Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2023-Q1

[Operator]

Good day and thank you for standing by. Welcome to the Avance Gas Holding Limited first quarter 2023 earnings conference call.

At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during this session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. Alternatively, you may submit your question via the webcast.

Please be advised that today’s conference is being recorded.

I would now like to hand the conference over to your speaker today, Øystein Kalleklev, Chief Executive Officer of the company. Please go ahead.

[Øystein Kalleklev, Chief Executive Officer]

Thank you Heidi, and welcome everybody to Avance Gas’ first quarter results. On the front page here, you will see our newest addition to the fleet, the Avance Avior, dual fuel large VLGC which we took delivery not from DSME but actually from Hanwha Ocean - it’s the second ship delivered from Hanwha Ocean after they changed or rebranded the name from DSME to Hanwha Ocean just now taking place, and we took delivery of the ship 10:05 local time, and she has just finished bunking and is ready to set sail into our booming spot market.

Today I also have Randi Navdal Bekkelund, who is our CFO, who will go through the numbers and the slides for you in the presentation, but before we begin, I would like to highlight our disclaimer. We will be referencing some non-GAAP measures, such as time charter equivalent earnings, TCE income, and of course with our other short presentation, so there are limits to how much details we can provide. Also just please note that you can ask questions either through our telephone conference or through our chat function, so we’re going to do the Q&A after we finalize the presentation of today.

Okay, let’s begin.

First quarter numbers, actually the highest profit we ever delivered before in our first quarter with earnings of net profits coming in at $36.3 million. The commercial figures were very much in line with guidance. We delivered load-to-discharge numbers at $58,400, in line with the $58,000 we guided, and then on the discharge-to-discharge numbers, $55,500, also in line with the $55,000 guidance we provided end of February. This means $0.47 per share in earnings, which is slightly higher than the numbers we delivered in Q4, which was actually the best numbers we have delivered since 2015.

I have already touched on the Avior, which we took delivery of this night. We also had the delivery of the third ship, Avance III Rigel in early February this year, so this means that we will have more ships in full operations for the second and the third quarters.

During the quarter, we also increased our coverage to forward freight agreements, our FFA, and the coverage now is almost two ships on FFA covered for the second half of the year, and I will provide more details on this shortly.

The spot market is also having a bit of a slip during [indiscernible]. It’s bounced back. We’ve been able to book very good numbers for Q2 as well and we’re guiding $50,000 per day on a discharge-to-discharge basis and load-to-discharge basis for the second quarter, and then with more ships in water for the second quarter than the first quarter, we do expect that the bottom line will not be far off the record high numbers we delivered for the first quarter.

The market now is even better, depending on the route, $80,000 to $100,000 per day for freight where the shortest hauls are $100,000 and the longest, like Houston to Far East, is trading at slightly above $80,000 per day, and this is the market we are putting Avior into today. This is actually of our modern [indiscernible] non-scrubber vessels, our ships with dual fuel and being a part of the bypass from earnings premium to this level.

As I mentioned, we have pretty good coverage also for the second half through both FFAs and some time charters, which I will cover shortly, so with the good numbers, we’re in a good strong financial position with $220 million of cash at quarter end. We don’t see any need to reduce the dividend - we keep it at the $0.50 we paid out for Q4, and this gives our yield of 26%. If we look at the dividend the last four quarters, it’s $1.40 per share or about 18%, so I think this should give people a pretty good yield sticking to the Avance gas shales.

Okay, let’s just look a bit into the performance. With a good spot market, of course the spot rate is driving the results. We have kept about 40% coverage for this year and the TCE rate, some fixed, some variable, delivered $40,000 for Q1. Spot rates with the good rate levels at the beginning of the year, we delivered $71,000. We have some hedging through FFAs, which I will cover shortly. Excluding those, TCE for the [indiscernible] was $62,100 for Q1, and adjusted for those hedges we delivered for our fleet $58,400. For Q2, we expect TCE rate to be slightly lower, $36,000, spot rates not that far away, $60,000, which means $50,000 for the fleet or $52,000 excluding the FFA hedging, so good numbers for Q2 with more ship space.

Let’s look at the fleet in total on Page 5. We have some different kind of classes of ships. We sold three ships last year of the 2008 - 09 vintage, and we have two more ships left, Iris Glory and Venus Glory - they are on fixed hire TC until Q3 and Q4 this year. Rates are at around $30,000 for these ships.

Then we have eight Jiangnan 2015-built ships, two of these ships do not have a scrubber, and we decided in order to hedge all diesel risk, it’s been very unpredictable how this will play out with the war in Ukraine and sanctions on Russian products. We therefore decided to fix Pampero on a 12-months time charter last autumn. At the same time, we actually sold a ship also which had a time charter until Q4 2023, so we basically--when we sold the ship, we kind of replaced the time charter coverage with Pampero, which is in the mid-30s on fixed hire TC. We also have one ship, Chinook, on variable time charter until early Q3 this year. The other six ships with a scrubber, which is really beneficial in terms of fuel costs, those ships we are putting in the spot market.

Then we have the new generation of ships. We took delivery of Polaris and Capella early 2022. Polaris is on a time charter until early 2024, a variable time charter, and then we also have a similar contract for Capella until February 2024. We have mutually agreed to terminate the variable higher time charter and we have then rather decided to replace that exposure with FFAs, and I will come back to that.

Rigel, the third ship of that class was delivered in February, and then Avior this night, and both of those ships are going directly to the spot market. We have seen delays on deliveries - we’ve seen this on both Rigel and Avior, and Avior was delayed about three months. We see that also on the last two ships, the Castor and Pollux, which will probably be delivered early 2024. We actually had four ships for delivery this year. We’re probably going to end up with two ships, so that gives you a bit of an idea about the high activity level at the yards and the risk of slippage. Those are also fully open, so we have very high [indiscernible] exposure for 2024 and we have taken some hedging throughout 2023, because people have been quite pessimistic on the outlook, given the big order book, but we kept spot exposure as we felt the sentiment has been too pessimistic.

In terms of the FFAs, we have three different complex structures. We have one legacy FFA, which was done early 2022 for one-third ship in Q1 at $29,000, and then you can understand why we have some loss on FFA in Q1. Then last November, we took coverage on our full scrubber ship for the full calendar year 2023 at $48,000 per day, which is a pretty decent result but of course less than the spot rates today, and that’s why we’re also taking some loss on that FFA contract in the quarter. Then when we replaced the Capella valuable higher time charter and took her out in the spot, we hedged that position for the second half of the year where we had done full cover for Q3 at $53,000 and 83% coverage for Q4 at $62,000 per day, thus what you have to be mindful of that is we have hedged VLSFO [indiscernible]. This ship can burn LPG, so in case we burn LPG, we can have a significant savings about $5,000 to $8,000 per day, and then we have hedged our conventional size of around 45,000 tons, but these ships can carry about 5,000 tons more, so in case we feel like tanks fill up, we also have some upside on that, so that could be possibly up to $10,000 premium on the FFA rate is we are able to utilize larger cargo size and burn LPG rather than regular sulfur oil.

I think that gives us good coverage for the rest of the year, but we are now booking ships into August so the market looks strong, and I’m going to come back to that later in the presentation. Let’s jump to Slide 6, just a brief touch upon the dividend.

We have been ramping up the dividend. We last quarter paid out $0.50 compared to an earnings per share of $0.45, 10 times higher than Q4 2021. We are repeating this today with $0.50, and as I mentioned, with the bookings for Q2 and more ship space, we are not going to be far off this for Q2.

In terms of the drivers there, we have-and Randi will probably touch upon it, we have strong earnings, good outlook. Of course, it’s not possible to get a huge backlog in this industry, but we have fairly good coverage for the rest of the year. We have $220 million of cash, no covenants, no debt maturing before ’27, so we are in a good position to pay very good dividends to our shareholders.

Before I hand over to Randi, just a short summary on the VLGC market. It’s been the strongest since 2015. In 2015, I think this company made more than $180 million of net profit. I don’t think we’re going to beat that this year, but I think we are in a very good position to beat the $90 million we generated last year. The market’s been volatile, like it’s always been. We had a slump in the market at the beginning of the year but it bounce back very quickly. We had a new slump during Easter but we also did have a recovery there, but we see it’s been slightly weaker in Q2 and that’s why the spot earnings are a bit lower in Q2 than Q1, but still at very good levels, much higher than the recent periods. Of course, the average here is from 2016 to 2022, which has been a bit more challenging markets.

If you look at the blue line, you see the markets for 2015, and the dotted line here is the FFA, which is converging around $60,000, where we have done our Q4 FFAs, so a very good market. Keep in mind, though, cash breakeven is in the low 20s, so we are generating substantial cash on these levels, driven by strong export growth, very elevated arbitrage levels especially between U.S. and the Far East, and also the uncertainty around Panama - waiting time has been lower recently, but it’s still a gamble, and these waiting times go up and down rather quickly and it’s hard to schedule our ships through Panama, which means that more people are ballasting usually through [indiscernible] but also to some extent Cape of Good Hope in order to avoid that risk and to have fixed scheduling dates for the fixing end days.

With that, I hand it over to Randi, and I will come back with some more market data afterwards.

[Randi Navdal Bekkelund, Chief Financial Officer]

Thank you Øystein, and let’s go to Slide 8 and have a look at our income statement and key financial figures.

As Øystein already touched upon, we are very pleased to present a net profit of $36.3 million or earnings per share of $0.47, which is the strongest net profit for the first quarter for Avance Gas ever. This corresponds to attractive annualized earnings yield of approximately 24%.

The average time charter equivalent rate, or TCE rate for the quarter was $58,400 per day, in line with the guidance of $58,000 a day, and is considerably up from $46,500 a day for the fourth quarter. The good results are explained by a supportive LPG price arbitrage between the U.S. and the Far East, resulting in a high [indiscernible] to pay for the freight, combined with significant slippage of the new buildings and the VLGC’s carry out special service this year.

Our TCE earnings include some negative effects of $3,700 a day which relates to the forward freight agreements and bunker hedging, which is derivatives, where the spot market was considerably stronger than our FFA coverage of 1.3 ships for the $2,000 a day for the first quarter. Just a reminder, the FFA and bunker hedges are designated for hedge accounting, where the fair value movement is taken through the other comprehensive income and equity and hits the TC earnings when they become effective.

Our operating expense, or opex was $9.7 million, equaling a daily average of $8,600 a day. This compares to $10.2 million or $8,700 a day for the fourth quarter. The operating expenses were down due to less ships or calendar days as we saw promised in November, combined with improved crew change costs.

Looking at our administrative and general expense, we continue to hold the lowest A&G expense by far compared to our industry peers. For the quarter, we had an A&G of $1.3 million for eth first quarter, equaling average per ship day of $1,200 and represents a normalized A&G going forward.

Non-operating expense consists mainly of financial expenses, and it was recorded with $4.3 million compared to approximately $4 million for the fourth quarter, so even though we have seen rising interest rates during the quarter, this has been offset by recognized effectiveness of interest rate swap gains during the period and interest income on cash deposits, maintaining a relatively flat interest expense for the quarter.

Moving to Slide 9, a few comments on our balance sheet. On the left-hand side of our balance sheet, we have approximately 75% consisting of our 13 VLGCs at quarter end, which became 14 today as we took delivery of our fourth dual fuel new building Avance Avior at 10:05 local time in South Korea. As of today, we have two dual fuel new buildings to be delivered by early 2024 and will meanwhile be recognized as new buildings under construction on our balance sheet with amounts related to pre-delivery installments based on milestones.

Looking at the right-hand side of our balance sheet, we have a balanced leverage ratio, 45%, and maintained our solid shareholder equity exceeding 50%. The total shareholder equity was $601 million at quarter end, corresponding to an equity ratio of 54% and has slightly decreased by $3.6 million during the quarter, mainly due to net profit of $36.3 million being offset by dividends paid of $38.3 million for the fourth quarter of 2022.

As with the spot market, the share price has moved significantly upwards these past weeks and is for the first time in many, many years supporting a book value with a price-to-book ratio of 1 today. We have a robust cash position of $220 million at quarter end, and we will now move to the next slide, showing the cash movements during the quarter on Slide 10.

We started the year with the highest cash position recorded in Avance Gas history of $224 million, and during the quarter we generated $48 million in cash flow from operations coming from a strong freight market, which was offset by $38 million in dividends paid for the fourth quarter 2022 and $10 million in scheduled debt repayments.

Avance Rigel was delivered February 9, with it the $61 million in investing activities, and in relation to that we drew $57 million under the $555 million bank loan that we refinanced and secured in May last year. This brings a total negative cash movement of $4 million, which explains the bridge from 224 to 220 at quarter end.

Moving to the next Slide 11, on the right-hand side we have an updated overview of our remaining new building capex. At quarter end, we had paid about 61% of the total capital expenditures of our new building program, and the remaining 39% or $185 million is fully financed with bank facilities for Avance Avior, which we drew today, while Avance Castor and Avance Pollux are financed with our $135 million sale-leaseback arrangement, which was signed in August last year. This means that we are cash positive of a total $8 million on deliveries.

As presented the past quarters, besides concluding the financing on our new building program, last year we also refinanced our fleet bank facility, consisting of the nine VLGCs and two new buildings where we significantly improved the terms compared to what we had with a longer repayment profile. We increased our revolving credit facility to utilize the flexibility to manage and optimize cash and lower our interest costs, lower margin, and we also pushed that maturity from June ‘24 to January ‘28. We have also locked in 90% of our average debt the next two years at an interest rate of 3% basis SOFR and compares to 5% today, which corresponds to a discount on interest rates of 40% compared to current levels.

To shortly summarize, we have a strong financial result, very sound financial position with $220 million of cash on hand, and we are fully financed, and that combined with strong earnings into the second quarter, we guided on $50,000 a day, and current level varying between $80,000 to $100,000 a day with a cash breakeven of just below $22,000 today, we are well positioned to continue returning value by distributing dividends to our shareholders.

With that, I give the word back to you, Øystein, for the market update on Slide 12.

[Øystein Kalleklev, Chief Executive Officer]

Okay, thank you Randi. Let’s touch upon the markets.

We actually have very fresh data here. We were sitting looking at some data last night, and we’re actually providing you with LPG export data from January to May, even though May is not finished yet, because we have predictive data based on loading schedules.

In any case, volumes are up, especially driven on the export side by the U.S. where they have very high inventory levels, and where the oilfields are getting more gaseous, which means more gas available for export, so 18% in U.S. or North America 2023 compared to 2021, and even more so in Middle East despite announced OPEC exports up 27%, relatively flat the other major regions.

On the import side, it’s driven by usually primarily Asia - it’s China and it’s India, going very steadily despite a period where there’s been lockdowns in China. Chinese LPG imports grew close to 10% last year, and it’s grown 28% over this period, driven of course by the affordability of LPG compared to other hydrocarbons.

Europe, of course with less LPG arriving in Europe from Russia, not really VLGC, it’s our smaller parcel sizes or by rail. Nevertheless, Europe has been buying more LPG and also driven to some extent by affordability in relation to the [indiscernible]. The cargoes are getting bigger - VLGC shares in terms of exports going from two-thirds to 70% from ’21.

Let’s look at U.S. in a bit more detail since this market is close to 50% of the VLGC exports. It’s been growing steadily the last 10 years, 7% annual growth. It’s tapering off a bit now but still the EIA forecasting 14% export growth from U.S. this year despite only 4% production growth, because more of the LPG is being exported, also to some extent driven here by more use of ethane in U.S. and then very high inventory levels in the U.S. which makes the price in the U.S. low compared to international markets, and this is driving the arbit cost, which is the next slide, No. 14.

The arbitrage, as illustrated by the price difference, of propane price from Mont Belvieu in the U.S. compared to the Far East Index for Asia, and of course this is our main driver for freight rates. It became extremely elevated before New Year, which really drove [indiscernible] to new heights before Christmas. It’s come down since then but still at $185 per ton, really supportive of the freight rates, and as you can see on the right-hand side, these are very correlated with the spot price rates and arbitrage.

To kind of dumb it down and simplify it, on Slide 15 we have a graph showing the key trading routes. It’s a traditional one, Baltic LPG1 from Ras Tanura to Chiba, today $107 per metric ton freight, which translates into about $92,000 per day on our eco non-scrubber ship. U.S. trade, Baltic 3, Houston to Chiba, Far East is $157 per metric ton, and of course as you can see, the product arbitrage here is $187 - that means the freight is $30 less than the arbitrage. Of course, you need some money for the terminal fees and other costs as well in order for the traders to make a profit. Right now of course, freight is getting close to the arbitrage, but when you have a very tight shipping market as we have today, the owners can take out a very big share of the arbitrage economics.

The shortest route is the one that is most profitable these days, Houston to Flushing, $96 - it’s the lowest rate in terms of per metric ton, but since this is our short haul route, it calculates to $110,000 per day, so what this means is of course with this very elevated trade state, people like to lock in long voyages in order to get a good bottom line, and that means that the shorter routes have to be trading at a premium for people to fix their ships for shorter routes, rather than locking in longer term profits.

Let’s head for No. 16, this is something we have been talking about since at least last autumn. We had said that we don’t believe we will see all the ships being delivered this year. We have seen it ourselves with slippage on boats numbers 3, 4, 5 and 6, and we saw slippage in Q1, 16 scheduled ships but only delivered 12. Those are slipping into Q2 and it’s a case of chain reaction, where you will see probably slipping throughout the curve and less ships than expected for delivery in ’23, and somewhat more ships for delivery in ’24. That balances out the market better. We also have a lot of dockings this year, so it means that fleet growth has been more muted than most people would expect.

Slide 17, before I think I conclude, is the fleet overview. People have been worried about this big column here in ’23 for deliveries. We have been less so because the fleet has been growing, so the relative growth is much less than the two spikes in 2016 - 17, when we had a time where freight rates stayed relatively low, and then also the other spike here in 2008/’09/’10, where we had a lot of ships for delivery.

What’s worth to say is scrapping has been extremely muted in this industry. A lot of the older ships are ending up in captive trade from Iran to China, and this is keeping older ships going. We’ve finally this year seen scrapping of two ships, both above 40 years old, but eventually decarbonization rules and probably more stringent rules will probably result in more of these ships being scrapped, and we see a large portion of the fleet being more than 25 years old, which is the normal economic life of these ships.

That’s it for me. Just to summarize, good results, first quarter profits of $36.3 million, slightly better than the numbers we delivered in Q4. We have very good bookings for Q2, we are now booking at very elevated levels into Q3, and we have good spot exposure, a balanced spot exposure for the rest of the year. The near term looks very promising. We will have more ships in the water, both in Q2, Q3 and Q4, so that bodes well for our bottom line, and with our good financial position that Randi already touched upon, we keep our dividend at $0.50, which gives our investors a very nice dividend yield.

With that happy message, I think we’ll conclude and open up for some questions.

[Operator]

Thank you. [Operator instructions]

We will take our first question. The question comes from the line of Climent Molins, Value Investor’s Edge. Please go ahead, your line is open.

[Climent Molins, Value Investor’s Edge]

Hi, thank you for taking my questions.

[Øystein Kalleklev, Chief Executive Officer]

Hi, welcome again.

[Climent Molins, Value Investor’s Edge]

Thank you. I wanted to start with a market related question. Exports from the Middle East have increased materially year-over-year, and I was wondering, are you seeing any effects on volumes due to the recent OPEC production cuts?

[Øystein Kalleklev, Chief Executive Officer]

Not yet. Of course, the OPEC cuts are for crude oil, so depending on the use of propane--it’s not really sure they will cut anything on propane. So far, we haven’t seen any trend towards less exports, so let’s see.

[Operator]

Unfortunately, Climent’s line has disconnected from the call.

[Øystein Kalleklev, Chief Executive Officer]

Okay. We have a question from the web here, we can take this in case he returns, from Friedrich Caspar [ph]. If VLGC spot rates remain above $50,000 during the remainder of the year, will you increase charter coverage vis-à-vis FFAs or by putting additional investments on fixed rate TCs? That’s the million dollar question. I don’t have--I can only describe how we are thinking about it. Of course, we are looking at the market now and of course you can lock in 80, 90, even $100,000 on a spot voyage, depending on the route and the length, so it’s really something you need to calculate on, let’s say somebody is asking if you want to fix a ship for $50,000 to $52,000 a day for 12 months, then you really need to calculate, okay, we can do one long voyage here, let’s call it at $80,000, and it takes 80 days or so, what is the implied value of the back end of the curve, and then we look a bit at what we think the market will pay that and also the FFA, and then we--because you can also take that cover to FFA is that is more effective, which is something we did last autumn.

I cannot give you a definitive answer. We’ll monitor the market if we feel that it’s value in doing it. I think right now, we’re quite comfortable with having 40% coverage for the second half of the year. Of course, we are fully open for next year, so it’s something we will consider day to day, monitor the market, do the calculations. I don’t rule it out, but we are actually also look to having more spot ships available because if we have more of our fleet in the spot market, we are really one of the very big players in the spot market. If we fix all the ships on TC, we become less [indiscernible] in terms of size. We are the fourth biggest VLGC owner, so if we trade all the ships spot, we get a dominant position, and if you have a dominant position in the spot market, it’s easier to position your vessels to trade ships on TBMs where you can swap vessels and maybe also invest less quality in Atlantic positions, where you are trading one on the VLGC route to, so you have a ship with a very fixed schedule for U.S. loading [indiscernible].

There are some synergies of being big in the spot market, and also in terms of the Panama ranking, so we like the spot market and I think we would probably grow our presence in the spot market rather than reducing it from, let’s call it the 60% exposure we have had to the spot market lately, and also we get more ships for delivery, which is also increasing our absolute size, not only the relative size.

I hope that was a satisfactory question, and then we can maybe check--yes, we can take one more question from the web, from Eytan Morgan [ph]. How far into Q3 are ships [indiscernible]? We had a delivery this night, we’re just bunking up Avior and setting sail, so basically are then chasing loadings in the U.S. middle of July, and then you have the return trip, so basically to simplify, you’re booking into middle of August, I would say, so that’s basically in the middle of Q3. Then you have a sense of--you know, a feel on how your Q3 backlog is building, and of course we’re building that backlog every week now.

Then maybe we can check whether the Value Investor guy is still online?

[Operator]

The participant hasn’t rejoined.

[Øystein Kalleklev, Chief Executive Officer]

Okay, thank you. In any case, thank you for the questions. I think we have to on this make some Avance [indiscernible] and give it away for best question from the Q&A session, so we get flooded with questions like we do in [indiscernible], so that’s maybe something we will think about when we return in August. [Indiscernible] orders which is locked in now with basically fully covered already and where we’re booking to Q3, so hopefully we’ll come back with some good messages for you in August.

With that, I thank you for joining and I wish you all a good summer. Thank you.

[Operator]

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