Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2021-Q2

[Operator]

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

[Kristian Sørensen, Chief Executive Officer]

Thank you very much, and hi, everyone, and welcome to this Q2 presentation. As mentioned, my name is Kristian Sørensen, and I'm the CEO of the company. I'm joined today by our CFO, Randi Navdal. I'd like to start with presenting some of the highlights for this quarter. So if we go on to Slide #3, please. We experienced solid export levels this quarter from the U.S., but high domestic LPG prices in the states close to spot arbitrage opportunities, which we need to ignite the U.S. Gulf freight markets. The other engine in the market, which is the Middle East exports were on the lower side and slightly underperformed compared to what we had anticipated. And even today, it's mainly the Indian charters to keep up the pace in the spot market, while activity on a conventional A&G Far East runs is pretty limited. The combination of lower activity in the Middle East, combined with limited arbitrage opportunities from the U.S. Gulf to the Far East has had a dampening effect on the freight market, which turned out slightly weaker than what we anticipated if you asked us 6 months ago. As you can see, we reported a TCE per vessel day of $27,730. As Randi will show you, we continued to experience certain operational issues linked to COVID, which in turn is reflected in a higher OpEx in the first half of the year than budgeted. Our EBITDA was USD 18.1 million with a net profit of $1.5 million and earnings per share of $0.02. Given our solid cash position and market outlook, the Board has decided to pay 100% of the net profit in dividends, equaling the said $0.02 per share. Other key events from the quarter which should be well known to our -- to all of you are our private placement of $65 million back in April. And late in the quarter, we got Avance Gas first sustainability linked bank loan in place. So Randi, I'll leave the word to you to go through the financials.

[Randi Navdal Bekkelund, Chief Financial Officer]

Thank you, Kristian, and good afternoon to you all. I will now walk you through the financial highlights of the quarter on Slide 5. Looking at our chartering results, we recorded a time charter equivalent earnings of $30.7 million, down from $47.8 million in previous quarter. The second quarter was impacted by the extreme cold in the U.S. leading into first part of the quarter. We also finalized the scrubber installation on our last vessel, Breeze in May, which was a good timing as the market picked up again in June. The TCE per vessel day came in at $28,774 in accordance with our guidance, and as the market was stronger in June compared to March, we had a negative load-to-discharge adjustment of $1.2 million and reporting a TCE per vessel day of $27,730. Operating expenses were $11 million or $9,300 per vessel day and is still impacted by the pandemic affecting our crew change, especially in Asia. Freight repairs and equipment is significantly higher as the container and air freight market went for this [ spike ]. In total, the COVID-19 and freight costs impacted our OpEx of approximately $1 million or $800 per vessel day in the second quarter. Administrative and general expense were slightly higher than last quarter due to one personnel expense and is expected to come down to $1.4 million next quarter and going forward. This leaves us with a reporting operating profit or EBITDA of $18 million. Depreciation expense were $12.3 million, slightly higher in the second quarter and first half as we reversed the impairment in Q4 last year and started depreciation of drydockings and scrubber installation now fully completed. And we will come down to $11.5 million next quarter and going forward. Finance expense is on par with previous quarter and down $2 million for the 6 months ended compared to last year and is driven by lower average debt and a lower margin on the debt financing combined with the decline in the floating LIBOR interest rate. And with that, we recorded a net profit of $1.5 million or $0.02 per share for the second quarter and $20.4 million or $0.29 per share year-to-date. Turning to the next Slide 6, we have an overview of our cash flow during the first half 2021. We had a cash position of $108 million as of June 2021, up $32 million from year-end, driven by cash flow from operations of $50.6 million and net equity raise of $64 million, offset by interest payments of $8.9 million and capital expenditure of $34 million, mainly related to our newbuilding program and to cash dividend payment of $17.7 million and debt repayment of $22 million. Looking at our estimated cash breakeven level on the next Slide 7, we have revised our cash breakeven levels for the financial year 2021, a bit down to $22,700 per vessel day as the LIBOR floating interest rate curve is down for the second half for the financial year '21. A few comments on our financing profile. Our outstanding secured bank loan amounted at $398.7 million as of June 2021, with no maturity before June 2024. We have a diversified pool of bank lenders, consisting of 7 banks and 1 new bank coming in on our new sustainability-linked financing to be drawn upon delivery of the two first newbuildings, Avance Polaris and Avance Capella scheduled for delivery in -- within the next 4 to 6 months. The facility has a maturity at the earlier of 5 years from delivery of the second newbuilding on June 27. And with the profile of 18 years, this utilized the cash breakeven level of approx $19,500 per vessel day, decreasing the average cash breakeven level for the fleets with $300 to $400 per vessel day. The facility has an annual sustainability margin adjustment linked to the company's ambition to reduce and outperform the carbon intensity targets set in the Poseidon Principles. The duel fuel newbuildings will lower our operational carbon footprint and the sustainability-linked financing further demonstrates our commitment to the decarbonization of the shipping industry with support from the banks in this facility. And with that, I leave the word over to you, Kristian, for the market update.

[Kristian Sørensen, Chief Executive Officer]

Thank you. So we can go on to the next slide, please. So like I mentioned initially, we have robust exports from the U.S. despite the lack of spot arbitrage opportunities and this has continued into the third quarter. In Middle East, however, they are not really firing on all the cylinders, but we expect the A&G exports to increase on the back of reversed OpEx cutbacks. There is a lot of focus on the congestion around the Panama Canal and rightly so because it is very unpredictable logistics now that the LNG and container vessels are prioritized. And the waiting time for LPG carriers varies from 5 to 10 days and even up to 14 days on the north as well as the southbound transits. In the short picture, ship owners are facing increased waiting time on their accounts on the ballast leg into the U.S. Gulf. But in the grander scheme of things, it's obviously absorbing capacity from the fleet. And it's not unlikely that more ships will be heading around South Africa and Suez to and from the Far East. All in all, the market is quite well balanced at the moment and with continued LPG stock building in the U.S. increased congestion in the Panama Canal and more vessels likely to trade around the Cape of Good Hope we see signs of an exciting winter market. Next slide, please. Looking a bit further ahead, we maintain our fundamental positive view for '21 and 2022. The latest figure showing a continued increased demand for LPG in Asia with the 2 most populous countries, China and India, showing robust demand growth. LPG is a clean energy source and countries around the Indian subcontinent like Pakistan and Bangladesh as well as in Southeast Asian countries are reporting a demand growth as the need for clean residential fuel is high on the agenda in this part of the world. Next slide, please. Exports from the states are also being revised upwards for the period towards the end of 2022. And we see increased utilization from the newly expanded terminals such as Targa and Nederland in the U.S. Gulf and Marcus Hook on the U.S. East Coast. The U.S. LPG market is extremely dynamic, and we can see that the stock build continues towards the winter season, which under normal circumstances should pave way for increased spot activity with lower domestic LPG prices in the U.S., which in turn will allow for the arb windows to open up. Next slide, please. The order book is something we are not particularly happy about. And throughout the second quarter, we saw a flurry of newbuildings being contracted. And especially in 2023, the number of deliveries is high. Although there are some mitigating effects in stricter environmental regulations, especially hitting the older part of the fleet, we are not naive and we are working on several measures to take down the risk towards 2023. Looking beyond 2023 and towards 2025, we are hopeful that we will see more of a 2-tier market where ships with a smaller CO2 footprint will be preferred and eventually less preferred vessels being phased out from the conventional trade routes. Looking towards '25, it's not an unlikely consequence as far as we can see that the large order book of dual fuel newbuildings will accelerate the green transition in the VLGC segment as the supply of more environmental-friendly tonnage automatically sets a new standard. Next slide, please. So to summarize. We reported the TCE for the second quarter in line with our guidance, and I'm happy to announce another quarter where we return value to our shareholders through dividend payments. We are looking forward to what seems to be an exciting winter market and maintain our positive view on the next 18 months ahead. And we are very proud of having secured our first sustainability-linked financing demonstrating the green profile of our newbuildings. So on that note, I would like to open up for questions. Please go ahead.

[Operator]

[Operator Instructions] There are no further questions at the phone line.

[Randi Navdal Bekkelund, Chief Financial Officer]

And we will now take questions from the webcast. We have received 1 question and that's have you sold a vessel?

[Kristian Sørensen, Chief Executive Officer]

And to that, the comment is that we are working on various opportunities to offload some of our older units in a market where they are priced at a good level. But I -- if -- when and if we have anything to announce, it will be announced through the stock exchange. Any other questions?

[Operator]

No questions at this time. Please continue.

[Randi Navdal Bekkelund, Chief Financial Officer]

We got 1 more question from Peter Vanderbilt. Has Petredec made their intention clear with their stake build?

[Kristian Sørensen, Chief Executive Officer]

Well, reply to Petredec. They built this -- it is obvious that we welcome all shareholders to Avance. So I'm very happy to see that they as an industry specialist believe in the market and in the company. And as we can see, it's a sign of untapped potential in the company. So apart from that, I don't really have any further comment to that question. So it's -- that's all I can say at the moment. Any further questions?

[Randi Navdal Bekkelund, Chief Financial Officer]

We got 1 more question from the webcast from Ula Sobiech. Do you have any thoughts on M&A opportunities?

[Kristian Sørensen, Chief Executive Officer]

I'd like to say that we obviously want to -- we are exploring all M&A opportunities out there, which we find attractive. I think it's natural for any ship owner that you want to look at expanding the exposure when you believe the time and the price is right and M&A opportunities is obviously a part of this. So we are obviously exploring opportunities. But so far, there have been no firm opportunities arising.

[Randi Navdal Bekkelund, Chief Financial Officer]

[Operator Instructions] Currently, we don't have any further but we can wait a bit. Let's see. There is one more. So we have another question here. What is Petredec's intentions?

[Kristian Sørensen, Chief Executive Officer]

That is unclear to me. We have no further comments apart from what I commented on earlier, which is that we obviously welcome them as an even bigger shareholder in the company. Apart from that, I can't really comment anymore.

[Randi Navdal Bekkelund, Chief Financial Officer]

So another follow-up question on Petredec came in. Will you co-work with Petredec LPG?

[Kristian Sørensen, Chief Executive Officer]

Yes. Obviously, I mean Petredec is already well-established client of ours, and we co-work and do business with Petredec in the market on a frequent basis. So the answer to that is yes. I mean we have already an established -- well-established client relationship with them as of today.

[Randi Navdal Bekkelund, Chief Financial Officer]

Okay. There are no further questions at this time. And thank you for dialing in and listening to Avance Gas Holding earnings conference call. And we wish you a nice day.

[Operator]

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