Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2018-Q2

[Peder Carl Gram Simonsen, Chief Financial Officer]

We'll start with Slide #4, which is summary of the financials for the quarter. We came in with a TCE rate of $7,700 for quarter, which compares to the 30-day adjusted index for $4,800. The year-to-date TCE is $10,100, which compares to a year-to-date index level of $7,900 per day. We came in with the OpEx of $10,150 -- sorry, $10,000,000,150, which corresponds to a daily OpEx of $7,950. The reason for the increase from the previous quarter is mainly slightly higher storing and maintenance expenses. Also in the previous quarter, we had 2 ships dry-docked, which normally reduces the OpEx per day somewhat.We also, in the previous quarter, had a reversal of previously accrued insurance expenses related to Monsoon, which were reversed in Q1, which brought the -- both the OpEx and the A&G a little bit lower than normal. The A&G is therefore in line with previous quarter with this adjustment at just below $1,000 per day. We saw that depreciation and nonoperating expenses increased somewhat, depreciation due to depreciation of dry-docking, which commenced during the quarter and the nonoperating expenses due to slightly higher LIBOR and slightly higher average debt. We had one ship dry-docked during the quarter and we have, so far, this year, dry-docked 4 out of the 6 ships due for dry-docking this year. The CapEx for that has been $3.3 million for this quarter.Our debt is now at $505 million, following a $25 million drawdown on the revolving credit facility, which brings us to an available liquidity of $81.2 million and a cash position of $56.2 million. If we move to the next slide, we have a breakdown of our cash breakeven. With this slide, the average year-to-date OpEx of 7.7 -- $7,700, we estimate a full year 2018 OpEx of $7,600. Our G&A is estimated to a conservative $1000 per day and the interest is based on the LIBOR forward curve and actuals per the second quarter. And as you remember, we have a 50% amortization reduction due to the agreement that we have with our banks which runs until second quarter 2019.Our estimated cash breakeven for the year is $17,900. We have dry-docked, as I mentioned, 4 out of 6 ships by Q2 of the ships that are not the Chinese built windlass. And the remaining CapEx estimated as per the second quarter is $2 million. We have one ship dry-docking in -- as we speak and one ship due for dry-docking in Q4, the Promise.If we move to Slide 6, we look at our operating performance this quarter. We have had 2 ships dry-docked in Q1, which corresponds to 5% of the total calendar days for that quarter. We also had, as previously announced, some repairs for Passat, which corresponds to 4% of those days. And the commercial utilization in the previous quarter of those days, which we call operating days, was 98%. Other than that, we had 54% of those days employed under CoA and 43% as spot fixtures. For the second quarter, we saw that we only dry-docked one ship, which corresponded to 3% of the available calendar days, and had some repairs to Mistral and Passat, which corresponded to 2%. And other than that, commercial utilization was 88% due to the lower rates and lower trading volumes, but the CoA volumes stayed fairly stable, while the spot volumes or spot utilization days fell. If you look at then the TCE rate, as mentioned, it was $7,700 for the quarter, based on our calculation of operating days. If we adjust in the waiting days and remove that from the days we arrive at $8,700 and increase our year-to-date TCE with around $750 per day. And I'll give the word to Christian.

[Christian Andersen, President]

By end of first quarter -- sorry, end of second quarter, the global fleet of VLGCs were at 265 ships, as you can see on Page #7. Four ships have been sold for recycling during first quarter and one ship is sold for recycling in July, adding total number of the ships sold for scrapping so far this year to 5. We have not seen any scrapping after the last one in July. Looking at order book, we have 3 more ships to be delivered this year, 2 of these are the famous Chinese ships sitting at Jiangnan Shipyard in Shanghai. They have been basically ready for delivery since last year and the yard is telling us or telling the market that these ships are coming to the market end of day, but so far we haven't seen it. Last rumor is that they will be delivered in September. There is one further ship to be delivered in fourth quarter. This will give an order book of existing fleet of 14.4% ships. If we look at order book going forward, you can see that this year, with the 3 remaining ships, we come up to 10. Next year, we are expecting 23 ships and in '20, we see 12. It's a bit too much, of course. We don't need these ships maybe, but compared to previous year, we are far below the big deliveries of 15 and 16 with around 40 ships each year. So that's good news for the market. Our business second quarter, Page #8, we haven't done any time charters. We have done 8 spot loadings and 11 contract of affreightment loadings in the second quarter. All this business is priced spot. We do have some fixed price spot loadings, of course, but they will be priced at the market on the time and the CoAs are 100% priced on the market. There has been a lot of waiting in the second quarter, unfortunately. This is in April and May. Since that, waiting has come down, but because of the high waiting, we have an average per ship per month for this quarter -- for second quarter of 3.3 ships. Peder mentioned that we dry-docked one ship all in all with the voyage conditioning and the timing to dry-dock is 42 days. In the quarter, we also had 4 off-hire incidents, 2 at hardly any time at all and 2 a bit bigger. One was a collision and one was insulation on cargo tanks, which had to be repaired. These 4 incidents in second quarter have 30 days off-hire. If we look at where the ships are employed, we had 9 loadings in the Middle East, 6 loadings in U.S. Gulf and 4 other loadings, which is basically -- actually we've been to Australia, we've been loading in Southeast Asia, West Africa, total of 4 loadings.And as on previous occasions, we basically go to the Far East so almost all these ships have been discharging into the Far East. We have 2 discharges into South America. This has been contract of affreightment voyages with voyage in direct computation, taking the ship to the Far East. So all in all, 17 discharges in the Far East in the second quarter. Still, on Page #9, we have 14 ships. Second quarter, we have been into 25 different countries. We have had 1,274 ship days. We have 12 people in the office and we have about 620 people onboard the ships. If you look at the graph on the right-hand side on Page #9, you can see that in April and May, we had between 5 and 6 waiting days per ship, dragging up the average. The first part of the year was pretty good and since May, waiting time has been hardly any. And this is, of course, due to the market and as -- for some of you who are following this Avance Gas index will remember that the lowest part of this year was in April where we touched down [ $123 ] per day. In addition, the waiting time were quite high in April. If we look at exports from the Middle East, on Page #10, we compare the 3 biggest countries with 3 years average and 3 years high/low. You can see in 2018, it's been pretty good, compared to the 3 previous years. And in May, we had a record high lifting. If we include the full Middle East, which is basically Iran and Kuwait, in addition to the 3 main ports, you can see that there was -- the biggest number of tonnes lifted in May, since we started Avance Gas in 2007, so from first of first in 2008, we were very close to a monthly lifting of 4 million tonnes. This has helped the freight rate recovering from 17th of April when the Baltic was down to $19.9, which was this year low. And if we turn to Page 11, and have a look at the U.S. Gulf, U.S. East Coast, and again, this is the same as always. We only count VLGC volumes. We do not count the smaller ships and we count each lifting. And again, 2018 has been much, much better during the summer months than the past 3 years. There is not any big difference between the continued export because all volumes are on both these graphs. But you can see on the right-hand side that we had 1 or 2 months in '17, which were as high as we had in June this year. If we look at the number of lifts, which I think is even more interesting because the volume in the U.S. goes a bit up and down on the ships so every time we employ a ship, that's the interesting thing. And looking at Page #12, you can see that the average loadings of '18 has been very stable, and as you remember from the previous graph, the past couple of years, we had a dip into the summer, which we didn't have this year. And this is the second thing, which have been helping us for the rates to recover from the years low and I would say maybe all-time low in April this year. Again, if we look at the trends from the U.S. export started with 8 cargoes in January '13. We are now in June, close to 60 cargoes, between 55 and 60 cargoes. For the U.S. lifts, the destination are very important and Page #13 will show you the past 4 years. You will see that this year, we're just below 60% of destinations to the Asia, to the Far East. This is basically because of February. February had a low number of liftings and had a low percentage to the Far East. So when we add up year-to-date by end June, we end at 59%. We think this will increase as we are moving forward because we see more cargoes going to Asia than we did in February. So we do expect that this will end up somewhere between 64% and 66% when we come towards end of the year. Sometimes we are talking about routing. I would say basically all ships go through Panama, both laden and ballast. There are some ships, however, doing Cape on the ballast leg based on the position, but as a main rule, it's Panama both ways. And, I think, the experience we have today is telling us that it's easier to get Panama slots both ways than some people were talking about a couple of years ago. We have also seen during the autumn when the product market has been [indiscernible] good. Some of our old customers want to send the ships the long route, the Cape rather than the Panama. This could happen again and will, of course, eat up some more capacity if it happens. It's a bit too early to say right now. Back to the order book on page 14. As you remember, 14.5% of the existing fleet. If we look at age of the ships, 50% of the existing fleet is built 2011 and later. 17%, it's a bit difficult to see over this page, but the light blue one is 17%. This is ships built 2000 and earlier. And if we divide this again into the years, you can see that we actually have more than 20 ships, which are more than 26 years old. And we think that 33 ships -- not we think, we know, we do know that 33 ships will be 25 years or older by 2020. And we do expect that the gray area, 7% of these ships, of the existing fleet is very likely to exit the freight market as we enter into 2020. The light blue one, 7%, on Page #14, is ships storage -- ships sitting on storage. And the average on the storage ship is about 10 years. There are, I would say, storage ships are divided into 2, some are very old and there are some are new ones, bringing the average down to 10% -- sorry, 10 years. But there are a number of older ships sitting on storage. And these ships are 75,000 and 78,000 cubic meter, while the modern fleet is 80,000 to 84,000 cubic meter. So you could argue that a storage ship of 75,000 cubic meter and even 78,000 cubic meter is too small to take a full cargo from one of the big VLGCs and this will support an idea that these old storage ships will be moved out of the market and larger ships will take over. I'm going to end this presentation with a short summary. It's kind of repeating myself. Second quarter, we had 48 cargoes out of U.S. Gulf on average for the 3 months. This is comparing to 42 cargoes last year. And, of course, again, this is because the summer export was maintained at healthy levels this year, while it came a bit down last year. Also in the Middle East, we have had an increase. If we compare to last month, the export from the Middle East is actually up 20%. It's not fair to compare to last -- to the previous quarters because normally there is always lower export in first quarter than second quarter. But even if we compare to the second quarter last year, we are up 11%. So the Middle East export is also up based on same period last year. The difference -- the main difference between second quarter '17 and second quarter '18 is Iran. Iran is taking 70% of the increase compared to the 2 quarters. If we look at the increase from first quarter to second quarter this year, it's widely spread all over the exporting countries. I would say maybe Qatar and Kuwait has a bit higher growth than the other countries in the Middle East. We see that U.S. production shale oil, pipe oil and shale gas is increasing. There is a lot of questions about tolls, what is going to happen when Mr. Trump is going put a lot of tolls on the LPG, nobody knows. We and some people do expect that the Chinese don't have any alternative. They have to take U.S. tonnes. Some people will claim that the Chinese will shift their purchase to the Middle East, remains to be seen. What we do know is that the Chinese traditionally don't like to buy CP price, they like to have Far East index or Bellevue. So are they able to shift all their purchases into the Middle East? We don't know, we don't think so. But when we do the simulation on fleet utilization, we see that the freight market is quite indifferent to U.S. cargoes ending up in China or other places in Southeast Asia. And I'm including India and other places. So even if we take all the Chinese tonnes to India and all the India and Middle East purchase tonnes to China, the fleet utilization is not really changed a lot. The next big or the next moves in this industry is the East Mariner II pipeline, which we've been waiting for, for some time. As you know, there have been disruptions on East Mariner I as well that seems to be solved. When we talk to our customers, they tell us that the East Mariner II pipeline will be commissioned at very end of this quarter or early next quarter and that we can expect volumes to reach Marcus Hook during first, sorry, fourth quarter this year. So we do expect that the Marcus Hook export will pick up considerably during fourth quarter this year. I did talk about the recycling. I will not mention that again, but it's interesting to see that we have not had any orders in the VLGCs segment lately. And finally, Avance Gas, we are studying what to do with the 2020 emission regulations. I guess there are 3 choices on the wind class, on the 8 Chinese built ships: we can do nothing; we can look at scrubbers; and we can look at LPG fuel. There is CapEx involved with both LPG fuel and scrubber, obviously. And it's more expensive to convert the ships to LPG fuel than to scrubber. The difference is that any conversion into LPG fuel will last for the remaining part of the ship's life, while scrubber has a limited lifetime for different reasons. We have not concluded yet and we still have some time. The docking schedule for the wind class is in 2020. And whatever we will do, we plan to do during the scheduled dry docking in 2020. We have decided not to do anything so far on the 6 older ships. Obviously, Avance Gas is also up for dry dock again in 2020. So we have an option to do a scrubber solution also there during the scheduled dry dock. And by this, I think, I will open up for questions.

[Peder Carl Gram Simonsen, Chief Financial Officer]

Any questions from the audience?

[Unknown Analyst]

Would you say that your second quarter waiting days is indicative of the global fleet utilization or is it due to commercial reasons that you stood up against low freight rates?

[Christian Andersen, President]

It's a bit difficult to have a very firm opinion on that, but I would think that it's more likely to be all over the fleet than just us.

[Unknown Analyst]

Can you say a bit more about the CapEx difference for the LPG conversion versus the scrubber? Have you sort of done any studies on that?

[Christian Andersen, President]

We are working on the pricing and so far we have some very indicative numbers, but I don't think I'd like to comment it because I think it's a bit premature. We like to work more with both the scrubber solutions and the LPG solution, and the LPG solution is technically quite complicated solution. So we don't really know the price of it and we can also go a couple of different routes. What kind of system will you have? Do you want me to take LPG directly from the cargo tank? Or are you going to build enough fuel tanks on the deck? That will also have a big impact on the price. But we will come back to that when we have a bit more clear picture about the pricing.

[Unknown Analyst]

Okay. And the loadings that you are taking from the U.S Gulf, are they spot or are they on the CoA structure?

[Christian Andersen, President]

It's a combination. We have spot voyages out of the U.S. and we do have some CoA loadings as well. I think the big...

[Unknown Analyst]

How is the CoA structure priced?

[Christian Andersen, President]

The big difference between our commercial strategy in '18 compared to '17 was that we are positioning ships to the U.S. on the spot market. We did a lot of spot loadings in the U.S. in previous years as well, but at that time and the charters booked the ships so early that we could book Far East placed ships and take them to the U.S. Over the last couple of years, you had to balance them towards the U.S. Gulf before you could book spot cargoes in the U.S. Then CoAs are based on a formula, and the basis of the formula is the board regulated price.

[Unknown Analyst]

Just another quick follow-up on the latter one. Does that imply a premium or discount to the Baltic?

[Christian Andersen, President]

Basically, there -- it's a bit complicated. There are no discounts to the Baltic in the formulas.

[Unknown Analyst]

Just a quick question on the Panama capacity. You said that more or less everyone is traveling to -- through Panama. Could you just say will there be capacity to continue to do so? And do you see competition from LNG vessels? And lastly, has something happened with the pricing there?

[Christian Andersen, President]

We do expect -- well, again, this has very much to do with Trump and the tariffs. If the U.S. export to Asia is increasing, there will, obviously, be more volumes going through Panama. We think there are room for more ships. We think it's likely that there will be more ships, but we think that Panama authorities will allow more ships to go through per day.No, we have not seen any big change in the pricing recently.

[Unknown Analyst]

We can just [indiscernible] them because I compared your outlook in -- the written outlook in the Q1 versus Q2, and last time you said that you were expecting VLGC freight market to improve. You didn't say that now. Is this -- was this the peak?

[Christian Andersen, President]

I think the big change was that when I had the presentation for the first quarter, we were at the absolutely rock-bottom. The market has turned. The freight market based on dollar per tonne has more than doubled since I had my last presentation here. We do expect the market to continue to improve, but it's very much to do with will we get the East Mariner II pipeline as promised in fourth quarter? What will happen to the older ships as we are approaching 2020? If we have 14% more ships delivered into the market with not too much growth then we have a challenge. If this is combined with the older ships disappearing into storage or being scrapped or a combination, I think the freight market looks pretty good. I'm meeting customers all the time and I had been last week with a customer. I -- last time I met him in March. He was very pessimistic for '19. When I met him last week, he had turned 100% around and he was now very optimistic on behalf of the ship owners for '19. So we are certainly optimistic and we think the freight market will improve. When we met last time, the market was so extremely low that I was 100% sure that the market would turn pretty soon. Right now, I don't know if we are going to move from Baltic today around $40, $41 which is giving us about $15,000 on the old ships and about $17,000, $18,000 close to $19,000 on the so-called eco ships. How much further will we be able to push the market up this year? I don't know.

[Unknown Analyst]

Around that last talk, I remember you said once that 55 to 60 VLGC cargoes from U.S. are going to, sort of, balance the market. That's where we are now? And now we are talking about the market being decent, but we are still in a sort of a cash breakeven territory. There is 20-plus vessels just [ delivering ] in 2019. So is the picture getting brighter or darker?

[Christian Andersen, President]

I think, right now, unfortunately, we are not at 55 to 60 cargoes out of the U.S. We have an average of 48 cargoes in the second quarter. So it's, again, if we are only able to move up to 65 cargoes plus on a monthly average, I am very optimistic about the freight rates. And if we get the East Mariner II pipeline in October, as we hope, and we are getting another 6 to 8 cargoes from Marcus Hook, then we are pretty much up to mid-50s plus and that will push the market up. Again, as I said, if we get 14.5% more ships over the next couple of years without any ships disappearing and with the fairly moderate growth in export, we might have a problem -- might have a challenge, but I'm pretty sure that the old ships they -- it's no way they can compete with the modern ships in the freight market. Not even now, but certainly not from 2020. So these ships will disappear from the freight market. We -- I think that the older ships, the smaller ships, will be broken up and I think that a larger part of the older fleet will take over storage and we've seen it already. Some of the very old ships have been gone out of storage for breakup and some of the not so old but still very old ships have taken over their storage positions. So I think we'll see more of this over the next couple of years. It doesn't make sense to have a 26-year-old ship competing on freight in 2020 when you have a spread between high and low sulfur of $250 to $350 per tonne. It doesn't make sense at all.

[Peder Carl Gram Simonsen, Chief Financial Officer]

Okay. I can take questions from the dialers.

[Operator]

[Operator Instructions] There are no questions from the phone. As there are no questions, I'll now turn the call back to your host for any additional or closing remarks.