Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2023-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Avance Gas Second 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. [Operator Instructions] Alternatively, you may submit your questions via the webcast. Please be advised today's conference is being recorded.

Now, I'd like to hand the conference over to your first speaker today, Oystein Kalleklev, CEO. Please go ahead.

[Oystein Kalleklev, CEO]

Thank you, and welcome everybody to Avance Gas' second quarter results presentation. I'm Oystein Kalleklev, as mentioned, CEO of Avance Gas and I'm joined today by Randi Navdal Bekkelund, our CFO. She will go through the numbers a bit later in the presentation.

First to start off, the newest ship in our fleet, the Avance Avior ship started -- ship was delivered from Hanwha Ocean, previously Daewoo shipyard in South Korea on May 3. And she recently completed her maiden voyage from Korea to picking up a cargo in the U.S. and then going back to China, and she is now on her way for her second voyage.

As you might noticed that also on the slide, we have a Blue Moon on the slide deck today, August 30, not only do we have our Blue Moon, but we have a Super Blue Moon. Last time, we did have this was 2009 and next time, we're going to have it is 2032. So once we finish the presentation, I recommend you guys to have a look up at the sky tonight, because it's not only the freight rates that which is occupying to the moon, and also on very nice moon today.

So let's start with the disclaimer. We will be presenting from expectations about the future with some forward-looking statements. We will use some non-GAAP measures, when it comes to the time charter equivalent earnings. And then, of course, we cannot cover all the details, so I also refer you to our earnings support, which we also published this morning.

So let's kick-off with the highlights. Very strong earnings for the quarter. The time charter equivalent earnings for the quarter was $52,000 per day on our load-to-discharge basis in line with guidance of $50,000 per day. Alternative measure here is also the discharge-to-discharge measure, which came in, in line with this $50,800, also in line with the guidance of $50,000.

This means that even though all the time charter equivalent earnings of basically our average earnings per ship was $6,000 lower than Q1, we did have more ship days available with the delivery of Avior in May and then Rigel in February. So with this more ship space, we actually replicated very good numbers from Q1. In Q1, we delivered our strongest Q1 numbers ever. I think this is the second-best Q2 numbers we have ever delivered, but combined, we are delivering our net profit for the first half of the year of $72 million, which is the strongest bottom line we have ever delivered.

As I mentioned in the beginning, we took delivery of Avior. She is -- we're fixing her now for the second voyage and then during the quarter, since we reported last time in end of May, we have also expanded into a new area, which I will cover later in the presentation with the contracting of four medium-sized LPG/ammonia carriers for delivery in '25 and '26. Since last time, we also extended the variable time charter for Chinook with a Supermajor for 12 months taking that ship into July next year.

As I mentioned, rates are going to the Moon. Today the Ras Tanura-Chiba Japan AG, Arabian Gulf Japan route, the rate today is about 80,000 for spot voyage. This is actually using the Baltic AG Japan route these days rather than the U.S.-Japan, where there are more cargoes, because of all the congestion in Panama, which I will cover lately which distorts a bit the TCE numbers. But 80,000 that means with the spot exposure we have, we expect second quarter -- second half of the year to be even better than the first half.

We are guiding stronger numbers for Q3. We expect to deliver TCE numbers in the high 50s compared to the low 50s. And as I mentioned, we also have more ship days, which is also increasing our earnings capacity. We also have a high spot exposure both for Q3 and Q4, which I will come back to.

So with that, the Board has decided to declare our third consecutive $0.50 dividend for the quarter, which then give a running yield of about 20% and of course, as I mentioned with these bookings, our earnings is not expected to go down for the next quarter. All-in-all, that means, we have delivered $1.7 of dividend last four quarters, which then gives our last 12 months yield of about 17%, still a pretty attractive yield.

So let's have a look at our commercial performance. We do have a combination here of ships on time charter. Here we do have both fixed rate time charter and variable time charter, meaning, more like an Index charter. So we have the two older ships on fixed hire rates. We have one ship, the comparable on fixed hire rates. And then in this Q2 quarter, we had two ships on Index, Polaris, and Capella.

As we mentioned in our May earnings report, we terminated the Capella Index and we have instead hedged that ship taking now into this potent hedged the exposure for Q3 and Q4 by derivatives, which we call, FFA. I will come back to that. So, the earnings for the spot ships was close to $65,000 for the quarter and $40,000 for the ships on time charter, that resulted in average TCE for the quarter of $54,500, but then we need to deduct the losses on the freight hedging about $2,500 for the fleet in total and where we end up at this $52,000, which I mentioned.

For Q3, numbers are better. The spot rates, we expect to be at around $71,000 for the quarter. We are more or less truly booked already for Q3, so we do have a pretty good idea about this number. TCE rates slightly higher, also driven by the index charters. And then, of course, we do have, as you can see more spot exposure in Q3, but we have also hedged more by FFAs. As I mentioned, we hedged one ship for '23 at $47,500 for the full year.

Once we terminated the Capella index, we hedged that ship for Q3 and Q4 at $63,000 and $63,000 respectively, on average $58,000. So that means, we do have more losses on freight hedging in Q3 as the spot market has been super strong. So that means, the rates, if you calculate the rate value will be arriving at about $61,300, but we expect the FFAs to drive this number down to below $60,000 and that's why we're guiding numbers on a discharge-to-discharge basis after the FFA losses are in the high 50s.

So I mentioned we have been doing some fleet -- now fleet renewal. Let's say here, I jump -- okay, I jumped on a flight area. Okay, let's give an overview first of fleets. So today, we have 20 ships in our fleet. So what we've been doing the last year or so is to renew the fleet. So we have been putting out the older ships for sale. These are the 2008 and 2009 ships. Last year, we sold three of these ships that is Glory, Providence, and Promise.

We announced during the summer that we also agreed our sale of Iris Glory for $60 million. And as we see how the sale is pending, that doesn't mean that any uncertainty about it. We have received the deposit from the buyer, the ship is on a time charter, which we expect to end in October and then we will deliver the ship to the new owners. That means, we only have one of these older ships left, it's the Venus Glory. She is also on a fixed hire time charter until about end of the year and we expect to dock this ship during the 15 year class for the ship in October.

We also have eight equal-class ships. These are built through ‘15. Two of these ships are without scrubber and the six other ships are with scrubber. The ships, we have a scrubber exhaust gas cleaning system. We trade those in the spot market. And the ships we don't have a scrubber with where we are facing some diesel risk, we have been taking on Time Charter. So Chinook, we recently extended on an index until next summer, while Pampero is on a fixed higher rate Time Charter until end of this year.

Then we have the new class of ships, the star class or the dual fuel class. Polaris and Capella, as I mentioned, delivered 2022. Polaris on a Time Charter until early next year. Capella now in the spot market where we hedged her by derivatives for Q3 and Q4. We took delivery of Rigel in February, Avior in May, and then we have two more ships for delivery next year.

Then during the summer, we've been busy ordering some new ships. These are medium-sized gas carriers. These are combination carriers, which can carry both LPG and ammonia. These ships can also burn both very low sulfur oil and LPG, and they are also fitted with the shaft generator, making them very economically to run. I will explain a bit more about this next slide.

So that means all together today, 20 ships. We have one ship with a pending sale that takes it down to 19 average age have we been able then to reduce to 5.6 years. All the new ships we have contracted are dual fuel ships, so 10 ships with dual fuel engines. We have, as I mentioned, six ships of the eco-class fitted with a scrubber. We have six ships which can carry both ammonia and LPG. This is the Castor and Pollux for delivery next year, so VLGCs, which can carry ammonia and all the new MGCs. That's actually also ammonia notation on Iris and Venus Glory. So if we adjust for that, the number is actually seven or eight depending on this pending sale.

We also have four of the dual fuel class ships, Rigel, Avior, Castor, Pollux, these ships can also burn ammonia as a fuel. So we do have quite a lot of flexibility in the fleet, both in terms of the cargo side, the cargo type, the fuel we can burn being heavy fuel oil on the scrubber ships, dual fuel or very low sulfur oil and then also ammonia on some of the ships.

So if we go to the next slide, I can explain a bit more about this fleet renewal. So what we've been doing, as I mentioned, last year, selling three of this 2008/'09 class of ships, we just announced sale of Iris. Of course, we are marketing Venus Glory also for sale. This ship is slightly better specs than Iris Glory. She has two deck tanks, which means you can fill the full ship with butane cargo and keep the propane heel (ph) in the cargo tanks. So if we assume we get the same price, $60 million, this ship has lower leverage, about $10 million less of leverage. This will release $60 million.

Then we have contracted four MGCs with a combined CapEx of $246 million, we do find this very attractive. [indiscernible] value for these ships are already about $5 million higher than the price we have contacted them for. So if we assume 70% loan-to-value, it might seem a bit high compared to what we have of loan-to-value today, but reflecting the fact that a lot of these ships typically have longer-term charters, which you can bank on and get a higher leverage on the ships.

That means our financing capacity of $186 million and the equity release or the cash release from Iris and Venus would be $60 million. So we will be able to finance the equity portion of these two ship -- of these four ships with the sale of two older ships. And that means one plus one is four new ships sold. So two 15-year ships can then easily become four newer ships. And if we fail on doing that, we also have a very substantial cash balance of $192 million, which we can utilize to finance the ships as well.

So just a bit more clarity on this. As I mentioned, four MGCs. These are super high spec, can carry both LPG and ammonia. They are fitted with dual fuel engines that can burn very low sulfur and oil and LPG. And right now, it's very attractive to be able to burn LPG, which is much cheaper than very low sulfur oil. [indiscernible] million, which is if you compare this to Korea built MGCs, it's about $8 million, $9 million less, and we have earlier delivery with first ship already end of '25 and the rest of the ships in '26.

So why are we doing this? It gives us revenue advanced ships. The MGC sector is also an attractive subsegments of the LPG market. And also, we have the additional benefit of being able to carry ammonia. Ammonia trade is also expanding. Ammonia is a more efficient hydrogen carrier than hydrogen because of much better volumetric density. So we do see a lot of opportunities there, especially with all these programs like Inflation Production Act, where we see a lot of blue ammonia projects as well as green ammonia projects. And this ammonia needs to be transported and we have the right ships in terms of the technical specification, but also the parcel sizes, which tend to be smaller for ammonia cargoes than LPG cargoes.

Additionally, last point, which I will also cover on the next slide is the fleet of MGCs is aging. So maybe we should just -- okay, it's a slide after that. So okay, Seaborne LPG exports, as I mentioned. So what we have done here on the number one graph on the left is to take out the data for LPG exports, and then we have drilled down to cargoes being transported by a medium-sized gas carrier. And as you can see, a pretty nice growth curve here, 11% CAGR from '14 to 2023. We do have a dip in 2022. This is mostly related to Russia.

So if you also look at the ammonia trade, we have the similar dip. However, just as we have seen in the product tanker space, the inefficiency are driving tonne mileage. So even though we have had this volume drop, tonne mileage has gone up. And of course, eventually, we do expect a pretty sizable increase in the ammonia trade.

Slide -- or the picture number there here is from the Yara Capital Markets Day presentation. They recently had, where we do see a lot of new users for ammonia. Of course, there's a lot of ammonia that needs to be green, which is black today. But then there's also a lot of new ammonia coming to the market through green or blue projects, where it could also be a better hydrogen carrier than just regular hydrogen. And that means we are bullish on the prospects and also the optionality of having these ships when we look at the fleet, which I think is the last slide I'm going to cover today.

Let's see. So if we look at the fleet, it's our aging fleet. When we take delivery of the ships, we have close to 25% of the fleet will be turning 20 years. And it's a bit lumpy this order book 2007, there are quite a lot of ships. So those ships will be 19. So close to 20 years, meaning that they are getting close to retirement. Additionally, we do see that the newer ships, just like with the VLGCs are much more efficient, both in terms of the engines, which are more efficient, but also the fact that they can burn LPG, which is much cheaper and also where you are reducing your carbon footprint. So with the order book today, 35 ships, including our ships. Most of the other ships are fixed on long-term charters, which means there are very few uncommitted ships available in the market.

Yeah. Okay. I have one more slide on dividends. Maybe that's the most interesting slide for investors. So as you can see, we've been ramping up the dividend. Q4 '21, we had $0.05. We increased it to $0.20. We kept it there for three quarters and now with very strong market from Q4 2022, we have been sticking to $0.50 per share. We are repeating that for Q2. And as I mentioned, outlook for Q3 and Q4 is even better. So I think we will be able to provide or continue to provide investors with a very strong dividend going forward.

And if we look at the decision factors without going in too much detail, of course, we just delivered our best ever first half profit of $72 million. Second half of the year looks very promising based on the market outlook and the FFA and the arbitrage levels. Of course, we don't have too much backlog, but we have two ships on FFA coverage. We have three ships on fixed higher rates, as I mentioned and two on the index.

We have a very good cash position, $192 million. We don't have any covenant issues with our banks and we don't have any loans maturing before 2027. We have increased our CapEx with the four MGCs. But as I mentioned, we do have a plan for financing those ships to the sale of older ships with a debt – plus and if not, we do have a sizable cash position to cover some of that CapEx as well.

So with that, I think I hand it to you, Randi.

[Randi Bekkelund, CFO]

Thank you, Oystein. And let's go to Slide 11 and have a look at our income statement and key financial figures. So we are pleased to report yet another quarter with strong financial results. The average Time Charter Equivalent rate or TCE rate for the quarter was $52,000 a day low to discharge and $50,800 in line with the guidance of $50,000 per day. This compares with the reported TCE rate of $58,400 for the first quarter.

TCE earnings are slightly higher in the second quarter of $63 million compared to $62 million, in previous quarter due to more vessel base aspect delivery of our fourth dual fuel new building Avance Avior in May '23. The TCE is reduced by $3 million in forward freight agreements or FFA, which translates to a negative effect for the fleet of 2,500 a day. The FFA is an alternative to contract coverage.

And as the spot market was considerably stronger than our coverage for one ship of $47,500 a day, we recognized a loss. So here just a reminder on the accounting side, the FFA and bunker hedges are designated for hedge accounting, where the fair value is taken through other comprehensive income and the equity and hits the TCE earnings when they become effective.

Operating expenses or OpEx were $9.7 million, equaling a daily average of $8,000 a day. This compares to $9.8 million or $8,600 a day for the first quarter. And operating expenses are down basically due to more -- partly due to more vessel days and as we taking delivery of two new builds year-to-date requiring less maintenance and repair enough story (ph).

We continue to hold the lowest administrative and general expense or A&G by far compared to our industry peers. For the quarter, A&G was $1.3 million, equaling an average per ship day of $1,100 and represents more or less a normalized A&G going forward.

Non-operating expenses consisting of finance expense, finance income and foreign exchange loss were $4.3 million and despite rising interest rates, we maintained the net finance expense from previous quarter as we have a high interest rate coverage of 90% of the underlying interest bearing best (ph) fixed at 3% compared to a current total of 5.3%.

And this, combined with the increase in interest earned on cash deposits throughout the quarter, we will see a relatively maintained net finance expense going forward as well. This concludes the net profit of $35.7 million, which corresponds to an annualized return on book equity of 24%. Looking at the first half net profit of $72 million. This is the best first half profit in Avance Gas ever.

Moving to Slide 12, a few comments to our balance sheet. Total assets increased by $54 million, primarily due to the delivery of our fourth new building Avance Avior, as I already mentioned. Our balance sheet currently consists of 14 VLGCs on water, which is soon to be 13 as we sold in 2008 VLGC Iris Glory with delivery to the new owners between September '23 and January '24.

Further, we have two dual fuel MGCs Avance Castor and Avance Pollux, which currently represents new builds under construction and we'll commence depreciation at delivery during the first quarter '24. Additionally, our balance sheet will increase with the reason for contracted MGCs as we pay pre-delivery CapEx prior delivery in '25, '26.

Looking at the liability side, we have a reasonable loan-to-value ratio of 51% and maintained our solid shareholder equity exceeding 50%. Total shareholder equity was $590 million at quarter end and has decreased by $10 million during the quarter and this is explained by a net profit of $36 million being offset by dividend paid of $38.3 million for the first quarter and a negative movement in other comprehensive income of $7.8 million, which relates to a positive movement in interest rate swaps and negative movements in the fair value of FFA hedging of $12.6 million.

As for the spot market, the share price has moved significantly upwards with a year-to-date increase of 76% and is currently supporting our book values with a price book ratio of 1.3. We have a strong cash position of $192 million as of June '23, which leads us to the next slide showing the cash movements during the quarter.

We started with a cash position of $220 million. And during the quarter, we generated $49 million in cash flow from operations coming from strong freight income exceeding our cash breakeven level at approximately $22,000 a day -- today, which was offset by a decrease in working capital of $80 million as accounts receivables increased by $14 million due to higher freight and we also had an increase in pre-payments of $9 million, mainly related to cash deposited on negative fair value of our FFA hedging position, which is partly offset by increased in accounts payable of $5 million.

Further, we paid $13 million in capital expenditure, of which $8 million related to Avance Castor scheduled for delivery in '24 and dry docking expense of $5 million of Iris Glory and Venus Glory. We had a cash release of $3 million in net proceeds from loan related to delivery of Avance Avior, cash release of $1 million from terminated swaps. We paid down debt by $12 million. And lastly, we paid $38 million in dividend for the first quarter of '23. And this brings a total negative cash movement of $28 million, which explains the bridge from $220 million to $192 million at quarter end.

Looking at our financing portfolio on Slide 14, 70% of our outstanding debt and committed financing at quarter end is sustainability lease (ph) bank loan with a split in term loan and $130 million non-amortizing revolving credit facility, or RCF, which gives us flexibility to pay down the RCF when we have the capacity to do so and avoid interest expense and redraw when we need the funding. So the remaining 30% is sale-leaseback arrangement, of which 20% or $135 million will be drawn next year as delivery of our remaining newbuilds.

We have also lost in 90% of our average debt in '23 and '24 as an interest rate of 3%, basis offer compared to floating [indiscernible] 530 today, as mentioned, and this corresponds to a discount rate on interest expense of $43 million compared to the current level. The chart on the right-hand side of the slide, you can see that we're close to finalize our VLGC new building program where the remaining two of the six VLGCs will be delivered within the six months.

At quarter end, we have paid about 75% of the total capital expenditure of our newbuilding program and the remaining 25% or $121 million. It's fully funded with $135 million sale lease back with no commitment fee such that, which we signed in August last year. So this means that we are a cash positive of $14 million on delivery in the first quarter next year.

So to shortly summarize, we have a strong financial results, a very strong financial position with a cash of $192 million. And that, combined with the strong earnings into the second half of '23. We are positioned to continue returning value through dividends.

So yeah, and with that, Oystein, I leave it back to you for the market and the company update on Slide 15.

[Oystein Kalleklev, CEO]

Okay. Thank you, Randi. Let's look at the demand and supply, nothing really new here. On the export side, there are two huge markets, of course, the Middle East and then U.S., which has become by far the biggest export market. And as you can see, growth here is pretty healthy, 17% growth in North American exports from 2021 to 2023 year-to-date. Middle East, even stronger actually, 28% from 2021 to 2023.

Import wise, it's mostly about Asia, China. It's a huge market. And even though economic recovery following the scrapping of the COVID restriction has been a bit slow in a lot of shipping segments. We see very strong growth on the LPG side, 27% up year-to-date and then 38% up from 2023 from 2021. And even during the COVID lockdowns of 2022, we had this market in China growing because LPG is cheap.

LPG can replace coal. Coal has actually been expensive. LNG has been expensive. LPG is easy to handle and a cheap and burn clean, and that makes it very attractive with customers. India also growing despite also the COVID with restrictions. And of course, Europe with less gas coming from Russia. We have seen a bit substitution effect here to LPG with pretty strong growth in the European import market as well.

If you look at the cargo types, VLGCs are by far the biggest cargo size. And then the other side is, of course, MGC. So VLGCs and medium gas carrier takes 83% of the cargo market. The others are the large gas carriers and the handy size.

So let's look at a snapshot of the market today or actually, this is close of market yesterday. The Baltic hasn't closed for today yet. There are three main routes, not surprisingly, they are from AG and the U.S. The most common Baltic LPG1 is Ras Tanura to Chiba. Yesterday, that closed at $97 per metric tonne. It means that people are paying $97 per metric tonne you are transporting and usually, on VLGC, you are transporting around 45,000 tonnes. On our bigger ships, we can transport all the way up to 51,000 tonnes. So these routes today gives -- given the bunker prices close to $80,000 per day on a run rate basis.

The other route is the U.S. to Japan. As you can see, it's a pretty big premium here, $93,500, but this assumes you get a kind of a perfect voyage and you have booked a slot in Panama and you go straight to the canal, which is, for the most part, not the case today, which I will come back to later. So if you are fixing this route, to Suez, which is the most common these days, you get a [indiscernible] economics about $80,000, similar to taking our Middle East cargo to Asia.

And then if you're doing a shorter-haul voyage intra-Europe, you can make as much as $111,000 per day. As I mentioned, the Panama auction, I will come back to this as well. Panama is clogged. We also have a bit in our slow traffic ahead in our presentation there. This means that with the worst growth (ph) in Panama since the canal opened in 1914, they have had to take down the numbers of daily transit. Each transit of our ship means that they need to refill the canal. And this means that about 200 million liters of water or 50 million gallons are displaced and lost to sea.

So when you have low waterfall in the main reservoirs, you have to limit the number of transit and you also have to reduce the draft. So when the Panama has less transit, they are not making as much money. So what happens then is that they start auctioning slots, which makes it also very unpredictable when you get a slot and people are paying top dollars with the average from 1st of August to 27th of August for the north bound, meaning the voyage when you're coming from Asia to load a cargo in U.S., average to skip the queue has been $844,000, and this comes on top of the regular fees close to $400,000.

So it's very expensive to get through it and in case a lot of unpredictability in scheduling a ship. As I mentioned, the U.S. exports strong, 10% up year-over-year, 11% in the Middle East and this 27% increase in import in China despite a rather slow economic recovery. So the arbitrage is one of the big drivers for freight levels. So if -- as it is today, LPG is super cheap in U.S., driven by very high inventory levels. Fields in the shale basins are getting more gaseous, that means you have more LPG production. LPG demand in U.S. has been pretty slow because of the weather, and that means you have huge inventories in the U.S. driving down price in the U.S., while demand is strong in Asia.

So today, the price of LPG is about $280 higher in Asia than in U.S. So actually, if you look at this freight rate of $175 per metric tonne, that leaves more than $100 per metric tonne in profit for the terminals and traders. So it's immensely profitable to move our cargo from U.S. to Asia, and that means you can also pay higher freight. And this arbitrage is not going away any day soon. We don't -- the future market doesn't expect arbitrage to stay at this usually elevated levels for all the time. But next year, average arbitrage is about $190 per metric tonne and this will be supporting the freight market.

And if we look at the graph on the left hand side in the bottom here, we look and look at the future freight rates, and these are the ones we can hedge. And you see this dotted line they're going to stay elevated for the remainder of the year and then we expect somewhat lower rate for next year, but still a pretty decent level. We are talking here average rate for next year 2024 in the future markets for a non-scrubber ship above $50,000 and which is more than twice of cash breakeven of around $22,000. So that's why we are pretty [indiscernible] both market because there is, as you can see on the right hand side, a fairly good correlation between the arbitrage and the freight rate.

So turning back to the Panama Canal. On the left hand side here, you see the waiting time. It's gone up and down. We haven't even come to the winter. Winter season is usually Q4 is when you have the biggest congestion in Panama. Now we are already seeing it in August, driven by this drought. And Panama has announced that limitation to number of daily transit will continue for a long time in order to fill up this reservoir.

Another thing is that, of course, this volatility in raising times is very sporadic. So it goes up and down. So when you are discharging a cargo in Asia, you're fixing a ship for U.S., you don't know whether the waiting time, will it be two days, five days, 10 days, 20 days. So it's very hard to get a fixed schedule. And then suddenly, if it goes up, which it happens quite a lot, as you can see on this graph, Certainly, you are losing your cargo and you have fixed your ship with a two-day [indiscernible] camp in order to get that cargo.

And if you are not making the cut, you will be dropped. And then you have been balancing on your own account and have to fix the ship again. So that means a lot of people rather than going U.S.-China, 10,500 nautical miles, 58 days on ship, they go through Suez. And this is adding days. So that's versus 14,500 nautical miles. And even if fuel prices are high, they might go Suez, if fuel prices are low, they might go through Cape of Good Hope in order to avoid the Suez canal fees and then we're talking 15,800 nautical miles and even longer legs. So when people are avoiding the canal, it drives tonne mileage.

And as I mentioned, you can skip the queue, but it's immensely costly. We have seen here on the right hand side, the blue dots are [Technical Difficulty] of winning an auction to get past the queue as the Panama has been increasing the number of auctions in order to keep the revenue stable. And as you can see on this blue dotted line, it's gone rapidly up. We have seen first starting to get $1 million, $1.5 million close to $2 million. And now last week, we saw $2.4 million being paid for our spot auction fee. And when you add the regular fee, you're getting close to $3 million to get your ship through the canal. And then, of course, you would have saved a lot of money going through Suez or Cape of Good Hope instead.

Yeah. Last slide before concluding. This is the regular slide. It's the order book. The order book has been the worry of most analysts for 2023, was scheduled 46 ships for delivery this year. I think we said in our November presentation last year, we didn't believe that, that many ships would be delivered. We had four ships for delivery this year. We're going to end up having two, meaning 50% slippage.

We do see slippage because the yards are quite busy these days with LNG and container orders, which means the market stayed much better than everybody expected, and people started to worry about 2024 instead. But as we have shown, the future rate curve is pretty good for '24 as well with non-scrubber ships making above $50,000. Of course, the future curves are not always right, but the fundamentals are in place for a very conductive market, given the arbitrage level and all the congestion in Panama.

So with that, I think we conclude, I just run through the summary very strong numbers for Q2, all-time high results for the first half of the year. We think we will do better in the second half of the year. We will also then probably book the transit $2 (ph) million gain on the sale of Iris Glory once we deliver that ship to new owners after we have completed the Time Charter.

We have more ships on the water in the second half of the year with two ships delivered in the first half of the year. We have a new subsegments with the four MGCs contracted at a very good time, at a very good price in a very interesting market. We have taken some more coverage with the Chinook variable Time Charter. And as I mentioned, two ships hedged on freight derivatives.

We are guiding stronger numbers for Q3, both Time Charter rates, but also we have more days available similar to the effect was in Q2. We are booking Q4 now at very good numbers, $80,000 for Baltic 1. And if you skip Panama, you get something similar for the longer route U.S., China, and that takes you basically almost a full quarter. So if you're booking $80,000 then on spot ship, you covered 85 of the 92 days in Q4. So with that, with a strong financial position and Randi has been talking about cash-wise and debt maturity wise, we are declaring another good dividend, $0.50, 20% yield.

And with that, I would thank you for listening in. We will be back with our Q3 in end of August, and I think we open up for some questions.

[Operator]

Thank you. [Operator Instructions]

[Oystein Kalleklev, CEO]

Yeah. I think we have some questions on the web in the chat function unless there are any questions via the phone.

[Operator]

None from the phone lines at the moment.

[Oystein Kalleklev, CEO]

We have a very long question there. Okay. Let's take the shorter two. Those two questions which are short of us because that's going to be…

Okay. You mentioned the 35 vessel order book and that many of these vessels are delivering on to long-term charter. How should we think about the potential for displaced spot vessels to add additional pressure on the market given many of these deliveries are in the near-term? And this is Charles [indiscernible].

So let me think here, 35 vessel order book. I guess he's talking about the MGC market here, where there are about 35 ships in order. We don't really have any exposure to this market until end of '25. So it's going to be more than two years before we take the first ship for delivery and then the next three ships in '26. So, yes, it's hard to predict the market near term here. Of course, LPG is cheap and we're not only seeing a very good market in the VLGC market. The MGC market is also strong now.

Of course, we are not able to capture that since we don't have any ship on the market. But we do think that there will be some fleet renewal here because ships are getting older, ships are getting less efficient. And there are new decarbonization rules coming into force from 1st of January this year. And then a lot of these ships are also trading in Europe where you will have the European CO2 taxation from 1st of January next year which will make our ships more competitive.

And then also, so for us, it's a bit about optionality. We are super comfortable trading the ships as LPG, but we get the added benefit of being able to trade ammonia quite easily. And the outlook for ammonia is pretty compelling. Even if you're not starting to use ammonia as a fuel for ships. There's a lot of ammonia that needs to be made from black to green and people are wanting to have more food in the future as well. So ammonia is, of course, driver for fertilizer. So we do see that -- even though it's not a shipping fuel, there are compelling outlook for the ammonia market, and that's why we order them price point, timing and optionality of trading both segments.

Yeah. Then we have a question from Jonathan Wolf. When do we have plans to make the share more accessible to U.S. based investors by listing here?

Yeah. We did see that’s -- or I mean piers here in the Norwegian market, BW LPG, they announced yesterday that they are going to seek our due lifting, which is something I've done with Flex LNG, where I'm also a CEO, we started that process in '18 and got that company listed in '19 in the U.S. market, and that's been going quite well. I think it's a bit different here because, we have a situation where the majority shareholder, Mr. John Fredriksen (ph) owns 77% of the shares. So the float is more of the [Technical Difficulty] so that makes it -- whether it's worthwhile to seek our U.S. listing given the float in the stock, I'm not really sure about. We could maybe consider our OTCX listing, something like that to make it a bit easier.

But I don't think it's worth spending them on doing a full listing of the company, given the shareholder structure today. So you have to buy it in the Norwegian market. NOK is super weak compared to the dollar. So maybe it's a good time to buy the stock and also have some exposure to the NOK because it's historically weak against the dollar. So maybe you can get double up, good income on the Avance stock and hopefully some appreciation of the currency. At least, we hope that here in Norway because it's rather expensive going above these days.

Let's see. We have one question from Greg Miller. I guess that's the Greg Miler of Freight Rates or something. Panama Canal restriction have occurred frequently in the past. Do you see anything different in terms of market impact and will you see it this time versus instances of Canal restrictions in the past?

That's a good question. Yeah. We do see this happening more or less every season, every Q4, the last couple of years, Panama has been clogging. It's not really any surprise because when they expanded the Panama Canal, our way back, that was done because to facilitate bigger container ships, with all the trade from China to America on bigger containerships. Nobody at that time was thinking that America certainly would become the biggest LNG and LPG exporter in the world. So the Panama Canal never really been scaled to this kind of trade.

And then when -- on top of that, you get very big drop driven by El Nino. Then suddenly, you get this situation already in the third quarter. So this is not going to get -- of course, rainfall will come back, but the congestion -- traffic will go up in Q4. So we don't really see any improvement near term. I think we will see a clogged canal both in -- for the rest of Q3 into Q4 probably taper off sometime next year. But this -- the trade is expanding. America is expanding a lot on the LNG side where capacity will grow immensely in the next couple of years. LPG export will grow. So no, we don't see any improvement.

And then, of course, you could always go into the discussion about climate change, if that's going to make the canal even more vulnerable in the future where a lot of people are making that argument. So we do think that Panama clogging is had to stay and there is a customs for the cruise ships, the container ship and the LNG ships with a more valuable cargo rather than the LPG ships. So we will probably see less of the VLGCs transiting to Panama going forward than in the past.

And should we try this long question? Okay. Maybe you should read it then. I don't put my glasses.

[Randi Bekkelund, CFO]

So we have a question from [indiscernible] about fiscal resilience and risk mitigation. The Q2 '23 report shows a drop in the average TCE rate from $58,400 per day in the previous quarter compared to $52,000 a day. Can you drive into the risk factors and market conditions that contributed to this 11% reduction? And what mitigative strategies is about [indiscernible] to combat these changes?

[Oystein Kalleklev, CEO]

Yeah. Okay. Let's go for that first. We did have a drop in our, as I mentioned, $6,000 less in Time Charter equivalent earnings or average earnings for the quarter and we mitigated that. We have more ships on the water, so we are able to generate the same results. We like the spot market. So we are happy taking that exposure and making $52,000 per day is pretty nice when your cash breakeven is $30,000 below that. That means $30,000 -- $11 million of EBITDA ownership of free cash flow ownership, not EBITDA, free cash flow to equity ownership. That's a pretty good return.

You can mitigate it, so we have done some mitigating and that's, of course, with on FFAs or freight derivatives where we basically enter an agreement to lock in freight levels and so we had one ship in the first half of the year at $47,500 and then we also did one for the second half of the year at average $58,000. So that's one way to do it. You can mitigate through derivatives. The easiest way to do it is, of course, to enter into our Time Charter where either index which will insulate you from some utilization risk, although the spot market is quite liquid.

So we don't worry too much about utilization risk as is often the case in LNG. So you rather -- you rather want to lock in the rate level, which is quite volatile. So you can do that by doing a fixed hire charter. That is something we consider from time to time. And if we get a good rate, we're happy to lock in some returns there. And as I mentioned, if you're looking in $52,000 and you have a cash back given of $22,000, you're generating $11 million of free cash flow, and that that's pretty nice. So that is something we will consider if we get the right rate. And of course, we always have to look at what is the fixed rate higher versus our expectation for the spot market. We can take one or two more of this.

[Randi Bekkelund, CFO]

Yeah. We have four more, let's continue with the second one. Revenue and competitive position, the TC coverage rate for the second quarter stands at 41% with an average TCE rate of $40,000 a day. How does this performance compare with your main competitors and what steps in the company taking to improve its TC coverage in the upcoming quarters?

[Oystein Kalleklev, CEO]

Improved TC coverage, that means that you want to improve the TC coverage. It's not nice to improve your TC coverage if spot market is better. So if we -- so more is adjusting our TC coverage. So let's say, last year, we saw that sentiment around the 2023 market was pitiful. So you could have fixed our ship for 12 months or 24 months. But the level you would have to be doing that was pretty low. So we rather given our strong financial position. We decided not to fix that many ship and rather stay in the spot market where we thought we will make more.

And of course, we've been proven correctly, but of course, the stronger spot market now is driving up also the TC rates. So TC rates come up substantially, also driven by better arbitrage. So we look at this on a daily basis. It's not like the TC market is super liquid, where you can just pick up the phone and say, I want to fix one ship 12 months at $50,000. I mean later, you fix the ship. So it takes a lot more work to do at Time Charter than our spot voyage.

So how it compares? $40,000, we double the fixed TC cover book was, I believe, $41,000. So it stacks pretty well compared to them, but it's a bit apples and -- apples and bananas because the TC book for us includes ships that are older where -- and then we also have some on variable Time Charters. So -- but $40,000, we're making a decent return on that. But of course, our spot exposure was closer to $65,000. So we're making a lot more money on spot, and we will be making more money on the spot in Q3. So -- but let's see, we will -- if we do any big Time Charter of the business, we will report that.

[Randi Bekkelund, CFO]

The third question from Mr. Tim (ph), is the portfolio diversification, the report highlights both of which is constituting 59% of activities at the TC rate of $64,500 per day. Could you explain the rationale behind this heavily in towards spot rates? Is the company looking to diversify its portfolio more evenly between term contracts and spot markets?

[Oystein Kalleklev, CEO]

But it's quite even, 59% and 41%. It's almost even then spot and TC. We're quite agnostic whether we do TC or spot. For us, it's a calculation. When we do a TC, we sit down, we make a curve, what we expect to make in the spot. We compare that to the TC rate and if the spot rate we expect to make is a lot better. We don't do the TC. If we expect the TC to be in line with what we would expect to get in the spot, we might do it just to tacked on the volatility in our earnings. But for us, it's really our numbers game. We don't have a fixed strategy that we want to have 67% of the fleet on TC or one-third on spot something like that. We are very opportunistically. We try to allocate the ships where we can get the best return. That simple.

[Randi Bekkelund, CFO]

The fourth question is on operational efficiency and market dynamics. You exceeded Q2 guidance of $50,000 by achieving an average TC rate of $52,000 a day. Could you unpacked operational efficiencies or favorable market conditions that contributed to this outcome, how sustainable are these factors?

[Oystein Kalleklev, CEO]

It's just -- we're just doing a slightly better than what we have guided, but it's really driven by markets. The market is volatility goes up and down. We try to capture the market on the up and fix some ships for longer voyages in order to lock in good rate levels.

How sustainable? Really driven by the market. It depends on energy prices. Right now, we have had an environment where LPG is incredibly favorably priced. We have had -- we have had good tonne mileage, strong growth from China, good export coal. So the market has been in our sweet spot, but this goes up and down like in all shipping segments. However, I think everybody has been positively surprised by the market this year because there was a lot of negative sentiment about it because of the order book for ships delivered this year, but the market has been able to take care of it.

And if we look forward, LPG, if you look at the price forward prices, they are low. So the arbitrage will stay strong. Panama will not improve and people want to start burning a cleaner fuel than coal and biomass. So I think we are well positioned, and we will -- as I mentioned, we do think second half of the year will be better than the first.

[Randi Bekkelund, CFO]

The final question from Mr. [indiscernible] is related to strategic financial planning given that the company has exceeded its TC rate guidance for Q2 '23, are there any immediate plans for capital reallocation? Thus Avance Gas intend to leverage this performance for growth strategies like M&A, technology investments or fleet expansion?

[Oystein Kalleklev, CEO]

Yeah. We just -- okay, we're paying out $38 million a quarter here in dividend which is a very good capital allocation strategy in my view. I'm a shareholder myself getting that dividend really is really nice. So we're paying out actually slightly more than the earnings. We have done that for the last three quarters, given the good outlook in our big cash pile. And then the big capital allocation strategy we have been pursuing now is to selling older ships and replacing them with new MGCs which are future proof in terms of efficiency and also given that they can transport ammonia as well as LPG. So it's basically fleet renewal for dummies as we put in the slide.

So with that, I guess we might be able to conclude. Do we have more questions? No, that's good. Okay. Thank you, everybody. Thank you for good questions. Thank you for dialing in or looking at our webcast. And yeah, we will be back in November with our Q3 numbers. And as I mentioned, we hope we will have a bigger bottom line for you guys. Okay. Thank you.

[Operator]

Thank you. That does conclude the conference for today. Thank you for participating and you may now disconnect.