Cool Company Ltd

OSE:CLCO

Earnings Call Transcript 2022-Q4

[Operator]

ladies and gentlemen, thank you for standing by and welcome to the Cool Company Ltd Q4 2022. [Operator Instructions] I would now like to turn the conference over to the CEO Richard Tyrrell. Please go ahead, sir.

[Richard Tyrrell, executive]

Thank you, Roberto, and good morning, ladies and gentlemen. It's great to be back to report on a strong quarter and what has been a busy few weeks. Let me start with the quarter in review. We've managed to leverage strong markets and build momentum for 2023 and beyond.

We're maintaining our strong track record of achieving industry-leading charters for our TFDE fleet. We closed the acquisition of 4 vessels on long-term contracts at attractive prices. We announced the sale of the Golar Seal 2013 vessel at 2.5x cash-on-cash return since the formation of CoolCo, which I'm sure you'll agree is a very attractive price.

Our TCE for the fourth quarter was an industry-leading $83,600 per day which is above our closest peer. Our adjusted EBITDA for the quarter was $58.6 million and that included a partial quarter contribution from our acquired vessels. That deal closed on November the 10th. And I should also add that number was weighed down a little bit by costs associated with our U.S. listing.

Those costs came to $3 million and they were expensed in the quarter since we are no longer intending to issue securities in association with that offering and that results in them being expensed as opposed to being netted off proceeds. What does all this mean? Well, it means that we were able to declare a dividend of $0.40 per share. That's $21.5 million in aggregate and implies a dividend yield of just under 13% at the current share price.

The chart at the bottom of the page, they tell the story of the year. And I think in summary we were dealt a good hand and we played it well. The time charter equivalent rate has gone up by 1.5x. EBITDA has gone up by 2x and the backlog has increased by almost 5x as a result of both our ability to win longer-term charters for our TFDE vessels and as a result of the 4-vessel acquisition which has the long-term charters attached to them.

So that's the summary. Let's get into the chartering and developments in the market. I think what we did in respect of our 3-year charters has been well telegraphed and the $120,000 a day average rate that we achieved on both of those 2 vessels was very, very reasonable compared to what we've seen for these kinds of vessels in the past. And now both of those vessels are on those longer-term charters.

Turning our attention to the actual overall market. The spot market has come up as it always does at this time in the year. But if you look at that chart on the right-hand side of the page, you'll see it's already starting to bottom out and it's bottoming out to the level which is above where it has bottomed out in the past, which I think is indicative of how there has been a reset in the LNG carrier market.

Maybe even more remarkable than that, however, is the way in which the term market has been relatively unaffected. And you can see that in the 1-year chart on the left-hand side of the page. I do think that maybe there were less 3-year charters over the last period than there were in the tail-end of 2022.

However, we do think the 3-year charters will be back in due course at attractive rates. And as you can see from these charts, there still are a number of 1-year charters at higher rates that reflect the shorter term. So overall, it's a very positive outlook for us given that we have exposure and that we have a September position and we have 3 redeliveries in 2024.

However, it's not just been on the chartering side that we've been creating value. And turning to Page 5 we show how we've been creating value on the deal side. And of course, we have a very strong platform that enables us to undertake opportunistic transactions. And the 2 that I highlighted from the quarter are the 4 vessel acquisition which has the long-term charters that complements our shorter-term charters and to provide a platform on which we can pay an attractive dividend.

The purchase price on those vessels was based upon what EPS and its affiliates paid to the ING Bank in May 2022. And given that the deal closed in November 2022 and given how the market developed over that period, that was a very attractive price indeed. And even the accountants agree with that. The chart on the left shows the purchase price allocation for the transaction which, while being a little bit technical, is indicative of the value creation.

And if you look at the value of the steel and how that's increased, you net off the liability of the contracts which were signed at a time where things were not as strong and therefore represents a negative. But the net of those 2 things still represents a $66 million value creation on a deal, which cost us about $170 million. If you remember that was how much of primary capital we raised back in November in order to fund it.

The other deal to highlight is the option to acquire the 2 high-end newbuildings. And this is something which we can all get excited about over the next few months because it's in that window that we expect to fix these vessels. The vessels are very, very attractive in the current market. There's only 4 to 6 uncontracted vessels delivering ahead of these 2 and that means we're getting into the window.

The last deal done on a long-term basis for these kinds of vessels was in excess of $100,000 a day. And at those kinds of levels, the returns will be exceptional for CoolCo.

Moving on to Slide 6. Here I'd like to highlight the very disciplined approach we're taking to value creation and we are acquiring vessels when it make sense to do so. However, we're also divesting vessels when we get attractive opportunities to do so. And the Golar Seal is a case in point. It's the oldest vessel in our fleet and we recently announced the sale for $184.3 million with an estimated close of late March 2023. The effective valuation, if you factor in the drydock, which will be for the buyer's account is approximately $190 million.

The valuation implies a 2.5x cash and cash return in a little over a year based on the $145 million per vessel valuation on the formation of CoolCo. And strategically, it releases $94 million of equity which is going to be available to fund the newbuild option should we choose to exercise.

That $94 million covers the full amount if we achieve 80% loan to value on those vessels, which should be possible with a contract. Those vessels at the current market rate will be generating approximately $60 million a year in EBITDA. And that isn't even that long to wait because the delivery is 2024 which is much, much sooner than when you would receive your vessel if you went to a yard today.

The valuation implied by the Golar Seal deal clearly has very positive implications for the rest of the fleet also. Page 7 gets into the market and how we see it. And overall, we're quite excited by the prospects for our vessels. We see a lot of the same characteristics that we saw in the market last year in the future. And specifically, the cargo values, while down quite a lot on last year, that's still elevated compared to historic levels.

We also see a high level of demand for storage. That, of course, comes about because of the seasonality in the Northern European markets especially. And given the loss of Russian gas into Europe, that's something we see set to continue. Also and this is a development on last year, 2023 and 2024 we'll see an awful high level of drydock activity.

We have it happens now we've sold the sea or don't have any for 2023, but we will have some in 2024. And that drydock activity will see vessels taken out of the fleet and it will increase demand for those vessels that remain active. Our vessels are very attractive as we've said in the past. They've got low boil-off and therefore, they attract a premium over other vessels in the class.

That is something again we see set to continue. The price of LNG has come off, but it's still high. The charters are making lots of money and the general trends are towards higher-quality vessels. I won't dwell too much on Page 8, but it's there just to give you a sense of when our vessels are coming open. And it shows a very nice balance of contracted revenues and upside from re-chartering opportunities.

You can see that we have 1 vessel coming open in September '23 and then we have vessels coming open in the second, third and fourth quarter of 2024. The vessel that's coming open in 2023 is a vessel already on a good contract and we'd expect that to continue. The vessels that are coming open in 2024 are vessels which are coming off option periods on contracts that were set at a very different level and there's substantial upside on those contracts.

Next, I'd like to hand over to John Boots, who's going to cover the quarter in more detail and our exciting U.S. listing.

[Johannes Boots, executive]

Thank you, Richard. Good morning. I'm now turning to Slide 9 where I will briefly recap our fourth quarter results. When discussing these results, we should keep in mind that all the P&L line items include the impact of 52 days of revenue and costs associated with our 4 newly acquired vessels on November 10 which therefore explains many of the differences quarter-to-quarter.

During this very strong fourth quarter, we delivered time and voyage charter revenues of approximately $79 million, resulting in an average TCE rate of $83,600 per day. In addition we have approximately $8 million in noncash amortization of net intangible liabilities and approximately $3.5 million in third-party vessel management revenues which totals $90 million in operating revenues.

This compares to approximately $66 million in total operating revenues in the third quarter and then TCE rate of $73,000 for the third quarter. The 36% increase was primarily driven by the contribution of the 4 newly acquired vessels as well as the full quarterly contribution from a previously signed new contract and options exercised at higher TCE rates.

The reported noncash revenue amort in Q4 is the result of the 2 fair value exercises that were done in conjunction with the 8 vessels spin-off from Golar in February last year and the subsequent 4 vessel acquisition from an affiliate of EPS Ventures in November 2022 and related to above or below market charters.

In the appendix on Slide 14 you'll find the 2023 guidance on this noncash revenue amorts. Our operational costs for the fourth quarter were $15.8 million, which is slightly over $16,000 per day per vessel. On average for the full year '22, our vessel OpEx was approximately $15,500 per day per vessel which is below the guidance of $16,000 per day provided during the second quarter 2022 earnings call.

The fourth quarter numbers for administrative expenses include third-party vessel management expenses, our routine corporate overhead and the nonrecurring charge to the income statement of approximately $3 million. That related to the one-off cost that Richard alluded to earlier.

Adjusted EBITDA for the fourth quarter of '22 was $58.6 million compared to $42.4 million for the third quarter of '22. Financing expenses include an approximately $1 million mark-to-market loss on the interest rate hedges that were put in place last year. Net income for the quarter was $33.2 million and earnings per share were $0.68.

We started the quarter with 40 million in shares outstanding. And as a result of the equity raise in November, we ended the quarter with 53.7 million shares outstanding. The $0.68 per share was calculated on a weighted average basis. In the table for the full year number, you see references to predecessor and successor.

Predecessor results refer to CoolCo activities that were carved out from the Golar consolidated numbers and related to periods prior to the variance staggered acquisition dates during the first half of '22. Successful results, on the other hand, reflect the results after these various staggered acquisition dates. And for the full year we've provided both the breakout and the combined total.

Turning to Slide 10. The fourth quarter cash flow bridge highlights the starting and ending cash which resulted in $34 million of cash flow generation. You'll see that the equity raise amount in November covered the acquisition of the 4 vessels, net of the assumed debt. The free cash flow to equity excluding working capital for the fourth quarter is $27 million which is reflected in the circled area.

This is the number to keep in mind when you look at the dividend of $21.5 million or $0.40 per share. As Richard said, based on last night's closing price, this dividend equates to a healthy yield of approximately 13%. The ex-dividend date will be March 2 and we expect to pay the dividends out on March 10.

For forecasting purposes, the footnote is an important one to highlight. On our $520 million bank facility, we do not have quarterly, but semi-annual amortization repayments in the amount of $20 million in May and November of each year. Such semiannual repayments will therefore generate a $20 million free cash flow to equity swing from one quarter to the other, everything else being equal. This is relevant in the context of looking at free cash flow to equity payout, but normalizes when viewed in the semiannual context that we recommend.

Turning to Slide 11. Our goal of the New York listing is to increase our liquidity and broaden our investor days by tapping into the largest global pool of investment capital. In this way we aim to strengthen our ability to use our shares as a currency when attractive opportunities exist to expand our fleet in a way that supports our goals and builds shareholder value. To reiterate an important point, we're not raising equity as part of this direct listing on the New York Stock Exchange.

We started this listing process last year and in line with the typical time line, we're now nearing the completion of this process. We recently made a public release of the registration statement and are currently awaiting final comments from the SEC. The dual listing will allow existing and new investors to transfer their shares from Euronext growth to the New York Stock Exchange or vice versa.

Holders of the Oslo shares who wish to transfer their shares to the U.S. will need to instruct the broker to deliver the shares to DNB and CPS with the request to move the shares to DTC in the U.S. And on the receiving end, they will also need to instruct their broker to formally receive their shares in DTC to ensure that the transfer is not rejected. The reverse process is applicable for those who want to move their shares from the U.S. back to Oslo.

Also note that as soon as we're listed on the New York Stock Exchange, our tickers on both exchanges will be CLCO, instead of COOL. We're excited to be listed soon on the New York Stock Exchange and be accessible to and on the radar of many more prospective investors.

Before I hand the call back to Richard, I would like to draw your attention to the 2 financial appendix slides which cover selected balance sheet items and other information such as debt maturities and some cost guidance.

This concludes my comments. I'll turn it over back to you, Richard.

[Richard Tyrrell, executive]

Thank you, John. And I wanted to just summarize with actually a playbook for 2023 because I think it's pretty clear what's in that playbook. John mentioned the U.S. listing. It's a shame that we couldn't use COOL in the U.S. I think it had been taken by a spec.

But CLCO is reasonable and we'll take that and we'll mirror that in Oslo to avoid any confusion. Of course, the whole purpose of this is to give access to CLCO for U.S. investors and ultimately increase our liquidity and achieve the kind of valuations that we feel the company deserves.

From a news flow standpoint, things to watch out for, of course, are around the chartering activity and we do have the vessels becoming available. The existing vessels coming available in '23 and '24, clearly the '23 one, that will be relatively near-term news. Whether we can fix out the '24 ones before close to the end of the year, we'll have to see. But there are inquiries around those vessels and some of those are starting to look quite interesting.

We've then got the new bills, which I would be very surprised if they were fixed over the next few months. And as we've commented upon, we have the option on those. And if they are picked at attractive levels, then of course we will finance it and we'll exercise it. Also, over this period we are going to have a very sharp focus on efficiency and emissions. We are seeing that there are big synergies between the 2. And there's a lot that can be done with our vessels and that's something that I look forward to reporting back on in the second quarter.

And then lastly you should also expect to see some improvements in our financings which, of course, will benefit from the improved fundamentals of our business. And it will allow us to fund the newbuild option with debt and existing cash. So no need for the issuance of additional equity and the kind of overhang that can come with that.

So that is where I will finish our presentation. And on that note, I'd like to hand over to the listeners and we'll happily take any questions.

[Operator]

[Operator Instructions] And the first question from [ Frode Montedal ] from [ Clarksons ].

[Unknown Analyst]

A quick question on the dividend or rather the cash breakeven. You basically have $58,000 per day breakeven. Is it possible to give some type of guidance on 2023 cash breakeven in terms of dividends? I mean, you talked earlier about vessel upgrades. So just curious about how much that could add to that breakeven?

[Richard Tyrrell, executive]

Yes, a vessel upgrade that going to be for 2024, we're up in 2023. And we do think that we'll be able to fund much of those by refinancing on those assets. So there will be a little bit which comes out of operating cash flow, but the majority will come from the refinancing of those vessels.

[Unknown Analyst]

Okay. So basically $58,000 is still a good number to work on for this year in terms of any cash for dividends?

[Richard Tyrrell, executive]

Yes. For this year, correct. So the $58,000 includes the typical OpEx and small uplift for G&A expenses and interest and amortization.

[Unknown Analyst]

Perfect. That's good to know. Second question if I may, is on the newbuild. It sounds like these ships are going to be fixed out on chart before you buy them. Is that correct?

[Richard Tyrrell, executive]

I think it's highly likely. I think it's essential. But based on the levels of interest we're currently seeing in the market, I think it's highly likely.

[Unknown Analyst]

But that doesn't impact the purchase price?

[Richard Tyrrell, executive]

No, it doesn't impact the purchase price at all. The only thing it impact slightly is the level of leverage you can achieve.

[Unknown Analyst]

Yes, for sure. And is it 10-year that is -- it seems like you mentioned 10 year at $100,000 per day. Is that what you -- is most likely or is it some type of shorter contracts like 3 or 5 years?

[Richard Tyrrell, executive]

I mean there's -- I'd say 10 is the most common in the market. Obviously, there's been a 3-year contract reported, I think $180,000 a day for a nearer-term delivery. And if that was available, then maybe would think about it. But I -- more than likely, these will go on to a 10-year contract or maybe even a longer contract because there are some 15-year contracts. And while these vessels are at quite a good price, of course, if you're paying $250 million for a vessel as some people are today, then you kind of need a 15-year contract in order to cover it.

[Operator]

The next question is from Petter Haugen from ABG.

[Petter Haugen, analyst]

And looking into your forward coverage for the tri-fuel coming open in '24, I suppose it's very easy to fix those newbuilds for longer terms. But could you share some thoughts about how you foresee to potentially contract those ships out prior to those redeliveries coming for Q4? Is it possible to see longer-term pictures or also for the tri-fuel vessels?

[Richard Tyrrell, executive]

The market is quite thin for longer-term pictures on the tri-fuel vessels, but they do exist. The vessel that's coming back in September, I think will be focused on a longer-term charter for that particular vessel, 3 or 5 years. Probably because just from a risk point of view, you don't particularly want it coming back at the same time as you've got other vessels coming back.

And we think the market will be there something longer on that vessel. On the 2024 vessels, it's maybe a little bit early -- too early to say. But there are charters who like them. They are quite okay with the $160,000s. Anything lower might be a bit small, but $160,000s are fine. And they are the ones that we're starting to explore options with at this stage. We'll have to see whether it comes to anything.

[Petter Haugen, analyst]

Okay. But I interpret that as it's very unlikely to see those '24 openings being fixed for the next few quarters. Would that be a fair interpretation?

[Richard Tyrrell, executive]

Yes, I think that's fair. I think the chances are those will end up getting fixed towards the end of the year when the market starts to pick up. And as we see every year, you're always better off fixing in the second half of the year because that's when you get the best rates.

[Petter Haugen, analyst]

Okay. Yes, agreed. Okay. And in terms of sort of the longer-term strategy here, I fully understand sort of motivation to get that U.S. listing. And I guess that also goes back to what to do with the newbuilds and your -- if I'm understanding you guys correct, you have more or less decided on doing a 10-year charter and not a shorter, higher charter for those 2 newbuilds.

[Richard Tyrrell, executive]

Well, I wouldn't put it so categorically. I just don't think there are that many shorter-term opportunities. The market for those newbuilds is more the 10-year market. And you do see once in a while these vessels fixed for a shorter period. And I would have an interest in doing that potentially because I do think if you are to fix '24 vessel for 3 years now at a really attractive price, that would be nice because we at least see a lot of the LNG volumes coming on in the sort of '27, '28 period.

So you'd get the vessel back just at the right time and potentially to be able to harvest some premium rate in the meantime. So if something was without that, then absolutely would do it. I don't think we're kind of looking at the longer-term charters because we're concerned about financing for example and that's what that's driving the turnover rate. We're pretty agnostic between the 2. And if we could get a decent rate on a short-term basis, we would.

[Petter Haugen, analyst]

Yes, that was precisely my thinking as well. It looks to be potentially less in '25, '26 here. So if one could come open again towards the end of the decade or if not a little bit sooner, that looks at least from my perspective interesting and interesting to hear about the same thinking is going on at your place. Okay. That was all for me.

[Richard Tyrrell, executive]

[indiscernible]

[Operator]

[Operator Instructions]

[Richard Tyrrell, executive]

Okay.

[Operator]

There are no further questions at the moment.

[Richard Tyrrell, executive]

Well, thank you, Roberto, for hosting the call. Thank you, everybody, for joining. I know it's a busy day today. I apologize for clashing with so many others. And next time we will have the call slightly later in the day because all being well, we'll have the U.S. listing. So that's just FYI for the next quarter. But in the meantime, thanks for joining and we'll look forward to catch up later on in the year.

[Operator]

That concludes the conference for today. Thank you for participating. You may all disconnect.