Dorian LPG Ltd

NYSE:LPG

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Dorian LPG’s Third Quarter 2023 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.

[Theodore Young, Chief Financial Officer]

Thank you, Darryl. Good morning, everyone, and thank you all for joining us for our third quarter 2023 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and replay of this call will be available through February 8, 2023.

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, 2022 that were filed this morning on Form 10-Q. In addition, please refer to our filings on Form 10-K, where you’ll find risk factors that could cause actual result results to differ materially from those forward-looking statements. Finally, you may find it useful to refer to the investor highlight slides posted this morning on our website.

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

[John Hadjipateras, President and Chief Executive Officer]

Thank you, Ted. Good morning and thank you for joining Ted, Tim, and me to discuss our third quarter financial year 2023 results. John Lycouris isn’t with us this morning, because he’s having knee surgery. John Lycouris has contributed a slide you will find in the deck. That was much interesting information which I think, you will – may want to note and take, and we will follow with. We will have some remarks read by – from him at the end of our presentation and feel free any questions you may have.

After me, Tim will present and then – ultimately, Ted will present and then Tim, including the $1 irregular dividend announced today, we will have returned over $500 million to shareholders since our IPO. Our board has focused on returns to shareholders, while remaining commercial – retaining commercial flexibility and ensuring a strong balance sheet. We’re still investing in our business as evidenced by the full vessel joining our fleet in this calendar year and our commitment to the installation of 3 additional scrubbers.

For the quarter our EBITDA was $76.2 million, and net income was $51.3 million. The net income is the second highest in our corporate history. Our net debt-to-capitalization was about 34%. Ted will give you details and, of course, answer any questions you may have on our quarter’s financial results.

Global LPG market fundamentals strengthened in 2022 with increased volumes from both major export basin and more frequent cargo routes to Europe. Global exports increased 4% this past quarter, and up 6% for the year with support primarily from North America. Total exports for 2022 increased to 117.5 million from 110.9 million tons in 2021. U.S. exports increased 6% or 700,000 metric tons from the third calendar quarter supported by favorable arbitrage economics, which persist today. 2022 U.S. volumes were up 3%, an increase of 1.3 million tons from 2021.

Middle East export volumes showed continued growth, despite maintenance in some terminals in the beginning of December. Annual volumes out of the region are up 18%, increasing by 6.4 million tons from 35.9 million tons in 2021 to 42.3 in 2022 driven by reversals to OPEC+ production cuts. Freight rates were this past quarter underpinned by a strong arbitrage and increased waiting time in Panama. Rates fell in early December as canal waiting ease and some terminals in the Middle East underwent maintenance and demand in Asia was subdued. We’re now seeing a rapid reversal and an increase in freight rates in both basins.

On the shore side, Dorian’s operation, we continue to work hard to ensure the well being of our crew, especially our Ukrainian and Russian seafarers and their families. On the performance side, we have been very focused on our strategy to comply with the 2023 IMO emission regulations, the EEXI and CII. We have built out dashboards and forecasting tools that assist our commercial team and optimizing our utilization, and achieve a solid CII score for each vessel in the pool.

Our team has spent the past 2 years preparing for these regulations. And see this year as a turning point and a journey to decarbonize shipping. We will continue our research efforts and installations of various energy saving devices and premium paints to reduce consumption costs and carbon footprint.

Looking ahead at the market estimates for U.S. exports point to further growth in 2023 and 2024. And its January short-term outlook report, the EIA said it now estimates are U.S. LPG exports will grow 15.9% in 2023 year-over-year. This is up from their October estimate of 11.3% in 2023. The U.S. is now producing well over 100 million tons of LPG a year, with 2022 numbers coming in at about 106 million tons.

I’ll hand you over to Ted now for his remarks.

[Theodore Young, Chief Financial Officer]

Thanks, John. My comments today will focus on the recent capital allocation events, our financial position liquidity and our unaudited third quarter results. At December 31, 2022, we reported $129.8 million of cash, which was net of the $40 million dividend payment made at the beginning of the month. Of January 30, 2023, we have roughly $165 million in cash, with the increase from December 31, reflecting the January distribution from the Helios pool. Also, as John mentioned, we will pay another $1 per share, which is an irregular dividend or roughly $40.3 million in total of dividends on or about February 28, 2023 to shareholders of record as of February 15, 2023.

The irregular dividend announced this morning reflects the strong rate environment and our resulting cash flow. Once paid at the end of February, Dorian will have paid over $300 million in dividends and repurchased nearly $229 million in stock, representing 18.8 million shares, which together totals nearly $530 million in capital returned to our investors since our IPO in 2014.

Our Board continues to take a pragmatic quarter-by-quarter review of the company’s performance, the LPG chartering market environment and other macroeconomic and industry factor to determine whether to pay, and if so, how much in dividends. With a debt balance at quarter end of $635.6 million, our debt to total capitalization stood at 43.2%, and our net debt to total cap is of course even lower given our large cash balance.

Moving into this calendar year, we will take delivery of our dual-fuel new building from Kawasaki at the end of March, as well as 3 long-term time chartered-in dual-fuel ships, representing nearly 20% growth in our commercially managed fleet. With these additional vessels, our cash cost per day will increase to $24,000 to $25,000 a day, but I would also note that these vessels offer higher earnings potential given their size, fuel efficiency and dual-fuel optionality. For the discussion of our third quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website.

Turning to our third quarter chartering results, we achieved a total utilization of 97.8% for the quarter with a daily TCE per operating day as those terms are defined in our filings of $52,768 yielding a utilization adjusted TCE of about $51,630, that again is TCE per available day. Spot TCE per available day, which reflects our portion of the net profits of the Helios pool for the quarter was about $52,583. Also, the overall Helios pool reported the spot TCE including COAs of approximately $57,000 per available day for the quarter.

You will note that these results are somewhat correlated with the average Baltic rate recorded on a 2-month lag. As many investors and analysts look to model the business, we would note that a 2-month lag Baltic is more in line with the actual cycle of the business. Our team books voyage is about 30 days out and the average load to discharge voyage – i.e., 1-way voyage is about 30 days. It is also worth reminding the investment community that the published Baltic rate assumes 100% utilization and is based only on the Ras Tanura-Chiba route.

Turning to the cost side. Our daily OpEx for the quarter was $9,739, which is up marginally from the quarter ended September 30, 2022. The crew costs, which include crew travel, appear to have found a new normal as crew cost per day has been relatively stable over the last 3 quarters, and spares and stores were actually down sequentially. Repairs and maintenance and lubricant costs drove the increase this quarter. Our time charter-in expense for the 2 TCE in vessels remained stable at $5.2 million.

Total G&A for the quarter was $6.9 million and cash G&A, that’s G&A excluding non-cash compensation expense was $5.9 million. Included in the $5.9 million is approximately $200,000 that we spent to provide accommodation and food to the families of our seafarers affected by the war in Ukraine. We also recognized about $250,000 of performance-based bonuses for some employees in the quarter. Thus, our core G&A for the quarter was about $5.5 million, which is consistent with our expectations.

Our reported adjusted EBITDA for the quarter was $76.2 million, up sharply from the prior quarter’s $46.2 million. We look at cash interest expense on our debt as the sum of the line items interest expense, excluding deferred financing fees and other loan expenses, and realized gain loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $6.6 million. Our hedges saved us $1.4 million in cash interest this period, and we recently extended our existing hedge profile to ensure that the 2022 debt facility is 80% hedged and towards maturity in 2029. Although, we currently hold an 87.5% economic interest in Helios, we do not consolidate its P&L or balance sheet accounts, which has the effect of understating our cash and working capital.

Thus, we believe it’s useful to provide some additional data in order to give a more complete picture. As of Monday, January 30, 2023, the Helios Pool held $20.5 million of cash on hand. Page 5 of the investor highlights materials outlines the economics of our scrubber investments and clearly this investment has been valuable for our shareholders. Of note, the total scrubber’s cost savings have now paid back the entire initial investment.

In addition, as John noted, we’ve committed to 3 additional scrubbers. And I would note that the installed cost of these 3 scrubbers will be roughly two-thirds of the cost that we incurred on the first 10 retrofits. You also note that our investments in performance monitoring have also proven their value as both our AER and EEOI have on the basis of unaudited figures for calendar year 2022 fallen by mid-single-digit percentages versus the prior year. Thus, Dorian’s contribution to a cleaner environment continues unabated.

The significant irregular dividends in the last 12 months underscore our Board’s commitment to a sensible capital allocation policy. The balance is market outlook, operating and capital needs of the business and appropriate level of risk tolerance given the volatility in shipping. We also continue to evaluate potentially interesting investment opportunities that may represent attractive risk adjusted returns. With a continuing solid freight market backdrop, we remain cautiously optimistic about our cash flow generation over the coming months.

With that, I’ll pass it over to Tim Hansen.

[Tim Hansen, Chief Commercial Officer]

Thank you, Ted, and good day, everyone. Thanks for dialing in. The October to December 2022 call for increased LPG export as well as import demand, which translated into a current freight market. North American export was buoyed by relatively mild winter, dampening domestic LPG consumption, and continued record setting production levels. The quarter is often characterized by seasonality as Asian importers tend to stockpiled for the winter, and 2022 was no exception.

North American exports set a record for exports for the quarter, while South Korea and Japan posted a strong import level also held by demand for LPG’s piling to navigate the cold winter. Middle East export volumes were slightly down compared to previous quarter. But nonetheless, it was a record high fourth quarter export.

The East of Suez market saw the BLPG1, which is a benchmark for [AG Chiba route] [ph] continually offers strength from the quarter prior, despite a free flow during the golden week holidays in the Far East. Several delays at key discharge ports in India and in the Far East saw considerable tonnage during October and November. Meantime, market players also had to plan with long lead times, because the west market was seen fixing in those 5 to 6 weeks in advance of the low delay hands [ph].

The result of the favorite product markets have sold in tonnage discharge port and navigating long lead times was a bullish [ph] market in October and November. On the 21st of November, we saw record high BLPG1 posted at $148 per metric tons. December was relatively quiet, as the seasonal back rotation in the markets impacted the product market, and a significant downward correction was seen in the second half of December.

The rest of Suez market likewise saw a rising market during October and November, with a downward correction in December. The rest of Suez market was also impacted by delays at discharge, but also had to contend with increasing delays for transiting the Panama Canal. These delays factors to vessels resulted in market players having to secure tonnage well in advance of the [lake hands] [ph].

The Western Suez market did not climb at the same pace as Suez market, partly due to the fact that ship owners’ being enticed to lock in firm earnings and longer voyages, which increased the competition for cargoes known to be destined for the Far East discharge ranges.

By September, a weakening in arbitrage, as you can see on investor deck online, due to the forward delivery prices of product in the Far East, the activity levels in the last few trading days of calendar 2022, this resulted in a significant freight market reductions. The East and West market freight indicated a well balance shipping markets are supported by strong fundamentals. Whereas in the summer, the balance shipping market demonstrated that the VLGC market could weather seasonal summer doldrums, the early into demonstrated how strong the market will rise when shipping demand increased.

The positive fundamentals of the market has been deemed over the quarters. This remain, however, market players attempting to understand the impact of the new COVID-19 normal in China, and whether world recession is looming in the horizon. Despite the present external risk, propane inventories continue to build in North America, and demand for LPG remains robust. Also, there’s reasonable optimism of increasing demand for LPG in China, once a hard landing of sudden opening is handled with more PDH to recover on stream and the industry operating on more stable basis.

With that, I’ll hand it back to, John.

[John Hadjipateras, President and Chief Executive Officer]

Yeah, thank you. As I said in the beginning, I think, we’ll have the remarks briefly that John Lycouris had prepared briefly read now, and then we’ll go back for questions. Thank you. Peter?

[Unidentified Company Representative]

Thank you. [Technical Difficulty] operation results and our near-term ESG strategy. Starting with our scrubbers, fuel spreads for calendar fourth quarter2022, our third quarter 2023 widened between LSFO and HFO benefiting our scrubber vessels with improved wage economics averaging about $5,831 per day net of our scrubber OpEx costs. The realized average savings were about $246 per metric ton of HFO consumed by our scrubber vessels versus the cost of LSFO. The hybrid features of our scrubbers provided additional upside for all ECA and SECA areas of trading. In addition, scrubbers reduced not only stocks, but also significantly reduced Particulate Matter and Black Carbon, and we feel are necessary precursor for putting future Carbon Capture systems on our vessels.

Pivoting to our ESG strategy, our immediate focus is on our fleet’s IMO mandated EEXI and CII rating, which will come into effect in stages in 2023. We’re reducing emissions and improving commercial performance by installing various Energy Saving Devices or ESDs. We’ve also implemented real-time data monitoring, as we mentioned before with sensors that track performance and optimize onboard operations and voyage completion. We combine this with robust crew training efforts, which we feel to paramount to getting this done. In addition, we have contracted 3 additional scrubbers, which will be installed in the next 2 quarters for 3 of our vessels which have upcoming drydocks.

Looking ahead, we’re investigating the potential for Carbon Capture and Storage onboard our vessels. We’re continuing to improve our energy efficiency onboard our vessels with a focus in vessel performance and emissions improvement, and we’re continuing to study technological innovations and advances as they mature and implementing them as soon as we can.

With that, I’ll pass it back to our Chairman.

[John Hadjipateras, President and Chief Executive Officer]

Thank you. Thank you. And Darryl, we can go with the questions now. Thank you very much.

[Operator]

Thank you. With the prepared remarks completed, we will now open the line for questions. [Operator Instructions] Our first question comes from the line of Omar Nokta with Jefferies. Please proceed with your questions.

[Omar Nokta, Jefferies Group LLC]

Thank you. Hey, guys, good morning.

[John Hadjipateras, President and Chief Executive Officer]

Hi, Omar.

[Omar Nokta, Jefferies Group LLC]

Hi, there. It’s a nice solid quarter, obviously, and it looks like more is on the way here, especially given what we’ve seen in the spot market here in the past week or so.

[John Hadjipateras, President and Chief Executive Officer]

From your mouth to god’s ear.

[Omar Nokta, Jefferies Group LLC]

Sorry, John, what was that?

[John Hadjipateras, President and Chief Executive Officer]

I said, from your mouth to god’s ear. I’m sure, god is listening to the analysts, right?

[Omar Nokta, Jefferies Group LLC]

He’s looking happily on you.

[John Hadjipateras, President and Chief Executive Officer]

Well, thank you.

[Omar Nokta, Jefferies Group LLC]

I would say the dollar dividend you declared, I think, clearly you’re conditioning us to – or I think, I’m being conditioned to expect these payments. And, I know, you’re still viewing them as irregular. And you mentioned in your opening remarks, the Board takes a more pragmatic approach to the payout each quarter. But how should we think of Dorian’s use of cash here as we think about the near- to medium-term? Are dividends the number one priority?

[John Hadjipateras, President and Chief Executive Officer]

No. They are – our capital allocation is our number one priority. And our – the way we think about the dividends are as part of a whole, which includes – it has included in the past buybacks, and now they could include them again; dividends, obviously, and reserves for a rainy day and for investment, including renewal. So up until now, as you know, we’ve invested only in one new ship, we feel that we’re covered with the 3 double fuel ships that we’ve chartered in, plus the new building that we’re taking in for ourselves.

We’re investing a little more in the scrubber because we feel that, that has given us good returns and we think the prospects are good. So while dividends are right up there, I think, you asked specifically, are the first priority? And, I think, we should say that they are equal weight in – that’s how we view them, equal weight within every quarter’s capital decision allocation, which is kind of long-term and medium-term.

[Omar Nokta, Jefferies Group LLC]

Okay. That’s fair enough. I appreciate that color. Maybe you did mention the investment and you’ve got the 1 new build, the 3 charter-in. At this point, it looks like you’re deploying capital on those 3 scrubbers. Just out of curiosity, you mentioned that those will carry a cost that’s about two-thirds of the initial program a few years ago. I think, generally, people have just assumed that it would be more costly today. And so, I just want to get a sense of what makes it cheaper this time around?

[John Hadjipateras, President and Chief Executive Officer]

I think the production really, because you’re right, it should be more expensive. But if you compare it to the first time we put scrubbers on board, which was in our initial 2 new buildings, it’s not only a third – it’s probably a third of the cost, not just a third offer. So they’re just – they keep coming down, I’m sure there’s – they will level off somewhere. But they’re more efficient. They’re more compact, easier to install. And that’s it really, I think, Ted, do you want to add?

[Theodore Young, Chief Financial Officer]

I mean, I think the other thing if there was some costs when we initially did the first retrofit, so basically I’m not a technical guy, but like high tech MRIs of the structure to see exactly where to put stuff. Well, now we know the plan of the ship. So some of that we’ve avoided and we’ve gotten better at installing them, our piece of it, and the yards have gotten better, too. So it’s all the learning curve, I think like John said.

[Omar Nokta, Jefferies Group LLC]

Okay. Yeah. What do you think in terms of timing, it sounds like, I think, Theodore had mentioned in the second and third quarters, you expect to complete them. What’s the expected sort of off hire time for those ships?

[Theodore Young, Chief Financial Officer]

We’ve modeled for the time being 30 days, that’s what it’s worked out to historically. We’ve done a little bit better than that sort of 27, 28 days, but we’ve assumed 30 for our internal modeling purposes.

[Omar Nokta, Jefferies Group LLC]

Okay. And that will happen anyway with the surveys that are due?

[Theodore Young, Chief Financial Officer]

It would, except it’s worth remembering, Omar, that when we normally do our special surveys, we actually are only in dock for 15 days. So it takes sort of an additional 2 weeks to install the scrubber. So we normally do not have 30-day regular drydockings.

[Omar Nokta, Jefferies Group LLC]

Okay. Got it. And then maybe just one more. And I guess maybe a bit more bigger picture just on what we’re seeing in the market. You referenced this early in the commentary. And maybe, Tim, just what’s been going on, I guess, with the spot market here recently kind of came into the year a bit softer kind of a little lower looks like the first couple of weeks and then here a bit of the past week or so we’ve seen a big jump. Just wondering what’s driving that that uptrend here recently?

[John Hadjipateras, President and Chief Executive Officer]

Tim, do you want to try and make a stab at that?

[Tim Hansen, Chief Commercial Officer]

Yeah, I think, it’s a combination of things that probably at the end of December we came from a very high point, and as we closed in on Christmas and the arbitrage closed in a little bit. I think people got quite keen to take the cargo that was there before the holidays and that made the rates fall. Then you had kind of two weeks of quietness before people got back in the seat and in that time, it’s really that you can say the broker setting the politics that kind of dictates the market without any much action. So the market probably felt more than it should have done from that perspective.

But also at the same time, as we came back, we normally see the quiet of the Chinese New Year, but this year, due to the cold spells suddenly hitting Asia, we actually saw the Chinese coming back during the Chinese holidays, which normally they take a week or so to before they get back in their seats. So the demand really picked up due to the cold spells in Asia, and we saw them [scraping for tons] [ph] even during the holidays, which we normally don’t see. So, of course, that demand open the up and kickback the action in the market. And, actually, when we then saw that there was actually not a length in the shipping market, which became apparent quite quickly.

But as there was no demand, the previous week or activity at least and then that kind of make the market dropped quite quickly, and then it rebounded actually to probably where it should have been…

[Omar Nokta, Jefferies Group LLC]

Got it. Thank you. Thanks for that color. I appreciate the time guys. Congrats again on a follow-up quarter. And I’ll turn it over.

[John Hadjipateras, President and Chief Executive Officer]

Thank you very much, Omar.

[Operator]

Thank you. [Operator Instructions] Our next question is come from the line of Sean Morgan with Evercore. Please proceed with your questions.

[Sean Morgan, Evercore Inc.]

Hi, team. I want to wish, John Lycouris, speedy recovery from his knee surgery.

[John Hadjipateras, President and Chief Executive Officer]

Thank you.

[Sean Morgan, Evercore Inc.]

Yeah. And just kind of, I guess, sort of a macro question about the market? How do you sort of think about the current order book, one in five, I guess, versus the existing fleet, and that’s the delivery schedule in 2023 versus kind of some of the petchem build out in Asia and sort of the ability of the market to sort of absorb that new tonnage. How do you get comfortable with sort of the rate outlook in that context?

[John Hadjipateras, President and Chief Executive Officer]

We think about it a lot. And we never get comfortable. We just weigh the balance of probability and to the best of our ability. So I let Tim give you some benefit of – some of the conclusions that we’ve reached on the projected equilibrium. We’re generally, I think, a little bit more optimistic than some other people. And, he’ll tell you why? Tim?

[Tim Hansen, Chief Commercial Officer]

Yeah. So, of course, one thing that you can’t hide is, obviously, is evident to everybody is at 46 ships or so delivering in this year. But, what we think, we believe, we’ll balance this out to see the additional production, especially from the U.S, which have surprised quite a lot on the upside. So we see that most of the U.S. 80% of whatever is produced in the U.S. will go to the Far East. So the demand side is really in the Far East. So when we model that we see kind of around 20 ships absorbed due to that increase of volume at least, and that’s without any inefficiency.

On top of that, when we have more congestions in the borders received more and more as a lot of places the infrastructure isn’t built out for the increased volume, especially like India and other places. We’re also seeing a lot more go into Europe due to the war in Ukraine. So here we also seen more delays and then usually as its bigger volumes coming in. And then as we mentioned a few times if the Panama Canal delays, we do see them increasing. You can say some of the delays have happened due to the quite firm container market.

But, again, even though that is that is kind of easing off, you are going to have a significant amount of LNG carriers built for the next year or delivering in the next year. And we also are going to see more Panamax container ships are delivering, and the new regulations in the Panama also allowing larger container ships actually to go through as they do not have to check the trucks into the box anymore. So we do see increased Panama Canal delays.

And then, we have – as Theodore mentioned earlier, the regulations on the EEXI and CII, which will have an impact on the shipping fleet as the SEC normally goes very close to full speed, where you see the tanker markets and the dry markets previously has not been running on full steam. So for them the EEXI reduction is not so significant. But for VLGC, this will have an impact on the fleet, which is quite significant, actually. So we see these factors as being able to absorb this shipping fleet coming in.

[Sean Morgan, Evercore Inc.]

That’s really interesting. So, basically, I think you have a little bit of a natural hedge, the downside, I guess, more VLGCs coming in the market and obviously a larger impact from the big container ship, right? But what you’re saying is that there’s still only one Panama Canal and you’re just going to have more congestion. So are you sort of now thinking that the new steady state is just constant congestion in the Panama Canal that’s effectively slowing down fleets for not just obviously VLGCs, but just global fleets and increasing kind of utilization based on wait times?

[Tim Hansen, Chief Commercial Officer]

Yeah. That is our view. I mean, you have about 260 new Panamax container ships on order and about 250 LNG new Panamax ships on order. So this will – not all of them will naturally use the canal, but there is more ships going in that way. And, I think, the LNG from the U.S. eventually even though you’ve seen it lately due to the war going into Europe. There will be more going to the east as well. So, I think, the utilization of the Panama Canal will be or it will be more busy. And we have also seen LPG carriers probably being the hard ahead of those, because we are excluded from booking ahead, where other liners and LNG carriers that can speculatively booked slots a year ahead.

LPG ships can only book 14 days ahead for the canal and future the ranking that most companies have then that is an issue as the larger container lines have the higher rankings. So, I see this increase continue, and also the Panama Canal authorities have increased the cost of the LPG carriers passing. I guess the LPG carriers is the smallest ship that can pass the canal – that can’t pass the old canal, and ask giving the least revenue. So we see significant increases of the actual transit cost plus people is most of the time having to bid for the auctions, which goes everything from $100,000 to $2 million on the auction fee.

So we’re seeing more people also taking the longer route around the Cape or to the Suez Canal to ensure that they can actually meet their [late hands] [ph] and have a firmer schedule. So also that longer route will give some more tons in the balance of things. And that configuration has gone due to the delays and due to the uncertainties and the auction fees, of course, which also you don’t know what will be. So these things, I think, is the actual statement.

[Sean Morgan, Evercore Inc.]

And then, if I could just squeeze in one more on this, I think, Ted in the prepared remarks said that the Baltic rate reflects Ras Tanura-Chiba route. And if I’m hearing correctly, it’s almost something like he doesn’t view that as maybe as central important route relative to the actual rates that you guys are seeing at your charter desks. So what routes do you think like now are kind of more indicative of how the trade is really happening for VLGCs kind of a weekly basis?

[John Hadjipateras, President and Chief Executive Officer]

Sean, let me take this as two questions, actually. And we’ll give you two answers. Tim will answer you specifically on the part of your question, which says, what kind of mix the trade – how we should think of the mix, right? Because it’s not just AG East, obviously, it’s a western route. And even the West is both AG, and then U.S. Gulf East, but also U.S. Gulf to the continent and other short-term.

So I let him give you that. But first, I want to Ted to address the reason why he said the lag and the 100%, because when you – I noticed that most analysts now use a 1-month lag on the VLGC rate on the AG rate. And, of course, it’s still 100% utilization, which is fine. But, I think, I’d like Ted to have to explain to you why we think the 1-month lag will not reflect the actual earnings, because the lag in the receipt of freight is at least 2 months. Ted, do you want to?

[Theodore Young, Chief Financial Officer]

Yeah, sure. Yeah. So, Sean, exactly what John said, so aside from there being a mix, it’s really the business, it’s really the cycle, right? Our guys are booking now here at the beginning of February, for voyages that won’t complete until at the earliest sort of April, and maybe even further out. And so, as a result, when you’re trying to do undertake a modeling exercise, and given how the loaded – sorry, the revenue recognition accounting works, you really tend to find that, there are 2-month lagged average is going to be a lot better.

Tim will give you more on the specific trade lines and there’s some – the rates behave differently there, particularly we’ve seen U.S. Gulf to Northwest Europe be a sweet spot, but Tim will comment on that. But it’s really just simply a better – look, if there’s no perfect way to do this, we acknowledge that we wanted to give a little guidance to the investment community about how to maybe narrow or make it somewhat more accurate.

And, again, I mean averages are tricky. We booked somewhere around 9 to 10 voyages a month, so 20 some odd working days in any given month. So it becomes quite tricky to strike broad averages, but we at least feel that looking at it 2-month lag is going to give you a better indication of what we expect to see in for quarter or what you can expect to see when we deliver quarterly results.

[Sean Morgan, Evercore Inc.]

Okay. Thanks.

[John Hadjipateras, President and Chief Executive Officer]

Do you want to hear from Tim about the mix, actually?

[Sean Morgan, Evercore Inc.]

Yeah, that would be good, actually.

[John Hadjipateras, President and Chief Executive Officer]

Okay, Sean, it was a great question. Tim, have a go and you can do it quickly.

[Tim Hansen, Chief Commercial Officer]

Okay. But as Ted mentioned, there’s basically three routes, so the Ras Tanura-Chiba, or East of Middle East to Far East; and then there’s a route U.S. Gulf to the Far East and U.S. Gulf to Europe. And I actually indexes for these three routes. They are not used very much, because there have been too illiquid and you can say, trading purposes and other which was really the intended for these rules to be published. So they’re not really used on a paper trading basis. And the market is not so big to have too many indexes, which then makes them adequate. But you can say, our trading is probably 80% out of the U.S. and 20% out of the AG. And the U.S. East is the most active spot market route – of the routes and it’s also the longer route.

So you can say it will have a bigger impact fixing on U.S. to the East, and then the AG to the East, or U.S. to the West. So it will imply the ship for 70 days instead of 30 to 40 days. So that route is really the most significant route I would say to match it up and, of course, people will change from one patient to the other. One of the routes is paying far less than the other ones, but it’s a matter of like, how do you deploy your ships, and which cargo do you for and where do you come open.

But I would say the most traded route is U.S. to the Far East. So what I would kind of watch out for that as well to kind of judge your readings and they are like said on the AG East, the index route doesn’t take into account kind of our waiting and it doesn’t take into account, I think time as well auction fees for the Panama Canal. So again, when you calculate the TCE returns on those, you will have to take that with a pinch of sold as well.

And then you have like a premium market has been U.S. to the West, where that’s a difficult market to operate in, because you are open quite close to the low posts. And as I mentioned before, sometimes the fixtures are 5 to 6 weeks ahead, when we fix the ship, so you’re hardly opening the AG, when you are opening the Far East story when you fix the ships, let alone open 14 days on the low port. So a lot of people avoid giving ending up in the western due to these reasons. But they do pay a premium. So if you kind of figure out how to manage it, and then the attractive market for some, so – but that also again when you then your earnings is really depending on where I come open on the previous whereas if I’m open in the West and go to the Far East, of course that will give you a significantly higher return on discharge versus balancing from the East, and then ending up on a short version in the West.

So these are kind of the variances as you see and as we fix sometimes 5 to 6 weeks ahead, if the market is tight; if the market is not so tight, and you will fix 2 to 3 weeks ahead in the West. But in the East, they will be more like 10 to 30 days ahead. So 30 days in the tight market, 10 days I’m not sure tight markets. And that’s, of course, again, kind of the lack that you would have to use would depend on how tight is the market and how hard to fix that.

[John Hadjipateras, President and Chief Executive Officer]

Thanks, Tim. Sean, is that giving you more than you want? Or…

[Sean Morgan, Evercore Inc.]

Yeah. No, that’s great, Tim. Thanks. A lot of deep nuance on kind of how it works.

[John Hadjipateras, President and Chief Executive Officer]

We thought it would be useful.

[Sean Morgan, Evercore Inc.]

Yeah. That’s great. Okay.

[John Hadjipateras, President and Chief Executive Officer]

Yeah. Thank you.

[Theodore Young, Chief Financial Officer]

Thanks, John.

[John Hadjipateras, President and Chief Executive Officer]

Thanks, guys. Thank you very much. Thank you. Darryl, I think we’re done. Thank you very much everyone for joining us, and we look forward to next quarter’s call. Thanks again. Bye-bye.

[Operator]

Thank you. This does conclude today’s teleconference. We appreciate the participation. You may disconnect your lines at this time. Thank you and enjoy the rest of your day.