Avance Gas Holding Ltd

OSE:AGAS

Earnings Call Transcript 2020-Q4

[Operator]

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Avance Gas Holding Ltd Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] I must also advise you the meeting is being recorded today, on Friday, the 19th of February 2021. And let me hand you over to your host today, Randi Bekkelund. Please go ahead, ma'am.

[Randi Navdal Bekkelund, Chief Financial Officer]

Good afternoon, everyone, and thank you for joining the webcast and conference call for the fourth quarter 2020 of Avance Gas Holding Ltd. As you just heard, my name is Randi Navdal Bekkelund. I'm the CFO. And with me today, I have our Commercial Chief Officer, Ben Martin. We will start today's presentation by going through the financial highlights of the quarter, which we'll follow with a market and company update. We appreciate your interest, and we will take questions at the end of the call. I will now move to Slide 3, going through the financial highlights. The comments will focus on our financial position and results on unaudited numbers, for the fourth quarter as well as comments on the dividend announced today. Turning to our chartering results. We have an achieved time charter equivalent rate of $40,700 per ship day on a discharge-to-discharge basis, which is in line with our guidance of $40,000 a day. And further, we have a commercial utilization of 99% for the fourth quarter. With the rates picking up at the end of this quarter as well, we had a negative effect of IFRS 15 of $4,600, giving a TCE rate of $36,100 a day on a load-to-discharge basis. This compares with the TCE rate of $21,500 in the previous quarter. Vessel operating expense came in at $9,400 a day for the fourth quarter compared to $9,300 in the third quarter. As commented in the previous quarter, the vessel operating expense is partly impacted by one-offs related to technical manager change, and the COVID-19 situation still remains challenging. In total, the change in technical manager and COVID-19 expense represents approximately $900 a day for the whole fleet. We would like to emphasize that our highest priority is ensuring safety of the crew and resolving crew change challenge. For instance, Avance Gas Holding Ltd is a signatory of the Neptune Declaration on Seafarer Well-being and Crew Change. We have fully completed the technical manager change in Q4, and we expect to improve technical efficiency of our fleet and expect to reduce the operating expense to normalized levels in 2021 and going forward. The administrative and general expense were $700 per ship day, slightly down from previous quarter, reflecting improving cost focus. Net profit for the quarter was $46.8 million, corresponding to an earnings per share of $0.73 compared with earnings per share of $0.04 previous quarter. The net profit includes a write-back of vessel impairment charge of $33.7 million. Adjusted for the write-back, we have an earnings per share of $0.21. Looking at the cash position. We generated approximately $100 million in cash flow from operations during the year. We raised $30 million by selling our oldest [ vessel ], the Avance, and we successfully completed the sale-leaseback transaction on the VLGC Pampero. We paid 20% of our predelivery CapEx of our newbuilding 1 and 2 and 98% of dry dock and scrubber installations. Further, we paid $19.1 million in dividends. We reduced our interest-bearing debt by $37 million, leaving us with a cash position of $75.9 million end of Q4. Today, we have a cash position of $93 million. And based on the strong long-term fundamentals, we expect to further strengthen our free cash flow generation. We also increased our equity ratio to 50.4% in 2020, up from 45.7% in 2019. And we are happy to announce that we returned value to our shareholders. The Board declared a dividend of $0.11 per share, representing 52% of net profit, adjusted for the write-back of impairment charge. We believe this is a compelling way of returning value back to our shareholders, and the capital allocation of dividend, investment and further balance sheet strengthening will be carefully considered by the Board going forward. Turning to Slide 4, a snapshot of our operating and commercial utilization. We had a strong commercial utilization of 99% for the fleet in Q4 and 97% commercial utilization for the year. We had 3% scheduled dry dock off hire for Q4 and 10% for the year, where approximately 3% is impacted by COVID-19. In addition, we had 2% off hire in Q4 and 1% off hire for the year, most of which related to change of technical manager. By Q4, our dry docking program and technical manager change are fully completed and 5 of 6 scrubbers have been installed. Turning to Slide 5, looking into the next quarter and the coming year. We have, based on the current information at hand, an estimated cash breakeven of $22,000 a day in 2021. For the first quarter, 70% of vessel base is contracted for approximately $48,000 a day, including both spot and time charter contracts on a discharge-to-discharge basis. We have no scheduled dry dockings, leaving us with a nearly fully tradable fleet, and we have a TC coverage of 25% at an average rate of $30,000 a day for 2021. And with strong long-term fundamentals on the supply, production and demand side, we have a potential significant free cash flow generation. And in Q4 this year, we will take delivery of our first dual-fuel newbuilding, enhancing the green profile of the Avance Gas fleet and taking an important step towards decarbonization. And with that, I leave the word over to you, Ben, for the market and company update.

[Ben Martin, Chief Commercial Officer]

Thank you, Randi. So if we move to Slide 6, please. Q4 has seen a return to incredible freight levels not seen for many years. A combination of stronger-than-expected U.S. exports, good buying demand in the Far East markets and marketing efficiencies allowed the odds to stay wide open for freight rates to rise to close to $3 million TCE per month for certain voyages. Move on to the next slide, please. U.S. exports averaged around 77 cargoes a month, which is up from 68 cargoes a month in Q3. Year-on-year, there were 837 VLGC cargoes exported in 2020 versus 744 in 2019. December in particular saw a huge export month with close to 80 cargoes being exported. This plentiful U.S. cargo, coupled with the main destination being Asia, increased the miles and spiked freight rates. Next slide. One of the main drivers for the rate surge we've seen has been the U.S. production data. We've seen better-than-expected production, coupled with lower-than-expected domestic consumption, which allowed for excess propane and butane to be exported at competitive prices. Hand in hand with this has been the expansion of terminal infrastructure, specifically in Targa, which now means that U.S. terminals can export up to 90 cargoes a month, should there be sufficient cargo available, of course. Removing this bottleneck has been a major positive for growth prospects of the LPG market. More recently, the EIA renewed its outlook for 2021 based on its February review, which implies 5.5% growth for U.S. production to 92 million tons per year, which is an increase of 2.6%. They're also forecasting flat domestic consumption, which means that possible exports can rise by as much as 11% to 52 million tons. Production for 2022 is currently estimated to be up nearly 2%. These revisions and increases were in line with our views from Q3 reporting that production would increase year-on-year as well. As we've seen this past year, abundant U.S. LPG is positive for the freight markets. There has been concerns around what the effect of President Biden's moratorium on drilling means for U.S. LPG production. We're still working to fully understand this picture. However, it appears that short and medium term, it could be largely muted. The moratorium refers to drilling on federal land, which accounts for around 20% of LPG production in the U.S. States like Texas, one of the biggest producers, has as little as 5% land being under federal control. Further, during the Trump administration, many permits were issued for drilling on federal land, and around 50% of these are yet to be used but still remain active, thereby effectively negating any real immediate concerns and medium-term LPG shortages. And as we see oil prices continue to strengthen, we could see these wells being drilled as well as ones which are not on federal land, which can further improve the production outlook. On to Slide 9. The Middle East Gulf region has seen variable exports this quarter with fluctuations in volumes between months, specifically to do with the cuts in Saudi. As a result, the AG loaded on average 53 VLGCs a month in Q4, which is slightly down from the Q3, which is principally, as we mentioned, due to OPEC cuts. When we will see these volumes come back is a subject for discussion, and we need to review that as and when we see the outcome of the next OPEC meetings. Our view still remains that cuts in U.S. -- in Middle East Gulf production will likely need to be replaced from somewhere, and that somewhere is usually the U.S., which, as we said before, is positive for long-term miles and therefore, likely positive for freight rates. On to Slide 10. Asia remains a driving force of the LPG market with 80% of the demand being centered there. With 70% of the demand from residential, contrary to what we might intuitively expect for a pandemic effect, the lockdowns enforced in Asia actually increased imports and helped support the VLGC market. India and Indonesia were of particular note here. China remains a big influencer on the market despite being less active last year. We expect them to come back strong this year, with new PDH plant demand to be in excess of 2 million tons additional consumption. Then, as we're seeing now, a higher oil price also puts LPG firmly in the top spot for cracker feedstock. On to Slide 11, looking at the shipping supply side of things. We see a positive outlook for newbuilding deliveries being relatively modest over the next 2 to 3 years. We see 37 ships on order for a global fleet of 305 ships. We have 21 due for delivery this year and 10 due for the following year, meaning a manageable supply increase which, given the currently expected dry dock schedules, we believe will be largely offset. If we look at the age profile of the existing fleet, we have almost 10% that is over 25 years old, a sign of some scrapping to come. This age profile, together with more focus on ESG policies and potential carbon taxes, could accelerate scrapping and create possible fleet shrinkage. So on to the conclusion and to round things up. On the supply side, the shipping supply looks reasonable. The order book is 12% for now, and we have a finite number of deliveries between now and 2023, giving owners pretty good visibility for the next 2 years. We see that the newbuildings coming in will be largely offset by the dry docking program. And as we mentioned, we have a moderately old fleet with close to 10% of the ships being over 25 years. The outlook for U.S. production is now more positive than it has been for some time, and a stronger oil price should have a positive effect both on drilling new wells and also opening up some deliveries to the Far East. We see the demand centers in Asia growing, and with the U.S. being the swing supplier, this is positive to miles and in our view, positive LPG freight. On the overall outlook, as Randi previously advised, we have already booked approximately $48,000 TCE for Q1 on approximately 70% of our vessel days, which puts us in a nice position, given where the market currently sits. Clearly, we're in a period of rebalancing in terms of pricing and unprecedented cold weather snaps, but we believe once U.S. prices normalize and buying comes back from Far Eastern counterparts, given also the size of the dry docking schedule, that we will see a return to tightness to the market and with an increased positivity for owners. Avance Gas has a fully tradable fleet with significant cash flow generation potential, which we'll be ready to take advantage of when the time comes. The cherry on the cake from a company perspective is we start to take delivery of the most eco and green dual-fuel VLGCs currently available in the market, something that marks a real milestone for the company and the commitment to clean LPG shipping. And finally, we're looking forward to welcoming our new CEO, Mr. Kristian Sørensen, who joins us on the 1st of April. Kristian will bring many years of experience and add some great directional focus to the Avance Gas management team, and we look forward to building a stronger future for our shareholders together. Thank you for listening. We'd be happy to take any questions that you may have now.

[Operator]

[Operator Instructions] There are no questions at this time. Please continue.

[Randi Navdal Bekkelund, Chief Financial Officer]

Okay. Thank you, Ella. And thank you for dialing in for Avance Gas presentation for the fourth quarter. If you may have any questions, please do not hesitate to contact us directly. And I wish you a nice weekend.

[Operator]

That concludes the presentation today. Thank you for participating. You may disconnect.