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Dorian LPG Ltd
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Greetings, and welcome to the Dorian LPG Third 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's 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.
Thank you, Christine, and good morning everyone, and thank you for joining us for our third 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 February 11, 2019. 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 express today. Additionally, let me refer you to our unaudited results for the period ended December 31, 2018 that were filed this morning on Form 10-Q where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements.
With that, I'll turn the call over to John Hadjipateras.
Welcome from Sunny Stamford, Connecticut. During the quarter, the Baltic rate reached $48.286 per ton in October, the highest level since February 2016. Volumes from the U.S. were unchanged from the previous quarter. AG volumes feel by $700,000 and yet the West premium was eliminated and at times negative as owners and traders ballasted their ships to the West. With a November propane naphtha spread at $58 versus $13 in 2017, 10 cargoes were shipped to the Europe in October-November of 2018 versus 4 in October-November of 2017, and freight rates to the Europe traded at a premium to both. US East and AG East rates.
Ships returning from the shorter trips to Europe, the wild gyrations and fall in oil prices, mild Bellevue prices in backwardation [ph], U.S. inventories higher in 2018, and Far East buyers holding off in December and January all took their toll pressing the Baltic to nearly $25 last week. We cannot guess when this will reverse but the paper market is forecasting a recovery in March. I think it's perhaps useful at this time to briefly review some of the fundamentals of the VLGC trade.
In the period 2013 to 2017 total seaborne trade in LPG increased more than 50% from 63 million tons per annum to 92.5 million tons per annum, and U.S. exports increased by more than 200%. Newer fractionation is planned in the U.S. through 2020 amounts to 1.6 million barrels a day, and export capacity through 2020 is expected to increase by 11 to 12 VLGC cargoes per month. China's imports between 2013 and 2017 increased from 4.2 million tons per annum to 18.3 million tons per annum. Three new PDH plants are scheduled for 2019 with total 2 million metric tons per annum capacity, a further 3 are schedule for 2020 and 2 in '21 and 2 in '22.
Planned expansions of Korea's cracking capacity is expected to double demand there over 10 years. Indian government forecast demand for LPG to grow 11% to 12% per annum over the next 5 years. LPG is a clean and portable fuel, it produces five times less NOx and diesel, it is non-toxic and non-corrosive. Up to 3.7 million deaths annually, according to the WLPGA, are attributed to ambient air pollution. LPG can and should be making inroads in transport, residential and electricity generation. The World VLGC fleet now comprises 270 ships; of these 24 are over 25 years old, and an additional 8 are aged between 20 and 24 years. There are 46 ships on order.
We have been asked to comment on the rationale for ordering new ships when the spot market is below levels that provide adequate let alone attractive returns. We haven't placed any orders so I can only speculate as what motivates others. Some of the orders were placed by traders at the time when the proposed Dorian BW merger was widely discussed in the press. Most others are either project-related orders by end users or as in the case of several Japanese owners, as replacement of all the ships in their fleets, some anticipated higher new building prices. We would prefer to see -- not to see any orders, but we also believe that trade volume is increasing and we'll absorb them.
The average age of the world fleet is 9.4 years, the average age of our fleet is 4.6 years; that age advantage should result in customer preference and it comes with significant fuel efficiencies which translate into higher earnings. Furthermore, we have plan to equip 10 ships with exhaust gas cleaning systems prior to the implementation of IMO 2020. John Lycouris will give you some details about this, as well as our thoughts on LPGS as fuel.
Finally, before putting Ted on, I would like to point out that despite a very low market during the first part of the nine months of our current financial year, our TCE improved to $22,688 from $21,199 for the same period last year, and our balance sheet remains strong. On an annual basis, we repay $64 in principle. Our debt is 90% hedged and our effective interest rate is less than 4.5% per annum. We have the lowest debt to a new building parody [ph] value and debt to total cap amongst our quoted peers, as well as the youngest and most efficient fleet.
Over to you, Ted.
Thanks, John. Beginning with our chartering results; we achieved a total utilization of 90% for the quarter with time charter equivalent revenue, which we define as TCE revenue over operating days of $30,108 yielding a utilization adjusted TCE of $27,101; that again is TCE over available days. Our spot TCE for the quarter was $30,139 with a utilization of 88.4%. Daily OpEx for the quarter was $8,287 which compared favorably to last quarter's $8,585, reflecting a fairly typical operating environment. The quarter-over-quarter trend is favorable and our technical management team continues to keep a sharp eye on cost.
Total G&A for the quarter was $5.2 million and cash G&A, i.e. G&A excluding non-cash compensation expense was about $4 million. This amount does exclude the professional and legal fees related to BW LPG's unsolicited proposal which we have separately reported. Our reported EBITDA for the quarter was $27.2 million, but if we flip out the professional fees related to the BW situation, which we certainly don't consider it to be ordinary course, our actual EBITDA for the quarter would have been $35 million, which we believe is a reasonable representation of the earnings power of our business in a rate environment that is still somewhat below the long-term average rate.
We look at cash interest expenses, the sum of the line items of interest expense excluding deferred financing fees and other loans fees and realized gain/loss on derivatives. On that basis, total cash interest expense for the quarter was $8.1 million, which was down from the prior quarter reflecting our continued strong principal amortization. We do continue to benefit from our hedging policy and the favorable pricing of our Japanese financings leaving us with a current interest cost, fixed hedged and a small floating piece of 4.3%. Excluding costs related to the BW proposal, we continue to maintain cash cost per day of approximately $23,000.
In addition to the seven scrubbers previously announced, we have committed to three additional hybrid scrubbers for $4.3 million, not including installation costs. As we have some flexibility and timing in the installation of our scrubbers, we may elect to finance these investments from cash-on-hand but we do continue to pursue a range of debt financing options. Our liquidity remains good and following the distribution from the Helios pool in January, our current free cash position is approximately $46 million.
With that, I'll pass it over to John Lycouris.
Thank you, Ted. With IMO 2020 0.5% sulfur cap for marine fuels coming into effect in less than 11 months, we're beginning to see fewer markets develop pricing for compliant fuel which is critical to the payback economics for scrubber investments. The most recent trades are supportive of a healthy difference between compliance fuel and heavy fuel which our scrubber equipped ships were burn [ph]. The recent trades were two lots of 10 December Mini Singapore FOB Marine fuel of 0.5% our futures contract which traded at $500 per metric ton and $517 per metric ton. The mini refers to 100 metric tons instead of 1,000; the December Mini Singapore Fuel Oil for 380 fuel oil, our future contract traded same time at $320 per metric ton. That's where the premium of more than $180 per ton for the 0.5% sulfur fuel versus the current market rates for the 3.5% heavy marine fuel oil, we would expect to recoup our investment in approximately 18 months.
Although the market and the demand for low sulfur fuel is still developing. We believe that the investment decision is already well-supported. We will continue to monitor developments, pricing and an availability of the compliant fuel in the next few months. We feel we should also explain this misconception that exhaust gas cleaning systems moves the pollution from the air into the sea. The scrubber wash water removes and converts sulfur oxides from the exhaust gases so that they are discharged into wash water as harmless sulfate. Besides sodium and chloride, sulfate is the most common ion in the seawater. Even if all the sulfur in the world were to be scrubbed, the increase in the ocean sulfate would be tiny. By the way, scrubber wash water discharges are also continuously monitored by the exhaust gas cleaning equipment as are the emissions and both are subject to strict discharge limits by the IMO and the board states. The waste that we use from the open and closed loop systems is segregated on board and must be landed to shore side reception facilities.
Also, low sulfur fuels and distillate have been placed, but these fuels by their very chemical composition will increasingly produce toxicity in their emissions, whereas scrubbed emissions will be a lot better. The Singapore MPA decision to ban open loops scrubbers was not supported by any scientific evidence and it did not go any more time into sequence notation as far as we have seen. At Darion LPG, we have designed and diligently prepared our fleet with a view to retrofitting either scrubber or alternative fuel for the vessels. We have been operating two scrubbers in our fleet since 2015, gaining experience and the knowledge base related to scrubber equipment which combined with a scrubber or readiness of our vessels expected to result in the retrofitting during calendar 2019 and 2020 of the 10-hybrid address gas cleaning systems we have recently contracted.
Given a projected of $150 to $200 per metric ton price differential between heavy sulfur fuel oil and the compliance 0.5% sulfur marine fuel, we expect to recoup the CapEx for the retrofitting of the hybrid scrubber system through our vessels within 15 to 24 months. We also consider that the LPG assured upgrade to some of our vessels will be possible in 2020 when the first LPG engine are to be built and retrofitting becomes possible. However, the investment required for this option at the current pricing is significant, perhaps up to three times that of a scrubber and we plan to closely monitor the evolution into the next year.
Another important aspect of the LPG as fuel development is very much dependent on future LPG pricing when compared with a 0.5% compliant fuel pricing and/or the scrubber solution viability in 2020 and thereafter. We do remain hopeful, however, that LPGS fuel will become an economically viable solution given these lower emissions and the upcoming environmental regulations post-2020. Thank you.
And with that, I will pass it over to John Hadjipateras.
Thank you, John and Ted. Christine, you can open for questions now. Thank you.
[Operator Instructions] Our first question comes from line of Noah [ph] with JP Morgan.
I wanted to ask -- I think a couple quarters ago, we talked a little bit about the panic now increasing it's holes for LPG ships. I just wanted to follow-up on that. I just kind of see -- has there been any effects in the usage of the Panama Canal by WLGCs at all or has affected you guys [ph]?
Thank you. John Lycouris will answer you.
Yes, the increase in tools has been taken in without a lot of heavy concern. There have been some instances where ships have been waiting to get their slots rather than go sooner but otherwise, we do see that the traffic through the new Panama Canal is very strong and we still see more than 30 ships every day going around. I mean, sorry, not every day, every month going back and forth through the Panama Canal, LPG ships that is.
And then just to follow-up on the scrubbers; the news that some of the ports around the world are banning open loops covers. I mean, I know that ships are not spending a lot of time burning fuel in ports but can you give us an idea of how that impacts the economics of the scrubbers or how many less days perhaps that you'd be burning the high-sulfur fuel?
John will give you some detail, but as far as we're concerned, this ban doesn't affect us because all the scrubbers that we're fitting are hybrid and therefore so they can be closed loop. But we actually believe that the open loop solution is viable and John will tell you why.
The open loop scrubber is good for the open sea, and it does not reduce the sulfur content enough to 0.1% which is applicable in many ports. As a result, many scrubbers are called the VGP-compliant and have the ability to reduce that affluent and the emission to 0.1% and also have effluent which is compliant with the port by using caustic soda; that makes sure that the water that you put out and the emission that you put out are compliant. So there are -- and we do use in the United States, a scrubber which uses caustic soda, and therefore neutralizes all the emissions and it comes out completely clean. So that's why we thought that the job of the Singapore port authority was a little bit far ahead of itself. But that's...
Uncharacteristically unstudied, we will say.
Yes.
And do you think -- I mean, there has definitely been momentum for the -- kind of -- we call the anti-scrubber crowd, do you feel like there will be some organization using scrubbers to try to kind of defend the science or do you see any sort of momentum building on that front?
We kind of think that the anti-scrubber thing is self-defeating, but -- and I think in a famous exchange between Patty Rogers and Bob Burke; Bob Burke told Patty Rogers, "You stick with it. We need the differentiation." So I'm not sure it's in our interest to convince everybody to put scrubbers in.
We can all have different opinions, you're saying?
[Operator Instructions] Our next question comes from the line of James Chang with Maxim [ph].
So, do you have any more insights into what's going on with the Mariner East pipeline? I think -- so now as it goes easements are -- I think they expired now and then there are more sinkholes [ph]. I mean how does it -- I mean have you heard anything more about what's going on there and potential impacts for you guys for the rest of this year if those pipelines are shutdown?
Yes, again John will tell you. We know as much as the industry knows but maybe we're closer to it because we have been directly -- they've been our customers and we've been talking to them. He can give a little…
James, as you know, the Mariner East One is the ethane pipeline and does not really affect us what we are more happy about is the Mariner is two which is the one that brings in propane into [indiscernible] in Philadelphia; so we are happy to tell you that that pipeline is operational and we'll start loading it's first ship this month and will be probably bringing in quite a lot of propane from the area -- from the eastern area of the United States. So this is good news for us. The Mariner East One which is the ethane that you're referring to, I -- I'm sure that it will take some time before it is resolved, all sinkholes [ph] and last time, last year this time in March of 2018 and they've managed to fix it up after a couple of months. I hope that they manage to do the same this year with Mariner East One because it's going to cause a huge congestion in Houston with -- and supply stretch on the ethane side of the business which is not good news for a lot of crackers that are starting up at the same time in Houston.
Okay. So you guys it doesn't seem like it's a big risk. Possible, because what's going on in Mariner East One and the process you don't think that's going to lead to anything Mariner East Two?
No, it's different by -- yeah.
Okay great. And the last thing I have is the door-to-door for the VLGC is a little robust [ph] this year next year. You know, in your gestination destination I mean do you believe all these vessels will be delivered?
I think it's hard to say that they will not be because they are mostly -- in shipyards that have a record of building and reliability but some of the orders that are included in the order book are for ethane carriers, and at least six of those were associated with the de-loss [ph] deal with you made, when they know about, and which we know now has been scrubber. So those ships might be -- something might happen with them but at the moment I will consider them questionable, certainly not in the delivery slots that they've been scheduled and have been shown until now.
Our next question comes from the line of Michael Weber with Wells Fargo.
This is Greg [ph] on for Mike. So just following up on the scrubbers, their high rate; can you remind us what the transition is like for them, is it quick and easy or is there additional dry-docking periods for that?
You mean to retrofit the scrubber.
No, just to switch them over from open loop to closed loop.
Oh no that's..
Well, it would require additional pumps, additional tank space and it is…
No, no; once it's hybrid, it's hybrid. He is talking operationally during that time.
If it is operational..
When it -- yes, if we go from close to open and the switch of...
Yes, I thought she meant was the foundation [ph].
Just to clarify, if the regulatory bans continue and you decide it's in the best economic interest to switch over to close loop; operationally, what does that process look like? Do you have to bring the ship in for further days off or is it something you can just do onboard?
No, the ship can operate for all of the time or part of the time it will--once it's hybrid, it's hybrid; you can do closed or open, this is by definition, this is it. There is no extra installation, modification, it's just -- operationally, it's just a flick of a switch almost.
And then thinking about the comparison between the scrubbers and LPG fuel; I mean think about it long-term; you could see profitability in the scrubbers, maybe changing from after that 15 to 24 month period whereas LPG fuel might be more profitable over the long-term; so how do you weigh that decision thinking about and very much a long-term way?
Well, it depends on the pricing and it depends on visibility. If we would like to think that LPG will be competitive so as to gain a bigger market share, as to become more -- to penetrate more markets, like I said in my remarks, where there is clean air around where people desperately needing cleaner air which -- and including LPG as fuel for ships, especially LPG ships. But at the moment from what we know and we cannot justify making the investment which is between 2.5 and 3 times the investment of a scrubber to make the investment into the LPG -- to do the LPG conversion. We think -- like John said, that over the next 12 months -- I mean, we'll keep watching and over the next 12/24 months we'll see how it goes and if we can, we will. I mean there is also a likelihood that the price will come down, the price of conversion, once it becomes that people started doing it on a more regular basis.
In fact, on the scrubbers; as you know, we have scrubbers on two of our ships which we put in at the new building stage which is nearly five years ago now. And I think that the price now at scrubbers today is 50% less than we paid for when we put them. Isn't that right John?
Yes.
So we would think that perhaps some things -- some similar development will happen with the LPG as fuel -- LPG conversion of engines.
Yes, that makes sense. Thinking like super long-term if that if -- we're in 2021 or 2022, say you even already got your payback on your scrubbers but the spread starts to narrow and profitability starts to go down on the scrubbers and like you said the OPG fuel maybe gets more cheaper in the future; is it something that we could see you could go for LPG fuel conversion on the ships that have scrubbers now?
We could, we could. Yes, absolutely. And not only that because of the -- the generator engines of the ships are not -- cannot be converted to LPG at this stage, nor have any engine been built to burn LPG as of this minute or planned for -- they are still working on building engines -- auxiliary engines like that. So you would be able to use the scrubber for the auxiliary engine while in port, so it would be useful to still have a scrubber onboard even though you use LPG. And remember, if you don't have enough LPG to burn onboard you would be able to switch into the compliance fuel of the future or into the heavy fuel oil if you have a scrubber. So have this queue of fuel ability in the future that is also very advantageous.
Try [indiscernible] if would be able to do anything; so that gives you full flexibility for the future. And besides we think that LPG in the engine would reduce maintenance, it's a cleaner burning fuel and it is very important to understand that.
Our next question comes from a line of [indiscernible].
I just wanted to ask you about your -- those two ships you have with scrubbers. Can you share based on how those two have outperformed the first whilst to deliver really?
Well, the thing is that we have been able to obtain employment that is superior to what we would have been able to obtain otherwise, and in time charter terms. And we also have been able to use the heavy fuel oil into all ports into the North Sea and into the American Emission Control Area; so we do get a good benefit with these systems already. However, I was at the Open Sea Week [ph], we don't need to use them at this time but we will be able to use them in the future. So yes, we did have some benefit, not as it would be in 2020 onwards.
And have you, obviously -- but have you started to initiate the discussions with potential charters which kind of incorporate that potential scrubber premium in 2020 so we can see or you can know what your share of that premium will be?
We have fixed the ship already which we reckon as an element of a premium in it but it's difficult to say what the share is. I can't speak because it's a long-term charter, it has -- and you have to make assumptions about the price and all but the very fact that you can get a piece of business because of it is significant. And going back to your original, about our two existing ships; so we were not able to get a charter that will pay sufficiently to what we thought was a fair kind of premium. So we kept the ship spot and we were perfectly happy because the benefit we knew was completely to us. And I think that sometimes you see that the straight calculation where a charter helps to pay for a scrubber and then claims 50% of the benefit or something like that. We haven't -- we don't expect to in that -- to be doing that, although if we see something that would work we would address it but at the moment we're quite content to take -- to make the investment and see the return either by way of directly benefiting in the spot market from lower costs or getting it back on increased premium on a time charter which is kind of difficult to identify exactly what the premium is.
And this is another question maybe for Ted; you mentioned that you've received some of -- some full payments recently about the $12 million or something; but the buildup last year or this year has been rather significant, still in working capital. Is this something we should expect to be reversed completely over the course of the next couple of quarters or…
I hope not because that would mean the rates are falling off. Most of the increase that you saw particularly over the last quarter which was -- I think 14 million of our reserves was really -- it's a function of increased profits in the pool; so hopefully we won't see the tail off too much. I think it's worth pointing out because of -- the way the pool works, it definitely -- there certainly is a working capital effect, but it's not the way you would typically think about it it were a fully owned entity. In other words, cash only flows one way; it only flows from the pool to us, it only flows from the pool to us. So, as a result, when you see that there was a cash effective of consumption because of receivables, that's part of -- that is truly part of the effect of reconciling net income to cash. I guess as it always is, but again, it's not as if we're forwarding money to the pool to help finance that receivable build. The pool maintains it's own levels of working capital, so it's dividended out are truly the profits.
We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.
Thanks, Christine. I want to thank everybody. And before closing down, John Lycouris wants to say something about the numbers that he gave you.
Because I saw there was a lot of interest in scrubbers I just wanted to mention the fact that American Bureau of Shipping has given us their latest reassurance [ph] on the matter and they told us that the adoption trend in scrubbers has reached above 2,000 vessels as of the end of last year. So, we are seeing very strong trends here for adopting scrubbers and we have seen a number of visible and large companies coming in favor of scrubbers. And I just wanted to give you that statistic because it is important to hear.
Thank you very much. John?
Thanks, all.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.