Cool Company - Q1 2024

Transcript

Operator (participant)

Good day, everyone, and welcome to the Cool Company Limited Q1 2024 business update. At this time, all participants are in a listen-only mode. Later, you will have the opportunity to ask questions during the question and answer session. You may register to ask a question at any time by pressing star one on your telephone keypad. You may remove yourself by pressing star two. Please note, today's call is being recorded, and I'll be standing by if you should need any assistance. It is now my pleasure to turn the call over to Richard Tyrrell, CEO. Please go ahead.

Richard Tyrrell (CEO)

Thanks, Todd. Good morning to those in the U.S. and good afternoon to those in Europe and further east. Welcome to CoolCo's first quarter 2024 results presentation. Please turn to slide three, CoolCo at a glance. I'm pleased to be able to present a set of results that have benefited from our charter backlog, something that has grown materially since the end of the quarter with the announcement of the largest single contract CoolCo has ever entered into. Namely, last week's 14-year charter with GAIL of India, who have the option to extend by two years at the end of the period. While this has taken some patience, this is an exciting development that I'll get back to later in the presentation.

Our backlog helped TCE for the quarter and partially offset the effects of a weakening spot market and some off hire for one of our vessels that was in between charters. Our second quarter outlook is for a stabilization in LNG prices and shipping rates. This has been helped by an uptick in demand for air conditioning in Asian markets, something that typically preludes a stronger market for shipping, with the refilling of storage in Europe coming next ahead of winter. Our expectation for the forthcoming fixing season is that rates will be higher compared to what we see today. Shipping distances will be up as more cargo is delivered to the east.

Disruptions, excuse me, to Panama and Suez will continue to result in vessels taking the longer route around the Cape of Good Hope, and steam turbine vessels will bear the brunt of any falls in utilization levels as new builds deliver. Slide four takes the quarter in greater detail, with a summary. The longer term employment for one of our new builds at attractive rates helps the seasonal downturn in rates and the in-between off hire on one of our vessels. Total operating revenues were in line with guidance at just over $88 million. In a reversal from the fourth quarter of 2023, the rate on our solo variable charter fell with spot market rates from $102,000-$55,000 per day, quarter-over-quarter.

Between charter off hire of 51 days further weighed on the TCE, along with delivery-related voyage costs. Since the end of the quarter, we've had the newbuild charter I've mentioned, and the first of our vessels for this dry dock cycle has entered the yard. Three more are scheduled to enter the yard in the third quarter of 2024, and you'll want to reflect this in your models. John will provide the relevant inputs for this later on slide 15. Our dividend for the first quarter of 2024 was maintained at $0.41 per share. The rate and Adjusted EBITDA charts show seasonal weakness this quarter, but we expect an improvement in the second quarter based on contracted revenues. The backlog tells a story of the new charter, and that's something we're very pleased with. Please turn to slide five.

The newly signed charter is for 14 years to GAIL, India's leading natural gas company. GAIL is investment grade and a significant importer of LNG into one of the highest potential markets. It is great to establish our relationship, and we're aiming to work together on future projects. GAIL is an end user for LNG in that it imports and trades the commodity, regasifies it, and sells on the gas to customers in the fertilizer, city grid, power, refinery, and petrochem sectors, among others in India. Growth is underpinned by a booming economy and high growth niches like the compressed natural gas and LNG markets for transportation. You can see how LNG imports have bounced back now that the prices have stabilized after the Ukraine shock and are now back on their upward trajectory.

The high-teen return on equity that we achieved on the new build sets a supportive precedent for the second vessel, around which active discussions continue. While talk of vessels that cost $260 million per day today, before capitalized interest requiring more than $100,000 per day, may prove on the optimistic side, something well into the nineties will be required to cover even the most competitive costs of capital in the industry. We generated higher returns on this ship because of when we ordered it and how much we paid, and we can see how important this is to our performance on the next slide, slide six. Combining well-timed sales with purchases, orders, fleet renewal, and the award of value accretive charters is core to our value proposition, and the charter on the newbuild demonstrates this.

In the last 18 months, we've acquired four vessels with a gain of $66 million based on fair market value accounting treatment. We've harvested a year of high rates on another vessel before selling it at a premium value with a gain of $78 million. And now we have the attractive charter on the newbuild that compares highly favorably with its purchase price, crystallizing at least $25 million in value. The third deal was funded by the second deal, thus allowing us to fund internally, along with competitively priced debt, which is another area where we have created value for our shareholders. Turning to slide seven, this is our familiar look at the LNG carrier market. It has been weaker, but our well-diversified portfolio of charters limits near-term exposure.

The chart on the left has spot data for TFDEs, and you can see from the orange line that this has bottomed out, and if last year is anything to go by, it will be up from here. The longer term, 12-month market, which is where we focus, is also starting to show signs of life. It is important that this develops positively before the Blizzard and the Glacier come off charter later this year. Both markets have an important bearing on sentiment, which is also important for our second newbuild, even though it is targeted at more long-term opportunities.

It's also worth highlighting the improvements that we see on the Husky, which is the dotted teal line in the second quarter, now that it's delivered onto its 12-month charter, and on the Glacier, which is the dotted gray line, that has had a nice step up in rate since March. Slide eight lists some of the reasons why a mild rebound in shipping rates is on the cards. The price of LNG and margins the shippers can achieve, while not what it was, remains supportive to shipping. As is shown on the charts, LNG prices are stabilizing at a level that includes an energy security premium compared to before the Ukraine war. This makes LNG nicely profitable, as shown by the margins in the middle chart.

The value of a cargo today is approximately $30 million, and with more than 25% of this being margin, the shipper base, the shippers are motivated to maintain lengths in their fleet. While LNG prices have increased in absolute terms, it is competitive again as a commodity compared to oil and coal, which is an important factor in growth markets. We saw earlier how more LNG is flowing into India, and the same applies to China and elsewhere in Asia. Above average GDP growth in these regions is a primary driver, with high summer temperatures for air conditioning adding seasonal demand. India is already hot, and China is getting hotter, which means more cargoes are heading east, more ton miles, and more shipping requirements. The last factor that we think makes LNG shipping interesting is volatility.

While CoolCo has been quite defensive in its chartering strategy, it does have vessels that would benefit if volatility returns. We saw volatility in the cold winter of 2020/2021, and saw it again because of the war in Ukraine. This year, the question marks around how Russian LNG volumes will reach end markets if banned from Europe. And if oil and tanker markets are anything to go by, the volumes will flow to the more distant markets that are willing to take them, and this will soak up quite some shipping capacity. John will now get into the first quarter in greater detail.

John Boots (CFO)

Thank you, Richard. Today, I will provide an overview, a financial overview for the first quarter of 2024. So, turning to slide nine. In our Q1 earnings release earlier today, we reported operating revenues of $88.1 million, a level consistent with our previous guidance and expectations. These operating revenues were inclusive of non-cash amortization of net intangible liabilities of $4.5 million, and third-party vessel management revenues of $4.9 million. The latter number is slightly higher than previous quarter because it includes notice and termination revenues due to the reduction in the number of third-party vessels under management. Time and voyage charter revenues for the quarter amounted to $78.7 million, resulting in an average TCE rate of 77,200 per day across our fleet of 11 vessels.

This decrease versus last quarter TCE revenues of $89.3 million is primarily due to lower floating and spot rates during the winter season for one of our vessels, and an off-hire period for another vessel as it transitioned from interim work in the spot market to a new one-year charter. Operating income for the quarter was $44.1 million, and the $11 million declined from the prior quarter, which was $55.1 million, which is mainly the result of the $10 million reduction in TCE revenues, and some incremental voyage and delivery expenses related to the vessel that transitioned to a new charter. The operating margin relative to revenues was 50%. Vessel operating expenses for the quarter were 17,600 per day per vessel, which was on par with our rolling four-quarter average.

Adjusted EBITDA for the first quarter of 2024 was $58.5 million, compared to $69.4 million for the fourth quarter of 2023. Again, mainly the result of lower TCE revenues. I would like to reiterate that adjusted EBITDA is calculated by netting out non-cash amortization of intangibles, which are part of our revenues, resulting in adjusted EBITDA this quarter being $4.5 million lower than what an unadjusted EBITDA would have been. Turning to slide 10. The net income chart on the left depicts the transition from Q4 to Q1. Reported net income for the first quarter was $36.8 million, up from $22.4 million in the fourth quarter. This increase is primarily due to a $24.5 million unrealized mark-to-market valuation swing on our interest rate swaps, and partially offset by the aforementioned lower TCE revenues.

On the chart on the right, excluding the non-cash items, the approved dividend of 41 cents per share represents approximately a 91% payout. Turning to slide 11. As we reported last week, our backlog now includes the newly announced newbuild charter with GAIL. Including extension options, our backlog totals nearly $1.9 billion, equivalent to approximately 64 years of backlog, or an average of close to five years per vessel, which considers all 13 vessels in our fleet, including the currently uncontracted newbuild. We have one vessel available in late July, early August, and another in late November. With last week's newbuild announcements, the TCE rate from our backlog increased from approximately $76,000 per day per vessel, to more than $79,000 per day per vessel, accounting for all exercised options to their maximum extent. Turning to slide 12.

This slide demonstrates that on a cumulative basis, since the inception of our dividend policy, we have paid out slightly more than our free cash flow to equity. Free cash flow to equity is calculated as Adjusted EBITDA, minus regular debt service, plus interest income. The board has approved a dividend payout of $0.41 per share, with an ex-dividend date set for the New York Stock Exchange at May 31, and the OSE at May 30, and a record date of May 31. From May 28 onwards, the standard settlement cycle for transactions executed in securities traded on the New York Stock Exchange will be shortened from T+2 to T+1, while the Oslo Exchange will continue to settle its trades on a T+2 basis.

As a result, there will be different dates between the two exchanges, as set out in our dividend press release. During these interim days, investors may be restricted to move shares between the New York Stock Exchange and the OSE. The dividend will be distributed to DTC registered shareholders on or around June tenth, with Norwegian-registered shareholders receiving their payouts approximately three trading days later, which will be on or around June thirteen. Turning to slide 13 on the financing. In late March, we reported the successful refinancing of our sale and leaseback facility, maturing in the first quarter of 2025, by increasing the existing $520 million bank facility by $200 million.

Given the very low interest rate on this existing sale and leaseback debt, we structured the refinancing with a delayed drawdown to ensure we continue to benefit from the low interest rates during the interim period, until the maturity of the sale and leaseback. Along with this increase, the banks approved certain changes to the financial covenants. The most significant one being a relaxation of the cash covenant to 4% of total debt. The chart on the left illustrates that once we draw on this upsize, our first debt maturity will not be until February 27. Our average interest rate is below 6%, and we have hedges in place for approximately 90% of our pro forma debt, which takes into account the newbuild financing.

As of March 31, cash and cash equivalents were approximately $106 million, which is a decrease versus the last quarter's cash balance of $133 million, which is mainly due to a new build milestone payment of $22 million during the quarter. As you may recall, the proceeds of our opportunistic sale of the Seal in the first quarter of 2023 provided the equity to fund these new builds. As a result, the March 31 cash balance is exclusive of the available pre-delivery liquidity of around $49 million under our new build financing, which we have opted not to draw yet. Turning to Slide 14. This slide presents the breakdown between realized and unrealized mark-to-market gains and losses, which are combined into a single line item on our income statement.

Since the inception of our swap program in July 2020, our cumulative realized swap gains have been quite significant, with $14 million in net gains. As of March, the unrealized gains for the interest rate swaps that have not yet matured are approximately $13 million. As previously mentioned, for those modeling CoolCo's performance on a quarterly basis, please take note of these significant and largely unrealized mark-to-market swings in our earnings reports. Then, turning to Slide 15. This slide provides selected guidance for the second quarter of 2024. Second quarter revenues are expected to align closely with our previous guidance. I'd like to reiterate that on one of our debt facilities, the principal repayments are on a semiannual basis, which affects our quarterly free cash flow to equity figures.

Finally, we anticipate four dry docks this year, one currently ongoing and three scheduled to start in the third quarter of 2024. We expect these dry docks to begin and end within their respective quarters, though the exact dates may shift based on cargo delivery schedules and charterers' needs. The resulting unpaid dry docking time accounts for some of the anticipated revenue decline from Q1 to Q2. With the financial overview concluded, I'll hand it back to you, Richard.

Richard Tyrrell (CEO)

Thanks, John. To those who've listened through the call, I'll just take a moment to underscore what we believe to be a very important takeaway. This is an industry that experiences both seasonality and cyclicality as regular occurrences, particularly in the spot market, but it's important to remain focused on the bigger picture and the longer term. The strength and promise of which you can clearly see reflected in our signing of the 14-year charter with GAIL, a great counterparty at a high-teens return on equity. We feel very good about the future of CoolCo's modern LNG carriers, and we believe that we're in a great position to seize opportunities and realize very significant value for shareholders in the way that we've demonstrated to date. Thank you very much for listening, and Todd, please, can we open up questions?

Operator (participant)

The floor is now open for your questions. If you would like to ask a question at this time, please press star one on your telephone keypad. You may remove yourself, of course, at any time by pressing star two. Once again, if you would like to ask a question, please press star one at this time. Our first question will come from Frode Morkedal with Clarksons Securities. Please go ahead.

Frode Mørkedal (Analyst)

Thank you. Hi, guys.

Richard Tyrrell (CEO)

Hi, Frode.

John Boots (CFO)

Hi, Frode.

Frode Mørkedal (Analyst)

Yeah, first off, congrats on this new charter with GAIL. I'm not sure if you actually said the rate, but based on the backlog increase, I just estimate it to be in the low $90,000 per day. I'm not sure if that's a good estimate or not, but could you perhaps discuss the expected returns on this? You mentioned the high teens, but if you could compare the rate to, let's say, the cash break even first off, and let's say a normal 10% return on equity, what type of day rate would that be? Just to have a framework to understand the day rate.

John Boots (CFO)

So in November 2022, we put a chart in our investor relations deck, Frode, that showed the economics. And there you see that in order for us to make a 10% equity return with the assumption that I mentioned there, we need at least $82,000 per day. So, and the breakeven is $69,000 in that chart. So if you then use your number that you calculated and you extrapolate, then you effectively come to the conclusion that equity returns are in the high teens.

Richard Tyrrell (CEO)

Then look at it, looking at it from the other angle, this vessel cost us $236 million, compared to the prevailing cost of these vessels, which is $260 million. So we've managed to harvest the benefit of that lower cost fundamentally.

Frode Mørkedal (Analyst)

Yeah, indeed. Great, great.

John Boots (CFO)

But looking at the best part.

Frode Mørkedal (Analyst)

Yeah.

John Boots (CFO)

Go ahead.

Frode Mørkedal (Analyst)

Yeah, that's good. That's a good comment. Do you expect to lever up to the 90% or so, loan to value? I think you had that optionality, in your chart you just presented. You talked about, I think you said 80% loan to value, based on the new build, but I think you could increase it further, right? Given this long-term charter.

John Boots (CFO)

Yeah, yeah. Today we can't because we need formal approval by the financier, but we expect that to happen. So we expect to increase the leverage to 92.5% of the shipyard expenses, which is in the mid-$220s million for each new build.

Frode Mørkedal (Analyst)

Yeah.

John Boots (CFO)

So, the answer is.

Frode Mørkedal (Analyst)

Around-

John Boots (CFO)

Yeah, but you know, we need formal approval.

Frode Mørkedal (Analyst)

Okay. That should add you $28 million or so. Maybe you could talk about the next, next new build. I guess given the long-term charter, right, you have now, I guess you could opt for lower or shorter contract, if you wanted to. What's your thinking here on the next new build?

John Boots (CFO)

The answer to that is, you know, yes, we can look at shorter charters. However, the rate advantage you get on a shorter charter in this market isn't gonna be as great as what it would have been, you know, call it 12, 18 months ago. So, you know, you've got to ask yourself whether that makes sense or not. Because obviously, you know, with a 10-year plus charter, you can get the extra leverage, you can release some equity, and, you know, that has significant value, which I think probably outweighs any rate advantage you can get from doing a shorter term charter today. Now, that could change, of course, quite quickly.

You know, the market is volatile, but that's at least how well we see it today.

Frode Mørkedal (Analyst)

Yeah, fair enough. My last question is on the dividend. It's been pretty steady at $0.41, even though you have your stated policy is closing, I think, right? But it seems like you, you find $0.41 to be a good one. So the simple question is, really, do you expect it to stay at that level, or, or, or are you expecting it to become floating in the coming quarters? I guess you have some CapEx commitments in the near term.

John Boots (CFO)

Yeah, we do and we've got the policy that spells out how we think about it. We obviously do the math each quarter, and we get to our dividend. And ultimately, it will depend upon the rates. I mean, we've got the backlogs, which is clearly very helpful, but you know, it will depend on the rates for the vessels that are coming over.

Frode Mørkedal (Analyst)

Okay. If I might have a sec. Another question really. If, given the cash you have today, and the increase in leverage, what's the CapEx you expect this year, your remaining CapEx, and what type of cash position would you be comfortable or do you need to have?

John Boots (CFO)

So from a cash perspective, we need the covenant cash is roughly $60 million. So on top of that, we need some working capital to run the business, right? Call it, you know, $30 million or so. So close to $100 or a little bit less than $100. You know, today we are at 106, but effectively, our liquidity is $155 million. And if you get the increase in the LTV, it's even more, it gets close to $200 million. But, you know, call it minimum cash is 90. You know, and then we have CapEx payments to be paid, right? Based on the announcement we made back in June, and that is in progress already to some extent.

And we've already paid, We've already paid $15 million-$20 million on the CapEx so far. What we announced back in June was for the upgrades, $50 million x 5 vessels.

Frode Mørkedal (Analyst)

Okay. That's clear. Thank you. Thank you, guys.

John Boots (CFO)

Thanks, Frode.

Operator (participant)

Thank you. Thank you. As a reminder, if you would like to ask a question, please press star one at this time. Our next question comes from Liam Burke with B. Riley. Please go ahead.

Liam Burke (Managing Director)

Thank you. Good afternoon, Richard. How are you?

John Boots (CFO)

Very well. Thanks, Liam. How are you?

Liam Burke (Managing Director)

I'm fine, thank you. Richard, can you give us some color on the vessels that are up for recharter? And would you think that the appetite that you saw for the long-term charter on the first new build is a positive reflection on, on the outlook for the recharters you have later in the year?

Richard Tyrrell (CEO)

Yeah, I think the markets are a little bit different. But yeah, sentiment from one does influence the other. You know, the new builds that focus a little bit more on these longer-term opportunities where you have quite often off-takers, you know, owners and users for gas looking to wanting to secure shipping and you know not just for one or two years, but for what we've seen with GAIL, 14 years. That is the main focus for that vessel. I wouldn't say it's the deepest market, but it's still very much there, and we're having some very good discussions in relation to that second ship. I mean, of course, we can always charter it on a shorter term basis as well.

But as I explained, based on today's market, I'm not sure it'd be particularly advantageous to do so. It could easily change, but at least as of today, that's the way we see it. The other vessels, they are more in that sort of shorter term market, which does follow a cycle, and we are coming into what is normally a good period for those types of vessels. And we'll have to see, but we're quite confident.

Liam Burke (Managing Director)

Great, thank you. And, on the loan covenants that you discussed earlier in the call, is there any discussion on any kind of limitations on dividend payouts? I mean, as you said earlier, your payout is over 90%. Is that come into the discussion with the bank covenants?

John Boots (CFO)

As long as we comply with the financial covenants, we have no dividend limitations.

Liam Burke (Managing Director)

Okay, great. That's what I needed to know. Anyway, thank you very much.

Richard Tyrrell (CEO)

Thanks for the questions, Liam.

Operator (participant)

Thank you. It appears at this time we have no further questions in queue. I will now turn the call back to Richard Tyrrell for any additional or closing remarks.

Richard Tyrrell (CEO)

Great. Well, it seems that everybody's keen to wait for the NVIDIA results, which I believe are later today. We will not compete with NVIDIA, but if anyone does have any further questions, I'm more than happy to take them offline. We will be in New York for Marine Money towards the end of June. So, we'll be available for in-person meetings as well at that time. Should anyone like one, please do let us know. We'll also be up in Boston and, you know, if there's demand elsewhere, we're more than happy to travel. Our ships travel all over the world, and so can we. Thanks, Todd.

Operator (participant)

Thank you. This does conclude the Cool Company Limited Q1 2024 business update. You may disconnect your line at this time, and have a wonderful day.