Cool Company - Earnings Call - Q2 2025

Transcript

Speaker 2

Ladies and gentlemen, thank you for standing by and welcome to the Cool Company Ltd.'s second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. As a reminder, this conference is being recorded. With that, I will turn the call over to Mr. Richard Tyrrell, our Chief Executive Officer. Sir, please go ahead.

Speaker 5

Hello and welcome to Cool Company's presentation of the second quarter 2025. Thank you, Janine, for the introduction. Page three has the quarter at a glance and sets the agenda for what we're going to cover today. We're going to keep it relatively short because of the holiday weekend in the U.S. The left column has the quarter's numbers, while on the right side, we provide some level of perspectives on the market and Cool Company. During the presentation, we're going to elaborate on these, covering how rates are slowly recovering, how LNG supply, both in the near and longer term, is developing, how our backlog of charters provides support while the shipping market balances, and lastly, how we are faring with securing employment for our vessels as they roll off charters. Page four has the second quarter highlights. Our average TCE was slightly down at $69,900 per day.

Total operating revenue remained steady at $85.5 million, and adjusted EBITDA was up at $56.5 million versus $53.4 million in the first quarter. As you can see from the EBITDA chart, EBITDA is modestly up year on year. We have the delivery of the Cool Tiger and Gale Saga to thank for that in a market that has otherwise been challenging. We've had to work hard to fix vessels that have rolled off charter, often fixing them multiple times in the spot market at unsatisfactory rates that reflect competition from the glut of ships in the market. While we've been successful in chartering vessels as they come open, our results are very much underpinned by our backlog in this type of environment. Dry docks have also been a feature with their associated costs and off-hire days.

We're close to the end of this cycle at the busy third quarter that John will comment on in more detail. Last but not least, I'd like to highlight that we published our ESG report for 2024 over the summer. Inside, you'll see the progress that we're making in many areas, with more to come in 2025 now that we have dry docks and upgraded many of the vessels in the fleet. Please go to the website and download the report if you're interested. Page five includes a reminder of what we noted in last quarter's presentation, including how LNG projects have been getting back on track. Golden Pass is a clear example of this, and together with other projects, we see a 23% and 39% increase in LNG supply compared to 2024 volumes by the end of 2026 and the end of 2028, respectively.

The arrival of new volumes is the primary way in which the LNG shipping market balances. In addition, we pay close attention to the volume heading east or the east-west arbitrage, as we call it. As of the end of last week, European storage stood at 76% compared to the 90% being at this time last year in 2023 and 2024. The reason for the difference is the greater drawdown last winter and the lower starting point to the filling season. It means that U.S. supply will continue to flow to Europe for a couple of months yet, which isn't great for ton miles, but I do like the tension for cargoes that it will introduce between the basins. Such competition could become highly relevant for the Cool Tiger, a vessel that is trading in the Atlantic spot market.

Most significantly this quarter, and since the beginning of the year, we've seen a very positive development on the supply side. These include a number of projects reaching commerciality, such as Louisiana LNG, Kaikou Pass 2, and Argentina LNG, and a flurry of positive news flow from other projects. Many of these projects are in the U.S., which is good for shipping given the distances involved. Page six puts this supply increase in perspective by comparing LNG supply announcements with previous year's levels. We're only halfway through 2025, and we're already at levels comparable to the last few years. If you annualize, you get to levels not seen since 2019. New projects take at least four years to reach production, but I'm sure you'll agree it points to a positive future for LNG.

Turning to shipping and the new builds, what's remarkable about this year so far is how orders have fallen behind the supply curve. This was inevitable given the market and the new building prices that remain stubbornly high, and it's a signal of a natural balancing that is positive for Cool Company Ltd. fleet longer term. Another positive for Cool Company Ltd. fleet is scrapping and idling. Page seven shows how we've reached 10 scrappings of LNG carriers to date in 2025, which isn't that many, but to complete the picture, you need to look at idling vessels. The chart on the right shows how the number of idling vessels has taken off in 2025. You always see a base of idle vessels amounting to 15 to 20 in dry docks, depending on the season, but the current level of idling is many more.

Most of these vessels are steam turbine vessels that have come to the end of their initial charters. We've long speculated on what might happen to them once off charter, and this chart answers that question. There are 215 steam turbine vessels on the water today, of which approximately 50 are idle, leaving another 150 or so set to make way for newer tonnage as they roll off charters over the coming years. In the near term, the idling of older vessels is helping the market find its balance. Some people point to the potential of reactivations, but this won't happen unless the market becomes imbalanced in the other direction because of the costs involved. The immediate market backdrop obviously isn't as good as the macro picture as shown on pages eight and nine. Page eight is for TCEs, where rates remain low despite a gradual recovery over the summer.

You can see how active we have been in the spot market to maintain our record of close to full employment. Spot fixtures are shown on the left, and 12-month term deals are shown on the right. I'd be delighted to see the rate line for 2025 show the same kind of winter seasonality this year, rather than falling away, same kind of winter seasonality in 2025 as seen in 2023, rather than falling away like it did last year. There are a few factors that could make a difference in this regard, but we're still contending with high levels of newbuild deliveries that will weigh on rates. At the end of the day, I'd be happy with a continuation of the gradual improvement in rates that we have seen so far this year.

The vessels with stars against their names, which are amongst the vessels that we have come open and we're needing to find continued employment for, have benefited to the tune of about $5,000 per day from the LNG e-upgrades installed during their recent dry docks. They're trading at levels which are above the line shown for more standard 160,000 cubic meter TFDE vessels. Depending on operating profile, these vessels, our LNG e-vessels, as we call them, save up to 30% in annual fuel consumption and emissions. Other points to highlight on these charts are the fact that Kool Blizzard and Kool Ice are already fixed on spot voyages for when they roll off their long-term charters later in September. Unfortunately, this means they come off their elevated rates, but it shows the attractiveness of these vessels in the market, albeit at lower rates.

To put the lower rates into context, and this is important guidance, we're likely to be down well over $100,000 per day across these two vessels come Q4, depending on how spot rates develop. We saw the effects of Glacier and Husky going on to lower rate deals earlier in the year, and we're fortunate that our backlog provides a cushion. As previously reported, Husky is now on a variable charter. This is a charter where we bumped along the minimum levels in the second quarter, which is to say the rates were around $20,000 per day with a $5,000 premium for the LNG e-upgrades. Moving to the two-stroke market and the Tiger on page nine, you'll see that like some of our TFDE vessels, we've been working hard in the spot market. There's more of a pickup on two-stroke during the quarter, but levels remain unsatisfactory.

We need to be patient on the Tiger before fixing long-term. The long-term market is better than either of these two charts suggest, but it remained very shallow in Q2. Activity has increased over the third quarter, with charters opportunistically picking up cheap tonnage. However, for now, we see option value in having the vessel open, even if it comes at the temporary cost of low rates in the spot market. Some of that continues to weigh on the 12-month market, and what you see on the right-hand chart is not reflective of the longer-term five, seven, ten, twelve, or even longer market that the Tiger will ultimately be targeting. Normally, John does the backlog chart on page ten, but I'm going to take it this quarter. The portfolio effect is an important way in which we de-risk the business.

As you can see from the chart, what this means in terms of firm charts, floating charts, and open days. We're sensitive to the fact that vessels come open over time, and turning the pink open days to blue fixed days is one of the most important parts of the job. We've achieved this in the third quarter, and this is something we aim to continue. Obviously, the current market isn't easy, and we've been grappling with poor rates. This is where the backlog comes in, and as you can see from the chart, it provides for a healthy foundation when faced with a lull in rates. 50% of our days are covered until 2027, by which time we anticipate the return of a much more balanced market, of course, with sentiment returning in advance. That's all I had on that page. Have I missed anything, John?

If not, please go ahead with the quarter in more detail.

Speaker 0

Thank you, Richard. I will go through the financials for the second quarter of 2025. Turning to slide 11. In our Q2 earnings release today, we reported total operating revenues of $85.5 million, in line with the prior quarter and above the guidance provided during our last call. Quarter-to-quarter variations were mainly driven by time and voyage charter revenues, with Q2 benefiting from fewer dry dock days and a full quarter of the Gale Saga contributions offset by lower average TCEs across the rest of the fleet. Operating results were further supported by the absence of positioning costs following the delivery of the Gale Saga in the first quarter. Fleet-wide, time and voyage charter revenues translated to an average TCE of $69,900 per day in Q2 versus $7,600 in Q1. The modest decline reflects the Gale Saga's higher TCE, being more than offset by lower rollover rates on open vessels.

Adjusted EBITDA for the quarter was $56.5 million compared to $53.4 million in Q1, largely reflecting the absence of the voyage-related expenses tied to the newbuild deliveries in January this year, which is a separate line item in the income statement. Adjusted EBITDA excludes $3.7 million of non-cash amortization of intangible assets and liabilities recognized in reported revenues, again often a source of variance versus consensus estimates. For Q3, we anticipate total operating revenues to be at a similar level as Q2. What I'd like to note, as Richard mentioned, that towards the end of the quarter, two vessels will be redelivered from their existing contracts, but each with a first spot voyage already secured. This will obviously impact our average TCE rate going forward as well. Turning to slide 12, the revenue bridge summarizes the changes quarter over quarter.

Operating income, on the other hand, on the top right for Q2 was positively impacted by the voyage expenses, as previously mentioned, and the net income for Q2 of $11.9 million is an increase of $2.8 million versus Q1, which was also impacted by less unrealized interest rate losses on the swaps. The operating margin remained strong at 43% of operating revenues. Turning to slide 13, with the completion of nine dry docks, four of which included performance upgrades to our existing vessels by installing subcoolers, alongside the addition of two newbuild deliveries, our vessel operating expense per day per vessel continues to trend positively. In the current quarter, average vessel operating expenses were $15,900 per day across the fleet of 13 vessels, a decrease from both Q1 and also from the average 2024 run rate, which was approximately $17,300 per day.

Looking ahead, we have two more dry docks planned over the next couple of quarters, and we expect to continue realizing benefits from operational dry dock efficiencies and economies of scale. Moving to slide 14, where I want to spend a little moment on the capital structure and interest rate management. During the second quarter, but also after quarter end, we entered into a significant number of additional interest rate swap agreements. These swaps cover two of our major debt facilities, and they meaningfully reduce our exposure to floating rates. As a result of these hedging actions, our average interest cost now stands at around 5.6%. Importantly, today, approximately 75% of our total notional debt is hedged or fixed. If you adjust for net debt rather than gross debt, that coverage ratio increases further to 82%.

We believe the additional hedges are a prudent approach, especially given the size and tenor of our facilities, and it provides greater predictability in our cash flows. Finally, on this slide, with interest rates trending downward, we may see more opportunities to selectively add further swaps on favorable terms. While we might not rush, we will continue to look for opportunities to lower our all-in cost of debt and enhance balance sheet efficiency. Moving to slide 15 on the liquidity. As of June 30, cash and cash equivalents totaled approximately $109 million. You see in the graph the breakdown of how we moved from the end of the first quarter to the end of this quarter. We also have $170 million in undrawn availability under the revolving credit facility that we secured in December 2024.

Taking this together with our existing cash, we ended the quarter with total available liquidity of $226 million. This strong liquidity provides us with the flexibility not only to weather volatility in the markets, but also to act opportunistically if the right opportunity arises. Additionally, since April 25, we have repurchased shares under our previously announced buyback program. As of August 22 this year, we bought back approximately 859,000 shares at an average price of $5.77 per share, well below our net asset value per share, reducing our total share count by 1.6%. Looking ahead, the pace and the size of further repurchases will depend on market conditions and the company's financial position. Turning to slide 16, looking ahead here as well, our financial position remains solid, giving us both stability and the flexibility to pursue growth when opportunities arise.

Our revenue and operating results underscore the strength of our chartering backlog, with an adjusted EBITDA margin of 66% and an operating margin of 43% of total revenues. Despite more open vessels near term, the fleet is well protected by its backlog against market volatility. On the strategic side, we remain disciplined in looking for asset acquisitions, focusing on transactions that enhance long-term value through active management. Finally, given the spot market rates are still below economic break-even, we continue to manage the business with a prudent long-term perspective. With the financial overview concluded, handing the call back to the operator for questions.

Speaker 5

Thanks, Janine. Whoever this question is, when you are.

Speaker 6

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. To ask a question, you may press star one on your touch telephone, and to withdraw your question, please press star one again. Our first question comes from the line of Alexander Bidwell from Webber Research & Advisory. Sir, your line is open.

Speaker 4

Good afternoon, Richard and John. How are you doing?

Speaker 0

Good, thanks, Alexander.

Speaker 4

Alexander, thank you.

Speaker 0

Taking a look at some of the recent activity on the liquefaction side, I mean, we've seen over a dozen SPAs signed in the past couple of months, two FIDs in the U.S. Gulf, and then the U.S.-EU energy deal. Could you give us a sense of how this recent activity has impacted sentiment within the charter market, and has it prompted any discussions with potential charterers?

Speaker 5

Yes, it has. It's early days, and the people who are sort of coming into the market now, I think they're bottom fishing a little bit. Certainly, this positive news flow is starting to get people focused on their long-term shipping needs. Of course, yeah, that's something that we've been waiting for for a while now.

Speaker 0

All right. I appreciate the color. I wanted to just quickly touch on, John, I believe you mentioned potential asset acquisitions. Can you sort of walk through what that may look like or what opportunities you guys might be looking at?

No, nothing in particular at this point. We're always looking at acquisitions, at whether it's companies and vessels. It's more a continued effort to look at these opportunities, but nothing concrete.

Speaker 5

We have the flexibility there with the RCF to do things. Obviously, we've done things in the past, and I think at the right time, we have quite some value by doing that. As John says, we're always on the lookout, but nothing specific.

Speaker 0

All right. That makes sense. Thank you, guys. We'll turn it back over.

Speaker 5

Thanks, Alex.

Speaker 6

Thank you. Our next question comes from the line of Liam Burke from B. Riley. Sir, your line is open.

Speaker 3

Thank you. Hi, Richard. Hi, John. How are you today?

Speaker 5

Good, good. Thanks, Liam. How are you?

Speaker 0

Good, thank you.

Speaker 3

Good, thank you. You highlighted during the year you have four vessel upgrades. You pointed out you've got a premium for the fixtures on the upgraded vessel. Are you satisfied with the return you're getting on this investment?

Speaker 5

Yeah, that's been a pretty good return. I mean, the investment was around $10 million. We're going to get the, at the moment at least, we're getting the $5,000 per day. I think we could potentially get a little bit more than that. I think at the moment we're kind of sharing the upside, if you like, with the charters. You know, maybe we can capture more of that going forward. If you've combined those cash flows with the benefits you get from the standpoint of extending the vessel's life, you get really quite decent returns on those investments.

Speaker 3

Great. On your dry docking, did you change any of your scheduling based on sort of a weaker chartering environment in anticipation of improvement as we get into 2026?

Speaker 5

Not really. I mean, of course, we always dry dock in the shoulder seasons where possible. That's no different from what it would be otherwise. We are obviously quite pleased to be done with the dry docks. It's quite nice to get some dry docks done when the kind of opportunity cost is relatively low because the rates are low. Going forward, now we're nearly through with them all, we're not going to have the off-hire days that are associated with dry docks. That'll be helpful.

Speaker 3

Great. Thank you, Richard.

Speaker 5

Thanks, Liam.

Speaker 6

Thank you. Again, to ask a question, please press star one on your touchstone phone. Our next question comes from the line of Frode Morkedal from Clarksons Securities AS. Sir, your line is open.

Speaker 1

Hey, guys. Thank you for taking my question.

Speaker 5

Hi, Frodda.

Speaker 1

On the prior question you had, on the prior question on the LNG e-upgrades, maybe you can remind us how far along in the upgrade program you are. You know, how many ships have been completed, how many remain, what's the total CapEx and what's the remaining. Also, on that premium of $5,000, if how that's derived, so to speak, you know, if it's a floating premium.

Speaker 5

Yeah, sure. We're four out of five completed. There's one more which will take place in the fourth quarter. A lot of the down payments have obviously been made, so there's limited incremental cost on these upgrades. They did cost about $10 million each for the subcoolers. The type of deals we've done on them fall into two buckets. We have the ones where we do upside sharing with the charters, which is fundamentally where we have a baseline, and to the extent we beat that baseline, we share in the upside. That baseline applies for when the ship is sailing and also for when the ship is stationary and basically waiting or being used for storage. These upgrades do actually provide value whether you're in either of those two modes. How much the total value is depends on the price of LNG.

It depends on exactly how the charter chooses to operate the vessels. Our guidance on that is the $5,000 per day. That applies to three of the vessels. On the last two vessels, they are the Kool Boreas and the Kool Baltic, which are on longer-term charters to Shell. We did get paid for the upgrades on a fixed basis. That's something which just feeds into the number without any further complexity.

Speaker 1

Okay, that's good. Good caller. I had a question on the demand rail, really. Basically, when do you see the balance shifting from Europe to Asia, you know, with more U.S. volumes? When do you think that will start heading east? I guess that's a big, difficult question, right? Do you think the inflection is months away or maybe years away?

Speaker 5

Yeah, I mean, I think you've got two things to look at there. One is the sort of macro picture, which might be sort of a little bit further out. You always have this shorter-term volatility, and that is related to various things. It might be outages with leaks in Japan through to the refilling of storage in Europe to just jumpiness for whatever reason. Those are the types of things which I think near the term could see vessels heading east. Of course, that would be very positive for ton miles. The other thing that we do think is supporting the market is the exit of the older steam turbine vessels. In the way the worse a market is, and it has been pretty, pretty bad, the quicker they exit the market and the quicker things find balance.

We're in a sort of period where you've got the pull on one side and you've got the push on the other. You can see from how the rates are gradually increasing the effects of those things, which ultimately will result in the more balanced market that we're all looking forward to.

Speaker 1

Yeah, that's a good point. On the steam turbine vessels, how many of these, let's say, 150 remaining that are not idled are actually occupied in the spot market, right? If you see more vessels potentially being idled because rates are low, just how important are they in the spot market?

Speaker 5

They're not really idled in the spot market. They might be sort of idled or certainly underutilized within a charter's fleet. That's two different things. Either way, once they get to the end, they get to the end of their initial periods, they're basically, they will be idled. They will ultimately become, they will ultimately get scrapped. It's something that you do see. Right now at the low cost of more modern tonnage, some charters are willing to just lay up a steam turbine vessel while still paying for it because that's cheaper than running that vessel. That's something that we see now. Of course, what it means is that once the vessel comes to the end of its charter, it means they haven't got any hope of getting any further employment.

Speaker 1

Okay. Got it. Thank you.

Speaker 6

Thank you. Our last question comes from the line of Petter Haugen from ABG Sundal Collier Holding ASA. Sir, please go ahead.

Speaker 1

Good afternoon, guys. A couple of questions from my side. Is it possible to share some of the factors, some of the metrics within the three-year variable charter you announced now? Is there an index plus? What is the index? Any floors or ceiling in that charter?

Speaker 5

Sure. Happy to, Petter. Thanks for the question. It is tied to an index. I won't go into the details of that, but it'll track the charts that you see from brokers for these types of vessels. The floor, excluding the upside from the subcooler and the other upgrades, is $20, and the ceiling is $100 plus or minus.

Speaker 1

That's very helpful. Thank you. I guess adjacent to that, the upside from the upgrades, is it possible for you now to quantify that and also perhaps shed some light on what factors which are making it sort of higher or lower? I suppose that gas prices in itself make it more valuable to use those upgrades when gas prices are high rather than low, for instance. Just to get a sort of a sense of the magnitude in a dollars per day perspective.

Speaker 5

Sure. We're typically sharing the upside. If we're getting $5,000 a day, the actual upside is $10,000 a day. That's why I was referring to that earlier, suggesting that we maybe get a little bit more than five going forward once the charters appreciate the savings. What drives that $10,000 a day? It's two things. One is when the vessel is going below its natural boil-off speed, then you run the subcoolers and you avoid sending gas through what we call the GCU, which is where the saving comes from. That is quite a material saving, and it's very material in this kind of market, especially when quite often, the vessels are relatively underutilized, right? Even if they are on charter, you can see that from average vessel speeds and so on. That's why we've been creating quite decent value there. That's one of the factors.

The other factor, of course, is that you mentioned is the price of LNG, which still remains reasonable, I'd say, and obviously quite high, in fact, by historic standards.

Speaker 1

Okay. No, that's very helpful again, Richard. Thank you. I guess my final question then, you will have a few other ships now coming off contracts in the start of 2026. How do you now plan to fix those in terms of the lead time for the fixture? Have you potentially already decided that those will more or less regardless now trade spot unless something dramatic happens to the TC rates?

Speaker 5

Yeah. I mean, you know, I wouldn't say necessarily that'd be trading spot, but there's, you know, a range of kind of deals you can do. You've got one at the end of the spectrum. You've got spot. You've then got short term, maybe 12 months, maybe 18 months. And the TCE vessels are still very much eligible for that type of business. I'd say in this current market, longer term is very shallow for TCE. If you're talking three-year plus, that's not really a market which exists today. However, of course, for the two strokes, it's a different story. You have obviously the option of doing spot like we're doing at the moment, or you have the option of doing something longer term in between.

What drags down the spot market a little bit, and also the, I'd say, the short-term market, so let's say 12-month market, is the fact that those are markets where you have sublets, and they end up competing with us on those kinds of periods. When you get to the longer-term periods, of course, sublets are generally available for those kinds of terms. When you're talking five-year, seven-year, ten-year, twelve-year, whatever the time period might be, the picture is quite different. I wouldn't say that's a robust picture at the moment, but it's a lot, lot higher than what you see in the spot and the 12-month width. It's got an evenly healthy market, and it's a market where we're seeing quite a lot more inquiries as of the current quarter, even if it was a bit quiet in Q2.

Speaker 1

Okay, that's also interesting. Thank you so much. That was all for me.

Speaker 5

Super. Thanks for the questions, Petter.

Speaker 6

Thank you. This concludes our question-and-answer session. Thank you for joining the call today. You may now disconnect.