Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Avance Gas Holding Ltd First Quarter 2021 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] And I would now like to hand the meeting over to your host today, Kristian Sørensen. Please go ahead, sir.

[Kristian Sørensen, Chief Executive Officer]

Thank you, and hello, everyone, and welcome to the Avance Gas first quarter presentation. My name is Kristian Sørensen. I'm the CEO of Avance Gas. I'm joined today by our CFO, Randi Navdal; and Chief Commercial Officer, Ben Martin.Before we get going, I'd like you to take notice of the disclaimer on Page 2, since the presentation is giving forward-looking statements. Next slide, please. First of all, we want to again pay tribute to all our crew members onboard the ships, who have for more than 12 months now been facing challenging conditions in terms of delayed crew change, difficulties with disembarking crew members with critical illness, additional safety measures to protect them from COVID-19 infections and so on. We know that many of our sailors also are under immense stress not being able to return home to their loved ones with onshore family members being hospitalized and even dying.The safety and well-being of our crew is, of course, the highest priority, and we are, therefore, very happy to see vaccination programs being initiated on U.S. port calls and more are coming. It should also be mentioned that we, as of this date, have not had 1 single COVID-19 case onboard our ships.So moving on to Slide 3, showing the highlights of the first quarter. The quarter was solid from a financial point of view, with the TCE reported of $42,522 a day. Our gross operating profit of $35.3 million and our net profit, $18.9 million, which corresponds to earnings per share of $0.30. From a commercial market point of view, the quarter was more like a rollercoaster, with rates dropping like a stone from $100,000 a day to OpEx levels around $7,000, $8,000 a day as the cold winter temperatures hit the U.S.Our TCE of $36,754 a day on a discharge-to-discharge basis shows strong commercial performance despite the market volatility, which is not for the faint hearted.In January, we contracted 2 dual-fuel state of the art VLGCs, which in April were followed up by 2 more newbuildings, bringing our newbuilding order book up to 6 vessels scheduled for delivery from end of this year up to end 2023. This will allow us to take greater part in the anticipated strong market ahead. And the newbuildings are also an important step for Avance Gas to grow the fleet to optimize our commercial operations as well as reduce our environmental footprint compared to fleets with conventional propulsion machinery.The equity portion of our $480 million newbuilding program is soundly funded through a private placement of $65 million in the second quarter, derisking our balance sheet. With a robust market outlook, strong cash position of $95.7 million in Q1 and $146 million as of today, we are pleased to declare a dividend of $0.14 per share, equivalent to 57% of our net profit for the quarter.So I'd like to hand over to our CFO on the financial highlights. Randi, please go ahead.

[Randi Navdal Bekkelund, Chief Financial Officer]

Thank you, Kristian. Turning to Slide 5, I would like to walk you through the financial highlights for the first quarter. Despite the cold snap in the U.S., we have a strong chartering results for the first quarter, achieving a TCE of $36,754 per ship day on a discharge-to-discharge basis, which is in line with our guidance. With the rates declining at the end of the quarter, we had a positive effect of IFRS 15 of $6.5 million, reporting a TCE rate of $42,552 on a load-to-discharge basis. This is up from $36,100 a day in previous quarter. Vessel operating expenses came in at $9,440 a day for the first quarter, slightly up from previous quarter. Operating expenses still impacted by COVID-19 expenses as crew change service and freight of equipment representing $800 a day. And further, we had a seasonal up storing and maintenance, representing another $800 a day, which is expected to phase out during the course of the year.The gross profit for the quarter was $35.3 million, up 20% from previous quarter due to a strong market in January before the extreme cold weather in the U.S. kicked in. The net profit was $18.4 million, corresponding to an earnings per share of $0.30, up from $0.21 adjusted for write-back previous quarters.Looking at the cash position, we generated $38 million in cash flow from operations in the first quarter, offset by dividend payment of $7 million, a scheduled repayment of debt of $11 million. And we reported a solid cash position of $95.7 million at quarter end. Today, we have a cash position of approx $147 million, as Kristian mentioned. And based on the strong long-term fundamentals, we expect to further strengthen our free cash flow generation. We are happy to announce the dividend distribution for the second time this year. The Board declared a dividend of $0.14 per share corresponding to 57% of net profit or $10.7 million, which includes issued shares following the private placement in April.The dividend runs at 10% annualized yield based on the market cap today. And in total, we have distributed $17.7 million in payment this year.Turning to Slide 6. Looking into the remainder of the year, we have a revised cash breakeven estimates from $22,000 to $23,100 a day, including expected COVID-19 expenses impacting the operating expense. As Kristian initially noted, we would like to emphasize that our highest priority is the safety of our crew, and we're proud to have a 0 lost time injury rate and no COVID-19 cases onboard our vessels.Key subsequent events after the quarter end, the key takeaways is in April, we successfully completed a private placement of $65 million, strengthening the balance sheet and fully funding the newbuilding program, assuming a normalized debt structure at delivery. The transaction was strongly oversubscribed, and the subscription price was close to the market share price. And just a few weeks ago, we received a credit approval from commercial banks for the financing of the 2 first dual-fuel newbuildings for delivery in Q4 this year and Q1 next year in a $104 million facility, with an average cash breakeven of $20,000 a day, reducing the average cash breakeven for the fleet with $300 a day in '22. The transaction is subject to normal documentation and closing procedures.Looking into the quarter we're in now, we estimate a TCE of $28,000 a day on a discharge-to-discharge basis, contracted for 95% of vessel days. This includes the TC coverage of 32% at $30,000 a day.Turning to Slide 7. Based on the strong market outlook, we would like to give you an idea of the cash flow potential. On the right-hand side, we have illustrated an annualized cash flow and cash yield in various spot freight rate scenarios of our existing fleet. On an annualized basis, an increase in freight rates of $10,000 a day corresponds to $57 million in free cash flow available for the company to distribute. The market has rebounded from the big freeze in the U.S. and the freight rates have turned to normal trajectories, currently at $40,000 to $45,000 a day, depending on the trade routes. But at current spot rate market, we have the potential of generating $90 million to $113 million in free cash flow, corresponding to 21% to 27% annualized cash yield.Turning to Slide 8. In December, the company will take delivery of the first of 6 dual-fuel newbuildings capable of burning LPG, highlighting the company's commitment towards the decarbonization, along with superior earnings potential. In 2022, we will add 2 dual-fuel newbuildings capable of burning LPG with superior earnings potential and basis the current fuel spreads and the extra cargo capacity to dual-fuel vessels will have up to $10,000 higher TCE per day versus a non-eco VLGC. Assuming the whole fleet trading at current spot market level, we have the potential of generating an additional $22 million to $26 million in free cash flow and increased cash yield was 6% to 7%.Next slide, please. By end of 2022, we will have 4 dual-fuel vessels on water, potentially increasing cash yield with 12% to 14% to our existing fleet assuming the current spot market level.Moving to next slide. In 2023, the 6 new builds will be delivered. And we can see that with 6 dual-fuels, we have the potential of generating between $66 million and $77 million on top of our existing fleet. Note that at even lower freight rate levels, closer to the cash breakeven, the newbuilds will have a potential of adding superior earnings as they're capable of burning LPG and have a lower cash breakeven.And with that, I would leave the word over to you, Ben, for the market update.

[Ben Martin, Chief Commercial Officer]

Thank you, Randi. So let's have a look at this -- the market update. Q1 has been the perfect example of the VLGC market showing both its volatility and resilience in the same period, as we saw the market come from near record high exports in December and January to be completely flattened by the cold weather induced infrastructure collapse we witnessed in February. And then showing remarkable resilience in March that culminated in record liftings in April. This really has been a very volatile period for all concerned.On average, we've seen 67 cargoes loaded in Q1 versus 74 in Q4 last year, which considering the seasonality and the weather issues is a pretty solid performance. In line with these exports, and as Kristian mentioned earlier, rates have seesawed and we saw TCE earnings went from $100,000 a day down to OpEx levels and then stabilize back at around $30,000 a day in April.If we move on to the next slide, please. Looking at the Middle East Gulf region, the defining feature here has really been the OPEC imposed cuts, which have decreased year-on-year exports from 2020 by around 10%. Looking specifically at Q1, we do see more positive news as we are recording 54 cargoes a month on average versus 50 cargoes for the same period in 2020. As oil continues to remain strong and if OPEC agree to minimize their cuts, which it has suggested they should, we would expect to see increased production from the Middle East Gulf regions through 2021 and into 2022. An X factor for reduction in the region will be when their own volumes are allowed back into the open market and at which price they are essentially marketed at. Putting all this together with the West volumes, we expect global LPG exports to reach 130 million metric tons in 2021.If we move on to the next slide, please. So if we jump for a moment to the demand picture for LPG, with 80% of the global VLGC demand coming from Asia, it is, therefore, Asia, where we focus our main attentions. Looking at the big importing countries. India is expected to grow and have shown real strength so far this year with 24% year-on-year growth. China, the after mentioned driver in almost all commodity markets, the story is also positive. We see LPG demand increasing, with particular note towards the new PDH plants, which we expect to remain around 4 million metric tons of incremental demand for 2021 alone. The expectations for growth in Japan and Indonesia are relatively flat.Next slide, please. So now if we look at the production side of things, specifically in the U.S. From where we were viewing things back in Q3 and Q4 last year, production looks much more positive for the coming years. The EIA, as expected, has continually increased its forecast for U.S. production, and we now see growth expected for both 2021 and 2022, with around 3% increase expected this year. We've also seen the bottlenecks of infrastructure in terms of pipelines and export terminals being removed with the U.S. adding a further 8 million metric tons export capacity, which essentially means that up to 90 cargoes a month can be exported should product be available and the demand be there. These 2 factors, coupled with the expected flat domestic consumption being forecasted, leads us to believe we will see a robust and healthy U.S. export market for the coming years.On to the next slide, please. The order book and the subsequent fleet growth have been a hot topic of discussion of late as orders now total 66 ships in a fleet of 310, representing over 20% growth. Clearly, this is a large number. However, there are a few points to consider while assessing the impact of pure fleet additions. Firstly, we're tracking 20% to 25% of ships needing drydocking in 2021 and 2022, which will always have a tightening effect on fleet availabilities. These ships will typically be out of the market for 3 to 4 weeks per ship. So this is a substantial drain on the ships available to charter.And then if we look at the fleet age profile, we have almost 10% of the fleet that is currently over 25 years old. And with scrap prices being high, we might see some of these older ships making their way to the breakers yards. This could be of particular relevance for 2023, when we have the largest number of newbuildings being delivered, which will coincide with around 25 ships being almost 30 years old, typically, the longest life span for VLGC ships. A further point of interest and one that is almost a hotter topic as fleet growth is the impact of the forthcoming environmental regulations like EXI. Assuming these regulations get ratified by IMO this summer, we could see a substantial portion of the fleet around about 150 ships being forced to steam at around 30 knots or thereabouts in order to limit their power output and therefore, reduce their emissions. This is a known unknown, but one that can have a significant tightening effect on the shipping fleet, assuming that rules are applied properly, and IMO ensures that there are no creative loopholes that can be exploited.

[Kristian Sørensen, Chief Executive Officer]

Okay. So let's turn to Page 17, please. I'd like to say a few words about our newbuilding program. Avance Gas is committed to contributing to a greener and more sustainable shipping industry. And our newbuilding program is a cornerstone for us to meet the new emission regulations and to reduce our environmental footprint. Although LPG as marine fuel brings us a long step in the right direction, it may not be the long-term solution for the industry. Ammonia by being such a dense hydrogen carrier is by many regard as one of the potential 0 carbon long-term solutions for marine fuel. However, ammonia is a poisons gas, which today has a very CO2 heavy production, which needs to be turned into blue and/or green ammonia production before you can claim its 0 CO2 emission status. In addition, I would say that the infrastructure is relatively limited, and it must be expanded if ammonia is to become a real alternative in the future.Having said that, ammonia has been shipped as cargo onboard LPG carriers for decades. And if ammonia really becomes the clean marine fuel that many market participants and observers hope, the gap to bridge is relatively small for VLGC newbuildings compared to many other shipping segments. Avance Gas is, therefore, preparing our newbuildings as much as we can for a potential future transition to ammonia as fuel at the vessels first 5-year drydocking. So this lies some years ahead of us.Next slide, please. So to sum up the outlook. On the supply side, we are monitoring the growing order book, which we, for obvious reasons, don't want to grow out of proportions. But we believe the new regulations being enforced from 2023 onwards will offset much of the additional capacity as older vessels will become less efficient and eventually be phased out. On the LPG production and demand side, we maintain our positive view on the U.S. production and exports forecast, where also the seasonal Panama canal congestion is anticipated to absorb fleet capacity like we saw previous years. And fleet inefficiency and heavy drydocking schedule will underpin the market fundamentals.As mentioned, we are guiding on a TCE of approximately $28,000 a day on a discharge-to-discharge basis for second quarter following the weak market in the first quarter, while we maintain our bullish view for the balance of the year and into 2022, where we also will have new and more efficient vessels on the water.So with that note, I'm pleased to open up for questions.

[Operator]

[Operator Instructions] There are no questions. Please continue.

[Kristian Sørensen, Chief Executive Officer]

Okay. Then I would like to thank everyone for listening in, and we round off the session as it is. Thank you.

[Operator]

That concludes the presentation. Thank you for participating. You may now disconnect.