Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Avance Gas Holding Limited First Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded, Wednesday, the 25th of May 2022. [Operator Instructions] I would now like to hand the conference over to your speaker today, Oystein Kalleklev. Please go ahead.

[Oystein Kalleklev, executive]

Thank you, and good afternoon, and welcome to Avance Gas first quarter earnings presentation. I'm Oystein Kalleklev, the Executive Chairman of Avance Gas. Today, I will be joined by Randi Navdal Bekkelund, our CFO, who will guide you through the financials a bit later in the presentation; and our Chief Commercial Officer, Ben Martin, who will join us for the Q&A session. [Operator Instructions]

Before we start the presentation, just to remind you of the disclaimer, we are providing some forward-looking statements and some non-GAAP measures linked to the TCE numbers and our limit to completeness of detail we can provide. So I recommend reading also our earnings release today.

So okay, let's start on the highlights. In the first quarter, we delivered time charter equivalent income of $46.9 million, corresponding to an average TCE of $37,600 per day, which we are reasonably satisfied with. We took delivery of our 2 first LPG dual-fuel VLGC newbuildings, Avance Polaris and Avance Capella, which went straight from the yard on 2 variable time charters with Total and Petredec, respectively.

The VLGC market started the year on good footing but have been very volatile. So far this year, with rates starting off at around $50,000 before falling down to about $15,000 in early March before quickly rebounding and now hovering above $50,000 again.

Financially, we are, therefore, also doing well with a net profit of $24.3 million for the quarter, equating to earnings per share of $0.32 per share. This corresponds to an annualized return on book equity of 17%, while we are trading well below book value with a market cap today of around $370 million compared to book equity of $570 million, i.e., giving a price book ratio of around 65%.

Please note that we utilize hedging accounting for interest rate swaps and thus do not book unrealized gains. But just like a lot of other shipping companies, we also made big gains on interest rate swap in the first quarter, which Randi will elaborate on.

Given the healthy bookings and improved outlook as well as the new financing we announced today improving our financial position, the Board of Avance Gas has, therefore, decided to hike the quarterly dividend per share from $0.05 to $0.20 per share, which provides our investors with an attractive running yield of around 17%.

While we have taken delivery of 2 newbuildings, we have also utilized a strong secondhand market to divest 2 of our older 2008 build ships. The 2 ships have been sold with a total book profit around $11 million, of which we are booking $6.2 million in Q1 for Thetis Glory sale, while the second sale will be booked in Q2 as delivery to the new owners took place in May.

Lastly, we are, today, announcing a big $555 million sustainable loan at very attractive terms. This loan will replace the loan for 9 of our existing VLGCs plus our 2 next newbuildings with an accordion option to also add newbuilding 5 and 6. This will push out our major debt maturity from 2024 to 2028, boost our cash significantly with pro forma cash of around $200 million, which gives us a very healthy cash.

Turning to Slide 4 and our fleet status. Avance Gas is a shipping company focused on seaborne transportation of LPG, with a fleet consisting entirely of the largest ships in this segment, which we call a very large gas carrier or just VLGCs for short. The VLGC market represents about 3/4 of all LPG volumes being moved at sea. Midsized ships transport about 15% of volumes. Large gas carriers, handysize ships and small coasters share the remaining approximately 10% of the market. 11 of our ships have a capacity of around 83,000 cubic meters, with our largest -- latest 6 LPG dual-fuel ships having a slightly bigger parcel size of 91,000 cubic meters, so we also have space for LPG as fuel and/or cargo on board.

As mentioned, we have sold 2 of our older ships. For the remaining 2008/'09 ships, we have secured fixed higher time charter coverage for most of 2023, thus also eliminating the fuel price risk as these ships are, on average, thirstier than newer ships and are also not fitted with exhaust gas cleaning system or what we typically call a scrubber.

We are also seeing very wide price spreads between very low-sulfur fuel oil and heavy fuel oil, with the spread currently at around $200 to $300, depending on where you tank up. Six out of our 8 ships in the spot market are fitted with a scrubber, and this fuel spread is significantly boosting their earnings potential compared to ships without a scrubber.

During the first quarter, we took delivery of 2 of our newbuildings, which are equipped with LPG dual-fuel system. These ships have very favorable freight economics compared to older ships as they are the most efficient and have the flexibility to run on LPG fuel, as well as compliant fuel, which is also good for the environmental profile of these ships.

Before turning over to Randi for our financial update, I just want to reiterate the favorable characteristics with our 6 new dual-fuel LPG VLGCs. By burning LPG, we have a low-sulfur fuel and do not require any scrubber. Particle pollution, which can be detrimental to people's health, is also reduced by 90%, while CO2 footprint is around 40% less than for a standard 2010 Korea-built ship, due to more efficient engines while also lower carbon levels in LPG compared to traditional marine fuel.

Hence, it should not come as a surprise that these ships will score top tier in the coming EEXI ratings and also when it comes to the annual Carbon Intensity Rating, which we call CII. Our next 4 VLGC newbuildings are also what we call ammonia-ready. This means that we can -- with some modification to the engine, which is working on as we speak, burn ammonia as purely in the future in case this fuel takes off. One of our ships will also be able to carry ammonia as cargo.

In connection with our annual report filing in April, we also published our fourth annual ESG report, which is based on the Marine Transportation Framework from Sustainability Accounting Standards Board, and we are, this year, also adding the Global Reporting Initiative index.

So with that, I'll turn it over to Randi for a financial review before I will revert with a short market update.

[Randi Bekkelund, executive]

Thank you, Oystein, and good afternoon from Oslo. Moving to Slide 6, I will briefly go through the key financial highlights for the first quarter 2022. The time charter equivalent, TCE, earnings came in at $46.9 million, corresponding to a daily TCE per ship day of $37,600, which is up from $21.6 million or a daily TCE of $27,600 in the previous quarter.

Operating expense were $10.7 million, equaling a daily average OpEx of just below $8,500. This compares to $9.7 million or $8,100 per ship day in previous quarter. We are still seeing COVID-19 crew change expenses in our books and this is likely to continue somewhat. That is expected to come down during the course of the year as the vaccine is rolled out to all of our seafarers and the local restrictions being eased as we speak, especially in Asia.

Administrative and general expense, A&G, for the quarter was $1.4 million, corresponding to $1,100 a day down from $1.6 million in previous quarter due to the recognition of one-off personnel expense and is expected to be maintained at $1.5 million on a quarterly basis in '22. And based on this, we reported an earnings before interest, tax and depreciation of just below $35 million for the first quarter, up from $21.6 million previous quarter.

As Oystein already mentioned, we sold 2 of our older units, the 2008-built vessels, Thetis and Providence, where 1 vessel was delivered to the new owner in March, thereby recognizing a gain on sale of $6.3 million in the first quarter. And Providence was delivered to the new owner last week and will recognize a gain on sale of just below $5 million in the second quarter.

Net profit was $24.3 million or $0.32 per share for the first quarter, corresponding to an annualized return on book equity of 17%. Furthermore, we have recognized $11.7 million in positive mark-to-market adjustment related to our interest hedges designated for hedge accounting through other comprehensive income and equity.

And for the second quarter, we maintained the supportive commercial results, which is expected to be similar to Q1 of $35,000 to $36,000 a day on a TCE per day basis on a discharge to discharge. And as the market is picking up at the end of the second quarter, we expect the reporting TCE to be approximately $32,000 to $33,000 a day, which is on a low to discharge basis.

A few comments to the balance sheet. At quarter end, we had an interest-bearing debt of $444 million, equaling a debt to total asset ratio of 43%, and we have a solid equity position of $571 million, corresponding to a book equity ratio of 56%. We have a robust cash position of $110.6 million at quarter end. And I will now move to the next slide to go through the cash movements during the quarter.

We generated $39 million in cash flow from operations and approximately $22.5 million in net cash proceeds from the sale of the VLGC Thetis Glory. We paid quite a lot of newbuilding CapEx of $121 million mainly related to our 2 first dual-fuel Avance Polaris and Capella delivered in January and early -- or end February. Out of the $121 million in CapEx, $104 million was financed with bank debt, and the remaining $16 million was sourced from cash at hand.

Furthermore, we repaid $10.7 million in scheduled debt amortization and prepaid $20 million on the revolving facility and just below $4 million in dividends, resulting in a cash position of $110.6 million by the end of the first quarter, which is up $9 million from year-end. And we will significantly increase our cash availability with the refinancing in place, which leads us to the next slide, Slide 8.

So last week, we signed a $555 million sustainability-linked facility with a bank syndicate consisting of 7 well-reputational Nordic and European banks. The new facility is the refinancing of the existing bank debt for 9 of our vessels on water and consists of an amortizing term loan facility of $200 million and a non-amortizing revolving credit facility of $125 million.

In addition, we also secured financing for the newbuildings number 3 and 4 for delivery in Q4 this year and Q1 '23. And this is structured in $115 million term loan facility. And we added an uncommitted option to finance the 2 large newbuildings for delivery second half next year at the same terms.

The new facility bears a panel of 5.7 years from signing and matures in January 28, has an age-adjusted profile of 20 years, a margin of 220 basis points plus floating sulfur and will significantly lower our cash breakeven with $800 per day for the 9 VLGCs and $1,300 a day for the whole Avance Gas fleet. This gives us a cash breakeven at attractive levels of $21,200 for the whole fleet, including the newbuilds and based on quoted sulfur today of 78 basis points.

Looking at our debt maturity profile post the refinancing on the next, Slide 9. So including the uncommitted accordion option for newbuilding 5 and 6, all vessels are financed with the first debt maturity in January 2027, pushing the majority of the outstanding debt from '24 to '28. And this leaves us with a very limited unfunded CapEx at approximately $20 million, which potentially can be sourced through free cash flow within less than 2 months in the current market environment quoted at $50,000 a day.

Looking at today's cash position on the next slide, we have a cash position of $121 million, and we will draw down the new facility of $325 million in the second quarter, corresponding to a pro forma cash position exceeding $200 million. And as we have structured the new loan with a revolving facility of $125 million, we can utilize the flexibility to manage and optimize the cash to avoid associated interest costs for overcapacity in cash. And lastly, all of our bank financing has now a sustainable-linked structure attached, further demonstrating our commitment to reduce our carbon footprint, which is well integrated into our business model.

So with that, I leave the word back to you, Oystein, for the market update and outlook.

[Oystein Kalleklev, executive]

Thank you, Randi, and well done with the financing. So let's review the recent market developments. As I mentioned in the introduction, our market is the VLGC market, representing 75% of seaborne LPG market. So we will focus on data for this market rather than the overall LPG market. So far this year, the VLGC market has grown steadily with 11% in the first 4 months of the year compared to an overall growth of 9% for the whole LPG market in this period. U.S. is about 50% of the market while Middle East delivered close to 40% of the VLGC cargoes.

On the import side, Asia is the main importer, taking around 75% to 80% of the VLGC cargoes. The export growth so far this year is driven primarily by the Middle East, growing a whopping 20% with 68% export quote from Saudi Arabia, 56% from Iran, and 19% from the United Arab Emirates. Exports from Qatar is, however, down 18% compared to last year.

The biggest export market, North America, where U.S. exports represent about 95% of the volume, grew at a steady rate of about 6%. On the import side, the biggest market is China, which represents about 25% of all VLGC cargo volumes. India slightly ahead of Japan with these countries importing about 14% of the volume. With the energy crisis in Europe, Europe has also been pulling in more VLGC cargoes than usual, with VLGC imports in the first 4 months going from 1.6 million tonnes to 2.6 million tonnes, equating to 60% growth.

Given the uproar in energy and commodity markets since the invasion of Ukraine by Russia, we do get some questions about Russian LPG exports. Russia produced quite a lot of LPG, which is maybe not too surprising, given their vast hydrocarbon infrastructure. In 2021, Russian LPG production was about 16 million tonnes. However, around 75% of this is consumed domestically, so only about 5 million tonnes are available for exports, and most of this is being exported over land, typically by rail.

The seaborne LPG exports from Russia is miniscule with volumes slightly above 1 million tonnes in 2021 and with all these cargoes being smaller than VLGC cargoes. So far, the seaborne LPG exports have been holding up. Volumes so far this year is 0.5 million tonnes compared to 0.4 million tonnes last year, but we do see LPG exports by land to Europe declining and more Russian LPG exports by land being diverted to other markets.

If we look at VLGC export market with a bit longer view, the growth of U.S. exports become more evident. Following the shale boom in the U.S., volumes are up 400% the last 7 years, with U.S. market share going from about 20% to about 50% today, while Middle East exports have stayed fairly stable. This have also resulted in steady overall growth for the market, with close to 8% annual growth in VLGC volumes in this period with total volumes of around 83 million tonnes in 2021 compared to the overall LPG market of around 110 million tonnes, i.e., the 75% market share of VLGCs that I mentioned.

With the good start of the year, as I recently explained, we do expect volume growth to be steady both this year and next year, with U.S. Energy Information Administration estimating close to 15% growth and U.S. LPG exports in 2023, which will mitigate the high fleet growth for the next year.

So what can we expect from U.S. volumes going forward? In the past, U.S. shale producers have been gobbling up debt in order to meet the production targets. Following the oil price lump in 2015, U.S. shale players become somewhat more restrictive on investment, and this was further aggregated by the oil price crash caused by the COVID-19 outbreak in 2020, which resulted in shale producers becoming even more restrictive on CapEx.

This has mainly been driven by investor pressure for the companies to rather return cash flow to dividends, deleveraging and buyback as evident from this recent survey by Dallas Fed, where about 60% of companies point out this as the major factor for them refraining production growth.

With oil prices firmly above $100 and also high natural gas prices, both domestically in the U.S. and even more so internationally, the free cash flow for the shale producer has therefore shot up as illustrated by this Wall Street Journal, an article or draft this week.

We do think that there are a couple of drivers that will result in increased shale production, which will also benefit LPG exports. We are in the midst of a global energy crunch where there are very many drivers favoring increased U.S. production, which have short lead time to the market. This is also evident from the stock market where the energy stock in the S&P 500 index are up by about 50% this year despite the overall index being down almost 20%.

The Baker Hughes Rig Index (sic) [ Baker Hughes Rig Counts ] has also staged a comeback and is up 60% compared to a year ago, which will be needed as the inventory of drilled but uncompleted wells, or DUCs, is now at the lowest levels.

Turning to Slide 15 and let's have a look at the freight market. The biggest driver for the freight rates is this price spread or arbitrage between the producing regions, U.S. and the Middle East, and the main import destination, Asia. With improved arbitrage spreads and tight shipping market, Baltic LPG 1, Middle East to Chiba in Japan, has bounced back from around $40 per tonne to around $85 today, while Baltic LPG 3 Index for U.S. to Japan has bounced back from mid-$70s to around $135 today, while fuel prices have stayed relatively flat.

Keep in mind that VLGC shipping is predominantly a voyage charter market, where the owner of the ship gets paid dollar per tonne of cargo ships and take care of the fuel and canal costs in contrast to the time charter market, where the charters pay both for higher fuel and canal costs in advance.

With the U.S. LPG price Mont Belvieu at an arbitrage spread to Far East Index of around $160 per tonne, shipping is thus grabbing a big share of the cargo economics. The Q3 and Q4 freight forward agreement, or FFAs, are at very conductive levels, with the 2 main freight indices at around $75 and $123 per tonne for BLPG1 and BLPG3, respectively, which provides similar time charter equivalent earnings as today, given the fact that fuel prices are in backwardation as well, with current prices per tonne, time charter equivalent earnings for modern nonscrubber ships today is, as mentioned, above $50,000 per day.

So if we have a look at the current fleet, we do see a big chunk of the fleet is approaching retirement, with 31 vessels already past 25 years and 18 vessels between 20 and 25 years old. Another 31 vessels are above 15 years and will be hit by coming decarbonization regulation with expected engine power limitation for the ships as well as for some newer ships.

Keep in mind that sanction trade is not just something we see in the crude oil market. Around 30 older VLGCs are also transporting product, which is sanctioned primarily from Iran. So in case sanctions are lifted due to progress on the formal joint comprehensive plan of action, these ships will probably not be around for trading any longer.

We pointed out slippage possibility for the order book for 2023 as the number of ships are quite big but were slim for 2024. Hence, we would expect some slippage, particularly if the market turn weak. GPS assume 39 expected deliveries in 2023 rather than the scheduled 46, as it's not unlikely that we do see some delays, particularly in China, where they have a stringent COVID policy.

Okay. Last slide before doing the summary. Again, our new look at the order book, as you can see from the graph, scrapping of older ships has been very muted the last couple of years. And we put it in this question mark here about capping from 2023 onwards when we do get the implementation of the new IMO regulation, the EEXI and the CII, which I mentioned.

Another factor these days are the fuel prices. The older ships, especially without a scrubber, are becoming less economically. We are also getting into EU carbon trading scheme for shipping, probably implementation 2024. Obviously, this will not be a big factor because a slim portion of the cargoes are going into Europe. But we would expect other countries to follow the path of EU to implement carbon pricing in shipping, which will penalize less efficient ships.

Another factor is the voyages are becoming longer. We do see that Panama Canal will nearly double the canal fees over the next 3 years, which means that we will see more ships continuing to avoid the Panama Canal, taking longer routes to -- and consumer market in Asia and this will be positive for tonne mileage.

So all in all, we think we have a fairly stable market. Order book for '23 is a bit high, but as I mentioned, we could see some slippage. And we do expect scrapping activity to pick up in the coming years due to the reasons I mentioned.

So then I think we can just do the summary. Good results, as we mentioned. We are reasonably satisfied with the TCE for the quarter. Bookings for next quarter are also at healthy levels with good outlook for Q3 as most of the cargoes being booked now are for Q3. We are hiking our dividend from $0.05 to $0.20. We're giving our investors a pretty good attractive yield. We have done a great refinancing, pushing out maturities and boosting our cash position while lowering our cash breakeven level.

We've started the renewal process of the fleet, selling 2 of the older 2008 ships at very good prices and booking at a profit to book values while we are trading well below book values. And then we have taken delivery of newer, more efficient ships.

Outlook, as I mentioned in the presentation, it's fairly good. Very conductive rates for the second half based on the FFAs we are seeing in the market. And 2023 will be -- it's a bit too early to say how that will play out. Order book is a bit big but also we'll see pretty high production growth. We see reasons for increased capping. And with the current newbuilding prices of above $90 million for high-spec VLGCs on dual-fuel, which is the only type people are ordering these days, we do think also that the contracting of newbuildings will be a bit muted as a lot of the yard slots are being taken up by LNGC carriers and container ships.

So with that, I think we conclude the presentation and we can check whether we have any questions.

[Operator]

[Operator Instructions] And your first question from the audio comes from the line of Climent Molins from Value Investor's Edge.

[Climent Molins, analyst]

You are now sitting on a very solid financial position, which will be further strengthened by the new refinancing. You declared a significant dividend on quarterly earnings. But given the discount to NAV you're currently trading at, how do you think about balancing dividend distributions with share repurchases?

[Oystein Kalleklev, executive]

Okay, that's a good question. I think maybe I had you on my call in Flex LNG conference call 2 weeks ago as well. And I think we also have some similar questions where we have a big pile of cash and what to do with it.

Yes, it's a good question. We just signed a loan agreement last week. We are preparing for drawdown of the new facility within 1.5 weeks and then getting the money on the account ahead of closing of the second quarter, with a pretty big cash pile, as mentioned, pro forma cash slightly above $200 million.

We've put in some -- similar to what we have done in fact, we've put in a big revolver facility, which enable us to keep a lot of liquidity available without having to pay a very high price for that liquidity. We have a commitment fee of 75 basis points, which means that we can have this cash available then for the next 5.8 years without incurring a lot of financial expenses, which will hurt our cash breakeven levels. And our cash breakeven levels are pretty attractive, I would say, for this fleet.

So let's see. It's a bit too early to comment on it. We are, of course, as a function of better market and better financial position, we are hiking the dividend quite substantially.

In terms of buybacks, it's a bit difficult as well with the liquidity and float and the share is not very great. We have Hemen Holding owning close to 77%. And actually, Avance Gas is one of the biggest shareholder also in Avance Gas with a big number of treasury shares. So in that sense, buybacks, it's a bit difficult, given the liquidity and the stock.

And we have, so far, focused on paying higher dividends to the shareholders. We have also good bookings for next quarter. So hopefully, that is something we can keep on paying attractive dividends to our shareholders. And then let's see when we are getting everything in place and what to do with it. But we're also doing this to have more financial flexibility in case '23 market is a bit wobbly.

[Climent Molins, analyst]

That's helpful. BW LPG conducted a very aggressive LPG dual retrofit program. Most of your fleet is now either scrubber-fitted, LPG dual-fuel for the newbuilds or chartered out, but you do have a couple of vessels which could be potentially retrofitted. Is this something you have considered? And if so, how much would it cost?

[Oystein Kalleklev, executive]

Yes, it's -- I think we have 2 ships. This would be -- it's Chinook and Pampero, which is 2015-built. So before they're going in dock in 2025, we probably have to make a decision what to do, either retrofit the LPG on them or scrubber. Right now in current market, having scrubber is a huge advantage, as I mentioned, with scrubber spreads of $200 to $300, depending on location.

So right now, we are just sitting back and enjoying having scrubbers on our ships. Of course, how prices will develop will also affect our decision what to do, going for LPG retrofit or the scrubber, which is achieved for alternatives. But we haven't made any decision yet on whether to go for the order next because for us, it's more like we have the option to wait. And we don't need to make this decision at least 18 months before getting to dock in order to kind of place the orders for the equipment. But it's certainly something we'll look into, but we will make that decision when we're getting a bit closer to 2025.

[Climent Molins, analyst]

All right. That's very helpful.

[Operator]

[Operator Instructions] There seems to be no further questions from the phone lines.

[Oystein Kalleklev, executive]

I think we have 1 question here on the web. What do you forecast regarding dividends in the coming quarter?

And the answer is very simple. Depends on the markets. We aim to pay out our excess cash and earnings to shareholders, so if the market stays strong, which it looks to be doing right now, I think people can enjoy a very good dividend. But this is not really a company where we have a lot of backlog. We have made -- we have put 5 ships on time charter, 3 of them on a fixed-hire time charter, which is giving us stable income on those 3 older ships for the next 2 years or so.

And then we have variable time charter on the newbuildings, so the earnings on -- for those ships are really dependent on where the market is going. But as long as we are making money, we aim to distribute the money back to shareholders. And with this new financing, we also have a bit better financial position than we had in the past.

We have a much longer maturity profile taken on the cash breakeven slightly. And we will have a lot more cash on hand so that we are able to kind of have the exposure to the market, which we like to have the exposure to, but you need to have some money in order to take some risks.

So that's it. Then I would thank you all for joining today's presentation, and we will be back with Q2 numbers in August. So I hope to see you again then. Thank you.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.