BW LPG Ltd

OSE:BWLPG

Earnings Call Transcript 2022-Q2

[Lisa Lim, executive]

Welcome to BW LPG's Second 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 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. Let me start by welcoming Kristian Sørensen to BW LPG. Kristian needs no introduction in our community, having been in the LPG shipping industry for over 20 years. He joins us this week, and we look forward to his contributions. I'm sure he'll hit the ground running right away. It has been a busy quarter for the team at BW LPG.

We concluded a sale and delivered BW Liberty. Completed a second tranche sale of our India subsidiary, which takes our ownership to 52%. And we entered into an agreement to acquire the LPG trading operations from Vilma Oil to expand our Product Services division. The acquisition is still subject to regulatory approvals, but my thanks to all colleagues that works hard across the finishing line, more on this later.

I'm also pleased to announce that all 15 of our retrofits are now successfully back on water and capable of burning LPG DS2. The world is facing great geopolitical instability. This is having a significant impact on the energy and shipping markets.

Energy security is a growing concern, and we want to play our part. Let me show you how LPG can contribute to the energy solution on our slide Page 4. The current instability highlights the value of LPG, and we're seeing increasing investments in U.S. exports due to higher demand and in particular from Europe.

Now LPG is versatile as it is imported by our ships from global suppliers and provides attractive energy security compared to solutions to require costly investments in infrastructure and pipelines. LPG is also cleaner than most other alternatives. These attributes support further investments and growth in LPG exports, imports and thus, transportation.

On the right side, we can see that LPG continues to be highly competitive from a price perspective. And there can be a convenient substitute in industrial processes, given the current elevated prices of natural gas. At the moment, natural gas is actually 6x more expense than LPG in Europe. Given the increasing importance of LPG as an energy source, we're committed to investing further in the LPG value chain.

As part of this strategy, we were happy to announce the expansion of our product services through the acquisition of the LPG trading operations from Vilma.

Let's turn to Slide 5. Again, we entered into the agreement on August 1 to acquire the LPG trading operations from Vilma Oil. Vilma has a strong track record and credible reputation in the LPG community. We are very excited to have a highly experienced team coming on board.

The transaction is in line with our strategy and enables us to expand our Product Services division. The combined team traded over 4 million tonnes of physical LPG last year, and we had the capacity to grow further. The transaction also adds 5 additional TC-in VLGCs, including one newbuild into our fleet. This also means we are expanding our coverage from U.S. centric to a global presence, supported by teams in both Europe and Asia and thus widening our service offering to our customer.

The acquisition brings increased agility and important insight in today's volatile market, further enhancing our core shipping business. We also see tremendous growth opportunities ahead along the LPG value chain, allowing us to generate even greater value for our shareholders. As I mentioned, the acquisition is subject to approval from the Spanish regulatories, and we expect the transaction to close by the end of Q4 this year.

You can turn to Slide 6. Moving on to the highlights for the quarter. We want to leave you with some key messages. We will continue to deliver on our stated strategy of fleet renewal and further expansion into the LPG value chain. We continue to have ample available liquidity of $360 million and a record loan net leverage of 25%. Against the uncertainties in global energy markets and concerning order book, we remain still optimistic for 2023, but we are also prepared for continued volatility.

More specifically on highlights, in addition to the Vilma transaction, we also sold the BW Liberty during the second quarter. In terms of outlook, we want to remind everyone that LPG, which mainly comes as the byproduct of upstream products production, is highly dependent on the oil and gas outlook. If oil and gas prices are sustained at higher levels, we are well positioned to benefit from another strong energy cycle ahead.

If the global economy experienced further turbulence on commodity price retreat, however, our balanced fleet and trading portfolio, ample liquidity, a strong balance sheet, we're prepared to maneuver through those challenges also. And finally, on dividends for this quarter with net leverage at 25%. we returned to shareholders a dividend payout of 75% of net profit after tax or $0.20 per share. This amounts to a total of $27 million.

Turn to Slide 7, please. The key financials, the second quarter, we reported daily rate to $35,400 per VLGC fleet per calendar day. Daily OpEx was $8,800. The increase was largely due to escalation in cost of lubrication roles and rise in insurance premiums, is something we're all facing at the moment.

We generated a net profit after tax of $39 million earnings per share of $0.26. This translated into a annualized return on equity of 10% with an annualized return on capital employed at 9%.

Next up is Niels, who'll take you through the market view and the commercial update. Niels?

[Niels Rigault, executive]

Thank you, Anders. Good morning, afternoon, and good evening to all of you. Please turn to Slide #9. On Slide 9, we share our view of the market. As Anders mentioned, we remain positive for the rest of '22 and next year. There are several encouraging developments.

The two main export hubs continue to increase their export. U.S. leading the way with a record LPG export. Middle East export is up significantly, in line with OpEx plus phasing out its existing oil production cuts. For the coming winter, we expect strong winter heating demand and retail demand to switch more to the clean and cheap LPG compared to the expensive natural gas and oil.

Today, LNG costs is about $500 in oil price equivalents. And oil price is today around $100. LPG is trading to 20% discount to oil. So the LPG cost is only $80 in oil price equivalents. In other words, and as Anders also mentioned, LPG is about 6x cheaper than LNG. I repeat myself, 6x cheaper than LNG.

So far, in Q3, we have fixed approximately 84% of our available fleet days at an average rate of approximately $36,000 per day on a discharge-to-discharge basis. Hence, Q3 is in line or slightly weaker than Q2. Looking into '23, we maintain a more positive outlook despite the order book. U.S. midstream operators announcing to expand fractionation capacity, which will increase LPG production.

We also expect the Middle East to continue their export growth with Iran being a great upside potential, so the sanction be lifted. In Iran alone can give employment to about 150 VLGC cargoes per year. On the demand side, we have been concerned of the current lockdown in China. However, the stats show the LPG import were relatively stable compared to Q2 last year. Hence, this could be another great upside potential when China opens up again with the number of PDH plants, which are still scheduled to come on stream.

Let's turn to Slide 10. The two charts on this slide reflects the current energy situation well. Compared to same period in '21, North America and Middle East exports have grown 6% and 16%, respectively. For the same period, European exports were down 13%, and Russia export declined substantially by 33%. Looking at the chart on the right-hand side, I want to draw your attention to the strong growth in Indian imports, up 16% year-on-year, which is very positive for our BW India business.

As mentioned, China remains the biggest importer of seaborne LPG and imports were stable. European imports were also up by significant 15%, again, reflecting the energy situation for the region.

Let's turn to Slide 11. U.S. LPG exports are fundamental to a well-balanced LPG shipping market, with Europe looking to become less dependent on Russian gas, seaborne LPG export from the U.S. plays an important part in bridging that gap. Since our last earnings presentation, EIA has revised up its expectation for '22. The result in net export growth of 10%, the previous growth forecast was 5.4%.

The forecast for '23 is unchanged with an 8.8% growth. Let's turn to Slide 12. The current VLGC order book stands at 65 vessels and only two ships were ordered during Q2. We see a clear tendency in the market that with current record high newbuilding prices and the long delivery time, the appetite for ordering has diminished. Due to our return focus, we have no immediate plans of ordering vessel despite a positive market outlook.

We remain comfortable with our current fleet profile, which should allow us to maneuver to all kinds of market conditions ahead. Our 15 upgrade LPG proposals are currently enjoying a huge savings by burning LPG instead of the less environmental oil dual. Today, the savings are about $8,000 per day while sailing on LPG.

Please skip ahead to Slide #15. We have 16% of our fleet to '23 at an average rate of TCE of $33,900 per day or $50 million revenue locked in for our TCE book. Most of our TCEs out is for our BW India business. We are confident with our spot open position to capture the positive market fluctuation ahead. And third, expansion of product services to the acquisition of Vilma LPG trading.

The expansion enabled us to offer clients all over the world delivery of LPG directly from the world exporters. In addition to service our clients, Product Services has contributed to high fleet implementation, increased market information, additional revenues and growth opportunities. That's it for me. Next in line is Pontus Berg, who will take you through the technical and operational update.

[Pontus Berg, executive]

Thank you, Niels. Thank you, everybody, for dialing in and listening to us. This quarter has been about capturing value for us. On the technical front, with the largest fleet of LPG-powered VLGCs on water, we have been systematically scaling up our intake of LPG as fuel to maximize our earnings by reducing the cost for fuel.

Our engineers are also holding their expertise into our fuel engine management. On the operational front, in Q2, we conducted close to 200 port calls Panama and Suez Canal transits. And the team targets just-in-time arrivals to save bunkers and reduce emissions. A global network of select port agents help minimize turnaround times and maximize commercial availability.

With all the 15 LPG-powered VLGCs now on water, we have been reaping the rewards of our ambitious retrofit project. We have supplied close to 10,000 metric tons of LPG as fuel saving about USD 5.3 million in fuel costs for a fleet. We have also reduced the carbon emissions by just over 15% by using this LPG as fuel.

Our LPG deck tanks, complement existing fuel bunker capacities and provide us with full fuel and cargo flexibility during the operations. We have set up LPG bunker fuel contracts with new and existing partners in most major loading ports.

Being able to lean on decades of operational experience has helped us to reduce the impact of inflationary pressures on the OpEx. For example, we are currently experiencing a 50% escalation in cost on lube oils and almost 40% increase in insurance premiums and consumables.

As Anders earlier mentioned, we are in uncertain times and prices of raw materials are soaring due to widespread restrictions of movement of goods from major producing countries due to the war in Europe and COVID-related lockdowns remaining in Asia. All of this reflect in the current increase seen on our OpEx.

We will continue to do our utmost to keep the OpEx on market-leading levels. However, without compromising on the well-being and safety of our crew and the reliability of the operations. Also, we have ensured that all our crew are fully vaccinated, which not only protect themselves but also their shipmates, terminal employees and surveyors and allow for minimal quarantine requirements during crew release.

That's my short update. So let me now turn over to our CFO, Elaine Ong, who will walk you through the financial positions and results.

[Elaine Ong, executive]

Thanks, Pontus. Let me walk you through some financial highlights from our second quarter. Net profit for the quarter was $39 million, with an EBITDA of $83 million. This translates to an EBITDA margin of 68% for the quarter. At the end of June, our available liquidity was $360 million, with a continued low net leverage ratio of 25%.

Our solid financial position will allow us to withstand any short- to medium-term volatility and to invest in the right opportunities for future growth.

Some key figures to highlight on our balance sheet. This quarter, net outflow from operations was $15 million, largely due to changes in working capital that amounted to $96 million. In brief, $68 million was due to the settlement timing for two LPG toggles that straddled the quarter end and $19 million was a result of higher bunker prices for inventory.

We reported a positive free cash flow of $21 million. This includes $45 million in proceeds from the sale of the BW Liberty in Q2 and $9 million in CapEx spend for our LGIP propulsion retrofitting program, which was completed in May. As previously announced, we received an additional $30 million in new equity from Maas Capital in June, for their further stake in BW LPG India.

From June onwards, BW LPG now owns 52% of our India subsidiary and will continue to consolidate our India results. During the quarter, we also prepaid $268 million of debt and returned $42 million in dividends to our shareholders, with a net leverage ratio of 25% at the end of the quarter, we have declared an interim dividend of $0.20 per share for the second quarter, which translates to a payout ratio of 75% of NPAT.

For 2022, we expect our operating cash breakeven for our total fleet including our chartered-in vessels to be at $22,300 per day. Here on Slide 18 is an update of our financing structure and debt repayment profile. After the voluntary prepayment of $268 million of debt during the quarter, our outstanding bank debt was at $490 million at the end of June.

Our gross debt currently stands at $653 million. This includes $61 million advances drawn from our trade finance lines and $107 million in lease liabilities from our time chartered-in vessels. With a cash balance of $166 million and $194 million undrawn revolving credit facilities, we ended the quarter with $360 million of available liquidity and a net debt of $487 million. On this note, let me open the floor for questions. Back to you, Lisa.

[Lisa Lim, executive]

Thank you, Elaine. We will begin our Q&A session now. [Operator Instructions] We have the first question from Petter Haugen. Please go ahead.

[Petter Haugen, analyst]

This is Petter Haugen from ABG talking. Very interesting these days with the great discrepancies among the different energy carriers. Could you shed some light upon what demand you've seen to -- well, as of today in terms of utility sort of motivated demand for LPG in order to utilize lower price for LPG compared to natural gas.

[Anders Onarheim, executive]

Niels, do you want to have a crack at that?

[Niels Rigault, executive]

Yes. I think it's -- I mean, still early days. I mean, the winter hasn't really started in, for instance, in Europe. But it's clearly that people will tend to go for a cheaper energy. And we have also seen announcements on the petrochemical side that people are looking at different alternatives for instance, using LPG as a fuel.

[Anders Onarheim, executive]

Yes. But I think also it's -- we still see that it's still -- I think the LPG market is still not well understood by all. And I think -- so we're starting to see more inquiries and interest. And of course, I think when -- again, as Niels, says when the winter starts hitting, I think that the search will really, really step up. And we are seeing already industrial players stating they can replace quite a bit of their LNG with LPG. And we think that's something that will continue.

[Petter Haugen, analyst]

Interesting. Another market-related question. We've seen congestion sort of issues starting to solve themselves in many segments. But in the Panama Canal, which, to best my knowledge, has been perhaps the most impactful in the LPG market. My understanding is that there is still substantial congestion. And well, looking for comments and if possible, any foresight on what to expect on the congesting issue, and particularly in Panama for LPG carriers?

[Anders Onarheim, executive]

Niels?

[Niels Rigault, executive]

Yes. No, it's definitely. First of all, it is very volatile, the waiting days, but we anticipate that to continue. I mean currently now I think some of our ships have been waiting on the northbound about 2 weeks to transit. So it's volatile, but the inefficiencies in the Panama Canal is here to stay.

[Petter Haugen, analyst]

A quick follow-up on that. Do you see congestion elsewhere?

[Niels Rigault, executive]

Yes. I mean there are, for instance, in India has been a lot of congestions because they have increased their imports to LPGs. We've seen a lot of inefficiencies on the discharge ports so ships are all waiting. There have also been some -- well, discharge inefficiencies in China. So yes, I would say that inefficiencies, we have experienced the last 24 months, are still there in our statements.

[Lisa Lim, executive]

Thanks, we have Anders Karlsen.

[Anders-Redigh Karlsen, analyst]

Yes. My question goes on the ships that you said were on charter to Vilma Oil. You said there were 5 ships, including one newbuild, I heard. Can you say anything about the duration and what kind of proportion these ships have? And also if there are any purchase options or anything similar linked to the charters?

[Anders Onarheim, executive]

Niels, for you again.

[Niels Rigault, executive]

Yes. I mean there are 5 ships we will take over. They're all on TCE from the 5 ships, one of them is a newbuilding. The duration is everything from 8 years to 2 years. And the proportion, we only see the LPG, while some of them have scrubbers and the rest is compliance fuel. But remember that 3 of the 5 already have TCE attached.

[Lisa Lim, executive]

Thank you. Next, we have Lars Christensen. Lars, if you please?

[Lars Christensen, analyst]

Lars Christensen with Navigare Capital Partners in Copenhagen. On the outlook for 2023, you had two highlights that you mentioned. One was obviously the economic outlook that has a lot of volatility in it these days and the other 1 was the order book. Could you please put some more words on what it is you see with the order book that the order book coming in, how will that be absorbed in the market? And what impact do you believe that's going to have on the open ship dates you have for 2023?

[Anders Onarheim, executive]

I will start, and I'll let Niels also talk. I think if you listen before, we have been somewhat concerned about the order book 2023 in the past, and then we've been trying to voice that quite clearly. I think with -- in the current energy environment, I think we do see and expect higher production particularly from the U.S. and also higher exports. And I think we are seeing that their increased activity should at least, to a great extent, absorb the additional fleet. But of course, we're still cautious because we also know that with the interest rates environment we're seeing, it could hurt the economy and also, of course, energy prices.

So we don't think that we're totally out of the woods, but I think we are more constructive, and we believe that both inefficiencies as Niels talked about and increased activity will lead to more exports and more activity on water. Niels, do you want to add something or?

[Niels Rigault, executive]

Yes. I mean, I said, I mean, the two main hubs, both of them have a quite large export growth going forward. I mean, as I mentioned, U.S. is from 6% and the Middle East 16%. And I have to admit that we just see already now how much LPG is coming up from the Middle East now. So the Middle East is really delivering on the LPG side. And as we discussed a little bit earlier, the inefficiencies will still be there, both on the Panama and on the discharge area. So yes, if you combine everything and also, if you look at the forward market, the FFA market, they also anticipate the market above $30,000 per day. So in our view, even though the order book is large, if we'll see next year will be a good year.

[Lisa Lim, executive]

Next, we have Joe Mars.

[Unknown Analyst]

Just going back to your previous point, can you just explain a bit better and excuse my ignorance, what the applications of natural gas that you think you could substitute into LPG from a price perspective at this ratio, whether that's -- I mean you mentioned utilities, but I assume it's not just utilities, there's also industrial use. If you could just talk about specific kind of use cases that you're seeing?

And the second is, can you just explain in more detail, I mean I understand that, obviously, to increase the exports from both the U.S. and Middle East is a combination of having the product and then also having the facilities. So is this a case where the facilities in terms of the export terminals need to be built out more? Or is it a case that you actually need more output? I mean I'm assuming in the Middle East and the U.S., you have sufficient output. It's just a question of facilities utilization, as you mentioned, can you explain those points?

[Anders Onarheim, executive]

Niels, do you want to?

[Niels Rigault, executive]

I think the first question is LPG versus LNG. I think the main part, we'll see from the retail. I mean, as we mentioned currently, the LPG is 6x cheaper than natural gas. So obviously, if Europe and Asia get kind of a cold winter, it's quite easy to substitute that to use LPG. We also see that, as I also mentioned -- I mean, we do use a lot of LPG. I mean they use as much LPG to spike up the LNG as possible. So they maximize that. So that, obviously, also is demand growth.

And we also see, I mean, the margins were not bad compared to LPG. It's also very favorable. So obviously, the petrochemicals industry using as much LPG to crack compared to naphtha. And then you said about if there is any bottlenecks or concerns of the export terminals. I mean, as I mentioned, maybe the fractionation -- building up more fractionation to get more LPG export.

That is underway. I mean, a lot of the midstream companies have had their earnings release and also mentioned that they will increase the fractionation capacity, which is very positive. So when it comes to the export terms of the U.S., they have still have capacity to increase exports. So we don't see that. And the same thing goes from the Middle East.

[Anders Onarheim, executive]

I just want to -- we don't have any sort of good numbers. I mean, Niels saying spike LNG. But I think we are seeing more and more people talking about it, and that's something that we are going to watch very closely because, obviously, if you can mix in LPG and LNG and to a great extent, if we're given the price differentials, I think that's going to be quite interesting also.

[Lisa Lim, executive]

[Operator Instructions] We have one question from Desmond [indiscernible].

[Unknown Analyst]

Private investor from the United States. My question really quickly. I'm very pleased with the voluntary debt payments. Do you expect these voluntary debt payments to continue? And is there a specific target that you're looking to meet with the pros debt?

[Anders Onarheim, executive]

Elaine, do you want to answer that?

[Elaine Ong, executive]

I don't think these voluntary debt payments are going to continue indefinitely because a lot of our facilities now are predominantly term loan facilities that have scheduled repayment schedules. And also with the rising interest rate environment, I think it would be prudent not to be too aggressive in paying off the debt that we have, which are quite attractively priced.

[Lisa Lim, executive]

Okay. Next, we have again Joe Benjomars.

[Unknown Analyst]

Yes. Sorry, just a follow-up. And again, I recognize it's very hard to historically find any parallel to the current situation. So normally, in the energy business, everyone tries to find the historical parallel, it's a bit hard.

So I guess what I just don't understand is the capability of the various equipment to be able to take -- I mean I can certainly understand in the United States, where the natural gas -- you generally have LPG within the natural gas, so the whole system is built up to basically fractionate, but you can clearly keep it in. There's a whole economic discussion of whether you keep the liquids in or you split them.

I just wasn't aware I guess, in the U.K., historically, there has been a fair amount of natural gas liquids produced out of the North Sea or I guess in Norway and New Zealand and other countries that use North Sea gas. Is that where you would think the majority of the capability would be to basically take more LPG?

Because it seems like if you built a system in Norway or the U.K. or maybe Denmark, historically, you had a lot of natural gas liquids just coming out of the North Sea that you were taking advantage of in your industrial system that probably has those systems ran down you didn't -- you don't have as much LPG. So is that where you would see the sort of demand source, if you will, for the marginal equipment that could switch?

[Anders Onarheim, executive]

I mean, I think I'm not going to dare to give you a clear answer on that because I think we are still also investigating it. As we sort of move further into the value chain, we're also learning quite a bit. Obviously, so far, we've been basically shipping it from A to B, and we've been happy with that. And certainly, in Norway, I don't think it's going to happen even though we have here tough discussions at the moment because we're sending all our electricity out of the country, but I don't think this is going to happen here. U.K. might be a market.

I think also on the continent. I would expect that more will look for opportunities and to see. And I think we -- again, we're going to be humble enough to say we don't know enough about that, but we're going to certainly try to -- and also now with the Vilma team coming on board, that we're certainly going to try to be better at understanding that and taking advantage of it.

But I think also what Niels said, I mean the -- where I think the real potential is. I mean there are many parts of the world where they're not as in -- they don't have the infrastructure and they're not into the green shift like we're in many other places. And I think that's also where we, as a world, we need to find solutions also for those places. So I guess we just think that gravity works.

And if something -- a product as clean and as efficient as LPG, if it remains that much cheaper, we do believe that it's going to be a -- we're going to see increased demand and also substitution effects. But again, I'm sorry, I can't be more specific because I really don't know.

[Unknown Analyst]

No, no. I mean the logic is 100% true. It's just always -- it's always a path, which is the challenge, but I guess we'll see in the coming quarters how it all shakes out. But thanks for your help.

[Anders Onarheim, executive]

At least we'll do our best to get you better and better answers.

[Lisa Lim, executive]

Okay. There are being no further questions, we have come to the end of today's presentation. Thank you for attending BW LPG's Second Quarter 2020 Financial Results Presentation. More information on BW LPG is available on our website. Have a good day and a good night.