan, we have Kool Husky coming open into this strong market. We have a portfolio that enables us to take measured risk on this vessel, and we're seeing more upside than downside in the rates at this time.

Turning to Page 4. As always, the second quarter was a shoulder period where we optimized and prepared for the more interesting quarters to come. The highlights for the quarter were, firstly, the exercise and financing of 2 state-of-the-art Hyundai Samho new builds for which we are in active discussions on long-term charters. Secondly, we upsized our largest bank facility by $70 million in the quarter at a reduced -- at a 50 bps reduction in cost, which is worth about $2 million per year in less interest cost. The $70 million upsizing will be used to fund our LNGe upgrades in 2024 and 2025.

Our time charter equivalent or TCE dropped slightly for the quarter because of the seasonal impact on our variable rate contract in Q2. However, we already see this very roll rate has bounced back in Q3 where we will be capped out at just above $100,000 per day from mid-August. Our EBITDA fell to $59.9 million in the quarter, primarily due to the fleet shrinking from 12 to 11 vessels after the nicely profitable sale of the Seal, the proceeds from which have been redeployed in the acquisition of the 2 newbuildings delivering in the second half of 2024.

We also had some catch-up costs on the ING vessels, which were purchased without spares weighing on EBITDA. These elevated costs won't be such a feature in the second half. Our firm backlog increased in the quarter as a result of a charter exercising an extension option. On this occasion, it was on a TFDE vessel, taking contract coverage on the vessel to 2028. We view this as another confirmation of the attractiveness of our vessels to our customers.

Turning to Page 5. And here, we show why the quarter is looking interesting from our perspective. We have the Kool Husky available. And as you can see, the spot rates have started their seasonal climb. Term rates are yet to follow, but our sense is that they will, as charters focus after the summer holidays and given the characteristics of the market.

Sublets are exiting as charters ready themselves for the heating season, and we believe the Husky to be 1 of the last 2 independently owned TFDE vessels available in the market.

Onshore storage is nearing full as can be seen in the chart at the top right of the page. And as a result, we're already starting to see vessels used for floating storage. This is the time of year when shipments start to Asia tying up tonnage on longer voyages and throwing the strikes in Australia, the potential for Panama disruption, heightened sensitivity around energy security and the forthcoming winter, and we have all the ingredients for an interesting near-term shipping market. And I don't think the interesting market only applies to the short term.

Page 6 shows new supply that is coming to the market, along with some very encouraging progress on FIDs. The FID of the Rio Grande LNG 16.2 million tonnes per annum project with the support of Total, one of our customers is particularly large and notable. Some people ask where the LNG is going to go, but I don't see this as being a concern at the right price as evidenced by the demonstrated ability of India, China and other markets to take very large LNG volumes when they are available and suitably priced.

There has been a huge build-out of Regas infrastructure and this isn't a constraint. So what

about price? At the top of the page, in the pop-out chart, you can see that TTF is much less expensive this year than it was last year, while still supporting reasonable margins for our customers. This leaves LNG today priced at a small discount to the Brent equivalent price, making it cost-effective in markets where liquid fuel is the alternative. LNG is still priced above coal effective price.

But some of this is offset by the higher efficiency of gas and not to mention the environmental benefits of the lower CO2 emissions, which are approximately 50% lower for gas than they are for coal.

Europe didn't burn more coal as a result of the Ukraine war as is sometimes reported. In fact, forecast to European coal demand in 2023 was actually down. But what I want to really highlight with this chart on the right is just what an opportunity there still is for LNG. Replacing 500 million tonnes of coal or under 10% of Chinese coal demand takes around 200 million tonnes per annum of LNG, which is a 50% increase in supply from current levels, and this demand need not all come from China. India and the rest of the world also have considerable potential.

The projects listed in the table amount to 150 million tonnes per annum of LNG supply. So you don't have to believe in too much coal to gas substitution to see where additional LNG demand is going to come from. This, along with the current focus on energy security, provide a backdrop for fixing CoolCo's newbuilds as well as our existing vessels as they can open through the medium term at attractive rates, and I expect to have updates by the next earnings call, if not before.

Johan will now take the quarter in more detail. Johan, over to you.

[Johannes Boots, CFO]

Thank you, Richard. Good afternoon, and good morning to those of you who are in the U.S. Turning to Slide 7. I'm giving an overview of the backlog. It shows a solid backlog in the near term with only 20% -- 22% open days expected by year-end ‘24 and [44%] open days expected by year-end '25.

Given the current expectations for the market, we believe that this level of open days provides us with an excellent and unique level of exposure to an improving charter market. On the chart on the right, the cash flow of our backlog, which is calculated as revenue backlog minus direct OpEx surpasses the net debt. This underscores a strong level of coverage while acknowledging though that the decline in net debt over time occurs sooner than the reduction in the backlog. Turning to Slide 8, where I will recap the second quarter results. When discussing and analyzing our results, it's important to bear in mind then due to the opportunistic sale of the Seal towards the end of the first quarter, the second quarter of 2023 only includes the full quarter contribution of 11 vessels as opposed to 12 vessels in the first quarter.

This variance has implications for most of the metrics we will discuss as well the fact that we had one vessel on a market-linked charter under which we would typically expect its earnings to dip during the summer months and outperform during the winter.

On the whole, the second quarter demonstrated significant strength with time and voyage charter revenues reaching around $82.1 million, leading to an average time charter equivalent rate of $81,100 per day. Revenue for the quarter included noncash amortization of net intangible liabilities totaling $4.5 million, along with roughly $3.8 million from third-party vessel management revenues. As a result, our total operating revenues amounted to $90.3 million, aligning well with the higher end of the guidance range provided during our first quarter earnings presentation in May.

Our year-to-date revenues were nearly double those for the same period in the prior year, largely due to the higher renewal rates during '22 and the acquisition of 4 vessels in November '22. For context, at this time last year, CoolCo reported an average TCE of 59,000 per day as compared to 81,000 we're reporting today.

Our operating income for the quarter reached $45.4 million. This includes roughly $19 million in vessel operating expenses, slightly higher compared to historical trends for the reason Richard mentioned earlier. For the second half of '23 though we anticipate these figures to refer back to historical norms. Operating income included $9 million in depreciation and amortization along with $6.2 million in administrative expenses, which is a combination of third-party vessel management expenses and routine corporate overhead.

Adjusted EBITDA for the second quarter was $59.9 million compared to $67.8 million for the first quarter in '23, again, mainly the result of the opportunistic sale and profitable sale of the Seal vessel. Year-to-date adjusted EBITDA also nearly doubled when compared to the same 6 months in 2022. When comparing the net income between the first and second quarter, it's important to note the onetime gain on the sale of the seal and the negative mark-to-market losses on the interest rate swaps in the first quarter, while for the second quarter, we incurred substantial mark-to-market gains on these swaps. Turning to Page 9, the net income bridge. The left-hand diagram echoes my earlier points, illustrating the transition from Q1 to Q2.

Looking at the chart on the right, the second quarter net income adjusted for net -- for noncash elements equaled $23.4 million. As previously indicated, the noncash amort of net intangible assets and liabilities pertains to the revaluation of the charter agreements as a result of the purchase price adjustments related to the ex-Golar vessel acquisitions or spin-off and the subsequent 4 acquired vessels.

The noteworthy gains from interest rate swaps in the second quarter is primarily due to higher market interest rates, with most of the gains being unrealized. Excluding noncash items, the dividend of $0.41 per share represents approximately a 94% payout of the second quarter net income.

Turning to Slide 10, the cash flow bridge. The bridge for the first half of '23 highlights the starting and ending cash, resulting in $180 million in cash flow generation, mainly the result of the sale proceeds of $184 million, minus the $90 million in related debt and fees, $128 million in EBITDA generation over the first half and $70 million in borrowings to fund the previously announced LNGe CapEx improvements across 5 vessels. These cash inflows were partially offset by the dividends paid in the first half and the scheduled debt service of $90 million.

Excluding working capital, the highlighted area with the circle in the first half of '23 is effectively the free cash flow to equity, approximately $42 million, leading to a dividend payout of roughly 100%. Looking ahead, the ex-dividend date is set for September 8 with the record date set for September 11. The dividend will be distributed to DTC registered shareholders around September 18, followed by Norwegian registered shareholders approximately 3 trading days later around September 22. Turning to Slide 11, the balance sheet. This chart shows our simplified balance sheet position with our assets, contractual debt and book equity.

Thanks to a robust market, strong earnings and substantial cash flow generation, our net leverage was reduced by 10% since a year ago. Assuming the remainder of the newbuild payments of the shipyard will be financed by the committed newbuild debt, our net leverage would be in the 65% mark on a pro forma basis. Our dual listing in both Oslo and New York has facilitated share transfers to the U.S. with 67% now listed in the U.S. and the remainder in Oslo.

We reiterate that Oslo shareholders aiming to shift their shares to the U.S., a process is

outlined in the FAQ section on our website under the Investors tab.

Moving on to the next slide, Slide 12, with some selected financial information. In the chart on the left at the top, you can see our debt maturities are well spread out. The table on the right shows that we have 73% of our gross debt locked in at fixed interest rates, leaving 27% unhedged. But when we account for excess cash. Excluding the $114 million in cash used to exercise the option for the newbuilds on July 3, our effective hedging reaches approximately 88%.

And this cash is netted because the yields on our excess cash and the unhedged floating rate exposure tend to move in sync.

At the bottom of the slide, the table highlights the significant volatility of the interest rate swaps mark-to-market values. For those of you modeling CoolCo quarter-to-quarter, be aware of this significant but largely unrealized mark-to-market element in our earnings reporting. The realized portion in a specific period can be offset against our reported interest expenses to determine the effective interest rate for such period. Overall, our effective interest rate stands at approximately 5.6%. Turning to Slide 13 on the selected Q3 guidance.

Similar to our approach during the previous earnings call, we provide some insights into the third quarter's revenue outlook, which is guided to be slightly higher than Q1. Among our fleet of 11 vessels, 10 are secured under medium- to long-term charters. For the remaining uncommitted vessel, we have assumed a spot voyage starting from September 11 onwards and typically a very firm period for the charter market.

With this financial overview concluded, I'll hand over the call back to Richard.

[Richard Tyrrell, CEO]

Thank you, Johan. And I will just end with saying how pleased we are with the perception that the company has received in the U.S. market since it listed on the New York Stock Exchange earlier this year. We do have a lot of new U.S. investors and obviously, a lot of investors from all around the world are investing through that market as well.

So before we get into Q&A, let me just end by summarizing CoolCo. And as you know, we connect the world with clean and more secure energy. And as explained earlier, we see growth in the LNG market and the long-term need for LNG as a transition fuel. We are a pure-play LNG company with a balanced portfolio of short- and longer-term charters.

We have built in and funded growth from 2 newbuilds delivering in the second half of 2024. And this is in addition to our measured rechartering exposure, where we expect to see vessels rolling off older legacy charters achieved better rates. We have a high-quality fleet that we are looking to improve still further with our LNGe upgrade program that will reduce emissions by between 10% and 15% per vessel as part of our wider 35% emissions reduction goal that will include the addition of new vessels over time.

We have in Eastern Pacific shipping, a highly supported 58% shareholder who enables CoolCo to punch above its weight with shipyards, financing institutions and on deal flow. And last but not least, we have an attractive dividend, which is approximately 12% yield at today's share price, a strong balance sheet and that enables us to make opportunistic acquisitions and consolidate the market across the cycle.

And with that, I'd like to open up for Q&A. [indiscernible], over to you. Thank you.

[Operator]

[Operator Instructions] Our first question comes from Chris Tsung from Webber Research.

[Chris Tsung, Webber Research]

So just touching on the point in your prepared remarks and the presentation, for the Kool Husky, when you're talking about taking risk, do you mean trading in the stock market instead of securing a long-term contract?

[Richard Tyrrell, CEO]

We certainly have the option to do either, and what path we choose will depend upon the respective markets.

[Chris Tsung, Webber Research]

Okay. And as a follow-up, what are the rates that you're seeing now for TFDE, both on a spot and term basis?

[Richard Tyrrell, CEO]

I think what you see in that chart which I forgot which page it was on now, but that's a fair reflection of what we see in the market. I would say the liquidity is relatively thin. But what indicated on that chart, which is, I think, about 120 in the spot market and rising fast and 100 in the term market is realistic. But as I mentioned in my comments, we do expect the term market to pick up in reaction to the way in which the spot market is moving. And that will kind of put it back into where it has been in the recent past for term business in our view.

[Chris Tsung, Webber Research]

All right. Great. Fair enough. And with the LNGC supply story very well understood and you just pointed out that there is a very big market for liquidity on those vessels. I'm assuming there's no opportunity to time charter in.

But if those opportunities do present itself, is that something you would consider?

[Richard Tyrrell, CEO]

I'm sorry, you're asking whether we would consider the time charter any of the vessels?

[Chris Tsung, Webber Research]

Right, if the opportunities were available.

[Richard Tyrrell, CEO]

Yes. We always like to stay abreast of the market, just in case we feel that those kinds of opportunities are worth following up. But we would, of course, look at those in the context of our own fleet and where we -- we wouldn't want to be in a position where we ended up with a lot of vessels available in the same quarter. We've spent a lot of time working on the portfolio and making sure that everything is nicely spaced, and that will remain a priority.

[Chris Tsung, Webber Research]

Sure. Portfolio first makes sense. And just I can squeeze one last one and just more of a modeling question. If you can help quantify the impact to vessel upgrades from the LNGe upgrades, how much per day savings are we looking at?

[Richard Tyrrell, CEO]

The savings, we believe, and it will depend on LNG price, of course, but we're modeling something in the order of $10,000 a day on average. And it will also depend on how you're operating the ship as well. But that's what we're looking at. What we can secure from the charterers is in a way sort of subject to negotiation. But obviously, we'll look to secure as much of that $10,000 a day as possible.

[Operator]

Our next question comes from Liam Burke from B. Riley.

[Liam Burke, B. Riley]

Richard, could you give us some sense as to on the global supply, fleet supply equation where we have a good percentage of the fleet operating under steam turbine vessels. As those vessels come off long-term charters, how do you see the supply side of the equation going forward?

[Richard Tyrrell, CEO]

Yes. In the last quarter, we spent a page on that very question. And the way we looked at -- or look at it is by asking how many older vessels are going to reach the 20th birthday in each of the years going forward. And the reason why we ask ourselves that question is because many of those vessels will be off contract as of that time. And it depends a little bit on the year, but there's between 15 and 20 older vessels that are reaching that age per year over the next few years.

I think that's as good a guide as any for how many steam turbines we would expect to lead the market annually.

[Liam Burke, B. Riley]

Okay. Fair enough. And the dividend was -- you maintained the $0.41 per quarter. Looking at your debt amortization schedule, which is very manageable, and -- but you do have capital outlays for the 2 new builds. Do you see this as a payable through the cycle, understanding you have other needs for your capital?

[Richard Tyrrell, CEO]

We do. And we obviously kind of have a stated policy on dividends, which has the word variable in there. But of course, we aim to sort of manage a little bit through the cycle. And this quarter, the dividend payout ratio was relatively high. However, you've got to remember that we aren't actually seeing any cash flows from those new builds until they deliver at the end of next year and the equity has already gone out.

So we do think that -- well, we are comfortable with the current levels of dividend in a nutshell. Do you have anything to add, Johan?

[Johannes Boots, CFO]

Yes. So any remaining shipyard payments are going to be funded by the committed debt financing. So the equity, as Richard said, has already been paid out effectively.

[Operator]

[Operator Instructions] Our next question comes from Frode Morkedal from Clarksons

Securities.

[Frode Morkedal, Clarksons Securities]

I'm not sure if you already talked about this. But on the new builds, I think last time you talked about that you wanted to have secured employment before taking or declaring the auctions. So maybe you could talk a little bit about the chartering landscape since they are not employed yet. Haven't you been -- or is this the rate that you haven't been happy with something else at play here?

[Richard Tyrrell, CEO]

Yes. We're sort of waiting for the -- to reach a landing zone on rate is how I put it in respect of the newbuilds. And we are holding out for a rate which reflects the current price of newbuilds, which obviously quite significantly higher than what we paid for those vessels. And I suppose, charterers are hoping that we'll settle on something slightly lower. But we have quite some time yet, not that I think we'll need to fix those vessels.

[Frode Morkedal, Clarksons Securities]

Sure. I guess it's good time to wait. And the seasonality should be in your favor, I guess. So on that note, I think you wrote in the press release about the rising natural gas prices being beneficial for shipping rates. Maybe you could talk a bit about that given the prices have come off, obviously, from the peak, but are now coming up again.

How is that impacting chartering decisions, both in the spot and maybe the term market as well?

[Richard Tyrrell, CEO]

Well, firstly, I'm not sure that volatility, if it's extreme, isn't necessarily a good thing. But it does [indiscernible], it does encourage our charterers to be a bit longer. However, I think almost equally important is that the charterers are making reasonably healthy margins. And the nice thing about the level at which the gas crisis is settling out is that it is at a level where the charterers are making healthy margins while also being at a level where plus or minus, it's interesting to the more price-sensitive markets.

And, yes, we talked to a little bit the equivalent pricing of oil and coal and so on. And obviously, now LNG is back in this ZIP code. The equation is something which people are looking at again, whereas this time last year, when LNG was at its peak, it wasn't really even a question.

[Frode Morkedal, Clarksons Securities]

The last question I had is on the retrofits with reliquefaction. I guess this might be obvious for some, let's say, shipping people, but I would think that a lot of general investors might not know that much about it. So maybe it could be helpful for you to explain the, let's say, the cost and benefit of doing those investments?

[Richard Tyrrell, CEO]

Sure. More than happy to. And when you look at the operating profiles of our vessels, they are the very maximum of going at 19 knots, maybe even 20 knots. However, quite often, they're sailing at a speed that we typically call slow steaming, somewhere maybe 13 knots, 14 knots. And sometimes, they're being used for storage and not moving at all.

So we've got upgrades which targets various regions of the operating range. When the ships are going fast, we've got plans to install air lubrication, which reduces the drag and efficiency of the ship at speed and that's at one end of the spectrum.

At the other end of the spectrum, we're installing subcoolers and subcoolers deal with the oil of gas. So LNG always boils off. In the old days, it all went through the engines, and that was that. Today, the engines are more efficient and at lower speed, there is an excess amount of boil-off and subcoolers take that excess and reliquefy it.

So to put it into context, one of our ships typically will have a boil-off of 0.1% of the cargo per day. And if you are stationary with a subcooler, you can reduce that down to 0.03% per day and that's very valuable. It's not something that's going to apply over time because you're not always stationary. But when you are, that's big dollars and it's real value for our customers.

[Operator]

There appear to be no further questions. I will now return the conference to Richard for closing remarks.

[Richard Tyrrell, CEO]

Well, thanks, everybody, for joining the call, and thanks for the excellent questions. I look forward to seeing some of you at the various events over the fall and look forward to bringing you the news of new charters as and when they come in. Thanks again.

[Operator]

Thank you. This does conclude today's conference call. Thank you all for attending. You may now disconnect your lines.