Dorian LPG Ltd

NYSE:LPG

Earnings Call Transcript 2019-Q2

[Operator]

Greetings, and welcome to the Dorian LPG’s Second Quarter 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally a live audio webcast of today’s conference call is available on Dorian LPG website, which is www.dorianlpg.com.

I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead.

[Ted Young, Chief Financial Officer]

Thank you, operator, and good morning everyone. Thank you all for joining us for our second quarter 2019 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; and John Lycouris, Chief Executive Officer, Dorian LPG USA. As a reminder this conference call webcast and a replay of this call will be available through November 6, 2018. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct.

These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we expresses today. Additionally, let me refer you to our unaudited results for the period ended September 30, 2015 filed on Form 10-Q this morning, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements.

With that, I'll turn over the call to John Hadjipateras.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Thank you, Ted, and welcome all to our Q2 financial year 2019 earnings call. Our financial results improved from last quarter and from the corresponding quarter of last year. Both our utilization and time charter equivalent reflect the better market. Ted will discuss the numbers. The whole quarter can be characterizes one of continuing recovery. The Baltic index was never below $35 and shot up into the upper 40s at its high point. It averaged $40 during the quarter, representing a big improvement from the second quarter of 2018 and a high point since the second quarter of 2016.

Like the investment community does, we too compare our results with the Baltic index. It is worth pointing out that our voyages are generally 40 to 60 days in duration and are fixed 2 to 4 weeks in advance. Consequently our results would normally outperform the index in a falling market and conversely underperform in a rising market. So far this year as a largest NGL exporting nation, the U.S. has increased its global market share to 34% compared with 33% in 2017 and 29% in 2016.

Through October, U.S. LGP exports totaled 26.8 million metric tons, 11% higher than last year’s 24.1 million metric tons measured over the same period. U.S. propane production is up 12% year-on-year and we think U.S. LPG and NGL exports are set for significant growth. In July, we saw the last Chinese bound U.S. LPG export cargo. The China U.S. trade war resulted in a shift of destinations for U.S. tons with more going to South East Asia around the Cape and Middle East tons going to China, which has had a positive effect on ton miles.

The U.S. exports are also increasingly headed to Europe where LPG remains the best feedstock for a flexible steam practice. Iran sanctions have had significantly reduced Iranian exports and helped to absorb U.S. tons in the East and keep the arbitrage open. Sanctions is sustained could have a positive impact on scraping as the older tonnage which traded from Iran may not be fully flexible to trade in the international market. John L will give you more information on the demand side.

Finally, I would like to give a better perspective on our thoughts on M&A on consolidation and on BW LPG’s proposal. We believe that there are potential commercial as well as capital market benefits from size. In terms of market presence, a bigger fleet can provide more flexibility. For this reason, we co-founded and operate a Helios LPG Pool, which now includes 29 ships. We have and will continue to explore growth opportunities.

Addressing the advantages and the capital markets, which may accrue to a larger cap company with greater trading and liquidity, whether accomplished through organic or M&A, we take the view that a strong balance sheet is far more important for sustained value creation, especially in a cyclical industry like ours. Scale does not in and of itself create an investable security. Our board, our management team and our financial and legal advisors spent a great deal of time analyzing the proposal and had multiple meetings with BW before their proposal was withdrawn.

In the course of our meetings, we explained that the financial advantages of our ECO fleet would be diluted by combining with their less fuel efficient and more highly leveraged fleet and that we did not believe that stock market trading liquidity would be enhanced by dual listing. Ted will discuss our Q2 earnings. Thank you, Ted.

[Ted Young, Chief Financial Officer]

Thanks. Total utilization of 95.8% for the quarter with time charter equivalent, TCE, revenue over operating days as those terms are defined in our filings of $20,973 per day yielded utilization adjusted TCE, which is TCE revenue per available day of $20,086. Our spot TCE for the quarter, again stripping out our time chartered vessels that are outside the pool was $19,481 a day with the utilization of 95.1%. OpEx for the quarter was $8,585 per day, which compared to last quarter’s $8,334. OpEx per day was affected principally by a higher spares and stores cost of $787 per day, which largely related to our preventative maintenance program and $313 per day related to the Captain Nicholas Drydock in Singapore and that amount included both non-capitalized drydock expenses and the purchasing of coolant after we exited drydock.

Thus after stripping out cost related solely to the drydocking, we were flat to slightly down quarter-over-quarter on our OpEx reflecting our ability to drive efficiencies in other areas. I'd note that our preventive maintenance programs are designed to improve the overall life of the equipment on our ships and thereby shorten our time and cost in drydock. In order to get a complete picture of daily OpEx, we feel that it is most appropriate to add a daily drydocking reserve, which is a non-GAAP measure I would add to stated OpEx per day. We've done that math for you in a presentation that you can find on our website.

Total G&A for the quarter was $7.5 million in cash G&A, i.e., G&A excluding non-cash comp expense was $6.1 million. We booked expenses of $1.7 million in the quarter related to BW's unsolicited takeover proposal. Those expenses were predominantly legal in investment banking fees. That’s why our reported EBITDA was $17.9 million. If we strip out those transactions related costs, which we don't consider to be ordinary course, our actual EBITDA for the quarter was $19.6 million.

We look at cash interest expenses to some of the line items, interest expense and realized gain loss on derivatives. On that basis, total cash interest expense for the quarter was $8.3 million, which compared to $8.6 million last quarter. We continue to benefit from our aggressive hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost, fixed hedge and a small floating piece of roughly 4.4%.

In the last quarter, we’d announced commitments for up to seven scrubbers and we have now committed to all seven scrubbers. We expect to receive debt financing for most if not all of the remaining payments, including installation costs due under the contract. We're still working on the detailed terms, which we will share when finalized. Excluding costs related to the BW proposal, we continue to maintain cash cost per day of approximately $23,000.

With that, I'll pass it over to John Lycouris.

[John Lycouris, Chief Executive Officer, Dorian LPG USA]

Thank you, Ted. Global Seaborne LPG exports through October stands at 78.9 million tons with U.S. LPG exports at 26.8 million tons and Middle East exports at 32.8 million tons. The U.S. LPG stock levels have increased steadily in October and we have seen propane and butane prices weakened. The significant increase in natural gas liquid fractionation and Mont Belvieu has produced additional supply of butane volumes, setting butane pricing at a discount to propane and resulting in record butane exports from the U.S.

These trends are likely to continue as the target terminal and the Mariner East are preparing for new export capacity. It is anticipated that the long awaited Mariner East will commence service in November initially with a reduced capacity of 150,000 barrels per day of natural gas liquids and that translates into about 4 to 6 VLGC cargoes of LPG per month. And it is anticipated also that they might reach the planned capacity of 250,000 barrels per day of natural gas liquids are about 8 to 10 shiploads by the second half of 2019.

China efforts to improve their air conditions in major cities by reducing automotive emissions has seen early adoption of the new gasoline spec, which has driven increased butane blending demands and the startup of new gasoline and pet cam refineries in early 2019. Another Chinese PDH plants is expected to start in the coming quarter along with new weighable plans announced to come online sometime between the second half of 2019 and 2021. The new building order book still stands at 13% of the VLGC fleet and the number of VLGCs over 20 years of age or older are currently at 12% of the fleet.

There are two vessels remaining to be delivered this year, another 18 in 2019 and 16 in 2020. Bunker suppliers will become the focus of the industry in the next few months and with compliant fuel launched and the increased focus by the maritime industry on the reliability, quality and stability of those new compliant fuels. The maritime industries compliant fuel conundrum is likely mitigated with a retrofitting of vessels either with scrubber system or alternative fuels.

At Dorian LPG, we have designed and diligently prepare the fleet with a view to retrofitting either scrubber or alternative fuel to the vessels. We have been operating scrubbers in our fleet since 2015, gaining experience and the knowledge base related to scrubber equipment, which combined with the scrubber revenues of our vessels is expected to result in the smooth retrofitting in 2019 of the additional seven systems that we have recently contracted.

We consider that the additional investment for the retrofitting of scrubbers given a conservatively projected $150 to $200 per metric ton price differential between the high sulfur fuel oil and the ultra low sulfur fuel oil of 0.5% breaks even within 15 to 20 months. We also consider that the LPG has fuel upgrade to some of our vessels and now possibly in 2020 when the first LPG engines will be built and retrofit becomes available then. However, the investment required for this option is significant and the breakevens are dependent on future LPG pricing when compared with future compliant fuel pricing.

As a full implementation of the IMO 2020 regulations comes into focus, especially after the recent MEPC meeting on non-compliant carriage of fuel by vessels and disposing of the experience building phase in proposals, we are confident that LPG is a very attractive solution given its lower emissions and the upcoming environmental regulations. Thus it is likely justifies the investment in upgrading vessels to LPG as marine fuel.

With that, I will pass it back to John Hadjipateras.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Thank you, John. Operator, do we pass it to you for questions, please?

[Operator]

Okay, certainly. [Operator Instructions] First question is coming from the line of with Peder Jarlsby with Fearnley Securities.

[Peder Jarlsby, Fearnley Securities]

Hi, guys. Just the first question on the potential of 4Q. We've seen rates slide a bit in recent weeks, but I think overall the quarter should be better than the third quarter. So using a 3 to 4 week lag, I think we have the bulk to get 25,000 a day. But I was wondering if you could add some color on how the market has been in the West so far and also potentially your geographical exposure so far this quarter.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Thanks. Well, it's – as you know we're biased towards the west most of the time, we have – but we do have an exposure in both markets. The last quarter, the one – we saw margins all compressed and even an elimination of the West premium. But I think our view is that there will continue to be a West premium. And that we have enough of a fleet diversity to be able to have chips in both – be exposed to the spot market in both markets – in both sides of east and west.

[Peder Jarlsby, Fearnley Securities]

Okay. And it’s so clear you've been outperforming peers and also the Baltic for quite a few quarters now. If that’s – I guess that's partly due to the western premium you have achieved, but could you also potentially quantify how much is due to your vessels, the ECO benefits compared to the Baltic benchmark vessel?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Well, it's difficult to say that because the Baltic don't forget is if you calculate off of the Baltic, you're using 100% utilization, which is rarely the case obviously in the real world. So you would discount the Baltic to some extent to project earnings of different fleets. On the other hand for the benefit of ECO, it varies depending on the price of fuel obviously. So I think I wouldn't be far off and Ted will correct me if I use a kind of average number of $2,500 a day...

[Ted Young, Chief Financial Officer]

Again, obviously, Peder, as you know that John is basing that on roughly current bunker prices. If bunker prices increase, which they may well in post IMO 2020 that that savings benefit increases quite significantly.

[Peder Jarlsby, Fearnley Securities]

Okay, thanks. And just a final question from me looking at the order book next year, this year we had extremely low fleet growth, next year there’s a few more vessels delivering. But big bulk of those vessels coming to the market next year are going to be trade or controlled tonnage for that. Do you have any view on how that will impact the market? Are you concerned that its traders are sitting on those vessels? Or do you think it doesn't really matter?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

We are cautiously optimistic that the increase in the volume and demand will absorb the ships delivering next year and the following year.

[Peder Jarlsby, Fearnley Securities]

Okay. So – but you're not worried that its traders sitting on the majority of that tonnage coming to the – hitting the water next year.

[John Lycouris, Chief Executive Officer, Dorian LPG USA]

But you say that, but a lot of these traders are – have a captive business, I mean are big contracts. They like end users in a way. It's not – they're not ordered totally speculatively…

[Peder Jarlsby, Fearnley Securities]

Okay, fine. That's all from me. Thank you, guys.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Thank you.

[John Lycouris, Chief Executive Officer, Dorian LPG USA]

Thank you, Peder.

[Operator]

All right, thank you. [Operator Instructions]

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Operator, while if – if you see – if you get any more question – in the meantime we’d want to address – answer an email question that we received about the report in a trade about a picture of our – one of our ships to Equinova. And so we can comment on that not specifically on the ship or the charter, but we can confirm that we did enter into a three year time charter with a major oil company for one of our scrubber ships at roughly the rates that were reported, which is 30,000 – just under 30,000 a day. Any more questions?

[Operator]

Yes. We have a question from the line of Michael Webber with Wells Fargo.

[Greg Wasikowski, Wells Fargo]

Hey, good morning guys. This is Greg on from Mike. How are you?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Hey, Greg.

[Greg Wasikowski, Wells Fargo]

Hey. So just starting with scrubbers, I'm just wondering to get your strategy and your way of thinking behind choosing which vessels to install on? And then are you happy with the seven? Or could you see doing more in the future as we get closer and get more clarity around fuel spreads?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Greg, yes. The ships that were selected are the ones that are scrubber ready as we mentioned on the just – write up just a few minutes ago. And we plan to install those because these are the ready ones and we feel that we can have a quicker turnaround on these vessels. We do not preclude the ability to do more ships in the next few months and years as things develop, but we keep an eye that LPG as fuel is another alternative. As I mentioned in the write up again, we wait to see where the compliance fuel price will land and where the LPG price will develop in 2019 to make a decision about the LPGS fuel and/or the scrubber. So that's the answer. Thanks.

[Greg Wasikowski, Wells Fargo]

Okay, thanks, very helpful. As a follow-up just to kind of jump over to BW; to the extent that you're able to comment. Where's that relationships stand? So this is very much a public event and arguably it’s started to get a little chippy towards the end. So the public vision is limited. Are things amicable there? Or is it fair to say that these conversations have ended for good?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

I think we can say that we hopefully mutually respectful competitors and that's the current status of our relationship.

[John Lycouris, Chief Executive Officer, Dorian LPG USA]

And I think it would only be fair to say that the conversations have ended for now. And I'm saying that purely from a legal perspective, I can't possibly speculate on what they might do in the future and certainly wouldn't be drawn on what our board might decide to do in the future.

[Michael Webber, Wells Fargo]

Thanks, guys. That’s helpful. This is actually Mike on for Mike. I just wanted to – yeah, I've been ghosting the call. So I have two valid questions. But John I wanted to dig in for a second on your LPG’s fuel feed works and forgive me if you put this out and I've missed it. But in terms of the costs associated with fitting an LPG carrier to effectively and efficiently run on LPG like to convert one of your existing carriers, do you have a vague cost point there in terms of just on a dollar basis? And then when you say you're looking at the spreads for the applicable fuels, what's the number you're looking for at which point you think it makes sense?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

The first part of your question, Mike, $6 million to $9 million is the number that I could give you. And this is on initial pricing by the engine manufacturers and by the cooling plants. And a number of other items that one would consider in this conversion of LPG as fuel. The second part is, we have a moving target. If LPG comes to be priced the same as fuel oil, high sulfur fuel oil, then I expect that the breakeven that you are asking would be somewhere between two and four years.

[Michael Webber, Wells Fargo]

Okay, so you need parity with HSFO basically to make that math work?

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Well, you know, I have to stab – I mean to take a price and give you something and that's the best I could do right now because…

[Michael Webber, Wells Fargo]

No, that’s fair, yeah.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

We run it. And it could be somewhere between two and three and four years. I think rather sooner than later, it might be around three years. And that's the number basis, the numbers that I just mentioned to your $6 million to $9 million.

[Michael Webber, Wells Fargo]

Yeah, okay.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Does that answers what you wanted?

[Michael Webber, Wells Fargo]

And no, it’s helpful. And just given some of the political concerns around scrubber tech in general, the…

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Sure…

[Michael Webber, Wells Fargo]

I would imagine that there's, from your counterparty perspective, there might be some ancillary factors as to why they might going to push forward for alternative fueling rather than simply just relying on scrubbers and HSFO. So, no, that's helpful and I can dig on that offline, but I'm…

[John Hadjipateras, Chairman, President and Chief Executive Officer]

It is absolutely exactly what we also feel that we would like to take a balanced approach to this and would not jump all the way into scrubbers, but considered both alternatives and be able to have a balanced flattish going forward.

[Michael Webber, Wells Fargo]

Okay, great. Well, we'll turn it over now. Thanks for the time guys.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Thanks, Mike.

[John Lycouris, Chief Executive Officer, Dorian LPG USA]

Michael, just one thing about that. I mean the one – one of the arguments in favor of scrubbers is that is actually actionable and that is – and you can see there's a visibility on the cost recapture. So that that is one argument that I can – we torture the whole subject like everybody else is doing. And our conclusion – my conclusion is it's a short term conclusion, maybe, maybe not, but it is actionable and it's something that we have preferred to do to step in front of it rather than, than just say we'll wait and see.

[Michael Webber, Wells Fargo]

Okay. No, it certainly seems like, you're looking to move the ball forward at least a little bit with the LPG’s fuel feed work and on the whole certainly seems like there's probably more diligent sector wide on scrubbers and there are actually on a lot of the asset decisions that get made, so – which is telling. So, now, I appreciate the thoroughness and what you guys are doing and we'll turn it over. Thanks, guys.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Thank you.

[John Lycouris, Chief Executive Officer, Dorian LPG USA]

Thank you.

[Operator]

Thank you. This concludes our question-and-answer session. I would like to turn the floor back for any closing comments.

[John Hadjipateras, Chairman, President and Chief Executive Officer]

Well, thank you all very much. Have a good afternoon and happy Halloween.

[Operator]

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.