Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2022-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Avance Gas Holding Limited Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

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 second quarter earnings presentation. I am Oystein Kalleklev, the Executive Chairman of Avance Gas.

Today, I will be joined by Randi Bekkelund, our CFO, who will guide you through the financials a bit later in the presentation.

So let's just have a look at the disclaimer before we start the presentation, I will remind you of the disclaimer as we will provide some forward-looking statements, use some non-GAAP measures and our limits to the completeness of detail we can provide in this rather short webcast. So we also recommend that you review our earnings, of course.

So let's kick off with a summary of our highlights. I'm pleased to say that in the first half of 2022, we delivered the best results since 2015. For Q2 time charter equivalent income, or TCE income came in at $43.6 million, corresponding to an average TCE per ship of around 36,200 per day, which is ahead of our guidance of around $32,000 to $33,000 per day. This resulted in EBITDA of $31.6 million and a net profit of 18.4 million, translating into earnings per share of 24 cents per share.

During the quarter, we completed the sale of the 2008 built VLGC Providence with a book gain of $4.5 million with a cash release of around $26 million, given our rather low leverage slightly below 50%. I'm also pleased to say we have been busy on the financing side recently. In Q2, we closed the $555 million facility announced back in May, which boosted our cash by around $83 million in the quarter. Under this facility, we also had the accordion option to add bank financing of $150 million for the 2 last new buildings. New building 5 and new building 6.

We have, however, agreed $135 million sale leaseback at attractive terms, which in addition to providing us with $20 million more cash also extend our debt maturity profile. So with that financing in place, all remaining 4 new buildings are fully financed with $250 million of debt finance commitments versus CapEx obligation towards the yard of $248 million, i.e., $2 million less than the debt secured.

Given the recent refinancing, good cash flow and vessel sale, cash balance jumped to 199 million at quarter end, which we find very comfortable given the fully financed CapEx program and our market outlook. Another recent event, which I'm pleased to announce is that we have been able to recruit a new Chief Commercial Officer to take over for Ben Martin, and we didn't have to look very far. My response to him, I have enjoyed working with Avance during the last 4 years, have agreed to also take on the role as CEO in Avance Gas.

Molins have a wealth of shipping experience after his maritime education, which also involved a couple of years at VLCC. He worked basically 10 years with LPG and Petchem. 10 years in very large crude carriers of VLCCs and around 10 years in LNG. So altogether, around 30 years in these 3 segments which share many similarities. Molins will likely also be fully dedicated to FLEX LNG, but we find taking on -- but we find taking on Avance as an exciting endeavor. And by doing so we can just cut cost compared to having duplicate management.

In terms of guidance for Q3, this is admittedly a bit on the soft side as the market has been slightly weaker in Q3 compared to Q2. We estimated TC’s to be in the low… we estimate the TC to be in the low 30s for Q3 with around 32,000 per day as the best estimate. Some of this is due to timing effects as we beat our guidance in Q2 due to similar timing effects. For Q4, we are booked around 50% and as we are now looking at fixing October date, rates have pulled up.

So based on market today and forward freight rates of FFAs, we do expect TC to bounce back up again in Q4. So with good results, 4 remaining new buildings fully financed with some spare left actually and $199 million of cash at hand, the board has decided to also pay $0.20 per share in dividend this quarter. This should provide us with an attractive yield of around 16%. $0.20 is also in line with what I would call the clean earnings per share. This is our earnings per share, where we adjust out the gain of the vessel sale 4.5 million and then add the noncash effect of the item of debt issuance cost, 1.6 million, which is booked under finance costs. Turning to slide 4 and our current fleet status. Avance Gas is a shipping company focused on seaborne transportation of LPG with the fleet consisting entirely of the larger ships in the segment, which we call very large gas carrier or just VLGCs for sure. The VLGC transport about 75% of all seaborne LPG.

During the first half of year, we have sold 2,008 built ships while taking delivery of 2 new dual fuel LPG ships. For the remaining 2008 and 2009 ships, we have secured fixed higher time charter recoveries from most 2022. This have thus eliminated the fuel price risk as these ships are on average last year than the newer ships, and they are also not fitted with exhaust gas cleaning system or what we typically call a scrubber, and I will revert with some more details on scrubber economics later in the presentation.

We have 8, 2015 eco-design we will receive. 6 out of these 8 ships are fitted with a scrubber, which has significantly improved the competitiveness this year given the fuel spreads. One of the ships KINO, which is not fitted with a scrubber, we have put on a variable TC until the middle of next year, giving us some charter coverage. During the first quarter, we took delivery of 2 of our new buildings which are equipped with LPG dual fuel systems. These ships have a very favorable freight economics compared to older ships as they are more efficient and have the flexibility to run on LPG fuel.

As I will illustrate shortly, LPG has become very cheap to other comparable foods. So we remain a bit about not only the environmental profile of the ships but also the economics. Next year, we expect to take delivery of 3 module fuel VLGC and the last remaining VLGC new building is expected to be delivered in early 2024. Before turning over to Randi for our financial date, I just want to highlight the coming compelling attributes of LPG. LPG is today cheaper than coal while being a clean burning fuel in terms of local emissions, which is a big problem for a lot of people around the world, especially in developing countries where access to electricity or natural gas piping is scarce and where often the only alternative is coal, biomass like wood or even waste.

Every year, more than 4 million people die prematurely due to indoor air pollution caused by household air pollution. Additionally, propane also contributes greatly to reduce CO2 emissions as well as ambient air pollution, which annual debt all is similar to the indoor air pollution. In total, around 8 million people just die from pork air quality. So this is a rather big thing, as I've also highlighted in the flex presentations in the past. So LPG is efficient in the sense that it has a high calorific value and it's pretty dense.

It's fully portable, which is a great advantage in rural areas with our pipeline or electricity infrastructure like my tires where I fueled my barbecue with propane and have done some very often lately. As I mentioned, LPG is clean burning with no Sulphur and virtually no particular matter emissions. LPG is extremely versatile and can use in transportation as Autogas in commercial businesses, industry like plastic and refinery, farming, domestic heating and cooking to mention some.

LPG is also very accessible. It can be transported with the relative ease over sea, road and rail and infrastructure is not very complicated as illustrated with the canister on the slide. And lastly, which is probably the main focus area today with energy crisis ravaging, LPG is affordable. As mentioned, is cheaper than coal, it's cheaper than crude oil and definitely diesel with today's refining margins. Natural gas is often considered its main competitor with advanced countries, mostly building out pipeline infrastructure to facilitate the movement of large quantities of gas.

In developing countries, but also rural areas in advanced economies, LPG is often a very good substitute. It's a bit hard to compare pricing with LNG on natural gas. LNG is still somewhat a regional market where U.S. consumers have access to cheap natural gas, even though Henry Hub recently hit a 14-year high. Henry Hub is now hovering at around $9 per million BTU translating into around $50 per barrel of oil equivalent. If you buy LNG on a long-term contract, which is the case for 2/3 of LNG volumes, price is around 20% discount to oil at around $80 per million BTU. This is in line with the price of LPG, which is around 90%. However, this is spot LPG compared to contracted LNG. However, if you are one of the unlucky spot LNG buyers where about 1/3 of volumes are traded, then you are paying around $75 per million BTU.

Today, European buyers dominate this trade. European pipeline gas prices are actually even higher than spot LNG due to the congestion issues in Europe. So pipeline gas is priced about $20 higher at around $95 per million BTU or $550 on a barge of oil equivalent. Thus, European pipeline gas is today around 6 times more expensive than LPG as I noticed was recently highlighted by one of our competitors. Although I have a problem remembering which competitor, I think it started with a B or was it a W. I'm not really sure.

Well, then, while I'm getting my brain walking again, I think I can hand it over to you, Randi, for our financial review before I will turn with a short market update.

[Randi Bekkelund, executive]

Thank you, Oystein, and let's have a look at the financial takeaways for the second quarter on slide 6. As already stated by a standard time charter equivalent TC earnings or net operating revenue and voyage expense came in at $43.6 million, equaling a daily TCE per ship day of 36,200 which is slightly lower than previous quarter but $3,000 to $4,000 a day ahead of guidance, and this is due to more favorable positions than anticipating, resulting in a positive timing effect of revenues in the second quarter.

Operating expense representing crew repair, maintenance, beers and equipment for managing the vessels on a daily basis also known as OpEx were $10.1 million, down from $1.7 million in previous quarter. This equals a daily average OpEx of 8,200 for the second quarter compared to 8,500 for the previous quarter. We're still seeing high crew change expenses, but a small portion relates to COVID-19 as the vaccine has been rolled out, and the local regulations have been listed. But as we're all seeing these days, either it's for business or pleasure, airfare expenses have increased significantly, causing a higher OpEx and represents approximately $300 a day for the second quarter.

Administrative and general expense for the quarter was slightly higher this quarter compared to last one and is explained by one of personnel expense for employees, which is expensed in accordance with accounting standards. And this concludes a reported EBITDA of $31.6 million compared to $34.8 million in previous quarter. The depreciation expense came in at $11.1 million. This is $1 million lower than previous quarter and is explained by one vessel less in the fleet during the second quarter compared to the first quarter.

Furthermore, we have sold one of our 2008 build ladies, which was delivered to the new owner in May and thereby, we recorded a gain on sale of $4.5 million in the first quarter. And in total, for the first half, we have recognized a gain on sale of $10.8 million, including Thetis Glory delivered to the new owner during the first quarter. Net profit was $18.4 million or $0.24 per share compared to $24.3 million or $0.32 per share for the first quarter.

The first half results of $42.7 million or $0.56 per share is the strongest first half in 7 years and is already 33% ahead of the full year results last year. As already stated by Oystein, we're happy to share the majority of that profit with our shareholders by distributing a dividend of $0.20 per share for the second quarter, which will be paid during September. Furthermore, below the net profit, we have recognized 5.1 million in positive mark-to-market adjustments related to our interest hedges, which is designated for hedge accounting through other comprehensive income and equity, which I will come back to you in a minute.

A few comments to the balance sheet, at quarter end, we had a net interest-bearing debt of $501 million, equaling a date total asset ratio of 46%. We had a solid equity of $579 million corresponding to a book equity ratio of 53%. And a strong cash balance of approximately 200 million, which leads us to the next slide number 7. With the refinancing of the bank facility announced in the previous quarter, we have significantly increased our cash position during the quarter as we drew $325 million, resulting in a net cash release of $83 million up to $325 million, $125 million is a revolving credit facility, giving the flexibility to repay when we have the capacity to do so and avoid related interest expense and withdraw when we need it.

Other movements in our cash balance is possibly cash flow from operations of $22 million sales of our land, generating a net cash release of below $26 million, offset by $15 million in dividends for the first quarter, pre-delivery capital expenditures in relation to our new buildings, 3, 5 and 6, totaling $24 million and $3 million in scheduled payment. And this adds up to an increase in cash of $88 million from the first 2 to the second quarter.

Moving to slide 8. We are happy to announce that a few days ago we signed $135 million sale-leaseback agreement with Bukom for financing the final 2 new buildings for delivery. Second half 23 and the first quarter 24. The new financing bears a center of 10 years from actual delivery date of each vessel has a repayment profile of approximately 22 years and is sulfur based as the LIBOR will be fit out in June next year. The agreement will contribute with a total of 39 million in cash release at delivery of these vessels, resulting in unfunded remaining capital expenditure and the funding of the new building program has been completed.

Along with a robust cash position, we are well positioned to continue returning value to shareholders through dividends as we have done for this quarter when we generate profits, while handling a potential downward moving freight market into next year when the order book is coming on other, even though we maintain our view that improving fundamentals and regulations, we likely have so the order book. Oystein will talk more about that in a few minutes.

Moving to slide 9. Following the refinancing of the 9 VLGCs executed in May and the sale leaseback agreement with Bukom, this slide gives an overview of our total committed financing and further demonstrates that we have secured financing for the whole fleet with a staggered debt maturity with the first maturity date in February 2027. We have further improved the profile, the tenor and pricing on our financing in the recent 12 months, resulting in an attractive average cash breakeven of below 21,000 over the debt duration of the whole fleet.

The financing portfolio is now diversified with 10 different well reputational lenders, including European banks and Asian leasing houses. We're also proud to have the majority of the debt linked and annual sustainability margin adjustment which goes hand-in-hand with the company's ambition to reduce the carbon intensity of the fleet with support from the bank. Moving to the next slide 10, provides you with an overview of the interest rate swaps which is used to manage the risk of increasing interest rates.

For the first half, we were ahead of the interest rate curve thus recognizing just below $17 million in interest rate lock gains through the other comprehensive income and a positive market-to-market value of $9 million recognized as an asset in the balance sheet. This was had a notional amount of $256 million by end of the second quarter. And subsequently, in July, we planned and expand an existing $15 million LIBOR interest rate swap in tool-based swaps and increased our hedging with another 100 million.

In total, $150 million fixed at an average rate of 1.87% basis so co-maturing in 2030 and 2031, compared with fixed rate today of approximately 2.7% with the same duration. Additionally, we now have LIBOR hedges with a notional amount of $206 million at an average rate of 2.82% maturing in 25 compared with the stock pricing today of approximately 3.8% with the same duration.

And this concludes the financing section, and I will now hand the word over to Oystein for the market update and approach.

[Oystein Kalleklev, executive]

Okay, thank you, Randi. And the outlook basically, as you can see, not only have net 575 million of debt financing, but she is also now embarking on raising our second child was recently delivered more or less according to schedule 3 weeks ago. So congratulations to you, Randi. Well done both.

[Randi Bekkelund, executive]

Thank you.

[Oystein Kalleklev, executive]

So let's review the little market developments. Slide 11 is the most boring slide in this deck. It's very similar to what we said in May. We see exports up 11% in the first 7 months of the year, the same run rate as reported in May for the first 4 months. The big relative increases are still coming from the big oil producers in the Arabian Gulf, led by Saudi, Iran and United Emirates as OPEC has been pushing up oil volumes. We do however, continue to see healthy growth from the U.S., which is the largest export market with around 50% of the volumes compared to our market share for the Middle East producer of around 40%. On the import side, both is steady everywhere.

While China has really put the breakdown LNG imports in 2022, with imports down more than 20%. This is not the case with LPG. In both in China, it's up by about 5%, which is maybe not too surprising given the affordability of LPG, as I mentioned in the introduction. Given the energy crisis in Europe it's not too surprisingly, also that we see growth from Europe eating into Asian market share with European buyers now increasing market share from around 7% to 10% compared to last year. Slide 12 and the cash costs.

In our May presentation, we had a slide on the capital discipline by the shale players despite our record free cash flow with investors pressure to maintain capital discipline being the main reason with about 60% of respondents saying this is the reason why they are not investing in drilling new wells. Since then, expected free cash flow have increased even further from around 170 billion to around $200 billion according to our new Deloitte study. So while shale players have been cash gains the last decade, they have now been turned into cash calls. And it's not only the shale players that are generating huge sums of money, the same goes with the whole upstream oil and gas industry on aggregate.

We are still of the belief that this super profit and rapid deleveraging will induce new investment, increasing production with associated export growth potential given the short lead time of Sealweld. So the million-dollar question is how will shale players spend the windfall of cash? So far, the focus has been on deleveraging with gradual increase on returning cash flow to shareholders through dividends and share buybacks. So capital discipline has been the name of the game. However, economic courses are usually like gravity. If there is profit to be made and we are here talking big profits with shale players generally making profit with West Texas Intermediate oil price in the range of $50 to $55 compared to our VTI price of closer to $100 today.

Such profits are difficult to say no to, especially when the balance sheets have been repaired. Additionally, Washington and even Brussels is now shouting drill baby drill, which is certainly a big change in policy, but maybe not too surprisingly given the energy crisis. Sealweld are also clearly low-risk investment as lead time in short and payback period, thus very short compared to large offshore oil field developments, which also enabled the drillers to hedge the price. So Dallas Fed has some regular service of participants in the industry.

And as we can see, lead time is short with about 24% of the market participants able to drill and complete a well within 6 months and more than 90% within a year and more oil and gas also means more LPG exports. So I think I said 24% I really meant close to 45%. But as you can see, wells can be brought to the market very quickly and it's extremely profitable.

So let's talk about China. China is the largest market for LPG. Market share close to 30% which is almost prices the other key markets being India and Japan. What LPG is used for very greatly for the different markets. Worldwide, [indiscernible] is the biggest share with around 40% share. Petrochemical, represents around 30% with transportation industrial refinery each about 10% with some usage also in agriculture. What is one of the key drivers for China's LPG demand is propane dehydrogenation plant or PDH plants in short. These are basically refining SPG into plastic and there's been a construction boom in China for such plants.

Plastic is a bits product during Covid-19, plastic have been essential, not only as plastic wrapping for fresh tomato but also a key input in all personal protective equipment. The construction boom in China, PDH capacity will create further LPG demand on the road. And the key factor to monitor here is the utilization of this PDH plant which will affect import volumes.

Turning to slide 15, Panama Canal tolling fees. As those who follow shipping closely, we have already seen the Panama Canal clogging up regularly with long waiting time. The Panama Canal was expanded in order to facilitate the increased container shipping traffic. However, a shale boom in the U.S. resulting in a sharp increase in U.S. exports of oil, LNG and LPG was not anticipated, so the Panama Canal is therefore running at max capacity. Since the Panama Canal is a monopoly, it can adjust its pricing according to the demand.

And with the high demand they are therefore pushing up the pricing by around 90% until the period 2025, slightly higher falling fees for the ballast voyage than the latent Lake. With more expensive transit and unpredictable waiting times, we think this means more wheel’s freight will be priced out of the panel with capacity being used mostly by container ships and LNG carriers which has a more valuable cargo. Our take is that this will result in longer sailing distances thus driving up freight demand. U.S. to China is around 10,000 article miles to the Panama Canal but 15,000 nautical miles, if you go to a Cape of Good Hope, thus increasing selling businesses by 50%.

I think particularly on the ballast leg where the tolls are increasing the most. This will be the case that voyage through cape of good hope on the ballast will be more common. This also enables a Cape of Good Hope on the ballast will be more common. This also enables ship-owner more tailing opportunities than being able to pick up cargoes in the Arabian Gulf, West Africa in addition to U.S. cargo, and this gives owners a bit more adding flexibility in addition.

So freight market, slide 16. The biggest driver for the freight rates is the price spread of arbitrage between the producing regions, U.S. and Middle East and the main import destinations in Asia. With arbitrage spreads in Contango heading into Q4 with U.S. [indiscernible] from around $120 per ton in September to close to $150 at the end of the year, we therefore expect freight rates to rebound in Q4 so we can generate somewhat higher earnings for this quarter compared to Q3, where freight rates have been slightly below the seasonal average while being above seasonal average in Q2.

So while spot rates continue to be volatile, the one-year time charter rates have been remarkable and stable this year with time charter rates of around $35,000 per day for a one-year time charter. Adding into the next slide, 17, the scrubbers. I mentioned the economics here has been fantastic. With a scrubber, you can burn the heavy fuel oil and used exhaust cleaner. And the spread has been extremely volatile, especially during Q2, and this also provides us some benefit on the fuel savings. The spread went up close to $600 per ton, translating into a fuel saving per day of close to $25,000 per day.

It's come down since the peak, but still at around $250 per ton and then converging towards $200 per ton in fuel spreads. So for the ships, we have with scrubbers the 6 to 15 eco-design ships. This represents a saving of close to $9,000 per day or $3.2 million per ship per year. So a very short payback time on these scrubbers. Scrubber installation is costing around $2.5 million. So you are talking here less than a year payback time. Last slide before concluding is the order book. The order book is always our team in LPG shipping.

But if we look at the order book, we have a big chunk of ships approaching retirement, 20 vessels already passed 25 years, 17 vessels is above 20 to 25 years. These are inefficient ships, which will be hit by upcoming decarbonization regulation with expected engine power limitation for these ships as well as a lot of the ships built prior to the Eco ships of 2014, 2015.

Additionally, there are 46 ships for delivery next year. We do expect some slippage and might also happen for us on the last ship. But in historical perspective, if we look at the numbers here, we do see fit big peaks in the 2008, it's the 2015/'16 and it's 2023, where you have a similar amount of ships as we had in 2016. However, the fleet of ships has grown tremendously during this period, driven especially by U.S. becoming a huge LPG exporter.

So if we look at the order book in relation to the fleet, the order book today is around 20% of the fleet. On the last 2 peaks, back in 2017, 2008 before the financial crisis, which really derailed the world economy. And then in 2015, just a bit prior to the oil price cash at the oil price cash in the U.S. then order book hit 46% of fleet. So we are talking a lot smaller numbers in terms of relative size of the order book compared to the fleet.

In addition, we have the new IMO 23 rules. There will be decarbonization taxation in the European Union for those ships calling into Europe. And we also have some movement on the joint comprehensive plan of action. This is the negotiations with Iran. There are about 30 ships, mostly older ships tied up in the trade between Iran and China. So these could figure some more scrapping as scrapping has been very low in the recent years.

And lastly, new building prices are affected by the high demand for building container ships and LNG ships and generally high material prices and inflation. So new buildings today are at around 95 million, which decentralize people running to the as ordering new ships. So we do think the number of ships coming for next year is a bit high, but we do expect some slippage.

We expect scrapping to come up. And in general, the order book compared to previous peak is much, much lower and much more manageable, especially when you have new decarbonization or coming into force. So with that, I think we summarize today's presentation. TCE income. TCE of around 36,000 ahead of the guidance of $32 million to $33 million. We are making $18.4 million of 24 cents or 20 as the clean-ups. We're paying out that all as dividend, giving our investors a very good attractive yield of around 16%.

We have fully financed the fleet. We have actually $250 million of debt financing for the $248 million of CapEx obligations, and we have a very big cash cushion of $199 million, which I think puts us in a very good position to navigate the market next year. We also do have some charter coverage. Earnings for next quarter a bit softer than Q2, but hopefully, we will be bouncing back in Q4. And with that, I think we open up for some questions, Heidi. So you can maybe check the teleconference while we are checking the chat.

[Operator]

[Operator Instructions] There seems to be no questions at this time via the audio.

[Oystein Kalleklev, executive]

Okay. Thank you, Heidi, and thank you everybody for joining. I don't think we have any chat questions either. But we always have to serve you. So if you have any questions, please reach out to us, and we will respond quickly. So with that, thank you, everybody. We will be back reporting Q3 in end of November. So I hope you joined them as well. Thank you.

[Operator]

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