Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2021-Q3

[Operator]

Good day, and thank you for standing by, and welcome to the Avance Gas Holding's Third Quarter Earnings Call. [Operator Instructions] And please be advised today's conference is being recorded. [Operator Instructions] And I'd now like to hand the conference over to your first speaker today, CEO, Kristian Sørensen. Please go ahead.

[Kristian Sørensen, Chief Executive Officer]

Thank you very much, and hello, everyone, and welcome to Avance Gas Q3 presentation. I'm joined here today by our CFO, Randi Navdal; and our Chief Commercial Officer, Ben Martin. We can go to the next slide, please, with the latest from our lawyers on Slide 3, please. Okay. So let's have a look at the highlights for the quarter. We achieved TC earnings of $31.6 million, equivalent to $27,548 per day, which includes the ballast cost we, accounting-wise, had to recognize through delivery port for our 3 older vessels, which were fixed on time charter for 2 years at healthy levels at $30,000 a day. Looking at the spot market, it was more or less floating along the same pattern as in the second quarter, with solid exports from the U.S. despite relatively high U.S. domestic LPG prices, and Middle East exports, which were still trailing behind the pre-COVID export levels. We report an EBITDA of USD 19.4 million, a net profit of $4.2 million and earnings per share of $0.06. We maintain our solid cash position, which currently stands at $105 million, and I'm very pleased to again declare a dividend this time $0.05 per share or 90% of our net profit for the quarter. Moving on, a key event for the quarter was obviously Hemen Holdings mandatory offer for all the shares in the company after they broke through 33% ownership in September. The result of the offer should be well known to everyone, with Hemen now controlling just shy of 77% of the shares. So over to you, Randi and the financial highlights for the quarter.

[Randi Navdal Bekkelund, Chief Financial Officer]

Thank you, Kristian, and good afternoon to you all. Moving to Slide 5. I will now take you through the financial takeaways from the quarter. As Kristian touched upon, the VLGC freight markets was impacted by low U.S. inventory levels, high U.S. LPG prices and thereby, narrowed U.S.-Asia arbitrage being the main driver behind our results. Looking at our commercial performance, we recorded a time charter equivalent, or TC earnings, of $31.6 million, up from $30.7 million in the previous quarter. The third quarter includes a ballast cost of shy $700 a day related to the 3 time charter contracts announced in October, as Kristian already mentioned. Operating expenses were $10.3 million or $8,600 per calendar day, down $700 a day from previous quarter. The corona is still among us and creates challenging -- challenges related to the crew change along with the high container and air freight costs, impacting our third quarter operating expense by $650 per day in total. For the fourth quarter, we expect the OpEx to come down to low $8,000 a day as most of our crew have been vaccinated. Administrative and general expense were slightly higher than last quarter due to nonrecurring expenses. This leaves us with an EBITDA of $19.4 million, up from $18.1 million previous quarter. Depreciation expense were $11.4 million, in line with indications given in our previous earnings call and is the normalized depreciation going forward. Finance expense is down from previous quarter due to lower average debt and interest costs, combined with capitalized borrowing costs. And with that, we recorded a net profit of $4.2 million or $0.06 per share for the third quarter compared to $1.5 million and earnings per share of $0.02 previous quarter. As Kristian stated, we are happy to announce cash dividend payment for the fourth time this year accumulated to $23 million in 2021, including the $0.05 per share announced today. Turning to Slide 6. I will take you through the cash movements during the year. We had a cash position of $102.3 million as of September 2021, up $24 million from year-end, driven by cash flow from operations of $71.5 million. Equity raise of $64 million, offset by capital expenditure of $42.1 million related to our newbuilding program and free cash dividend payment of $19.3 million and scheduled repayment of debt and interest of $46.5 million in total. Since 2019, we have paid $78 million in CapEx related to our newbuilding program, corresponding to approx 41% of the pre-delivery capital expenditure. We have secured sustainability-linked financing of the 2 first newbuildings, Avance Polaris and Avance Capella, scheduled for delivery in January and February 2022. Assuming the same financing for the remaining newbuilds, we have approximately $83 million in newbuilding CapEx to be sold by cash in hand and cash flow from operations until delivery of the final vessel in 2023. Moving to Slide 7. We have an estimated cash breakeven of $22,900 a day for fiscal year 2021, implying that the cash breakeven for the fourth quarter will be below $22,500 subject to the OpEx coming down to low $8,000 a day which is expected. Furthermore, we are exploring financing on the remaining newbuilds to be financed, and we are expecting to achieve attractive financing that will reduce the average cash breakeven for the fleet. Furthermore, today, we actually received credit approval for the refinancing of the Iris Glory by way of a sale/leaseback transaction previously announced in October. A few comments on our employment before I round out. We have an estimated TCE of $28,000 a day contracted for 94% of vessel days for the fourth quarter. And this includes time charter, or TC coverage, of approximately -- that is 40% at an average $31,000 a day. And the guidings of $28,000 a day also includes approx 50 days waiting time northbound in the Panama Canal, which is obviously hitting our results. Looking into 2022, our current TC coverage is 23% at $30,000 a day, primarily representing the three 2-year time charter contracts earlier stated. And based on the current market sentiments with freight rates exceeding $40,000 a day, we expect improvements in Q1 2022 bookings. And I will now hand the word over to you, Kristian, to talk about the markets.

[Kristian Sørensen, Chief Executive Officer]

Thank you, Randi. We can go straight to Slide 9. As mentioned initially, the VLGC market in Q3 was very similar to what we went through in the second quarter, where the U.S. exports was the main driver despite the high domestic LPG prices. And for most of the time, there was a very slim price differential between the U.S. and the Far East. The Middle East exports are slightly up, but the spot market was still dominated by Indian charters, while Far East and Western charters were pretty much absent from the spot fisher list. Going forward, we expect the Middle East exports to gradually increase, especially from Saudi as reversed OPEC cuts and technical issues on gas plants release more cargoes for exports. Next slide, please. At the end of the third quarter into the fourth, we experienced more inefficiencies in the global VLGC fleets. This is particularly around the Panama Canal, but also increasingly in the Far Eastern and Indian discharge ports. Recently, we have seen waiting time for Panama Canal transits up to 21 days on the Transpacific ballast leg, while we are currently seeing more than 14 days waiting of a laden leg from the U.S. Gulf to the Far East. In the short term, this is causing operational challenges, but in the medium term, this has started to translate into more capacity being absorbed from the fleet and increased rate levels in both the AG and in the Atlantic Basin. Next slide, please. As you all know, the U.S. gas prices have been at record high levels since the cold freeze in February. U.S. LPG inventories have still not reached the same levels as last year, and we are still well below the 5 years average. Nonetheless, the demand side has proven to be less price sensitive than expected as LPG is not only an alternative fuel source but also the main energy source for millions of people in the residential sector and the growing number of PDH plants in the petchem sector. Over the last years, capital discipline, solid balance sheets and dividend capacity have been the priority among most drillers in the U.S. However, on the back of high energy prices in general, we are starting to receive some reports from the third quarter results about increasing CapEx for both shale players and large energy companies, which usually is a leading indicator for increased production, although it is still early to say. Provided a normal winter in the States, we believe in a 6% increase in U.S. production and exports reaching approximately 53 million tons next year and further growth but at a slower pace from 2023 onwards. Slide 12, please. Looking at the demand side. Asia will continue to be the dominant off-taker of seaborne LPG as approximately 80% of all the VLGC cargoes and of Eastern Suez. Indian LPG imports seems to end close to 16 million tons this year, while China seems to be passing 22 million tons, thanks to its massive expansion of PDH plants in the petchem sector. Globally, Poten & Partners estimate a growth in seaborne LPG trade from approximately 118 million tons this year to 125 million to 126 million tons in 2023, and the majority will be on the LDCs. The demand growth will be first and foremost in Asia with India, Japan, Korea and China still being the dominant importers, while LPG continues to penetrate new markets in Southeast Asia and the Indian subcontinents. Next slide, please. There is naturally a lot of attention on the order book, especially in 2023. But although we are sharing some of the analysts' concern, we maintain our bullish view on 2022 and a cautiously optimistic view on 2023 by also taking a few measures to reduce the risk, but maintain proper market exposure. We do see the upcoming regulatory measures to reduce vessels' emissions as well as increased inefficiencies and uncertainty around programming of vessels, especially for U.S. bulk loadings as considerable absorbers of freight capacity which we believe will moderate the added capacity from the order book. Next slide, please. This is showing the latest developments around the Panama Canal and the waiting time. And to illustrate the inefficiencies, you can see from the graph on the left that the waiting time on both sides of the Panama Canal has soared from the third into the fourth quarter. 23% of the Panama transits in total were LPG carriers so far this year. And from January 1, there will be no more prebooked slots more than 14 days in advance, and we foresee increased scheduling uncertainty around the vital Panama Canal. So to recapitulate on our final and last slide. Avance Gas reported time charter equivalent of $27,548 per day, including the recognized ballast costs from -- for our 3 older vessels entering 2 years time charters. We are very happy to declare a dividend of $0.05 per share, which means that we have paid a total of $23 million in dividends in 2021. Market-wise, the U.S. exports were maintained in the third quarter at the high level with the support of robust demand side in Asia. Looking at the financing side. We are in the process of closing the refinancing of the Iris Glory in a sale leaseback transaction, where we expect -- or we will release about $16.6 million in cash. We are further, as Randi said, exploring financing on the remaining 4 newbuildings. And for Q4, our guidance on the LTCE is $28,000 per day, including approximately 50 waiting days for owners' account in the Panama Canal. We're currently experiencing a firming market with spot rates in the $40,000 territory. And we anticipate a firm market over the winter period with inefficiencies and increased export volumes supporting the market sentiment. And finally, we are looking forward to take delivery of our 2 new dual-fuel vessels in January and February next year. We should benefit from strong tailwinds in the market. So by that, I would like to open up for the Q&A session.

[Operator]

[Operator Instructions] No questions coming in on the phone lines at the moment. So I'll hand over to you to see if there are questions on the web.

[Randi Navdal Bekkelund, Chief Financial Officer]

Thank you. There are no questions then on the webcast either. So I believe this concludes our conference call.

[Kristian Sørensen, Chief Executive Officer]

Yes. So thank you, everyone, for listening in. And let's round it off if there are no more questions. Okay. Thank you.

[Operator]

Thank you. So that does conclude the conference for today. Thank you for participating, and you may now disconnect.