Höegh LNG Issuer profile - PDF

Investment Research 27 May 2015 Höegh LNG Issuer profile We assign a BB- credit rating with an unsecured bond issue rating of B+ to Höegh LNG (HLNG). HLNG operates seven FSRU s and three LNG carriers and

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Investment Research 27 May 2015 Höegh LNG Issuer profile We assign a BB- credit rating with an unsecured bond issue rating of B+ to Höegh LNG (HLNG). HLNG operates seven FSRU s and three LNG carriers and was formed by Leif Höegh & Co. in Its key segment, FSRUs, has high barriers to entry with only three established players, and its vessels are employed on longterm contracts with creditworthy counterparts. The company has recently ended its first growth phase which is reflected in its financial figures. We consider HLNG s business risk profile as satisfactory and its financial risk profile as highly leveraged. Company overview HLNG is a leading operator of FSRUs and LNG carriers and is now in the process of growing its business further upstream via development of FLNGs. HLNG is one of the pioneers within the LNG shipping segment with more than 40 years experience. In 2004, the company received the patent approval for its SRV concept, and has since then been a key developer of FSRUs and is the leading player within this niche segment today. Its vessels are employed on long-term contracts with Oil & Gas majors and its FSRUs play a vital role in making natural gas available for new countries seeking natural gas as an energy source. HLNG has also established a Master Limited Partnership ( MLP ) as a funding source going forward. The company is 44% controlled by Leif Höegh & Co. and is listed on Oslo Stock Exchange under the ticker HLNG with a market cap of USD980m. Key credit highlights HLNG has recently completed its first growth phase, ordering and taking delivery of four FSRUs, now all on secured long-term contracts. This is reflected in its historical figures, with 2015 set to be the first year in operational mode, which is taken into account in our credit rating. The MLP structure is first and foremost a funding source, but offers credit challenges as the issuer s long-term contracted assets will be sold to the MLP in exchange for liquidity to fund further growth. On the other hand, drop downs to the MLP should also reduce the company s leverage in the years to come, improving credit metrics for HLNG. Höegh LNG: financial overview E 2016E 2017E Total revenues EBITDA adjusted EBIT Net income Fixed assets ,073 1,274 1,243 1,473 Cash and cash equivalents TIBD Adjusted/Capital (%) 62% 60% 65% 73% 70% 66% NIBD Adjusted/EBITDA (x) 9.6x 15.7x 11.1x 6.3x 4.0x 4.5x FFO FFO/NIBD (%) 2% 1% -3% 8% 12% 13% EBITDA/interest (x) 1.3x 1.2x 2.2x 3.0x 3.9x 4.3x Source: Company data, Danske Bank Markets estimates Facts Sector: Shipping Corporate ticker: HLNG Equity ticker: HLNG Market cap: USD980m Ratings: Rating agencies: n.a. Danske Bank Markets: BB- Analysts: Bjørn Kristian Røed Brian Børsting Key credit strengths Long-term contracts with solid counterparts Long industry track record Leading position in FSRU segment with only three established players Industry with high barriers to entry Strong liquidity FSRU and LNG demand outlook Key credit challenges Aggressive growth strategy MLP structure Highly leveraged Potential entry into construction of FLNG assets Capital intensive industry Danske Bank Markets has been appointed Joint Lead Manager and Bookrunner in connection with an upcoming offering of debt instruments by Höegh LNG NOT FOR DISTRIBUTION IN THE US Important disclosures and certifications are contained from page 21 of this report. Company description and history Höegh LNG (HLNG) is an established ship-owning company in the field of global liquefied natural gas (LNG) transportation. The company has a fleet of three LNG carriers (LNGc) and seven Floating Storage and Regasification Units (FSRUs). The company has also established a Master Limited Partnership (MLP), named Höegh LNG Partners (HMLP) which controls three of its FSRUs. All but one LNGc in HLNG is chartered out on long-term contracts to Oil & Gas majors. The Höegh family is a strong and committed sponsor (44% ownership) of the company and has a long-term horizon for its investment in HLNG. HLNG was one of the first movers in the LNG shipping business when it emerged almost 40 years ago. As a result of the strong emphasis on technological development, HLNG is in our view one of the LNG shipping companies with the most versatile operational experience and strongest know-how. It aims to expand to other LNG business areas, such as natural gas liquefaction, and has completed various pre-feed studies, which should form a potential new business area emerging for the company during the next couple of years. Leif Höegh & Co. history Leif Höegh, the founder of the brand, began his career as a ship owner in 1927 in oil transportation and by the start of WWII the fleet consisted of 13 ships. In the 1960s, the company moved into the oil/bulk/ore tanker segment and the business was later developed into forest product carriers and car carrier shipping (joint venture with Ugland), while the company got its first LNG tanker in In 1987, the company was listed on the Oslo Stock Exchange as Leif Höegh & Co ASA after merging the diverse ship owning and ship management units. In 1992, the tanker division was spun off and listed as Bona Shipholding. During the 1990s the company was also for some years in the reefer business. From 2000, the company changed its strategy from diversification to growth in RoRo and LNG. All non-core activities such as dry bulk and open hatch fleet (forest cargo) were divested. In 2008, the company acquired a fleet of 12 car carriers from A.P. Møller-Maersk in exchange for shares in Höegh Autoliners. Höegh Autoliners is today the fifth largest pure car and truck carrier (PCTC) company in the world. With a long track record for traditional LNG transportation, Höegh LNG has been one of the pioneers in developing FSRUs over the last few years and is now established as the leading operator of FSRUs, the number one growth priority for the company. Now that FSRUs are a proven technology and asset among clients, the next potential business area is floating liquefaction assets (FLNGs), which we expect to be a part of the next growth phase for Höegh LNG. LNG Carriers: Transport liquefied natural gas, which is natural gas (methane) that is cooled down to -160 C until it becomes liquid and its volume is reduced by about 600 times, making it suitable for shipping. When reaching its destination, the LNG is reheated and it reaches its gaseous state and is ready to be sold to consumers, which includes both industrial and residential users. FSRU: a Floating Storage Regasification Unit is a liquid natural gas (LNG) terminal whose main structure is a specialised ship which acts as a component in transiting and transferring LNG through oceanic channels. FSRUs are more cost-effective to meet low demand or in the start-up phase for LNG compared to traditional land-based terminals. These units are quicker to develop and can be relocated in order to meet demand. FLNG: Since 2006, the company has invested more than 400,000 engineering manhours in front-end engineering design (FEED) and field specific studies of a floating LNG production, storage and offloading solution (FLNG). An FLNG liquefies the 2 27 May 2015 natural gas onboard a floating vessel and will transfer the liquefied natural gas onto LNG carriers. Höegh LNG history Leif Höegh & Co. decided to enter into the LNG industry by ordering one LNG carrier on spec Norman Lady enters into a 20 years charter agreement with ADGAS (Abu Dhabi Japan The LNG carrier Matthew enters the Höegh LNG fleet under management for Suez (now GDF Suez). Charter agreement for LNG carrier Arctic Lady is signed with Total to serve the Snøhvit LNG plant, Norway. Höegh LNG is awarded an Approval in Principle (AIP) for the Company s FLNG design. The Group s second SRV, GDF Suez Cape Ann, is being delivered to the Group and its joint venture partner from Samsung Heavy Industries. The LNG carrier STX Frontier enters the Höegh LNG fleet under a time charter with STX Pan Ocean and is delivered to Repsol under a time charter. Entered into firm shipbuilding contracts with Hyundai Heavy Industries Co. Ltd. (HHI) for the building of two FSRUs in addition to an option agreement for one plus one plus two FSRUs. On 5 July the Company s Shares were listed for trading on the Oslo Stock Exchange. The Group enters into an agreement to acquire LNG Libra, a 126,400 cbm Moss type LNG carrier built in The vessel is to be delivered in the third quarter of 2012 and enter into a six month charter with the North West Shelf project in Australia. Established a Master Limited Partnership listed on the New York Stock Exchange in 2014,Höegh LNG Partners LP ( HMLP ). Tp provide direct access to the U.S. capital market and facilitate further growth of the Company. The MLP will acquire, own and operate FSRUs, LNGCs and other LNG assets employed on long term contracts First LNG carrier, Norman Lady, is delivered, and Höegh LNG established as an operator. Norman Lady enters into a years charter agreement with Gas Natural. Charter agreement for the LNG carrier Arctic Princess is signed with Statoil to serve the Snøhvit field, Norway. Receives patent approval on its SRV concept. Höegh LNG Holdings Ltd. is established as a separate company, business is transferred to Bermuda. The LNG carriers Arctic Princess and Arctic Lady are delivered to the Group and its VJ partner. Charter agreements are signed with Suez (now GDF Suez) for the two Neptune vessels. The Group s first SRV, GDF Suez Neptune, is being delivered to the Group and its joint venture partner from Samsung Heavy Industries. Höegh LNG is granted final approvals by the UK Department of Energy & Climate Change to construct the Port Meridian Deepwater Port. Port Dolphin is awarded Deepwater Port License by the US Maritime Administration. Höegh LNG establishes a separate in-house technical management company, Höegh LNG Fleet Management AS. Signs a firm and final agreement with PGN to provide PGN with an FSRU and mooring system offshore, near the city of Medan, in Indonesia. The project will employ the first of the Group s new FSRU's. Signs an agreement with AB Klaipedos Nafta for a new LNG floating storage and regasification unit in Lithuania. The Group intends to use the second of the Group s new FSRUs. In February, the Company completed a Private Placement. On 13 February, the Group entered into a shipbuilding contract with HHI for a third FSRU to be delivered in Q2 2014, and entered into an Option Agreement for additional FSRUs. Source: Danske Bank Markets, Company data 3 27 May 2015 Business risk profile We view HLNG s business risk profile as satisfactory in credit agency terms supported by its long-term contracts with creditworthy counterparts, among whom are oil & gas majors like Statoil (AA-), Total (AA-) or government-backed customers like Klaipedos Nafta (Lithuania), PGN (Indonesia) and SPEC (Colombia). The presence of governmentbacked customers explains the importance of FSRUs for a country or a region s supply of energy, satisfying the daily needs of its industry or population. HLNG s long industry track record, being one of the pioneers behind LNG transportation and later FSRUs and now FLNGs, also counts as a key strength in its business profile. Being the leading FSRU provider among only three established players (Golar LNG and Excelerate being the other two), in an industry with strong supply/demand fundamentals, with four FSRUs on order and more than 30 FSRU projects visible in the pipeline we regard these as key strengths in the credit profile of HLNG. Key credit challenges involves its MLP structure, where HLNG will drop down assets with long-term contracts to the MLP, in exchange for liquidity to fund further growth and dividends from the MLP, a structure which does not reflect cash flows as quickly as would occur if the assets were fully controlled by HLNG. The company has recently completed its first growth phase, and this can be seen in the historical figures and in the company being highly leveraged. The company is developing its FLNG technology and is expected to make larger investments into this unproven and much more capital-intensive asset class, which adds to the key credit challenges of HLNG. The company will continue its aggressive growth phase, and although the balance sheet and existing cash flow is at a different level than at the time of the IPO (2011) and its last bond issue (2012), this counts as a key credit challenge. Höegh LNG: historical EBITDA and EBITDA margins EBITDA adjusted EBITDA Margin % % 50.0% 40.0% % 20.0% 10.0% E 2016E 2017E 2018E 0.0% Source: Company data, Danske Bank Markets estimates Fleet As of May 2015, HLNG operates a fleet of six vessels, of which three are FSRUs and three LNG carriers, with average contract durations of 10 years. HLNG also has one FSRU on order with delivery scheduled for Q1 17. HMLP acquired three FSRUs from HLNG back in August 2014, in conjunction with its IPO, which means HMLP s fleet consists of two SRVs and one FSRU. The FSRUs in HMLP have average contract 4 27 May 2015 durations of 17 years and we should consider and expect all vessels with long-term timecharters attached in HLNG to be sold (drop-downs) to HMLP. The average age of the fleet is 10 years, with LNG Libra currently on a short-term contract with Gas Natural being built in 1979 most likely being sold for green recycling at the end of its timecharter in December LNG Libra was originally acquired as a conversion candidate for FSRUs, but when counterparts preferred FSRU newbuilds, the LNG Libra was traded on short-term contracts as an LNG carrier, and is not considered a core asset for the company. Höegh LNG has a 33.98% ownership share in Arctic Princes and the JV partners are Mitsui O.S.K Lines (Baa3 rated by Moody s) (MOL) controlling 33.98% and Statoil (Aa2 rated by Moody s). The sister ship, Arctic Lady, is 50% owned by Höegh LNG and 50% by MOL (50%). Both these vessels are financed by a UK lease and bareboat chartered to Leif Höegh (UK) Ltd. This makes drop-downs to the MLP a little more challenging for the company, which potentially would lead to stable cash flow from these vessels, a development that would support the credit of HLNG. The FSRUs and LNG Libra are all controlled 100% by Höegh LNG. Höegh LNG Partners consists of three vessels that were dropped down at the time of its IPO. GDF Suez and GDF Cape Ann are both 50% controlled by Höegh LNG (58% through HLNG and 42% through HMLP), 48.5% controlled by MOL and 1.5% by Tokyo LNG Tanker Co. Höegh LNG (Holdings & Partners): fleet and contract duration overview Vessel Name Vessel Type Built Counterpart Contract year end Option Duration Höegh LNG Holdings 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec 31-Mar 30-Jun 30-Sep 31-Dec Libra LNG 1979 Gas Natural Höegh Gallant FSRU 2014 Egas Höegh Grace FSRU 2015 SPEC Independence FSRU 2014 AB Klaipedos Nafta Artic Princess LNG 2006 Statoil Artic Lady LNG 2006 Total FSRU Höegh LNG Partners GDF Suez Neptune FSRU 2009 GDF Suez GDF Suez Cape Ann FSRU 2010 GDF Suez PGN FSRU Lampung FSRU 2014 PGN Contracted Spot Under construction Source: Danske Bank Markets, Company data Counterparts A key credit strength for HLNG is its counterparts, which consist of large oil and gas majors and utility companies. Counterparty risk will always exist, but we do stress that the role of an FSRU in particular is often crucial for a country or a region s supply of energy in satisfying the daily needs of its industry or population, so barriers to step away from contractual obligations should be considered as high for this segment. The counterparts with their respective S&P ratings include Total (AA-), Statoil (AA-), Klaipedos Nafta (A- country rating), GDF Suez (A), Gas Natural (BBB), EGAS (Bcountry rating), PGN (BB+, BBB+ country rating), SPEC (49.99% controlled by Promigas, which is BBB- rated by Fitch). This leaves EGAS as the counterpart with the highest risk from a credit perspective, but with the FSRU contributing 10% of Egypt s consumption of domestic electricity and 50% of the current electricity deficit, the risk of EGAS walking away from the contract is from an operational perspective considered limited by us. Aggressive growth strategy Höegh LNG s growth strategy has been aggressive since its IPO in 2011, during which time it has grown its fleet from two to six FSRUs. The company has a tactic of always ordering a new FSRU when the last FSRU has secured a contract. The reason for always 5 27 May 2015 having an FSRU on order has to do with the tender process and the flexibility it gives HLNG when discussing various projects with various counterparts, also giving the company the ability to deliver the FSRU with a relatively short lead time. This tactic has been successful for the last years, but is considered a key challenge for the HLNG credit. Relationship between Höegh LNG and Höegh LNG Partners HLNG successfully completed an IPO of Höegh LNG Partners (MLPG, which is structured as an Master Limited Partnership ( MLP ) where Höegh LNG is the General Partner (GP) (See Appendix for further descriptions on the MLP structure). Höegh LNG Partners has the option to acquire assets from Höegh LNG with contract durations of five years or longer. These assets are estimated to be dropped down to HMLP using EV/EBITDA multiples ranging from x which will boost HLNG s liquidity, but at the same time strip out future cash flow to HLNG from the asset, with HLNG relying on its share of dividends and individual distribution rights (IDRs). Having an MLP offers some positive and some negative considerations to the HLNG credit. Positives include: 1) The MLP being an additional source of capital; 2) Selling down assets at a premium to current values and construction costs, boosting its liquidity; 3) Drop-downs of FSRUs to reduce HLNGs leverage; 4) Drop-downs increasing dividends and IDRs and eventually being sufficient to cover interest costs. Negatives include: 1) Most likely no assets on long-term contracts; 2) Capex risk; 3) Dependent on available equity to fund newbuilding instalments; 4) Aggressive growth to satisfy MLP investor s demand for continuous growth of unit distributions; 5) Current debt guarantees to MLP assets (this might change now that the MLP is fully operational). Overall, we conclude that the MLP set-up is a key credit challenge for HLNG. Höegh LNG: overview of HLNG and HMLP structure Source: Danske Bank Markets, Höegh LNG LNG shipping segment introduction and market snapshot After the LNG has reached a liquefaction plant from its production field it is liquefied to make it ready for shipping, and the LNG is loaded onboard LNG carriers. When it reaches its destination, the LNG is discharged at a regasification terminal where it is heated back to its gaseous state and again ready for consumers. LNG is not an energy source as such. It is only a liquid state of the energy source natural gas, which consists primarily of methane and a small portion of ethane. Natural gas is growing the fastest among the three main fossil fuels as it is cleaner and cheaper than competing fuels and resources are abundant May 2015 Höegh LNG The LNG value chain E&P Liquefaction Shipping Regasification Delivery Exploration and Production offshore and onshore by E&P companies. The Natural Gas reaches a liquefaction plant, is cooled down to 160 degrees celsius and reaches its liquid state Loaded onboard LNG carriers which are one of the most complex vessels to construct. The LNG is still liquid and After reaching its destination, the natural gas is discharged at a regasification plant and is brought back to its gaseous state When at gaseous state, the gas is transported through pipelines/grids to its end users/consumers. Source: Company data, Danske Bank Markets Natural gas is expected to increase its share in the global energy mix towards 2035 and
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