BW LPG Ltd

OSE:BWLPG

Earnings Call Transcript 2022-Q1

[Lisa Lim, executive]

Welcome to BW LPG's First Quarter 2022 Financial Results Presentation. Bringing you through the presentation today are CEO, Anders Onarheim; CFO, Elaine Ong; EVP Commercial, Niels Rigault; and EVP Technical and Operations, Pontus Berg. We are pleased to answer questions at the end of the presentation. [Operator Instructions]

Before we begin, we wish to highlight the legal disclaimers as shown in the current slide. This presentation, held on Zoom, is also recorded.

I now turn the call over to BW LPG CEO, Anders Onarheim.

[Anders Onarheim, executive]

Thank you, Lisa, and welcome to our first quarter results presentation for the financial period ended 31st of March 2022. As Lisa said, I'm joined here by Elaine, Niels and Pontus.

If you go to Slide 3. The year started with a good level of activity in the VLGC market and demonstrating the importance of our business in the context, marked by global, geopolitical and economic uncertainties. I also want to take the opportunity to congratulate colleagues on the completion of our ambitious LPG retrofitting program.

I'd also like to thank all our partners and suppliers for their support. It's been a long journey from contract signing in 2018 to redelivery of our 15 retrofitted VLGC earlier this month. And even with complications from COVID-related restrictions, where VLGC site teams spent the equivalent of 1.5 years in quarantine. The team managed to complete the program ahead of schedule and within budget and with zero major safety incidents.

We now own and operate the world's only fleet for retrofitted LPG powered vessels and the world's largest fleet to be powered by LPG. This is part of our strategy for smarter shipping. We decarbonize operations, deliver strong financial performance and invest in innovation and technology.

Let me quickly then talk about the key business highlights and market outlook. Please turn to Slide 4. In the first quarter, we reported $36,900 per day per VLGC fleet per calendar day, with 9% technical offhire. This was primarily due to the retrofitting.

Commercially, we achieved strong TCE of $40,400 per day -- available today with a high commercial utilization of 96%. And we generated a net profit after tax of $58 million and this translates into earnings per share of $0.41.

Moving on to the highlights for the quarter. We now report the highest available liquidity to date at $651 million and a record low net leverage ratio of 25%. And today, we want to lead with 3 key messages.

Firstly, we now have a more optimistic view of 2023. Secondly, as mentioned, our leverage ratio is at record low levels. And thirdly, our dividend policy is updated to target a 75% dividend payout ratio when net leverage is below 30%, continued on a quarterly basis going forward.

Our more optimistic outlook is driven by higher energy prices and growing political support for LPG as transitional fuel and an energy source. We believe the market fundamentals in 2023 are supported despite uncertainties from heavy newbuilding deliveries schedule. Niels will talk more about this later.

For this quarter, with net leverage of 25%, we will return to shareholders a dividend payout that is 75% of NPAT or $0.31 per share. This amounted to a total of $42 million. And continuing our focus on generating returns for our shareholders, we have sold the BW Liberty in the second quarter at a very attractive price. We currently have no CapEx commitments other than just regular maintenance, but we still continue to evaluate investment opportunities along the LPG value chains.

Like with the LPG retrofit program, there are opportunities that are smarter, less capital intensive and allow us to further strengthen our position in the LPG value chain without ordering new vessels.

LPG is clearly part of the solution towards a sustainable future. And as a member of the broader LPG industry, we must continue to communicate this strongly. On that note, we're also honored to be selected to form part of the OBX ESG index that comprised of 40 blue-chip companies listed in Norway that demonstrates good ESG practices. There is no doubt in my mind that LPG is a sustainable transition fuel and power a cleaner energy future.

We go quickly to Slide 5, the key financials. We generated an annual return on equity of 16% and with an annual return on capital employed of 12%. Our operational and free cash flows were $164 million and $249 million, respectively, for the quarter, maintaining our flexibility, allowing us to value sizable investment opportunities and enabling us to continue to return cash to our shareholders.

With that, I will let Niels take you through the market review and commercial update. Niels?

[Niels Rigault, executive]

Thank you, Anders. Good morning and afternoon to all of you. On Slide 7, we share our view of the market, and as Anders mentioned, we have upgraded our market outlook for '23 driven by expected increases in LPG production following the rapid surge in oil and gas prices. Of course, the order book is a concern. However, our analysis suggests that piping emissions regulation and increased concessions in the Panama Canal combined with higher LPG production to partly offset the freight pressures from the new vessels.

So far in Q2, we have fixed approximately 74% of our available fleet days on an average rate of $36,000 per day on a discharge to discharge basis.

Turn to Slide 8. The world needs LPG, and this is perfectly demonstrated in today's energy situation. Since the start of '22, WTI has increased by 40%. Natural gas has more than doubled, and European NAFTA had jumped by 24%, while LPG prices have increased by only 8% making it more competitively priced for both in digital and retail uses.

A good thing about LPG is that you don't need expensive infrastructure investments compared to other gases such as LNG. It is practical and give cost competitive solutions to provide energy safety to both established and developing markets. Almost 50% of the world LPG demand goes into retail. The retail demand is continuing to grow strongly, well supported by progressive governments in emerging economies seeing the benefits from a clean and affordable source of energy.

We also see strong demand from the petrochemical segment. Taking April, as an example, seaborne LPG imports into North Europe from the U.S. rose by 22% from the previous month due to favorable propane/naphtha spreads.

Countries such like China, Vietnam are ramping up their PDH and cracker projects, adding significant incremental demand for LPG. What I'm trying to emphasize here, until the world finds a green energy solution to completely replace fossil fuel, LPG is helping the world meeting its energy demand in a flexible manner that can integrate well with renewable energy production.

Turning to Slide 9. U.S. is the main driver of global LPG seaborne trade, and it will continue to be. With Europe looking to reduce their dependence on Russian gas, more C1 LPG will be part of the solution. U.S. shale producers had the capacity and the capability to ramp up production and under today's $100 oil price environment and in an industry that is quick to react, we expect the LPG production to increase.

EIA expects the U.S. LPG export to grow by almost 15% in '23. In addition, we also have seen the midstream companies reevaluating or planning for new NGL infrastructure investments. This has certainly given us more confidence in facing the high newbuilding orders next year.

Turning to Slide 10. The current VLGC orderbook holds 65 vessels or 20% of the existing fleets. If you look from a percentage perspective, the fleet is expected to grow by 30% next year. While I just mentioned in the last slide, EIA expect the US LPG exports to grow by 15% in '23. We have not even talked about Middle East, which is also progressively adding back production.

Our investments in the existing dual-fuel upgrades is the largest commitment towards decarbonization in the sector. We believe that LPG as a fuel is both clean and economical.

Looking at the price between compliant fuel and LPG for '23, LPG is priced over $100 cheaper, representing a TCE premium of about $4,500 per day compared to conventional vessels. We have, for the last 5 years, been active to sell our vintage vessels, total 23 ships. For the last 12 months, we have sold 7 VLGC at prices above book values. These transactions have generated a total net gain of $35 million or $0.26 per share for our shareholders.

We are now comfortable with our current fleet profile, which will allow us to maneuver through all kinds of market conditions ahead. We have no vessel orders and no immediate plan of ordering vessels despite a more positive market outlook.

Please skip ahead to Slide #13, and I'll talk about the Time Charter Overview. We have 60% of our open days in '23 at an average TCE of $33,800 per day, mostly are for our BW India business. We have a good position to capture the strong market ahead, and we will continue to focus on the U.S. to Far East voyages. I am confident and comfortable with our current portfolio.

We have the critical mass, which is a key to optimize the spot earnings and help our clients with today's inefficiencies.

That's it for me. Next, Pontus Berg will take you through the technical and operations update. Thank you.

[Pontus Berg, executive]

Thank you very much, Niels. Good day, everybody. So the year has gone off a good start for the technical and operations teams. As Anders mentioned, we have completed our ambitious project to retrofit 15 VLGCs with LPG dual-fuel technology. And we have done so during what is possibly the most challenging times in recent history. The global -- well, possibly more so the local COVID-related restrictions and lockdowns, which meant we had 462 days in Chinese quarantine hotels for a site team. We managed to complete this LGIP project ahead of time and within budget.

This massive achievement is possible only with an excellent team on site, supported by dedicated shore personnel and external partners. I take this opportunity to thank [ Holloman Flag ], DNV, [ Yiu Lian Dockyard ], Wärtsilä, MANES, WLPGA and last but not least, our own teams for their support from idea to realization of this pioneering project. With close to 25,000 hours on LPG, we are accumulating some very valuable learnings. Of course, as with all pioneering technology, there are some teething challenges, but our dedicated team is working hard alongside trusted suppliers for solutions.

Our in-house technical and operations teams manages complex multimillion dollar projects such as newbuildings, upgrades, life extensions. In the past decade, the teams have reduced OpEx by a noteworthy 20%, and this while improving safety performance to be best-in-class and reducing technical offhire. Hence, we see lower OpEx, less incidents and higher commercial availability.

When required, we can leverage on colleagues across functions at the larger BW Group. We are ready to support our core shipping business and food partners with deep experience and expertise from offices that cover all the time zones.

Looking ahead, the team will continue to ensure our owned and chartered-in fleets are managed to market-leading operational levels and that they are all future proof and in compliance with upcoming environmental requirements. Our LPG-powered vessels, will fully comply with CII and EEXI requirements that will come into force January '23, meaning we will see no need for power adoption and lower speed for compliance.

That is actually the reality for any VLGC that only have a scrubber or rely on compliant fuel. Our entire fleet will benefit from current digitalization and smart voyage routing initiatives to optimize our fuel consumption.

Also, our Alpha-Ori smart technology initiative is helping us to monitor our emission performance, and we are now piloting its ability to automate data flow for compliance with the IMO organization's data collection and reporting requirements.

We will also continue to explore new technologies as we develop our next-generation VLGC.

With that short update, let me now turn over to our CFO, Elaine Ong, who will walk you through our financial position and results.

[Elaine Ong, executive]

Thank you, Pontus. Greetings. Let me provide some color on our first quarter financial results. Net profit for the quarter was $58 million with an EBITDA of $93 million. This translates to an EBITDA margin of 72% for the quarter.

As at the end of March, our available liquidity of $651 million and net leverage ratio of 25% are our highest and lowest since listing. We are, therefore, in a solid financial position to withstand any short- to medium-term volatility and to invest in the right opportunities for future growth.

Let me now highlight a few things on our balance sheet. In quarter 1, we generated $164 million in operating cash flows and $249 million in free cash flows. This includes $94 million in sales proceeds from the sale of the BW Trader and the BW Niigata during the quarter.

As previously announced, we have received the $50 million in new equity from Maas Capital for the investment into our India subsidiary. And just earlier this week, Maas Capital confirmed a further increase in their capital investment.

When this transaction is concluded, BW LPG will own 52% in our India subsidiary. Our strong cash flow has allowed us to return value to our shareholders in several ways.

First, it has allowed us to aggressively pay down our debt. We will voluntarily prepay $268 million of debt by the end of Q2. I'll elaborate more on this in a bit.

Second, as earlier mentioned by Anders, we have enhanced our dividend policy to target a quarterly payout ratio of 75% of NPAT when our net leverage ratio is below 30%.

With a net leverage ratio at 25% this quarter, we have declared an interim dividend of $0.31 per share, which translates to a payout ratio of 75% of NPAT.

And third, we announced our share buyback program in December last year. And as of the end of Q1, we have purchased 3.8 million shares amounting to approximately $21 million. We plan to complete the program in due course.

Finally, for full year 2022, we expect our operating cash breakeven for our total fleet, included our chartered-in vessels to be at $21,300 per day.

Here on Slide 16 is an update on our financing structure and debt repayment profile. Our gross debt was $843 million, which included $728 million in debt outstanding from our 4 term loans. The rest relates to lease liabilities arising from the time chartered-in vessels under IFRS 16. Our Trade Finance Facilities of $280 million remain unutilized during the quarter. We ended the first quarter with $353 million in cash. This, together with $298 million in available revolving credit facilities put our available liquidity at $651 million and a 25% net debt of $490 million.

As mentioned earlier, given our strong liquidity, minimal committed CapEx and with no major balloon payments due in the next 5 years, we have voluntarily prepaid $73 million of debt in April, and we plan to prepay another $195 million in June. These prepayments will be reflected in our second quarter results.

With this, we will have 8 unencumbered vessels worth over $600 million available for financing when needed.

On this note, let me open the floor for questions. Thank you, and back to you, Lisa.

[Lisa Lim, executive]

[Operator Instructions]

We have one question from [ Desmond from BMO ].

What is the current net per share? Anders?

[Anders Onarheim, executive]

Elaine, you want to get that?

[Elaine Ong, executive]

I don't have the latest number, but if I could just come back to you in a bit, we should be able to get that to you shortly.

[Lisa Lim, executive]

Can you please -- we have a few questions on the chat channel. An you please share some more details around the second transaction with Maas on the India JV? How much did it invest and at what valuation? Anders?

[Anders Onarheim, executive]

Yes. Niels, I'll let you answer that for the Maas Capital. How much they invested?

[Niels Rigault, executive]

That's a big question. In total, they have committed about $80 million in equity.

[Anders Onarheim, executive]

That gives a little less than 50% ownership.

[Niels Rigault, executive]

Yes.

[Lisa Lim, executive]

The next question is from [ Fredric Ness ]. To what degree does the war in Ukraine impact LPG freight markets?

[Anders Onarheim, executive]

I can start, and I'll let you continue, Niels. I think it's impacting us in a way that -- of course, with the increasing oil and gas prices that helps the production and hence, also the exports from the U.S. in particular, as Niels said. Russia is not the big exporter of LPG. So the direct impact is somewhat limited. But again, we clearly see that, as Niels said, that LPG is a very flexible and clean alternate energy source. And so we do see that there is increased demand also in Europe for LPG. But the direct effect, I guess, Niels, is not that high.

[Niels Rigault, executive]

No. We have obviously seen much more activity from U.S. to Europe. I mean because of the naphtha LPG spread has been very positive. But I mean, we also see that the shipping premium market, if you compare Houston to North Europe, it's about 20,000 -- paying about $20,000 more per day in premium compared to Middle East, Far East.

So it's -- for shipping terms, the rates are highest between Europe and U.S.

[Anders Onarheim, executive]

Also, if you come back to the previous question, our NAV or at least the share of equity per share is $10 -- $10.3 per share. So just about SEK 100 per share. Of course, as we have to make some assumptions on the newbuild equivalent, but that's our forecast.

[Lisa Lim, executive]

Next question. What are the expectations in terms of MEG exports?

[Anders Onarheim, executive]

The expectation for energy exports?

[Lisa Lim, executive]

MEG exports.

[Anders Onarheim, executive]

Middle East. Niels?

[Niels Rigault, executive]

Yes, I mean, as we have also seen in the presentation, we have seen now that Middle East has been a declining export area, while U.S. have grown dramatically. But we clearly see now that the exports on the Middle East is growing.

[Anders Onarheim, executive]

And both Saudi and Kuwait are increasing production, also exports.

[Lisa Lim, executive]

Moving on to the next question. Will forecast at

4.8% growth in exports require additional export projects online? Or is there spare capacity?

[Anders Onarheim, executive]

Do you want to take that, Niels, or maybe Elaine, do you want to take answer?

[Niels Rigault, executive]

I would just say that there are definitely export capacity in the U.S.

[Pontus Berg, executive]

Yes, I can add some color to that. I think in the U.S. right now, we see ample supply of infrastructure. And you can see that the sales at the terminal rates are still stable, indicating that there's good terminal capacity, and we expect even with the higher production out of the U.S., that there should be sufficient both pipeline fractionation and terminal capacity to take us at least through 2023 and probably into 2024, 2025.

And just on the -- I mean, on the Middle East now, I mean our expectation is, as you know, it's been a period of up and down demand. Last -- in 2020, the exports from Middle East was down around 6%. And for VLGCs and we expect to now it will grow around 5%, 6%, 7% in 2022 and -- that's a similar to what we saw in 2021. And then going forward, in 2023, it also would also be around 5%. So it's in this -- which for the Middle East, it's a healthy, healthy growth, meaning that number of VLGCs occupied in the Middle East from 2021 to 2023, will grow with about 10 VLGCs.

[Anders Onarheim, executive]

If I can just add a little bit more color on the U.S.. I think, f course, we are studying very closely what's going on in the U.S. And while we see there's clear incentives now to increase production, we also know that from history, shareholders have been very, very adamant about the company is really being disciplined on their CapEx.

So this -- we're watching it closely, but we do see at least tendency towards again, more aggressive behavior from the producers. So we are quite optimistic of our volumes in the U.S.

[Lisa Lim, executive]

Next question. Are you looking at acquisition opportunities given your high cash levels?

[Anders Onarheim, executive]

I mean we are always evaluating opportunities. But I think for right now, we feel that we have interesting prospects. As Niels said, we are looking at both -- other types of investments along the value chain. But we're always looking if we can create value via through acquisitions or partnerships, we'll continue to evaluate that. But there's nothing concrete to mention now.

[Lisa Lim, executive]

Next question. Can you provide any commentary around the newbuild market? What kind of return lines are being marketed and at what pricing?

[Anders Onarheim, executive]

Niels, I'll let you take that?

[Niels Rigault, executive]

Yes. Obviously, the yards are quite busy these days. And -- there are 3 different places where you could order VLGC, that's either in China or Korea or Japan. Korea being the larger exporter of VLGCs. But right now, they are quite busy on the containers and LNG and then the tanker side.

What I understand now, the delivery now for a VLGC, we're talking more second half 2025.

As for the prices, they are indicating around the low $90 million for VLGC.

[Lisa Lim, executive]

Next question. There are about 5 -- 50 VLGCs older than 20 years. How will EEXI and CII impact these older vessels in terms of speed? And do you expect increased scrapping as a result of these regulations?

[Anders Onarheim, executive]

Pontus, this is your favorite subject.

[Pontus Berg, executive]

Absolutely. Thanks, Anders. Well, if we look at the really old ones, which are high on the fuel consumption, we will expect about 2 to 3 knots speed reduction will be required, and that will be achieved by installing something that's called engine power limitation. I don't think anyone has the final number since the actual due date for -- well, since the actually expected date for the final calculation methods will not be available until later this summer because the IMO, and the IMO people are still disputing a little bit. But it is -- believe that it is a very high likelihood that it will be implemented. And if it entails higher scrapping levels, it is quite likely, but I think this question more comes around what we believe in the market. And since there are a lot of LPG coming online, possibly not.

[Lisa Lim, executive]

Next question. Is there a particular target ratio for the share repurchases in terms of NAV per share? Or is there any market value under NAV acceptable at these debt levels?

[Anders Onarheim, executive]

We have -- that's a discussion we have with the Board continuously. But we are -- we generally stay quite disciplined when it comes to what levels we buy back shares. But again, for now, we have -- we will continue with the program that we have started. But again, we will be disciplined. So we haven't set a specific ratio, but we have our own limits in mind.

[Lisa Lim, executive]

Next question, will there still be Panama delays if much of the LNG exports head for Europe than Asia?

[Anders Onarheim, executive]

Niels, do you want to answer that?

[Niels Rigault, executive]

Yes. I mean the LNG towards Europe is additional. So you'll still see a lot of LNG. The same thing goes for LPG, probably going East and using the Panama Canal. And even though there's been much more activity from U.S. to Europe, we have seen the Panama Canal delays increasing.

Just today, back and forth on the Panama Canal, it's about 3 weeks waiting. So from a [ voice ], Houston Far East, which normally takes 60 days suddenly now we're talking about 3 months run voyage.

So yes, we expect more delays in Panama going forward.

[Anders Onarheim, executive]

I mean, the Far East is still the biggest importer of LNG.

[Niels Rigault, executive]

Yes.

[Lisa Lim, executive]

Next question on newbuilds. Can you provide any commentary on the newbuild time line and marketing?

[Anders Onarheim, executive]

I'm sorry, I didn't quite understand that question, Lisa. One more time.

[Lisa Lim, executive]

One more time, one second. Can you provide any commentary around the newbuild market? What kind of delivery time lines are being marketed and at what pricing?

[Niels Rigault, executive]

Yes. Well, I just -- it's -- we're talking about 25 second half, 25 deliveries and the prices for VLGC today is quoted around $90 million.

[Lisa Lim, executive]

Okay. There are no more questions on the channel. [Operator Instructions]

[Anders Onarheim, executive]

Okay, I guess, Lisa, then I think we should thank everybody for participating and we will be back with more news as long as we -- as soon as we have them. Thank you very much.

[Lisa Lim, executive]

Thank you, Anders. We have come to the end of today's presentation. Thank you for attending BW LPG's First Quarter 2022 Financial Results Presentation. More information on BW LPG is available online on our website at www.bwlpg.com. Have a good day, and a good night.