Cool Company Limited (CoolCo) has announced its first-quarter results for 2024, maintaining a consistent dividend payout and reporting significant growth in its charter backlog. The company's operating revenues reached $88.1 million, aligning with previous guidance. A landmark 14-year charter with GAIL of India has been secured, marking the largest single contract in CoolCo's history.
With a backlog now valued at nearly $1.9 billion, equivalent to around 64 years of operations, the company's financial position appears robust. The Q1 2024 dividend has been sustained at $0.41 per share, with an ex-dividend date slated for May 31st. CoolCo's outlook for the second quarter remains positive, anticipating stabilization in LNG prices and shipping rates.
Key Takeaways
- Operating revenues for Q1 2024 stood at $88.1 million, meeting the company's guidance.
- CoolCo reported a substantial increase in its charter backlog, now valued at nearly $1.9 billion.
- The company announced a maintained dividend of $0.41 per share, with a 91% payout.
- A significant new-build charter with GAIL of India contributes to the backlog, with TCE rates over $79,000 per day per vessel.
- CoolCo has a strong liquidity position, with approximately $155 million available, potentially rising to $200 million.
- The company has committed $15-20 million for CapEx related to vessel upgrades.
Company Outlook
- CoolCo expects Q2 revenues to align with prior guidance.
- The company is optimistic about seizing opportunities and creating shareholder value.
Bearish Highlights
- CoolCo has paid out slightly more than free cash flow to equity since the inception of their dividend policy.
Bullish Highlights
- The company has successfully refinanced its sale and leaseback facility, increasing it by $200 million.
- CoolCo anticipates a demand increase for air conditioning in Asian markets and the refilling of storage in Europe to stabilize LNG prices and shipping rates.
Misses
- The company reported lower TCE revenues this quarter.
Q&A Highlights
- Richard Tyrrell highlighted the company's strong liquidity position and their proactive CapEx investments in vessel upgrades.
- Discussions for a second newbuild with a long-term charter are underway, indicating a strong market.
- There are no limitations on dividend payouts, provided financial covenants are met.
- CoolCo is open to in-person meetings in New York, Boston, and potentially other locations based on demand.
InvestingPro Insights
Cool Company Limited (CoolCo) has demonstrated financial resilience with its Q1 2024 report, and the InvestingPro platform offers deeper insights into the company's performance and potential. According to InvestingPro Data, CoolCo has a market capitalization of $645.61 million and a low price-to-earnings ratio of 4.66, suggesting the stock could be undervalued relative to its earnings. The company's revenue for the last twelve months as of Q1 2024 stands at $350.86 million, although it has experienced a quarterly revenue decline of 6.79%. Despite this, CoolCo boasts a high gross profit margin of 78.26%, indicating strong operational efficiency.
An InvestingPro Tip highlights that CoolCo's stock generally trades with low price volatility, which could appeal to investors seeking stability in their portfolio. Moreover, the company has been profitable over the last twelve months, reinforcing its financial health. However, investors should note that CoolCo's short-term obligations exceed its liquid assets, which could present liquidity challenges.
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Full transcript - Cool Company NYQ (CLCO) Q1 2024:
Operator: 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. [Operator Instructions] 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: Thanks, Todd. Good morning to those in the US and good afternoon to those in Europe and Further East. Welcome to CoolCo's First Quarter 2024 Results Presentation. Please turn to slide 3, 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. Well, that's taken some patience. This is an exciting development that I'll get back to later in the presentation. Our backlog helps TCE for the quarter and partially upset 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 [pre-use] (ph) 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. Distributions -- 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 newbuilds deliver. Slide 4 takes the quarter in greater detail. With a summary, the longer-term employment for one of our newbuild 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 sole variable charter fell with spot market rates from $102,000 per day to $55,000 per day quarter-on-quarter. Between charter, off-hire of 51 days further weighed on the TCE along with delivery related voyage costs. At the end of the quarter, we've had the newbuild charter I've mentioned, and the first of our vessels for this drydock 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 the story of the new charter and that's something we're very pleased with. Please turn to Slide 5. 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 and that it imports and trades the commodity, regasified it, and sells on the gas to customers in the Fertilizer City grid, power, refinery, and petrochem sectors, amongst 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 newbuild 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 [90s] (ph) 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 6. 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 7, 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 is bottomed out. And last year, if anything to go by, it will be up from here. The longer term 12 month markets, 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 8 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, whilst not what it was, remains supportive to shipping. As is shown on the chart, 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 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 turn 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] (ph) because of the war in the Ukraine. This year, the question marks around how Russian LNG volumes will reach end markets if banned from Europe. And in oil and tanker markets, there's nothing 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: Thank you, Richard. Today I will provide an overview, financial overview for the first quarter of 2024. So turning to Slide 9, 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 potential 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 forone1 of our vessels and an off-hire period for another vessel as it transitions from interim work in the spot markets to a new one-year charter. Operating income for the quarter was $44.1 million, and a $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 transitions 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 $0.41 per share represents approximately a 91% payout. Turning to slide 11, as we reported last week, our backlog now includes the newly announced new-build 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 [uncompacted] (ph) 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 exercise options to their maximum extent. Turning to slide 12. This slide demonstrates that on an 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 set -- with an ex-dividend date set for the New York Stock Exchange at May 31st and the OSE at May 30th and a record date of May 31st. From May 28th 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 different press release. During these interim dates, 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 around June 10th with Norwegian registered shareholders receiving their payouts approximately three trading days later, which will be on around June 13. Turning to slide 13 on the financing, in late March we reported the successful refinancing of our sale and lease back 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 rate 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 31st, 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 payments 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 newbuilds. As a result, the March 31st cash balance is exclusive of the available pre-delivery liquidity of around $49 million under our newbuild 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 2022, 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 $30 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: 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-teen 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 for questions?
Operator: The floor is now open for your questions. [Operator Instructions] Our first question will come from Frode Morkedal with Clarksons Securities. Please go ahead.
Frode Morkedal: Hi guys.
Richard Tyrrell: Hi, Frode.
John Boots: Hi, Frode.
Frode Morkedal: 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 estimated to be in the low $90,000 per day. I'm not sure if that would 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 be given 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.
Richard Tyrrell: So in November 2022, we put a chart in our Invest 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. And the breakeven is [$69,000] (ph) 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 within the high-teens.
Frode Morkedal: And then 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.
Richard Tyrrell: Yeah, indeed. But you have to [look at that chart] (ph). Yeah. Go ahead.
Frode Morkedal: Yeah, that's good. That's 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 newbuild. But I think you could increase it further, right, given this long-term charter.
Richard Tyrrell: 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] (ph) for each newbuild. So the answer is yes [indiscernible].
Frode Morkedal: Well that should add you $28 million or so. Maybe you could talk about the next newbuild. I guess given the long-term charter we have now, I guess you could opt for shorter contract if you wanted to. What's your thinking here on the next newbuild?
Richard Tyrrell: The answer to that is yes, we can look at shorter charters. However, the rate advantage you get on a shorter charter in this market isn't going to be as great as what it would have been, call it, 12 months, 18 months ago. So you've got to ask yourself whether that makes sense or not. Because obviously, with a 10-year plus charter, you can get the extra leverage, you can release some equity, and that has significant value, which I think probably outweighs any rate advantage you can get from doing a shorter term charter today. Now that can change of course quite quickly. The market is volatile but that's at least how we see it today.
Frode Morkedal: Yeah, fair enough. My last question is on the dividend. It's been pretty steady at $0.41 even though you have your stated policies closing I think, right? But it seems like 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 are you expecting it to become floating in the coming quarters? I guess you have some CapEx commitment in the near-term.
John Boots: Yeah, we do and -- we've got the policy that spells out how we think about it. We actually do the math each quarter, and we get to our dividend. Ultimately it will depend upon the rates. And we've got the backlogs, which is clearly very helpful, but it will depend on the rates for the vessels that are coming open.
Frode Morkedal: Okay, if I might have another question really. Given the cash you have today and the increase in leverage, what's the CapEx you expect this year, the remaining CapEx, and what type of cash position would you be comfortable or do you need to have?
Richard Tyrrell: 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 $30 million or so. So close to $100 million, or a little bit less than $100 million. Today we are at $106 million, 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, common – [minimum cash is $90 million] (ph). 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. We have already paid $15 million to $20 million on the CapEx so far. And what we announced back in June was for the upgrades, $15 million times five vessels.
Frode Morkedal: Okay. That's clear. Thank you. Thank you, guys.
Richard Tyrrell: Thanks, Frode.
Operator: Thank you. [Operator Instructions] Our next question comes from Liam Burke with B. Riley. Please go ahead.
Liam Burke: Thank you. Good afternoon, Richard. How are you?
Richard Tyrrell: Very well, Thanks, Liam. How are you?
Liam Burke: Fine, thank you. Rich, if 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 newbuild is a positive reflection on the outlook for the recharters you have later in the year?
Richard Tyrrell: I think the markets are a little bit different, but sentiment from one does influence the other. The newbuilds, that focus a little bit more on these longer-term opportunities where you have quite often off-takers and end users for gas – [wanting] (ph) secure shipping, and 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 shift. I mean, of course, we can always charter within a short-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 short-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: 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?
Richard Tyrrell: As long as we comply with the financial covenants, we have no dividend limitations.
Liam Burke: Okay, great. That's what I needed to know. Anyway, thank you very much.
Richard Tyrrell: Thanks for the questions, Liam.
Operator: Thank you. And 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: Great. Well, it seems that everybody is keen to wait for the Nvidia (NASDAQ:NVDA) 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 let us know. We'll also be up in Boston and 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: 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.
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