Cool Company - Earnings Call - Q4 2024

Transcript

Operator (participant)

Hello, and thank you for standing by. I would like to welcome everyone to the Cool Company Limited's Q4 2024 business update. I would now like to turn the call over to our CEO, Richard Tyrrell. Please go ahead.

Richard Tyrrell (CEO)

Hello, and welcome to CoolCo's presentation of the fourth quarter 2024. Thank you, Justin, for the introduction. Please turn to page three, CoolCo at a glance. The quarter was decent, even though the chartering market for new business is another story. From a rate perspective, winter was canceled this year, and we're contending with the lowest rates we have ever seen on our two spot market vessels. We have a reasonably well-spaced portfolio of charters and over $1 billion in firm backlog, but this does not take away our exposure to vessels that come open over time. While rates languish at below economic break-even on open days, we have decided not to declare a dividend. Instead of predicting the timing of when markets normalize and risk getting it wrong, not declaring a dividend at this time provides the combined benefits of financial flexibility and creating capacity for opportunistic growth.

We have a good track record in this area, and it's the kind of market where opportunities are likely to come along. For the quarter, revenue was up slightly, and the hard work of our chartering team enables us to guide towards similar levels for the first quarter 2025. We're going to get into the drivers of this market and when conditions are likely to normalize in the presentation. While we've often talked about how the market will rebalance in theory, this quarter we have some real data to show how it's happening in practice. Turning to page three and the quarterly highlights, our portfolio of charters has provided solid support in the face of a rapidly deteriorating market.

We see the impact of this market on our TCE after the Kool Tiger delivered in October and undertook a positioning voyage to the Atlantic Basin before being faced with the spot market rates that prevail. The same applied on the Glacier after it delivered later in the quarter, redelivered later in the quarter, I should say. The positioning voyage also had an impact on fleet utilization, and we shall see the same in the first quarter because of the positioning voyage on the GAIL Sagar. However, in stark contrast, the Sagar has delivered onto its 14-year charter and has recently lifted its first cargo from Cove Point. As mentioned, revenue increased for the quarter to $84.6 million, primarily because of fewer dry dock days. Adjusted EBITDA also increased modestly to $55.3 million. The backlog remains strong at $1.7 billion, of which over $1 billion is firm.

Turning to page four, we see the picture of the current market. It's a market that requires agility, differentiated vessels, and strong customer relationships. Rates are well below break-even. It's not unusual for them to be low at this time of year, but what was unusual is the complete lack of a winter market. This year's winter blew through the floor of anything we have seen for many years. The Tiger and the Glacier have been exposed to this market, but we've managed to keep them employed, achieving 92% utilization in the fourth quarter, and we expect to beat this in the first quarter of 2025. Sustained high LNG prices in Europe, the resulting trading patterns, and the delivery of new vessels have put significant downward pressure on the near-term chartering market. Adding to this pressure has been the number of sublets in the market.

These are vessels that are delivered ahead of the projects for which they are intended and are typically chartered out into the market without much consideration of rate, something that is negative for sentiment. With headline rates at these levels, longer-term deals are few and far between. The spread between spot levels and the levels required to commit a vessel on a term basis are simply too great. CoolCo is seeking to bridge such conditions through a combination of spot, short-term, and floating-rate deals. John has a breakdown of our backlog on one of his slides. In the next slides, we have our observations from the market. Turning to page five, we see a list of new supply in 2025. That was the case until Costa Azur announced a delay of a few months earlier this week, and you see that now slipping until 2026.

While this story of delays is getting old, it does mean that precision around timing is important when thinking about the shipping market. The most significant near-term projects we see in the market are Venture Global's. The first Calcasieu Pass moves to commercial operations in April, and while the plant has been operating for some time, it's only now that the vessels that were originally intended for lifting its cargoes will be doing so. Removing such vessels from the sublet market is going to help, and the pattern will be repeated as more projects come online. Plaquemines is the other Venture Global project that will be a major contributor over the coming months. It's up and running, and I think they're up to around 15 cargoes so far. Corpus Christi Stage Three, Trains One to Four, is coming on stream steadily over the course of 2025.

LNG Canada is a big project for the middle of the year, and at the back end, we have a handful of projects, including the first of the Qatari North Field expansion projects potentially. Because a number of these projects only start at the back end of the year, ton-mile development is only expected to be 4% in 2025. But 2026 is a different story, where we see the full benefit of annual production flowing into the 17% expected growth. Shell, one of CoolCo's customers, published its 2025 LNG outlook earlier this week and commented on seeing 600 million tons per annum of demand by 2030, increasing to up to 700 million tons per annum of demand by 2040. This demand will ultimately be a huge opportunity for CoolCo.

Shell also had a list of the delay factors that we're all too conscious of: geopolitical tensions, regulatory hurdles, startup risks, civil unrest, labor shortages, and supply chain bottlenecks. None of these are going away, and the industry needs to become better at factoring them into their fleet plans. However, it is very reassuring to see Shell's 2040 projection and how it is aligned with our long-term view of the LNG market. Page six looks at the developments in idling and newbuilds. I have long said that steam turbine vessels leaving the fleet will eventually balance the market, and we're starting to see it in the data. The chart on the left-hand side of the page shows how closely idled vessels are correlated with vessels reaching 20 years in age.

What's happening here is that vessels are rolling off their initial contracts and immediately being idled rather than dry docked. All are now warm stacked at best and unlikely to play an active role in the market going forward. The number of vessels reaching 20 years in age is set to increase over the coming year, and these vessels are not being scheduled to lift cargoes. This is enabling the customers to specify larger cargoes, for which our TFDE vessels are the ship of choice. CoolCo vessels are particularly attractive because of their size and also the upgrades that we're in the course of progressing. These specifications make them ideal replacement vessels for the steam turbine vessels that are leaving the fleet, leaving us well-positioned to take over such business. Just as steam turbine vessels reach retirement, new build orders have all but dried up.

This is only natural in the current rate environment and obviously a good thing for vessels that are already on the water when thinking about the years ahead. Moving to page eight, we have some other factors that explain the part of the other things that are impacting the market, and here we think about how changes could improve matters. The swift onset of poor market conditions could be quickly reversed, and let's think about how. Firstly, increased LNG supply resulting in lower prices will create demand in the price-sensitive markets, especially the Asian markets, which are more distant and therefore require more shipping. Geopolitics can have an impact too. China, at the moment, takes only 5% of U.S. LNG volumes, and that clearly needs to adjust as trade rebalances.

The return of limited Russian gas to Europe would result in less demand in Europe, and we see U.S. LNG traveling further, so again, something that's positive for shipping. Floating storage could increase as a result of contango trades reappearing, and that's in a market where seasonality now can apply not just in the winter but also in the summer. I think overall it's going to increasingly become the case that LNG shipping is a highly leveraged option on the trading dynamics connected to the increased LNG supply. The top right chart shows how TTF prices in Europe are dragging up LNG prices to levels that make it less attractive to the price-sensitive markets. It also shows how the forward curve is flat and has very little money in it for traders.

Under more normalized conditions, volatility in this curve results in ships having option value and being used more for storage. The chart below bears this out. It shows how this last winter it wasn't so much the case, and vessels used for storage were 10-15 fewer than what we typically see at that time of year. This added to the market's softness, and it's something that we'll monitor going forward. Now moving to page nine, and this is where I comment on the dividend not being declared, and here's why. It's fundamentally while rates languish below break-even on open days. A firm backlog of more than $1 billion across the fleet is reasonably well spaced, but this doesn't take away our exposure to vessels that come open over time.

Instead of predicting the timing of when markets normalize and risk getting it wrong, we've not declared a dividend. This increases our runway in the event of delays to more normalized markets and provides capacity for opportunistic growth. The chart on the right-hand side includes our break-even levels for reference. They, of course, reduce over time as debt is repaid and interest falls. We took this decision from a position of strength. We have more than $1 billion in firm backlog. We have $288 million of liquidity at the end of 2024. We're reporting strong operating results, and we have no refinancings until mid-2029. From here, John will take the quarter in more detail.

John Boots (CFO)

Thanks, Richard. So I'll run you through the fourth quarter, turning to slide 10. In our earnings release earlier today, we reported TCE revenues of $80.8 million, exceeding the guidance provided during our third-quarter earnings call.

This also marks an increase from the prior quarter's $77.7 million in TCE revenues, primarily driven by a reduction in dry dock days. Time and voyage charter revenues generated an average TCE rate of $73,900 per day across the fleet of 12 vessels in Q4. This compares to $81,600 in Q3, mainly the result of the new build vessel entering our fleet in mid-October, which operated in the spot market, and one vessel finishing her contract during the quarter and also operating in the spot market. Total operating revenues of $84.6 million surpassed both consensus estimates and Q3 levels. These figures include $3.1 million in non-cash amortization of net intangible contract assets and liabilities, along with around $700,000 in third-party vessel management fees. Adjusted EBITDA for Q4 reached $55.3 million, up from $53.7 in Q3, reflecting the increase in operating revenues.

To note, Adjusted EBITDA does not take into account the $3.1 million in non-cash amortization that I mentioned previously. Vessel operating expenses averaged $17,000 per day per vessel during the quarter, a decrease from Q3 and slightly lower than the full-year average in 2024. Moving to slide 11, where we show the bridge from Q3 to Q4 for both operating income and net income. Q4's operating income was $38.5 million, slightly lower than the $38.9 million in the previous quarter. This was driven by higher TCE revenues offset by higher OpEx due to the addition of the Kool Tiger and new build and its positioning expenses. The operating margin remained strong at 46% of operating revenues. Net income for the quarter was $29.4 million, up from $8.1 in Q3. This increase was primarily due to a $23.5 million swing in net unrealized gains on mark-to-market interest rate swaps.

Turning to slide 12, as of December 31st, our backlog exceeded $1.7 billion, including all extension options. This equates to approximately 61 years of backlog for an average of 4.7 years per vessel across the entire fleet of 13 vessels. The average TCE rate of our firm backlog of approximately $1 billion is above $82,000 per day. The chart on the left illustrates our backlog distribution over the next two years, where near-term coverage of consensus revenues remains robust, approximately 86% in 2025 and 65% in 2026. Turning to slide 13, where we show illustrative operating revenues, it highlights the potential upside for 2025 and 2026 revenues under different rate scenarios. Assuming an underlying rate of $20,000 per day for open TFDE days and an additional $20,000 per day premium for two-stroke vessels, the revenue opportunity is significant.

If TFDE spot rates were to rise to $70,000 per day, the upside potential exceeds $60 million in 2025 and $100 million in 2026. To emphasize, these are not projections of rates for the respective years, but an exercise meant to show the company's performance in different hypothetical scenarios. Also note that the low end of $20,000 per day for open TFDE vessels, as Richard has mentioned as well, is an extremely depressed level in any historical context. While such increases do not materialize overnight, it does underscore the increased earnings potential under improved market conditions. Turning to slide 14, in today's market environment, we are pleased to maintain a robust balance sheet with strong liquidity, no debt maturities until mid-2029. Over the past year, we effectively restructured most of our debt through refinancings and also covenant harmonizations, reinforcing our financial flexibility.

The unwavering support from our lending partners has been instrumental in this process, positioning us well for the future. As of December 31st, cash and cash equivalents totaled at approximately $165 million, up from $142 million in the previous quarter, largely due to the drawdowns under various financings. Adjusted EBITDA was mostly offset by debt service in the fourth quarter, but note that our debt service in each of the second quarter and the fourth quarter of each year includes semi-annual debt repayments. These two quarters always show a higher debt service amount. In addition to the cash, we retained $123 million in undrawn capacity under the RRCF that we secured in December last year. In addition to not having any debt maturities until 2029, our average interest rate is well below 6%, and 77% of our debt is either hedged or fixed on a net debt basis.

To recap the presentation on slide 15, in summary, we had strong revenues and operating results reflecting strong chartering performance. The company delivered an adjusted EBITDA margin of 65% and an operating margin of 46%. Our fleet remains well positioned, with the majority of open days secured under the $1.7 billion backlog. Balance sheet is in good shape and should allow for opportunistic growth. On the strategic front, our asset purchases in previous years show our disciplined asset management approach to drive value creation. Given the currently depressed spot rates, which remain below economic break-even and even operating costs, we maintain a prudent long-term focus. Should rates improve meaningfully from these levels, free cash flow should become available to shareholders again. So with the financial overview concluded, Richard, I'm handing it over back to you for some closing comments.

Richard Tyrrell (CEO)

Thanks, John.

The one thing I'd like to just emphasize is the significant upside once rates start to improve and normalize. And with that, Justin, please can you open up the lines to questions?

Operator (participant)

Thank you. Excuse me. If you'd like to ask a question, please press star and the number one on your telephone keypad. Again, that is star and the number one on your telephone keypad. And for our first question, this comes from the line of Frode Mørkedal from Clarksons Securities. The line is open.

Frode Mørkedal (Senior Equity Analyst)

Hi, Richard. Hey, guys. On the dividends, since I'm first out there, I noticed you mentioned, of course, it's taken from a position of strength and it's prudent to cut the dividend, which makes totally sense. But you also mentioned in the slide on page nine that you considered the runway in the event of delays, right?

So maybe you could talk about that consideration given what you have in terms of backlog and the balance sheet you have. How would you consider the runway?

Richard Tyrrell (CEO)

Sure. Yeah. Obviously, the runway is something that we've felt the need for as rates have come down, and we felt the need for a longer runway, and hence the decision that we took. And of course, what we typically do is look at where we have significant refinancing needs, which in our case are way out in 2029. And we have a balance sheet which can basically accommodate whatever the market throws at us between now and then. Now, our expectation is that things will get better way, way, way in advance of then. But if they don't, then we can accommodate it.

Frode Mørkedal (Senior Equity Analyst)

About the CapEx you've had in terms of upgrades and stuff like that, how's that looking from now on?

Richard Tyrrell (CEO)

It's looking very good for a couple of reasons, and it's only something that's actually been incurred on one vessel so far, which is now back on the water. The other vessels are going in and out of the yard over the next few weeks and months, but on the vessel that we upgraded, we have been making upside in excess of $5,000 a day, and that means under the terms of its contract, the total upside has been $10,000 a day, and we've been sharing that with the charter, so there's real money in those upgrades, and I think almost more importantly in this market, it makes the vessels that much more attractive to charterers, and it helps with the employment of the vessels.

So either way, we're getting good value out of those upgrades.

Frode Mørkedal (Senior Equity Analyst)

Okay. On the market, I noticed the layup slide you had on steam, but how would you consider the TFDE economical decision to either lay up or idle a ship? What's the layup cost today if you wanted, or somebody in the industry wanted to lay up a ship?

Richard Tyrrell (CEO)

It depends whether it's a sort of cold stack or warm stacking, I guess, in drilling terms. You save a bit of money if you get a warm stack because you can reduce the number of crew on board, and you obviously need less consumables. So there is something of a saving there. Does that answer the question, or are you thinking about it slightly differently?

Frode Mørkedal (Senior Equity Analyst)

No, I guess you haven't really considered doing that, I guess.

It seems like people are trying to keep the ship cool, right, and then hoping for a turnaround. But at some point, I guess people need to consider idling a ship for a while.

Richard Tyrrell (CEO)

Yeah. I think that's what you referred to there, Frode, is like the first step. The first step is at what point do people say, "We're not going to take heel and allow the ship to warm up?" And we haven't reached that stage on any of our ships, but we know others that have. And the issue with that, and what makes people very reluctant to do it, is that to get a ship back online again costs about $500,000 because you need to get it cold. And you can do the math.

So these kinds of rates, you need a [jolly long contract] in order to amortize that kind of amount of that kind of expense. So we are seeing a lot of vessels which have gone warm, and that applies across almost all asset types. So that's kind of the first step. And the next step is actually laying up properly where you go to an anchorage, and then you finally get to the step where things literally get mothballed and nothing other than the older steamships are in that kind of position.

Frode Mørkedal (Senior Equity Analyst)

Okay. That's cool. Great call. Final question I had is on scrapping. Why haven't we seen more scrapping on the old steamers yet?

Richard Tyrrell (CEO)

I tend to look at idling more than scrapping because I just think there's a backlog building. And whether they're idling or scrapping, they are effectively out of the market for all intents and purposes.

Frode Mørkedal (Senior Equity Analyst)

Sure. Agree. Thank you.

Richard Tyrrell (CEO)

Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Liam Burke from B. Riley. The line's open.

Liam Burke (Managing Director)

Thank you. Hi, Richard. How are you today? Fine, thanks, Liam. How are you doing? I'm doing fine, thank you. I think it's, I mean, pretty much consensus that 2027, the supply of LNG carriers are going to be awfully tight. Some people are speculating there'll even be a shortage. In your prepared comments, you said that charters, I mean, there's very little discussion on any kind of long-term charter.

Understanding that a year and a half from now, possibly, there's going to be a tightness of supply, why aren't there more discussions about this or charters trying to grab assets while they can?

Richard Tyrrell (CEO)

Well, at the moment, the bid-ask spread is quite large, and I was talking a little bit about our runway.

I mean, I think the actual charterers, they view themselves as having a bit of runway as well before they have to worry too much. So they are there, and they've been sitting on their hands. We're seeing a few signs they might be starting to, I don't know, want to wriggle their hands free. But it's very early stages as of now. But I think fundamentally for these guys, a longer-term deal is going to be still in the high 80s. And it's very, very difficult to take up to your management a deal at that kind of level when they're looking at the press and they're seeing the spot market at levels that it is today.

Liam Burke (Managing Director)

Okay. You also mentioned the current state of the spot market, which, I mean, is pretty indescribable at this point, is creating opportunities for assets coming online.

Have you seen an attractive pipeline, and how would you manage balance attractive asset values with having to own this vessel through an unpredictable period of tough times?

Richard Tyrrell (CEO)

Yeah. And that's a balance you have to get right, obviously, if you want to go down that path. It's exactly the way you've got to think about it. And then the added sort of complicating factor in the LNG space is that they're in the liquid market for these assets. So it's not like dry bulk and tankers where the deal's happening day in, day out, and you've got reference points. So we've got in our mind what prices make sense for what kind of vessels. We'll have to see if we get into sort of a landing zone for a deal. But obviously, in this kind of market, it's quite possible that we do.

If we find the right kind of deal, it'll be a nice opportunity to grow the business and create some more value.

Liam Burke (Managing Director)

Great. Thank you, Richard.

Richard Tyrrell (CEO)

Thank you, Liam.

Operator (participant)

Thank you. Again, if you'd like to ask a question, please press star and the number one on your telephone keypad. Our next question comes from the line of Climent Molins from Value Investor's Edge. The line's open.

Climent Molins (Head of Shipping Research)

Good afternoon. Thank you for taking my questions. Hey, most has already been covered, but I wanted to follow up on Frodo's question on the dividend as well as on Liam's last question. You mentioned that part of the reasoning for cutting the dividend was also to set you up to potentially acquire some vessels on the road.

And could you give us some more commentary about how you currently view the trade-off between potential growth, let's say, and repurchases?

Richard Tyrrell (CEO)

It's a good question. And there's sort of three things that you've got to consider. You've got the growth, and then you've got distribution via repurchases, and then distribution via dividends. We have very much left the repurchase program in place. So we do believe that there's value to be created there. And of course, that is something that you can move on quite quickly when the time is right. And ultimately, I think it's what any sort of growth opportunity is going to be measured against.

Climent Molins (Head of Shipping Research)

Makes sense. Thanks for the color. You also mentioned that vessels used for storage this year have been kind of lower than in previous years.

And I was wondering, on top of the lower volatility in the TTF, have you seen any other large drivers for that trend?

Richard Tyrrell (CEO)

No. But I think it is very much, well, I mean, it is the very flat curve that's driving that trend. Now, why have we got a flat curve? Well, there's a few reasons. I mean, I think we've gone from a market which was very much focused on the winter season. Now you have a bit more of a winter season and a summer season. That's because of the air conditioning demand in the more emerging LNG markets, which in itself doesn't make the sort of contango go away because you've still got the shoulder periods in between. But I think what has created some of the issue this year is the refilling of storage in Europe.

That has sort of elevated the price of the LNG in periods when maybe you wouldn't normally have expected it to be quite so high, which of course has taken away that contango that the traders like to trade around.

Climent Molins (Head of Shipping Research)

Yeah. That makes sense. I'll turn it over.Thank you for taking my questions.

Richard Tyrrell (CEO)

Thank you very much, Climent.

Climent Molins (Head of Shipping Research)

Thank you. And your next question comes from the line of Nils Thommesen from Fearnley Securities. The line's open.

Nils Thommessen (Shipping Analyst)

Hey, afternoon, guys. Hi there. Just quickly on Kool Tiger, and I guess it ties a bit into the other questions. But is it the most likely outcome that you're going to enter some sort of an index deal and then at a fixed rate at a later stage this decade? And are you looking at other sort of setups?

And if it's the index with fixed, at what point do you think that charters are willing to commit on fixed charter rates? Tom, is it 2027? Is it 2028? Where do you see sort of the demand for that?

Richard Tyrrell (CEO)

Yeah. I think that having a floating-type deal is a good way to bridge any valuation disconnects between those owners and the charterers. So we could well go down that route. We do think there's quite a lot of demand for 2027 and certainly 2028 for longer-term business. But that's the kind of business where charters are still sitting on their hands because they don't feel they need to lock that in quite yet. But of course, a vessel is eligible for that business. And maybe something which combines that kind of deal with something floating in the short term is something that I could definitely foresee.

And then you've got this other category of charters who actually do have nearer-term demand, but of course, they're wanting to use their bargaining power at the moment to try and get a very, very good deal. So our job is to try and flush them out a little bit and maybe cause that bluff. But when you've got a market of other owners looking to compete for business like that, it takes real discipline on the part of the market to actually win those businesses at a half-decent rate.

Nils Thommessen (Shipping Analyst)

Yep. That's a good call. Thanks.

Richard Tyrrell (CEO)

Thanks, Nils.

Operator (participant)

Thank you. And seeing as there are no more questions in the queue, that concludes our question and answer session. I will now turn the call back over to our CEO, Richard Tyrrell, for closing remarks.

Richard Tyrrell (CEO)

Thank you, Justin.

Thank you to everybody who joined the call and for those who asked some excellent questions. For those who will be in Norway next week, I'll be at the DNB conference. See you there. For those who are attending Capital Link at the end of March in New York, I'll be there also. Hopefully, we'll see a few people at those events. If not, catch you next time. Thank you.

Operator (participant)

The meeting has now concluded. Thank you all for joining. You may now disconnect.