Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to today's Avance Gas Holding Ltd Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would like to hand the conference now to your first speaker today, Mrs. Randi Bekkelund. Please go ahead, ma'am.

[Randi Navdal Bekkelund, Chief Financial Officer]

Thank you. Good afternoon, and hope you're all staying safe and healthy. Welcome to the presentation of Avance Gas' third quarter 2020. As you just heard, my name is Randi Navdal Bekkelund and I'm the CFO. I'm here joined by our CCO, Ben Martin. We will start today's presentation by going through the financial highlights of the quarter, which will follow with a market and company update and a Q&A session at the end.I will now move to Slide 3, going through the financial highlights. Here, we have a snapshot of the financial highlights for the third quarter. We have an achieved time charter equivalent rate of 23,300 on a discharge-to-discharge basis. And with the rates picking up at the end of the quarter, we had a negative effect of IFRS 15 of $1,700 a day, giving a TCE rate of $21,500 on a load-to-discharge basis. The TCE rate is also impacted by approximately $4,000 a day, representing ballast space, which will recover and have a positive effect in Q4 and partly Q1.Vessel operating expenses came in at just above $9,300 a day for the third quarter, up from $8,600 a day previous quarter. The increase reflects one-offs related to change of technical manager for 4 ships and crew change remain challenging, which is dependent on local regulations. By end of October, we have fully completed the technical manager change for 6 vessels. We do expect that the change of technical manager will have an effect in Q4. However, the investment in change of technical manager is expected to reduce operating expense and improve the technical efficiency of our fleet over time.Administrative and general expenses was $700 a day, slightly up from $600 recorded in Q2, reflecting low A&G in previous quarter due to personnel expense. Further, we have secured financing for predelivery CapEx of the newbuilding program through the 2 transactions. In September, the sale of the 2003-built VLGC Avance was successfully completed. Following repayment of debt, the transaction generated $17 million in net cash proceeds and a book profit of $6 million recorded in Q3. In November, the company signed a $45 million sale-leaseback transaction with a Chinese leasing house for the VLGC Pampero, previously announced in August. Expected closing is the next couple of weeks.Net profit for the quarter was $2.3 million, corresponding to an earnings per share of $0.04. Looking at the cash position, we recorded a cash balance of just below $80 million, down by $7 million compared to previous quarter as a result of payment of second installment of our dual-fuel newbuilds, dry dock scrubber installation and sale of Avance and prepayment and scheduled repayment of debt. Today, we have a cash position of $86 million.It has been a challenging year with dry docking 60% of fleet, scrubber installation, change of technical manager through oil price disruption and a pandemic, where crew changes has nearly been impossible due to closed ports. We have managed to navigate through the challenging period, recording profits each quarter with a year-to-date TCE rate of $31,100 and a net profit of $24 million. And for that, we would like to thank the team in Avance, the commercial, operational and technical team for finding the best solutions and, of course, the crew members onboard going over due. Looking into the next quarter, we have an increased coverage from 20% to 35% in Q4 at an average rate of $31,000. Including the coverage, we estimate the TCE rate on a discharge-to-discharge basis of $40,000 a day contracted for 90% of vessel base.Moving to Slide 4. We have a -- we are commenting and -- with a special survey and scrubber installation for the fleet. By end of September, we have 7 of 8 dry dockings, 5 of 6 scrubber installations. We have recorded 140 off-hire days, most of which relates to dry docking and scrubber installation and partly related to the change of technical manager. We still see some delays due to the pandemic, but not to the same extent as we did in the first quarter during the lockdown period at the yards. We have paid 95% of the capital expenditure, corresponding to $2 million in remaining CapEx related to dry docking. In 2021, we have no unfunded CapEx, assuming a normalized financing on the newbuild. We expect the special survey to be fully completed by end of Q4 and the scrubber installation in Q1, which leaves us with a nearly fully tradable fleet in 2021. Moving to Slide 5, an update of our cash breakeven and coverage. Already mentioned, we have an estimated cash breakeven of around $22,500 for the full year, slightly higher than previous quarter, driven by higher operating expense due to one-offs and change of technical manager and COVID crew change challenge. The cash breakeven for 2021 is expected to come down to $22,000, including the sale leaseback transaction. As already mentioned, we have increased our coverage to 35% with an average rate of $31,000 for the fourth quarter. But looking into next year, we also have a coverage of 27% at an average rate of $30,000 a day.And with that, I leave the word over to you, Ben, for the market and company updates.

[Ben Martin, Chief Commercial Officer]

Thank you, Randi. So as we previously mentioned, I will talk through the market fundamentals first, which is basically a review of Q3 together with some forward-looking views for the coming periods. We'll also then touch on our dual-fuel newbuilds as well as some Avance Gas specifics.So if we look at Slide 6. When COVID hit in Q2, the LPG market collapsed, as did every other market. We, therefore, started our Q3 from a weak position with earnings being below $20,000 a day on a TCE basis. The LPG market has a modest-sized fleet of around 300 ships, and so a few minor fluctuations in the S&D on the shipping side had a disproportionately large impact on the TCE rates. When tightness occurs through things like Panama delays, turn time in various ports, the utilization in the market increases and rates generally follow. This is what happened in Q3. We saw market inefficiencies create tightness and push sentiment up despite the weak out -- economic outlook. The U.S. exports continued to flow, and we saw the main demand centers draw cargoes, increasing ton miles and pushing freight in an upward direction.We move to Slide 7. The main driver in the LPG freights is the flow of U.S. LPG, and July saw a strong recovery from a weak Q2 position. During Q2 and Q3, while we have seen the rig count fall in line with weaker oil prices, we have seen rig productivity increase in July and August, meaning there is more LPG in production and, therefore, an increase in exports.Given the main demand centers are in Asia, the U.S. flows increased ton mile and helps tighten the shipping market, allowing for increased freight. That they are both allowing for cargoes to move at solid freight levels, ship owners have been -- have seen earnings improve accordingly.If we move to Slide 8. The EIA has consistently increased their expectations for LPG production over the last 3 months, and with it, market sentiment for a positive LPG view has developed. Physical terminal export capacity is there to allow cargoes to flow following terminal expansions completed. The oil price is showing positive signs and with it, a more stable environment in developing. As positivity returns to the market, LPG will continue to flow to the usual demand centers. We move to Slide 9. The other production center is the Middle East, whose production is much more closely correlated to oil price. We've seen pretty steady exports in Q3, and we expect this to remain stable for the balance of the year at around 55 cargoes a month. The X factor for production here is what happens with OPEC and the oil price. Unfortunately, we cannot see the future, but the current movement and momentum does seem positive. If we move on to Slide 10 now. Now on the demand side, the focus is always on the Asian market with it being 80% of the demand profile for LPG. Clearly, we've seen demand destruction through COVID. However, imports in both India and China remained strong. India, in particular, due to government policy, has meant Q3 imports were 20% higher than the same period in 2019. We have seen and continue to see great potential in India, South Korea and Indonesia, while Japan has remained relatively flat. Looking into 2021, we see PDH demand increasing in China due to new facilities coming online, coupled with the eventual global recovery driving demand for Chinese-made products. Move on to Slide 11 now. We see the order book being positive for the LPG segment as it currently stands at only 13% of the current fleet. There have been limited orders made and of those placed, we're seeing a strong trend towards LPG dual fuel, where we have 26 orders of dual-fuel capacity currently in order. This includes the 2 Avance Gas fully dual-fuel vessels under construction at DSME. On the scrapping side, we have just under 10% of the fleet being over 25 years old, which could encourage some scrapping. There's a large swath of ships due for dry dock over the next 2 years, where 70% -- with 70 ships scheduled for 2021 alone. We expect this to keep the market relatively firm and coupled with scrapping and the well-spaced newbuilding deliveries. Moving on to Slide 12. Avance Gas has got 2, 91,000 cubic dual-fuel vessels under construction at DSME due for delivery in Q4 '21 and Q1 '22. These vessels have low consumption and a much greener profile than any other vessels currently on the water. Our vessels are the best-in-class and come equipped with shaft generators, meaning you don't need to burn fuel oil in the auxiliary engines while sailing, as with both traditional fuel oil-burning ships and retrofit dual-fuel vessels. The average auxillary engine will produce around 5,000 metric tons of CO2 per year, something our dual-fuel vessels do not do. To put this into a visual perspective, 5,000 metric tons of CO2 production is equivalent to removing over 2,000 cars from our roads, assuming those cars drove for 15,000 kilometers each on an annual basis.The other benefits of our vessels, as we've previously stated, is a 99.6% reduction in SOx emissions, a 90% reduction in particle pollution, a 28% reduction in CO2 emissions and an 81% reduction in NOx. We believe that given the length of time a vessel will trade for, having the most efficient and leased environment -- environmentally impactful ships must be a priority. And these type of dual-fuel vessels are the green future LPG transportation needs. Moving on to Slide 13. Drawing the market review to a close, things look positive for LPG and for Avance Gas. The supply side of the shipping equation looks favorable to owners, and we see the near-term progress of supply and demand is also looking better than previously assumed. The U.S. production outlook for 2021 has improved. And this, coupled with the dry dock expectations and a small newbuild delivery book make 2021 look like it will be a good year ahead. Q1 has already started well with some strong numbers being completed on a TCE basis for early January shipment fixtures. As previously mentioned, our current guidance for Q4 is close to $40,000 a day, with basically 90% of our shipping days being booked, something that should leave shareholders and investors confident about Avance Gas. The current coverage for 2021 sits at 27%, showing a measured view toward risk management. From an Avance Gas company perspective, we have implemented the technical manager changes on a number of ships, which has been costly and operationally challenging, but one that will set us up to trade our ships more efficiently and control costs more strictly allowing for greater reliability from an operational and financial perspective. As Randi mentioned earlier, we have no unfunded CapEx for our newbuilding program, absent the debt part, but given the green profile of the vessels and interest we have received so far, this should not be an issue. Given the outlook for Q4 and beyond, together with our upgraded fleet profile, which increases vessel earning days and therefore, cash flow, the capital allocation between dividends, growth, fleet renewal and further balance sheet standpoint will be carefully considered by the Board in order to maximize shareholder value. We firmly believe Avance Gas is in a great position to build a stronger future for our investors. And Randi, myself and all team at Avance Gas will ensure we do all we can to deliver the best results possible.Thank you for listening today. That concludes our reporting. So we'll hand back to the operator for a Q&A session.

[Operator]

[Operator Instructions] Your first question comes from the line of Gregory Lewis from BTIG.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

I guess my first question is in the slide deck, you kind of mentioned the potential for retrofits. And just as I think about that, maybe it doesn't make sense to retrofit all of your vessels, maybe just the 8 newer ones. But just kind of curious how you're thinking about that. I know some other companies have thought -- have looked at retrofitting and said it was too expensive or it didn't justify the cost. Now that wasn't specifically in LPG. That was more on LNG. So just trying to understand, is that something that you think gains momentum over the next couple of years? Is it something that Avance is thinking about?

[Ben Martin, Chief Commercial Officer]

Sure. Thank you for the question. I think, for us, it's about what is the right thing to do sort of in the long term. If we look at, as you mentioned, the cost of the capital outlay for dual-fuel conversion for an LPG ship is around about $10 million. So it's not insignificant in -- when you look at the value of the vessel. Then, you need to come -- maybe physical conversion in the yard, which is somewhere between 60 to 90 days, given some of the experiences we've seen so far. Plus you have a 2-year lead order time to get ready. So it's -- those things are quite sort of problematic, I would say, just as a starting point. And then if we think where we're trying to get to, which is an actual greener vessel, the dual-fuel retrofits, as we sort of said in the presentation, they're not fully green because the auxiliary engines are still burning fuel oil. So while it might be a step in the right direction, for us, it doesn't feel the right investments, given that you're only getting a portion of the benefits of a fully dual-fuel vessel.

[Gregory Robert Lewis, MD and Energy & Shipping Analyst]

Okay, great. And then just another one for me. Clearly, the market has stabilized and strengthened in the winter. I mean whether that's -- I'm just kind of curious as we kind of try to understand, realizing there's a lot of moving parts. I mean I guess what I would wonder is, as naphtha has recovered in price, how much of an impact would you say that has been on helping the LPG market rates move higher? Like you mentioned the arbitrage window's open. So just kind of curious how we should be thinking about that with naphtha -- realizing that oil prices seem like they continue to kind of melt higher here?

[Ben Martin, Chief Commercial Officer]

Yes, sure. I mean we see, as you said, 80% of the demand profile for LPG is in Asia, and 70% of that is non-industrial. So the big driver is really in those areas. The naphtha component is, I would say, relatively small. But obviously, as the oil price increases, you could see that being a potential challenge. But I think for us, we see the pull on propane being strong enough to keep the LPG flowing.

[Operator]

[Operator Instructions] Your next question comes from the line of Petter Haugen from Kepler Cheuvreux.

[Petter Haugen, Equity Research Analyst]

I have a quick question on the fixings for 2021. To what extent should we sort of read that to be in expectation of, what to say, a softer market? And if so, could we expect to see more fixings for next year? My second question, I'll just pose it. We'll have [indiscernible] day some week I think. But on the inefficiencies, the Panama Canal seems to be quite clogged at the moment. What would we expect from a normalization in the canal? Should that be a negative catalyst for freight rates in the VLGC segments?

[Ben Martin, Chief Commercial Officer]

Hi, Petter. Can I just check the first question? Was it do you think that we will be taking more TCE coverage for next year?

[Petter Haugen, Equity Research Analyst]

Yes, precisely.

[Ben Martin, Chief Commercial Officer]

Okay. So I think we're comfortable with our TCE coverage. As we said, we have 27%, which gives us a decent sort of exposure to the spot market. And we believe that the spot market will stay strong for -- certainly through Q1. And if we look traditionally and seasonally, we have -- yes, some are low, but then it picks up again in sort of towards the end of the year. So from our point of view, we have a base risk management with the TCE coverage we have, and then we're happy with the spot exposure that is left.If we look at inefficiencies and specifically Panama, there are 2 main things really causing -- or 3 main things really causing problems there. You've got water issues or draft issues, which are limiting the transits, which is something which we just have to wait and see what happens with weather. Then, obviously, you've got the seasonal sort of clogging, let's say, because it's coming up to Christmas, and there's demand for container goods to be using transits. And then, obviously, we have the COVID effect of lack of crew to be able to manage the tugboats, which limits the number of transits. So really, how do we resolve any of those problems? It's almost impossible to say. Unless these, yes, vaccines prove to be 100% efficient, and they manage to get enough staff to be able to man the tugboats, these sort of delays could be around for a little bit of time. We sort of -- we're seeing anything from 5 days up to -- even to 10 days to 12 days worth of delays. And the booking system makes it quite difficult for people to plan. And I think if you can't plan efficiently, then you have to make other plans, which means going around the Cape, which add ton miles, which stretches the fleet further. So we don't see immediate, let's say, changes because of the Panama Canal.

[Petter Haugen, Equity Research Analyst]

Okay. If I just could then try to sort of -- well, a quick follow-up on that. If one were to see at least the COVID effects will probably be temporary and draft issues as well. So if one was to see this issue being resolved, is that -- is it the talk of sort of 1% of the VLGC fleet? Or is it sort of efficiency improvement in the line of, say, 5% of the VLGC fleet? Just to sort of get the feeling of how large an effect this is.

[Ben Martin, Chief Commercial Officer]

To be completely open, I wouldn't be able to put a specific number on that. I mean if we're adding sort of between 5 and 10 days to a voyage, then yes, I would imagine it's going to be a few percent. But unfortunately, I can't give you a specific answer for that.

[Operator]

[Operator Instructions] There seems to be no further questions at this time. Please continue.

[Randi Navdal Bekkelund, Chief Financial Officer]

Okay. And with that, we would like to thank you for dialing in, and hope you're staying safe and happy. And have a nice day.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.