Dorian LPG Ltd

NYSE:LPG

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the Dorian LPG Fourth 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.

[Ted Young, CFO]

Thank you, Melissa, and good morning everyone. Thank you for joining us for our fourth 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 May 30, 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 March 31, 2019 that were filed this morning on Form 8-K. In addition, please refer to our previous filings on Form 10-K and Form 10-Q where you will 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.

[John Hadjipateras, Chairman, President & CEO]

Thanks Ted. Good morning from Stamford, Connecticut and welcome to our financial year 2019 fourth quarter earnings call. As we have done in the past, I will give you a brief report and introduce Ted to go over the numbers for the quarter followed by John, who will talk about the developments in the market and our fleet, then we will take questions.

On this day in 2014, the Baltic rate was $80. In 2015 on this day, it was $111. They're then followed three long miserable years. It was $30, 12 months ago, and it has been trending up since, but not wholly without volatility. From the $30 in May 2018, we went to $48 in October and dropped to a low of $24 in February of this year, before making the recent high of $65 in April.

Yesterday, we closed at $59.50, a sturdy time charter equivalent of 45,500 a day. This volatility negatively impacted the financial results of the quarter we are reporting, and we expect it will positively reflect in the current quarter results when we report them. Seaborne LPG exports year-to-date have increased 17%, totaling 34.5 tons. Export capacity as forecasted grow considerably in each of the next two years.

New fractionation is planned in the U.S. through 2020 amounting to 1.6 million barrels a day and export capacity through 2020 is expected to increase by 11 to 12 VLGC cargoes per month. Demand forecast remains strong as well driven by new PDH plants scheduled to start in Asia and planned expansions of Korea's cracking capacity.

The Indian Government is also forecast demand for LPG to grow 11% to 12% per annum over the next five years. LPG is a clean and portable fuel. It produces five times less NOx than diesel. It is non-toxic and non-corrosive. Up to $3.7 million deaths annually, according to the WPGA 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 277 ships, 35 of which or 12% are over 20 years old. The order book remains stable at just over 13% of the fleet. Five vessels have been delivered this year. Our ECO fleet and readiness to fit exhaust gas cleaning systems, our experience with operating two ship already fitted with these systems, our customer focus and full operation should keep up at a competitive advantage.

We continue to consider potential conversion to dual fuel capability, and while the economic viability is yet to be proven, we are nevertheless convinced by the promise of LPG over alternative fuels including LNG. LPG has excellent clean handling properties, lower emissions, low methane slip and lower installation and life cycle costs.

Finally, before putting Ted and John on, I would like to reiterate what I also said on our last call that our balance sheet remains strong. We have the lowest debt to new building parity value and debt to total cap amongst our quoted VLGC peers. Our debt is 90% interest rate hedged and our current interest rate cost is less than 4.3% per annum.

Ted?

[Ted Young, CFO]

Thanks. My comments today will focus on our unaudited fourth quarter results. Also, please note that we expect to file our full 10-K next week. Giving with our chartering results, we achieved total utilization of 90.2% for the quarter with a time charter equivalent per day -- time charter equivalent again is our time charter equivalent revenue over operating days, as further defined in our filings of $18,883 a day, which yielded utilization adjusted TCE or TCE per available day of $17,032.

Our spot TCE per operating days for the quarter was $16,550 with utilization of 88.5%. I'd also point out that our spot results are net of the administrative costs of the pool, and as a result, our actual time charter equivalent is higher than this level. Daily OpEx for the quarter was $8,104, which compared to last quarter's $8,287 per day. The quarter-over-quarter trend is of course favorable and our technical management team continues to keep a sharp eye on cost.

Total G&A for the quarter was $5.7 million and cash G&A i.e. G&A excluding non-cash compensation expense was about $4.4 million. This level is broadly consistent with last quarter's. Note by the way that our G&A excludes the professional legal fees related to BW LPG's unsolicited proposal, which we have separately reported.

Our reported adjusted EBITDA for the quarter was $14.1 million was a decline from the third quarter and reflects the more challenging rate environment that we faced in the quarter just ended. We look at cash interest expense for some other line items interest expense excluding deferred financing fees and other loan expenses and realized gain loss on derivatives. On net basis, total cash interest expense for the quarter was $7.8 million it was down about $200,000 from the prior quarter largely due to continued debt pay down.

As John points out an excess of 90% of those debt is either fixed or hedged and we currently enjoy a financing rate of around 4.3%, which we believe is quite competitive. Excluding costs related to the BW proposal, we continue to maintain cash cost per day of approximately $22,000 including lower time charter.

Turning briefly to the full year, we reported full year TCE per operating days of $21,746 which was fairly flat with the prior year. OpEx per day was $8,329, an increase over last year due to drydockings this financial year and some other cost increases in various categories. EBITDA again excluding the BW proposal cost of the year just ended was $74.4 million, which was flat with a $74.5 million reported for fiscal year 2018.

For the coming fiscal year, we expect scrubber and drydocking related capital expenditures of roughly $15.5 million. We break that down as followed by quarter, $2.8 million expected in Q1, which is at the quarter ending June 30th, $6.5 million in the quarter ending September 30th, $5.1 million in the December ending quarter and $3.5 million in our fiscal fourth quarter.

We currently plan to drydock five vessels and install scrubbers on two of those five during calendar '20 -- sorry, we're going to drydock five vessels, we will install scrubbers on all of them and we're also going to install ballast water treatment systems on two of those five. In terms of timing, we expect to drydock two vessels in July this year 2019, two in August and one in September.

In addition, this $15.5 million capital costs, we will incur some non-capitalized expenses as well. While we normally complete special surveys in 10 to 14 days, the installation of the scrubbers can add up to approximately two weeks to the process, meaning that we could be up higher for up to 25, 30 days for each vessel.

However, our technical team continues to evaluate ways to reduce time and drydock such as by completing certain work while at C. Given the strong rate outlook, we currently anticipate funding these investments from cash flow, but we are continuing to evaluate several financing possibilities. These make economic sense for shareholder. We will look to execute on them.

We remained comfortable with our current and forecast liquidity levels given our current or constructive market view. On May 31, 2019, the restrictions on payment of dividends and stock buybacks from our May 2017 bank amendment will lapse. While we have made no plans to repurchase stock or pay a dividend, capital allocation is a top priority for our management and our board. We are pleased to have this additional flexibility available for our shareholders again.

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

[John Lycouris, CEO, Dorian LPG USA]

Thank you, Ted. The U.S. LPG exports April year-to-date have grown 21% year-on-year to 11.9 million tons, while Middle East exports have grown 6% year-to-year to 13 million tons. U.S. exports exceeded historical highs this April, increasing 39% year-to-year to 68 VLGC cargoes versus 49 Chicago for the same time last year. Propane inventories in the U.S. continue at the higher end of their five year range.

In 2019, U.S. supply forecast have been revised higher with a completion of the [indiscernible] [Sinock] pipeline and the schedule of third quarter '19 completion of the Grand Prix pipeline, both will be carrying Permian wide grade volumes through Mont Belvieu. With so much feedstock flowing through the Gulf Coast, enterprise has now moved forward as estimated completion of their frack 10 unit to the fourth quarter of 2019 from first quarter 2020 previously.

In total for pad 3 we estimate an additional $270,000 per day of fractionation capacity would be additive in 2019 and another 1.35 million barrels per day planned for 2020. Given this increase supply, significant expert volumes of LPG appear to be much realizing. AltaGas, Ridley Island in British Columbia is an LPG expert terminal which has just recently completed its outfitting and building and is currently loading the first VLGC bond for the Far East. We expect to see two VLGC cargoes per month out of Ridley this year and likely to go three or four cargoes next year per month.

In 2017, 24% of all the U.S. exports were delivered to China. Within the imposition of this U.S. China tariffs, all export to China effectively start and equivalent volumes were instead lifted from the Middle East. Thus, bolstering the Saudi CP posted prices in the process versus the Mont Belvieu LPG prices. A significant arbitrage developed between the two primary supply regions resulting in U.S. LPG becoming very price competitive.

So countries like India and Indonesia, this meant substantial reduction of listings from the Middle East and U.S. sourced cargoes were in high demand, drop to seven U.S. sourced VLGCs both for Indian discharge most likely exaggerated by the U.S. non-renewal of the Iranian sanction waivers and highlighting the desire of importing countries to diversify the source of LPG supply.

In view of the general elections, the Indian government accelerated their massive subsidy program by adding LPG connections to 10 million users within the first quarter of 2019, resulting in a 10.2% year-on-year demand increase. Indonesia followed the similar trajectory in LPG demand during the first quarter of 2019 from new LPG cylinder subsidies on account of their upcoming elections in their country.

The reduction of lifting from Middle East was again taken up by U.S. sourced LPG cargoes. Shipping delays in the Houston ship channel have also boosted Mariner East pipeline volumes out of Marcus Hook terminal to around 8 VLGC vessel per month during March and April.

When we visit that one of our vessels loading at the Marcus Hook terminal last week, we witnessed firsthand of 36 hour turnaround in loading a full VLGC cargo in our vessel. When in the past, it would have take four days and we’re highly impressed by the terminal’s efficiency of operations and a significant refrigerated propane stores tank form likely to be the largest in the East Coast of the United States.

Finally, to recap, Dorian LPG designed and diligently prepared this fleet with a view to capitalize on the IMO 2020 regulations. We have been operating scrubbers in our fleet since 2015, gaining experience and knowledge in real-time scrubber equipment operations. Many of our vessels were both scrubber ready, retrofitting commenced during calendar 2019. Our high hybrid scrubbers enabled our vessels to operate in all portion of the world either in open or close loop, in fresh or salt flourish and will uniquely position our fleet to operate with maximum flexibility.

Thank you and with that, I’ll pass it over to John Hadjipateras.

[John Hadjipateras, Chairman, President & CEO]

Thanks, John. Melissa, you want to turn it over to questions please.

[Operator]

Thank you, gentleman. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Noah Parquette with JP Morgan. Please proceed with you question.

[Noah Parquette, JP Morgan]

I want to ask maybe, Ted, as you guys, obviously, rates have improved quite a bit so more cash flow hopefully coming. You mentioned you're okay with the capital structure, but the things that you want to do in terms of the repaying debt or kind of reversing the capital leases, are you comfortable with just natural deleveraging where you're at now and then focus on other?

[John Hadjipateras, Chairman, President & CEO]

I think we're not focusing yet on what to do with the excess capital, with the excess. But as always, Noah, I think we'd look at share prices -- what would be creating best shareholder value. I think we don't look at our leases as being burdensome at all. And I don't want to signal something that we haven't decided yet. But if were to deleverage, it might be more firstly bank obligation then the leases. And otherwise, it's a problem we look forward to having to think about.

[Noah Parquette, JP Morgan]

Okay. That makes sense. And I want to ask you guys give great color on the market and the reasons for hours and the tariffs. What would you think would happen assuming an agreement is reached where the tariffs do go away? That might be a little farfetched, but I just would love to hear your thoughts on how that would affect marking any reversals as you speak?

[John Hadjipateras, Chairman, President & CEO]

To give you three letter words, wow. That's what I think. I would say business as usual.

[John Lycouris, CEO, Dorian LPG USA]

Yes, yes, I think.

[John Hadjipateras, Chairman, President & CEO]

As you know, there hasn't really impacted the ton mile equation, but the dark cloud over the kind of the uncertainty et cetera is something that we fear for the future of the world economy and its potential impact on everything including our trade. So if that was removed, I think it would be a very big positive all around for everyone.

[Operator]

Thank you. Our next question comes from the line of Michael Webber with Wells Fargo. Please proceed with your question.

[Michael Webber, Wells Fargo]

First question is, especially just really high-level and pretty straightforward. We can all kind of map out, how different U.S. export facilities are coming online and being debottlenecks and it's a bit of a crystal ball question. But when we look at that and you look at the dynamics we've got in play now from a ton mile perspective. Is there a particular inflection point that you see coming with any particular phasing in of the facility and/or patch of time or you think okay this seems like this is where we're going to hit a critical point from a utilization perspective and you can start to see rates really gap?

[John Hadjipateras, Chairman, President & CEO]

Really gap upward you mean, right?

[Michael Webber, Wells Fargo]

Yes.

[John Hadjipateras, Chairman, President & CEO]

Since we've defined your question high level, I'll let Lycouris answer it.

[Michael Webber, Wells Fargo]

Or you can get a granular as you want, I just figured it to be high level, but by all mean you can do it through the day, go ahead.

[John Lycouris, CEO, Dorian LPG USA]

Well, Mike, the issue is the Houston ship channel, but if as you see the facilities are being expanded, not only the Houston ship channel improved, but also in other places like Netherland and Freeport Texas and Marcus Hook and the West Coast in the United States.

I think we will be able to have a better utilization of the vessels, which is good news for all of us because that means that we will be able to move more products out. So, in general terms I think that the way we’ve done it for the last five years within increased capacity coming online and being able to deal with it, I think we will continue to do it. I do not see a jump up or some kind of unusual movement in the market.

[John Hadjipateras, Chairman, President & CEO]

But I think it’s obvious that we are having -- we are closer to equilibrium, right. I mean these spikes tell you that there is a kind of that the demand supply balance is closer with equilibrium. Now the fact that they can drop as much as it does, it shows, it tells you that we're not there yet, but right I think we’re definitely moving in the right direction.

[Michael Webber, Wells Fargo]

Yes, we'd agree and then it makes sense and that it kind of leads to me to the follow-up to that question. If I think about the top half of the cycle and finding an inflection point where you do see rates kind of gap up and you go back to a period like 2014, 2015. It would seem that we probably still need to see a couple of new export facilities built in the U.S. kind of new construction, which seems like we’re kind of getting closer to that point, getting a nameplate and then starting to tackle a little bit on to that. I guess the question is. Do you think that’s probably valid? And then to the extent that you’re having conversations with your customers, do you think that’s something we would likely see in the next couple of years?

[John Hadjipateras, Chairman, President & CEO]

Hard to tell, I was down in Houston last week and I met with one of the terminal operators there. And they have a pretty solid expansion plan, but I don’t think they want to get ahead of themselves. So, they are not really sort of leapfrogging. They are going one step at a time. That’s my sense.

[Michael Webber, Wells Fargo]

Okay. That’s helpful. It’s a tough question to answer so I appreciate you swinging at it. Ted, one modelling question for you just and you might have mentioned in your prepared remarks I might have missed, but in terms of the legal expense from BW. Should we expect any of that to bleed into Q2 or is that done?

[Ted Young, CFO]

No, it should be done. Look, we’ve booked the vast, vast, vast majority of it in Q3 and we booked like $2,200 something this past quarter and that should be end of it.

[Michael Webber, Wells Fargo]

And I apologize that by doing this a bit out the sequence, but if I just jump back to the market and maybe just thinking about supply disruption from a tonnage perspective, you guys laid out your plan for drydocking, scrubber installation and ballast water treatment. As you look at the rest of the LPGs space to the extent that you can get a sense of what you’re competitors are planning? How do you think that scrubber adoption throughout the rest of the space? How should we think about the cadence of vessels kind of going out of the market over the next 12 months to 18 months? Going into the drydocking…

[Ted Young, CFO]

We’re all looking at each other. I mean look obviously all the 2015 builds are going to be coming up pretty fast. I mean 2014 was not a huge year of deliveries, but beginning in 2015 all those 15 builds are going to by and large we're going to have to want to dock. So it'd be a big number.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Peder Jarlsby with Fearnley Securities. Please proceed with your question.

[Peder Jarlsby, Fearnley Securities]

Just on the time charter, I noticed that you had roughly $2.50 million or slightly less on chartering close to roughly 10 days chartered in. Is it fair to assume that the close to, all in cost for that is $23,000, $24,000 a day or I missed something? It seems like good rate.

[John Hadjipateras, Chairman, President & CEO]

Yes, not far off, not far off.

[Peder Jarlsby, Fearnley Securities]

And I guess this deal was concluded slightly ahead of the market kind of taking off. What do you think you would have to pay for a similar deal now?

[John Hadjipateras, Chairman, President & CEO]

I don't know. I mean do you know -- because of this volatility, it's sort of it goes off week-to-week, but I don't think we could repeat that deal today.

[Peder Jarlsby, Fearnley Securities]

One market related question for John. We spoke a lot about call it the oil linked to Asian propane prices in the past. And as we kind of move forward, do you think that Asian propane will continue to be priced off oil? Or do you see all the pricing dynamics emerges as the more of the call it incremental demand coming from non-flexible feedstock or pet chem?

[John Hadjipateras, Chairman, President & CEO]

I think it's probably more related to the products other than the PDH plants and it is related to more to the petrochemical rather than the oil price. I think we have disengaged on that, but we are certainly tied with Middle East pricing and that affects the business just like NAFTA does. But NAFTA is pretty far away now as it becomes more competitive, there is always the opportunity for NAFTA to get the bigger market share. But it's very difficult to make changes in the mix of feedstock to these petrochemical facilities unless there is a long-term trend. And I don't see a long-term trend here. And I see a long-term trend for the LPG to be significant in volume to be able to command a good attracted price versus NAFTA.

[Peder Jarlsby, Fearnley Securities]

Yes. I guess what a lot of investors are kind of looking at these days is IMO 2020 and what's going to happen with, potentially a lot of NAFTA coming into the market next year, and then I don't know if you have any views on how that could potentially impact the market?

[John Hadjipateras, Chairman, President & CEO]

Peder, this is a crystal ball question and I really -- everybody has their own opinion about things. It's not -- we've even speculating about it. Whatever I say is just my opinion versus your or somebody else's. So, I'd rather leave it alone and try to prepare ourselves for every eventuality and that's how we feel it.

[Operator]

Thank you [Operator Instructions] Mr. Hadjipateras, there are no further questions at this time. I’ll turn the floor back to you for any final comments.

[John Hadjipateras, Chairman, President & CEO]

Thank you, Melissa, and thank you all. And we look forward to -- we wish you a happy summer and we look forward to next call and hopefully continuing improvements in the market. Thank you and bye, bye.

[Operator]

Thank you. Ladies and gentlemen, this concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.