Dorian LPG Ltd

NYSE:LPG

Earnings Call Transcript 2023-Q4

[Operator]

Greetings. Welcome to Dorian LPG Fourth Quarter 2023 Earnings. 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, CFO]

Thank you, Sherry. Good morning, everyone, and thank you all for joining us for our fourth quarter 2023 results conference call. With me today are John Hadjipateras, Chairman, President, and CEO of Dorian LPG Limited; John Lycouris, Chief Executive Officer of Dorian LPG USA; and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and replay of this call will be available through May 31st, 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 March 31, 2023 that were filed this morning on 8-K. In addition, please refer to our previous filings on Forms 10-K and 10-Q, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. Please note that we expect to file our full 10-K in the first week of June. Finally, you may wish to refer to the investor highlight Slides posted this morning on our website for additional information of the Company's speakers' comments today.

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

[John Hadjipateras, Chairman, President and CEO]

Thanks, Ted. Thank you all for joining John L in Athens, Tim in Copenhagen, Ted, and myself from Stanford.

The fourth quarter marked the culmination of the best financial year in the Company's history. Strong chartering results and a solid balance sheet enabled us to return nearly $225 million to our shareholders during fiscal 2023, and we remain conservatively capitalized with net debt to net total CAP of 33%. The VLGC freight market experienced significant volatility in the quarter. And -- but has continued strengthening throughout 2023.

Our financial results reflect the better rates and our diligent chartering management of the volatility. North America's export volumes have been supported by ample production and inventory, currently surpassing the five-year average by 30% and exceeding last year's levels by 43%. Estimates for U.S. exports point to further growth in '23 and '24. In it's May short-term energy outlook, the EIA said it now estimates that U.S. LPG exports will grow 12.2% in 2023. The order book seems so far to be absorbed by increasing ton-mile demand.

On the HR side, for our Ukrainian and Russian seafarers affected by the crisis, we introduced flexible arrangements. With joining and repatriation, we added free accessible data communication services on board, supplemented medical insurance, and are providing a monthly allowance for displaced families.

On the social front, we tasked two key executives to spearhead our diversion, equity, and inclusion efforts on board and onshore in cooperation with the All Aboard Alliance, an initiative which we helped develop with the Global Maritime Forum. And on the environmental front, we joined the Maersk Mc-Kinney Moller Center for Zero Carbon Shipping as mission ambassadors and plan to lend our expertise to the center to elaborate on various decarbonization initiatives.

The IMO's new EEXI and CII regulations resulted in an increasing focus by customers on quantifying voyage emissions, something we have been preparing for and are ready for. We are retrofitting our shifts with energy saving devices and premium paints and progressively reducing emissions and fuel costs through voyage optimization and close collaboration with our crews. And as an example, we applied the first silicon paint on one of our ships with a target of about 5% in fuel savings.

Our commitment to sensible and environmentally sustainable investment is evidenced by the addition of three dual fuel VLGCs so far this year, with a fourth coming later in the summer. These will trade in our LPG -- Helios LPG pool. Three of them are capable of transiting the old and new Panama Canals, a strategic advantage we will leverage by trading around the congestion when it occurs in the new canal.

John Lycouris will give you some more information and then followed by Tim and Ted. John?

[John Lycouris, CEO, Dorian LPG USA]

Thank you, John.

During the first quarter of 2023, the average daily fuel cost of low-sulfur fuel oil versus the high-sulfur fuel oil amounted to $5,226 per day, which benefited our scrubber vessels with improved voyage economics.

The average realized savings over all available days of our scrubber vessels were about $212.5 per metric ton of high-sulfur fuel oil supplied versus low-sulfur fuel oil alternative. The hybrid feature of our scrubbers provided additional benefits for all emission control areas, and the voyages in the North Sea.

Our scrubber retrofit program for the fleet has been very successful in terms of return of capital invested, thereby validating our decision to make the retrofitted investments in 2019 and '20. On the basis of such good results, we have committed to retrofit a further three scrubber units in the next quarters to our vessels that are coming up for drydocking, which will increase our fleet of scrubber vessels to 15. Note that the installed cost of these scrubbers is about two-thirds of the previous scrubber installations.

With most spot voyages originating from Houston, our LPG dual fuel vessels have benefited from attractive pricing of LPG versus low-sulfur fuel oil, which on average has recently -- has amounted to $180 per metric ton. This does not take into consideration the additional energy efficiency of LPG, which stands at 11% over fuel oil.

At the start of 2023, the EEXI and CII regulations by IMO entered into force addressing international vessel carbon emissions. To comply with the EEXI requirements, we have adopted measures that improve the technical efficiency of our fleet. We have installed several energy-saving devices such as Mewis Ducts, as well as Propeller Boss Cap Fins, as well as implementing fleet-wide engine power limitations.

These initiatives reduce fuel consumption, ensuring significantly lower carbon emissions that ranked our vessels EEXI compliant. In addition, we are implementing silicone anti-fouling hull coatings for our vessels during their upcoming drydocks, which provide additional improvements in performance and emission reduction and which lead also to better CII ratings.

Our fleet performance department in Denmark closely monitors daily vessel performance using state-of-the-art software, gathering live data to ensure optimal operational performance and emissions profile for our vessels. Our new tech department is following the latest developments in Marine Carbon Capture and Storage Solutions, as well as wind-assisted propulsion, which we believe could be significant in addressing the IMO's mid-term decarbonization ambitions. We are also examining the retrofit of advanced propeller designs in combination with the Energy Saving Devices mentioned above.

Last month, the EU Parliament voted for the implementation of EU Emissions Trading System or ETS for shipping, which is expected to be adopted in June 2023. Under this regulation, vessels over 5,000 gross tons, which includes all our vessels in our fleet, calling at EU ports will be required to purchase and surrender EU carbon allowances commensurate with the amount of CO2 tons emitted while entering, departing, or staying in EU waters. In 2022, our vessels called at European ports 14% of the time and thus we believe the financial impact on us will be limited based on the current trading patterns.

The regulation when it comes into effect in 2024 will be phased in at initially at 40%, then at 70%, and in 2026 a 100% of all carbon emissions for those voyages and the voyages coming into in and out of the EU. The current European EU allowances are priced at EUR90 per ton of CO2. And this is a pricing as of May 19th. Dorian LPG has been monitoring and verifying its carbon emissions since 2018, and we are well prepared to comply with these regulations when they become effective.

And now, I would like to pass it over to Tim Hansen, Chief Commercial Officer, for the commercial update.

[Tim Hansen, Chief Commercial Officer]

Thank you, John, and good day, everyone.

The fourth quarter fiscal year ending in March 2023 saw the increased seaborne trade of LPG. The January to March period was the strongest corresponding quarter on record in terms of LPG transported on VLGCs. As for the previous quarter, our North American export was buoyed by the relatively mild winter, dampening domestic LPG consumption and a continued record-setting product levels. The quarter ending March '23 was a quarter with the highest export volumes on record for North America.

Middle East export volumes for the quarter stood at about 10.3 million tons, down from the two previous quarters, but nonetheless, it reflected a record for our first calendar quarter. The start of the year is historically characterized by volatility in the freight markets. The market must absorb the post-holiday season while the LPG product market is historically in backwardation going into spring, and the Lunar New Year celebrations in much of the Far East, resulting in a narrowing off and reduced trading activity. 2023 was no different.

The East of Suez market saw the BLPG1, which is a benchmark for AG-Chiba rate corresponding -- correct significantly downwards at the start of January. The impact through the first week of January was a fall of $41 per metric ton on the BLPG1 benchmark.

This steep drop however, was an overreaction after a quiet period, and it corrected towards the end of January as market players look to lock away positions prior to the Lunar New Year celebrations. The sea activity of the market created an upward momentum again in the freight rates.

It has to be kept in mind that the drop was from the high level of $119 per metric tons on the benchmark rate as the last quote in 2022, which equals a time charter equivalent in excess of $100,000 per day on non-scrubber ECO vessel. It fell to the lowest point in January -- at the end of January where the benchmark rate bottom out at $57 per ton, equal to a time charter equivalent of $33,000 per day, before climbing $102 per metric tons in the second half of February or $85,000 per day, then sliding back to $65 per metric tons or $45,000 per day at the end of the quarter.

Thus, all in all, a strong growth this quarter despite the volatility and degradation, and the bottom of the market considerably stronger than what has been seen in the previous first quarters. Furthermore, with the West freight rate market in February being at a premium to the East, many vessels was positioned out of these market and into the West. The month of February was mostly a story of steady improvement in the Eastern market and March was largely a story of sales decline and deal activity.

For the rest of Suez market, it followed a similar trend to the East of Suez market. January was the most volatile month of the quarter, with the first half of January seeing VLGC operators competing for the East only discharge voyages, choosing employment over freight discipline. It was only at the last week of January that the market regained a bullish sentiment. Although the Lunar New Year celebrations usually result in a quiet period for the VLGCs market, this year it was active. Product market fundamentals were positive and activity was strong.

Advancements with the freight market truly taken off, was the West having to absorb the China's ballasting in from the East and only also when the relet tonnage were absorbed did the market see bigger jumps in the freight market.

Likewise, we saw a rising market during October and November with a downward correction in December. March was acquired months in the spot market, somewhat explained by the market needing to digest a strong finish of February month, and many players leaving the trading desk for business trips to the Far East.

Some hauling activity is likely also explained by the macroeconomic worries after the banking sectors levels. The disappearance of risk appetite by central banks around the world considered rectifying action, softened the activity and freight rates gradually softened as well.

By the time activity had again picked up at the very end of March, the VLGC3, which is the West to East index, was posted in the $90 per metric tons on the Houston sea barrack somewhat not seen since August 2022, still earnings being equal to $33,000 per day at the bottom with a top in February, reaching a $162 per metric tons or $86,000 per day.

Over the quarter, there has also been more activity on the time charter market. Despite 12 VLGCs new buildings being reported delivered during January and March and scheduled new building deliveries for the rest of the year, there is seemingly a drive to ensure vessel supply from several market players. This is indicative of the positive fundamentals of the VLGC market, with seaborne trade is increasing and vessel supply being absorbed by the inherent inefficiencies in the market.

The positive market fundamentals for VLGCs therefore remains, as does the macro-economic concerns, but as was seen during the banking turmoil of March however, the VLGC market is resilient as propane inventories continue to build in North America, and demand for LPG remains robust.

Thank you very much, and over to you Ted.

[Theodore Young, CFO]

Thanks, Tim.

My comments today will focus on the recent capital allocation and then, our financial position and liquidity and our unaudited fourth quarter results. Again, you may wish to refer to the investor highlight Slides posted this morning on our website. At March 31, 2023, we reported $148 million of free cash. As of yesterday, May 23rd, our free cash balance stood at a virtually identical level of $148.6 million, which is net of the $40.4 million dividend that was paid on Monday.

In addition, I'd note that on top of our free cash, we also have $11.4 million in available for sale securities. A highlight of the quarter was of course the delivery of the Captain Markos, our dual fuel 84,000 CBM VLGC delivered to us on March 31 at the Shikoku shipyard in Japan. She was financed under Japanese Financing arrangement that we agreed in 2021. The tenure of that agreement is 13 years and we amortize $210,000 per month until year five and thereafter, $250,000 per month until maturity.

The interest rate is 2.59%, including the credit adjustment spread plus one month term SOFR. Additionally, during the quarter, we voluntarily prepaid $15 million of debt under the Cresques Japanese Financing arrangement. With a debt balance at quarter end of $663.6 million, our total debt to total book capitalization stood at 43.2%, and net debt to net total capitalization at 33.5%.

Our leverage ratios were up marginally from last quarter due to the delivery of the Captain Markos, which added $56 million in debt on March 31. We have no refinancings until 2026, ample free cash, an undrawn revolver, and one debt-free vessel. Thus we have a significant measure of financial flexibility.

We currently expect our cash cost per day that's OpEx, G&A, time charter-in cost, print interest, and principal for the coming year to be approximately $24,000 to $25,000 per day.

Now, I'd like to turn to our chartering results and again would remind you to look at the Slides posted this morning on our website. For the quarter, we achieved total utilization of 95.7% for the quarter, with a daily TCE that's time charter equivalent revenue over operating days as we define those terms in our filings of $68,135 yielding utilization adjusted TCE or TCE revenue per available day of about $65,187. Spot TCE per available day, which reflects our portion of the Helios -- net profits of the Helios Pool for the quarter was about $68,019.

Also, overall, the Helios Pool reported a spot TCE including COAs of approximately $78,530 per available day for the quarter. We note that we had previously indicated that a two-month lagged average is a good proxy for our chartering results. That guidance did not hold this quarter because of the volatility that Tim referenced, including a significant drop in rates from the end of September -- sorry at the end of December to the beginning of January.

Daily OpEx for the quarter was $10,304 excluding drydocking-related OpEx. It was $10,528 per day including those amounts. Our OpEx increased somewhat sequentially -- sequentially as we experienced moderately higher cost per day for spares and stores, repairs and maintenance and other miscellaneous expenses. Our time charter-in expense for the four time charter-in vessels increased to $7.2 million, reflecting the partial quarter of the HLS Citrine and the HLS Diamond.

For the quarter that ends on June 30th, we expect total TCE-in expense of approximately $10.5 million, which will reflect full quarter contributions from the Citrine and Diamond. We expect the crystal ball, the fourth dual fuel VLGC to join our fleet to deliver during the quarter ending September 2023, and thus for our TCE-in cost to increase to $12.9 million for that quarter. On a fully delivered basis, we estimate total quarterly TCE-in expense to be $13.2 million to $13.3 million. All these numbers are provided for your reference in the investor highlight Slides posted this morning.

Our total G&A for the quarter was $7.5 million and cash G&A which is G&A excluding non-cash compensation expense, was about $6.7 million. Since we incurred about $0.5 million in predelivery G&A expense, if we exclude that amount, our cash G&A was about $6.2 million. Since our G&A normally skews higher in the fourth fiscal quarter or the first calendar quarter because of certain statutory accruals that we must make, we were pleased with our G&A control this quarter.

Our reported adjusted EBITDA for the quarter was $102.1 million, which is the highest quarterly EBITDA in our corporate history. To put that amount in context, our total EBITDA for fiscal 2022 was $161.1 million. Interestingly, the March 2023 quarter also represented the highest ever level of U.S. Gulf loadings, 267 liftings to be precise, underscoring the significance of U.S. exports to the global LPG trade.

Turning to interest expense. Our cash interest expense, which we define as the sum of the line items' interest expense, excluding deferred financing fees and other loan expenses plus realized gain loss on interest rate swap derivatives, resulted in a cash interest expense for the quarter of $7.1 million.

With the addition of the Captain Markos and the reduced debt on the Cresques, we estimate that our total quarterly interest expense for the current quarter, that is the one ending June 30th, will be about $8.1 million, reflecting a full quarter of the Markos, and the higher SOFR rates on our floating rate debt. Nonetheless, we continue to benefit from our hedging policy and the favorable pricing of our Japanese Financing, leaving us with a current interest cost on a weighted average basis of 4.1%.

Although we currently hold a roughly 8.6% -- sorry, 86% 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 its useful to provide some additional insight in order to give a more complete picture. As of Tuesday, May 23rd, the pool had roughly $8.7 million of cash on hand.

Turning to capital allocation. With the payment of another $1 of regular dividend, we have now paid dividends in seven of the last eight quarters, totaling $8.50 per share or $343.3 million. When coupled with our $113 million self-tender offer and $115.5 million of open market repurchases, we've now returned over $570 million to our shareholders since our IPO. The significant dividend payments in the last year underscore our Board's commitment to a sensible capital allocation policy to balance it's market outlook, operating and capital needs of the business, and appropriate level of risk tolerance given the volatility in shipping.

We remain cautiously optimistic about our cash flow generation over the coming months. But we'd be vigilant for changes in the global macroeconomic and energy market outlook.

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

[John Hadjipateras, Chairman, President and CEO]

Thank you. Sherry, we're ready to take some questions.

[Operator]

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

[Omar Nokta, Jefferies]

Thank you. Hey guys, good morning, good afternoon. Wanted to ask about the state of the VLGC market. Obviously in your opening remarks, you talked about just the strength that we're seeing, but just wanted to maybe dive a little bit further into it, you mentioned the new building. They've been absorbed so far, but given year-to-date rates have average basically two times, that they did last year at this time, with perhaps the new buildings just aren't enough, so just wanted to get a sense from you, kind of what's really been driving this market upturn that we've been seeing and the sort of relentlessly continuing to strengthen as we proceed through the year?

[John Hadjipateras, Chairman, President and CEO]

Thanks for the great question, Omar. I'll let Tim have a -- have a go at answering it, because he is right there on the front lines. I think I can introduce him by saying that last year, the expectation was a fear of the order book, but already by the end of the last year we were seeing, anticipating stronger '23 than had been generally projected, and of course, we are pleased that it's continuing, but I'll let Tim give you a little more color as to how confident we are about it strengthened going forward, with the usual caveats, so of course, Tim?

[Tim Hansen, Chief Commercial Officer]

Yes, I mean I think what has kept the market strong is the high production in the U.S., which was also supported by the higher crude prices and the LNG prices due to the -- due to the war in Ukraine and the sanctions against Russia. So that we have seen more product upcoming into the market than we initially had expected.

We've also seen the global economy recovering better than was expected after the COVID, especially China has recovered better, and with the high oil prices also we have seen the demand for both during some of the winter as a substitution for LNG, which I think we've discussed on previous calls.

But also now in the second market as a asset substitution. So, there has really been good pricing of the LPG due to the competitive pricing of the LPG due to the high production of both crude oil and natural gas. And with China recovering quicker, the import demand in China has also -- is not giving the long haul voyages, that of course also absorbed a lot of ton miles compared to what -- if you look at what the average has been.

Voyage lengths and the additional tons have had some so to speak, gone longer haul, if you see, view that, so that has tightened and I think we have still not seen really the impact of the CII and the EEXI yet and also the Panama delays has not been worse than the normal or if there is a normal for Panama delays. So, there still are some factors that we see, it can give some electricity even if there is some downturn in the market.

And as I mentioned, going forward, we see this reduction continue and also we have seen more time charter inquiries also for longer periods where it's been initially shorter periods because people was nervous about the market very dull, but now we do see two and three years' time charters been concluded well at a decent level, so there seems to be a general also perception that that market should hold up.

[Omar Nokta, Jefferies]

Thank you. That's very helpful and that actually does touch that your last comments just about the time charter market has definitely a bit more liquidity, I was going to ask about that. You've generally in the past had secured some vessels on medium-term charters, but recently over the past few years have become more maybe spot focused. I know you extended the Concorde and course there, maybe just on those two, were those options that were exercised by the charterer or were those new one-year contracts? And then, so that's the first question.

And second is, as you mentioned about the two, three-year charters being done at decent levels in the market, are those interesting enough for Dorian to put on contract as well?

[John Hadjipateras, Chairman, President and CEO]

Tim, I mean, yes, I can answer the last question, this is, yes, partly in a conservative way. We are doing -- we are picking up some and Tim, I think both the Equinor and the Chevron and Chevron was a new one or and Equinor was an option, I think, but Tim correct me if I'm wrong.

[Tim Hansen, Chief Commercial Officer]

That's correct. Yes. One was options and the other one was an extension of the contract that expired. And then we have -- we have done the periods when we saw like in December be resolved. We like the shorter haul one-years with a prompt deliveries wherever the charters could take advantage of the -- of the $100,000 per day market and then kind of hedge the risk overall, where now we are seeing two and three years.

So we have -- we have done a few of that through the pool to take a little bit of coverage there lately. But we didn't do much over the winter, which is normally the usual time to the extent. We didn't really see the value, as there was too much nervousness still about the forward market of the LPG and the influx of the newbuilding where we had a bit more bullish view I think than most of the time.

[Omar Nokta, Jefferies]

Okay, got it. And sorry, just a final question or sort of final follow-up. It sounds like just from your comments that if you were to enter into a time charter, that would be via the pool, the pool would put the vessel on contract, you wouldn't necessarily pluck it out of the pool and put it away?

[Tim Hansen, Chief Commercial Officer]

Yes. The pool is structured so that longer-term deals is done outside the pool, because that's more on, you can say, that is more like a financial decision and whether we consider one, two and sometimes three years' time charters is more spot trading strategy that these are deals that complement the U.S. spot trading strategy. So that is done via pool.

[Omar Nokta, Jefferies]

Great. Well, thanks, guys. I'll turn it over. Congrats on the quarter.

[Theodore Young, CFO]

Thanks, Omar.

[Operator]

[Operator Instructions] Our next question is from Sean Morgan with Evercore ISI. Please proceed.

[Sean Morgan, Evercore ISI]

Hi, guys. John, in his prepared remarks kind of went through some of the efforts that you guys are undergoing to trying to reduce carbon consumption, I guess also to improve operating performance to save on fuel and whatnot, do you think -- what's sort of your expectation for I guess like the iteration after IMO 2020 and being sort of top down probably to basically have to maybe change propulsion or do more in the way of carbon savings versus where the industry is kind of currently?

[John Hadjipateras, Chairman, President and CEO]

Did you say change propulsion, you said?

[Sean Morgan, Evercore ISI]

Yes, just kind of like the next iteration of IMO 2020, what are you sort of thinking in terms of where the industry is headed?

[John Hadjipateras, Chairman, President and CEO]

Boy, if we knew the answer, if we knew the answer. At the moment, we're just -- we're looking at everything. And we think that there hasn't -- there is no silver bullet yet. No -- nobody can say that we -- down the line, we're going to be all wind-powered or anything. I think it's a mix. I feel that we are managing.

Our fleet as well as it can be and with a good -- a good mix of dual fuel, scrubber, energy devices, lots of -- we keep finding with new technology and all that, we keep finding low hanging fruit to improve and even 1%, 2%, 3% when you add up -- add up, it comes, it's significant.

So, down the line, of course, people have talked about ammonia and people have talked about methanol. LNG of course, so far has been the most popular dual fuel which to us It didn't make sense of course, because of -- because of the trade that we're in. So, it's kind of easy to go -- to default to LPG as ideal fuel of choice, but I think the industry in general hasn't found one answer, and it's in a funny sort of way, it's helping the balance because it's made investment less, how shall I say, people are more reluctant to build ships. So, that's good from a fleet balance point of view.

[Sean Morgan, Evercore ISI]

That's sort of interesting. So you think after we kind of absorb this current wave of VLGC newbuilds, that are sort of on for delivery that we might see kind of a pause as the industry tries to take account of the best positioned for potential new rules coming down the pipe?

[John Hadjipateras, Chairman, President and CEO]

Yea, we already -- we naturally see a pause, and after '23 because of the shipyards are quite full and the orders that have been coming in. There are still orders coming in for VLGCs but they are trickling in. So, I think that the bulges is in '23 and early '24, and then that's it. And it's a normal sort of replacement.

[Sean Morgan, Evercore ISI]

Thanks a lot, John. That's it for me.

[John Hadjipateras, Chairman, President and CEO]

Thanks, Sean.

[Operator]

And that concludes our question-and-answer session. I would like to turn the call back over to John Hadjipateras for closing comments.

[John Hadjipateras, Chairman, President and CEO]

Thank you, Sherry. And my closing comment is to thank everybody for your -- for listening in and for your questions and have a good summer until we meet again. Bye-bye.

[Operator]

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.