BW LPG Ltd

OSE:BWLPG

Earnings Call Transcript 2021-Q3

[Lisa Lim, Head of Corporate Communications]

Welcome to BW LPG's Third Quarter 2021 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. [Operator Instructions]Before we begin, we wish to highlight the legal disclaimers in the next slide. Again, we wish to highlight the legal disclaimer shown in the current slide. This presentation held on Zoom is also recorded. I now turn the call over to BW LPG's CEO, Anders Onarheim.

[Anders Onarheim, Chief Executive Officer]

Thank you, Lisa, and welcome to our third quarter results for the period ending 30 September 2021. As always, I am joined by Elaine, Niels and Pontus. Finally, the leadership team and I are on the road this quarter. We will be speaking from various corners of the world: me back in Oslo, Elaine from Frankfurt, Niels and Pontus in Singapore. And we certainly look forward to meeting our investors and business and bank partners face-to-face very soon. While we see a gradual easing of COVID-related restrictions around the world, operations remain challenged. We also continue to insist on strict measures to protect crew and staff from COVID-19 also going forward. On the business and commercial fronts, the third quarter allowed us to again deliver decent returns and we remain optimistic for the rest of the year, and we think will provide another good year for returns from BW LPG. We turn to Slide 4. The shipping industry is really at a crossroads, and ship owners must plan the next steps carefully. Our decisions cannot only cater to short-term market investor demands but must also accommodate long-term developments in technology and regulations. At BW LPG, we strive to maximize the return on our assets. And one important way we are doing so is through focusing on technology. The pioneering LPG propulsion technology now powers 10 of our VLGCs. This is the world's largest fleet of lower emission VLGCs.And let me remind you, LPG has the lowest greenhouse gas emissions profile of any carbon-based fuel. With LPG, we benefit from a 17% decline in CO2 emissions versus MDO. And by retrofitting, we save over 1 million tons in CO2 emissions versus ordering newbuilds. With 10 vessels on water, 2 at yards and over 10,000 hours in operation, we have proved that the LPG propulsion technology works. Our program to retrofit 15 of our VLGCs with this technology will be completed in the first half of 2022. We also continue to invest in digitalization. SMARTship technology onboard our ships enables real-time data transfers between ship and shore. And together with other initiatives, such as smart weather routing, reduce fuel consumption, which not only means lesser emissions, but also greater savings. Slide 5. So in the third quarter, we reported $27,800 per day for our VLGCs, for the VLGC fleet per calendar days. Importantly to note though, we had 8% planned off-hire on our fleet. This was driven primarily by our LPG dual-fuel retrofit program. Commercially, we achieved $30,100 per available day with consistently high commercial utilization of 98%. This performance translated to a net profit after tax of $29 million and an earnings per share of $0.20. And for the third quarter, we will be distributing a dividend of $0.10 per share amounting to a total of $14 million.Before we move to the highlights of the quarter, I'd like to again stress that our focus is to ensure the best long-term returns for our shareholders. This strategy includes optimizing the returns on our assets through LPG propulsion retrofits, buying and selling vessels opportunistically, having a strong balance sheet and utilizing technology to optimize [ voice ] returns. And we do walk the talk. We've been strengthening our financial position and deleveraging our balance sheet since 2020, including $256 million of undrawn resolving -- revolving credit facility, $127 million of cash. Our available liquidity is at $383 million with the lowest net leverage ratio in 7 years at 36%. This strong balance sheet prepares us for all kinds of market conditions and allows us to participate in sizable and attractive investments in the LPG value chain when we identify good opportunities.Our retrofit program remains on track. We have retrofitted for the 2 vessels this quarter with LPG dual-fuel propulsion, bringing the total to 10 vessels on water. We continue to embrace technology in shipping and have fitted 3 more vessels with SMARTship technology, bringing the total now to 20 vessels.This technology, together with active weather routing, has given us fleet-wise fuel savings of approximately $1.5 million so far this year.Since 2020, we have been divesting our less economic and efficient vessels at very attractive levels and well above newbuild equivalent prices. During the quarter, we have included the sale and delivery of BW Confidence in July and BW Boss and BW Energy in August, generating $81 million in liquidity and a net gain of $9 million. Lastly, we have exercised the purchase option on Yuricosmos in August, now named BW Niigata. This transaction has generated an expected 8% return on capital, and again, on right-of-use assets of $3 million.These asset transactions are an integral part of our strategy. In order to provide healthy returns over a cycle, we need to deliver steady operations and sound commercial decisions. Thus, we find it highly rational to sell our least favorable assets at prices at or above NAV, while the stock market is valuing these assets at more than a 40% discount.Looking at the market, we expect healthy TCE rates for Q4 2021, comfortably above cash breakeven. This is supported by continued growth in U.S. exports, recovering volumes of the Middle East, strong and stable end-user demand as well as increasing shipping inefficiency primarily in the Panama Canal. We also continue to be optimistic for the next year. As we look towards 2023, we reiterate the sustained export growth of U.S. LPG and no further newbuilds are key to bring about a balanced market.Let's quickly go to key financials on Slide 6. The VLGC market held relatively steady during 3Q compared to the preceding quarter. We generated an annualized return on equity of 9%, and our annualized return on capital employed came in at 7%. Year-to-date 2021 we delivered a return on equity of 13% and a 9% return on capital employed. Our operational and free cash flows remain healthy at $63 million and $106 million, respectively, for the quarter, giving us good flexibility and enabling us to continue to return cash to our shareholders.As highlighted earlier, our net leverage ratio continued down from 40% at the end of the second quarter to now 36% at the end of Q3, the lowest in 7 years. Next up, Niels will take you through the market review and commercial update. Niels?

[Niels Rigault, Executive Vice President of Commercial]

Thank you, Anders. Good morning and afternoon to all of you. On Slide 8, we are sharing our view of the market. Currently, the market is robust, and we expect rates to continue to firm up. This is driven by strong fundamentals such as winter heating demand in Asia and increasing shipping inefficiencies, especially for the Panama Canal. Last on fixture we did for December lifting out of the U.S. with discharge into Asia, gives a run rate above $40,000 per day. We have fixed approximately 80% of our Q4 available fleet sales at an average rate of $32,000 per day on a discharge-to-discharge basis.As Anders said, we continue to be optimistic for next year. The current high oil and gas prices will support stronger production growth out of both U.S. and the Middle East. The shipping efficiencies will continue to support the [ total ] demand, offset vessel supply and add market volatility. Today, we have seen the Panama Canal waiting days increasing to more than 1 month for both ways, and we believe the congestion in the Panama Canal will become the new norm. As a result, we expect more traffic around Cape of Good Hope for the U.S. products to Asia.Turning to Slide 9, and talk about the seaborne LPG trade overview. Driven by high oil and gas prices, we continue to see a recovery in U.S. upstream activity. North American LPG exports have increased by 16% year-over-year. The strong exports despite the high LPG prices continue to illustrate the strength of the LPG import demand. Despite falling petrochemical margins, China LPG imports recovered strongly by 30%. China is set to drive the most meaningful LPG demand growth moving forward. There are 21 PDH development scheduled from '21 to '24 in China. Those plants will generate over 12 million tons of incremental import demand per year. Retail demand into India continues to grow and the LPG import has increased by 20%. Significant infrastructure investments have taken place in India to encourage high levels of imports, such as new pipelines, port expansions and storage facilities. Furthermore, the country is expanding into petrochemical segment with PDH plant investment. This will unlock tremendous potential import demand growth for the petrochemical sectors in India. Turning to Slide 10. As you can see on Slide 10, we have the EIA short-term energy outlook released in November. The forecast for U.S. LPG exports will remain high for '22, production growth by 6% compared to 4.1% in '21.Let's turn to Slide 11, the VLGC fleet profile. So 7 more vessels are expected to be delivered from '23 to '24 compared to last quarterly update. This includes 19 in '22, 42 in '23 and another 8 in '24. We have no newbuild orders, but we have the largest fleet of LPG propulsion vessels ready by Q1 next year. We continue to upload some of our non-LPG propulsion [ ladies ] at good premium to book values and in line with brokerage valuations. These transactions crystalize the values for our shareholders as our current share price is trading more than 40% discount to our book value at USD 9.4 per share.Turning to Slide 13, and talk about our commercial performance. Despite the 50% increase in bunker costs compared to only 4.5% increase in freight, we have achieved a commercial result of $30,100 per available day with a strong commercial utilization of 98%. This is approximately 20% above the average [ voltage rate Ras Tanura to Chiba ]. Our TCE per calendar day came in at $27,800, and the result was mainly impacted by having 8% of off-hires. We decided to bring forward our drydock LPG conversions, so we can enjoy more available saving days next year when we anticipate a stronger market.Turning to Slide 14 and talk a little bit about our time charter portfolio. During the quarter, we have renewed 3 time charters contracts in our Indian subsidiary for 2 years at an average gross GCE rate of mid $30,000 per day. Our time charter-out revenues for '22 now stands at $75 million with an average TC-out rate of $33,100 per day. Our TC-in costs remain low at $26,100 per day. As of today, we're happy with our spot exposure for next year. That's it for me, and Pontus Berg will take you through the technical update.

[Pontus Berg]

Thank you very much, Niels. Turning to Slide 15, please. Anders has earlier mentioned that to date, we have actually 11 LPG-powered releases serving our customers with the lowest greenhouse gas emission profile in the sector in the water. BW Freyja is currently undergoing sea trials following her conversion. She is expected to be redelivered to commercial by the end of next week, and she will thus be #12. The 3 final vessels in the retrofitting program are planned for conversion during Q1 next year.Furthermore, we have 5 vessels due for normal drydock, where the majority are scheduled in the second half of '22. In total, we estimate 290 days of planned off-hire due to scheduled drydocks in 2022. As we progress our retrofitting program, we also continue to invest resources to answer the question of what's next? Our engineering and innovation teams are busy working on the task. And in an uncertain future, our next-generation VLGCs must comply with long-term trends in emission regulations and yet make business sense in the short term. We remain convinced that LPG propulsion is part of the solution as we wait for technologies to progress and for alternative fuel supplies to mature and reach the scale needed to make economic sense.In the meantime, we are exploring hydrogen, batteries, rotor sails and ammonia as alternative fuel sources. We continue to optimize our assets and operations by looking at how we can improve hardware, systems and designs. We are also exploring the feasibility of carbon capture onboard for future compliance requirements. As we explore what is next in terms of technology and design, we are also making good progress with digitalization of our fleet. Over 50% of our ships are now connected to Alpha-Ori SMARTship system, sharing real-time data with our offices. This allows for better and more efficient support to our teams at sea. With better data, we provide better support and improve our operational performance. This translates to real savings for our business. For example, we have saved over -- nearly 2,500 metric tons of fuel since January by usage of active weather and voyage routing.Now on our crew. We continue to navigate operational challenges from COVID-19, to mitigate complexities in embarking and disembarking crew as well as with port cost, we focused on getting our cruise vaccinated. Having fully vaccinated crew onboard reduces time spent in quarantine, minimizes vessel delays and helps protect our team members, both at sea and onshore. We now have 12 fully vaccinated ships and approximately 85% of the total crew who vaccinated.Finally, on OpEx. We continue to maintain market-leading OpEx trends for our fleet. We see this as an important priority and business practice despite unprecedented global challenges to our operations. However, our vessel operating expenses came in higher than normal this quarter at $8,400 per day. This was due to incremental manning and logistic costs incurred due to pandemic. Now let me turn over to Elaine, who will walk you through the projected fleet CapEx in our fleet positions and results.

[Elaine Ong, Chief Financial Officer]

Thanks, Pontus. Let me just begin with a few comments on the table on this slide. Thus far this year, we have spent $89 million on fleet upgrades. This relates to the retrofitting of 9 dual-fuel propulsion engines as well as installations of ballast water treatment systems and SMARTship technology onto our vessels. We plan to spend a further $31 million on these fleet upgrades in 2022, of which the remaining 3 retrofits will be financed by new debt. The remaining capital expenditures relate to the regular scheduled maintenance on our vessels.Let me now provide a few highlights on our income statement here where we reported $29 million in net profit this quarter. Our TCE income was $105 million for the quarter. Similar to the previous quarter, we have a higher-than-usual plan off-hire with 4 of our vessels at the yard undergoing LPG propulsion retrofits. The TCE number includes a net positive impact of $1 million related to the effects of IFRS 15, which is an adjustment to the guided TCE that we provided earlier on a discharge-to-discharge basis. Vessel OpEx was $8,400 per day, which was explained earlier by Pontus. We concluded the sale of 3 vessels during the quarter, realizing a net gain of $8.7 million. The vessels were delivered to its new owners for further trading in July and August. We also exercised the purchase option for the Yuricosmos in August, reporting a $2.5 million gain, which represents the difference between the lease asset and lease liability on our balance sheet.Page 17 provides a snapshot of our balance sheet and cash flow statement. On our balance sheet, we ended the quarter with $127 million of cash and $1.8 billion in vessel book values. We also had $1.3 billion in shareholders' equity at the end of the quarter, which translates to $9.35 per share. Our operating cash breakeven for 2021 is at $22,200 per day. And at the end of September, our available liquidity is at $383 million, with our net leverage ratio at its lowest level in 7 years at 36%. Our net debt position at the end of the quarter was $765 million, and we will have no major balloon payments due in the next 5 years.Lastly, let me provide a quick update on our financing. We are in the documentation stage for the financing of the remaining LPG retrofits, which we expect to close by year-end. On this note, I would like to open up the call for questions.

[Lisa Lim, Head of Corporate Communications]

[Operator Instructions] We have a question from Brian Reynolds.

[Brian Patrick Reynolds, Analyst]

Looking ahead towards the uncertainty in 2023 just around the regulatory environment, just kind of curious if there was an initial view on what we would need to see from scrapping, lower steam rates and Canal congestion to help offset the newbuilds expected to come online in 2023. Any initial thoughts would be helpful.

[Anders Onarheim, Chief Executive Officer]

Niels, maybe you should take that.

[Niels Rigault, Executive Vice President of Commercial]

Yes. I mean it was several inefficiencies coming up. But in '23, the new EEXI regulations will take place where we are currently calculating that about 50% of the fleet will need to reduce speed. The other inefficiency will be the Panama Canal, right. Today, or this -- what we have been so far is that it's possible to book the slots 6 months in advance. That would not be possible from next year. And we can already see today that there are more than 1 month waiting to go north or south from the Panama today. I think that the majority of the inefficiencies we see which could offset some of the newbuildings.

[Anders Onarheim, Chief Executive Officer]

And I guess, Niels, when it comes to scrapping, I mean, we've always been conservative, I think, in estimating and scrapping. But there's no question that as we head towards '23, there will be, I think, some ship owners' time to make some tough decisions because clearly, some of the older assets will be very hard to deploy.

[Niels Rigault, Executive Vice President of Commercial]

Yes, you're right. I mean there hasn't been any VLGCs sent for demolition since 2018. And if you look at the fleet profile, more than 10% of the fleet will be 28 and older. So yes, definitely.

[Brian Patrick Reynolds, Analyst]

Great. Appreciate that color. And maybe just staying on the theme of YMO 2023, and towards next week's MEPC 77 meeting. Just kind of curious, it sounds like you guys are trying to set yourself up to be compliant for any type of new regulations. But from a carbon tax perspective, I know $100 per metric ton has been tossed around as the right number to spur investment and no carbon propulsion systems. Just kind of curious if you have a thought around what the right number is and how BW LPG is kind of situated for that number or anything, either higher or lower?

[Anders Onarheim, Chief Executive Officer]

I don't think we have a number that we want to share or have. I've seen our Chairman have commented around that in other floors. But I think clearly, we are prepared for there to be some taxes coming on this. And I think that's also why I think you're seeing that we are -- we're both very -- still very focused and committed to our LPG retrofitting program. We are also, as you see, we've been selling some of our least efficient vessels. And so I think we are really preparing ourselves for that. And of course, that's also the reason why we, again, also have strengthened our balance sheet. We want to be prepared for various scenarios. But again, I don't have a number that I could share. I mean we would discuss some internally, but we do not have a number that we'd like to put out there.

[Brian Patrick Reynolds, Analyst]

I appreciate it. And maybe just as a quick follow-up on capital allocation as we go ahead into 2022. I know you guys have been pretty consistent with the historical payout ratio around 50%. And just given with leverage dipping low 2x and much of the retrofit program kind of ending, just kind of curious how we should think about capital allocation into 2022? Or just given the regulatory uncertainty, if you guys would like to keep a little bit more cash on the balance sheet just to make any future potential capital investments? And that's it for me.

[Anders Onarheim, Chief Executive Officer]

No, I think it's a valid question. It's clearly there's something that the Board is also asking us the same thing. Again, clearly, we -- given both the uncertainty, but given also the fact that we think there will be some quite interesting developments on everything from engines to fuels to even ship designs in the next several years, we at least -- we probably want to keep a little bit extra on the balance sheet. At the same time, it will come to a point where we will have to really consider if there are other good ways to deploy that capital also.As Niels mentioned, we are also looking at certain parts of the value chain outside just pure shipping because -- and we've seen already that our product services area has given us a lot of good insight into more of the value chain. So we are actively looking for investments. And if you find the right ones, we will definitely execute.

[Lisa Lim, Head of Corporate Communications]

We have 2 questions from the chat box. The first question, with high LPG prices, are you currently running vessels on LPG? And the second question, are you seeing any demand for time charters at present time? And if so, at what level?

[Anders Onarheim, Chief Executive Officer]

Yes. Again, I -- Niels, maybe you can take that, unless Pontus wants to talk about what we're running the ships on at the moment?

[Niels Rigault, Executive Vice President of Commercial]

At the moment, as we have said that the LPG prices are quite high due to the high demand for LPG. So currently, it's -- we are burning compliant fuel for our ships. And we also see that the propane prices compared to WTI is going down. So as soon as it makes economically sensible, switch back to LPG.

[Pontus Berg]

I should also add that we are actually running a few ships on LPG still because with our play with Epic Gas and saving our heel and actually accumulating LPG from before going into the retrofitting. We still have some E left, which we are using as fuel right now.

[Anders Onarheim, Chief Executive Officer]

Yes. And also Pontus and Niels, I guess, we also still have one ship on the TC going on LPG, the first ship retrofitted.

[Pontus Berg]

Generally, yes, correct.

[Anders Onarheim, Chief Executive Officer]

Yes. So we're getting still very good valuable experience, even though economically right now, it's better to go in compliantly.

[Lisa Lim, Head of Corporate Communications]

[Operator Instructions] Okay. We do have a question. Are you seeing any demand for term charters at present time? And if so, at what level?

[Anders Onarheim, Chief Executive Officer]

That's for you, Niels.

[Niels Rigault, Executive Vice President of Commercial]

Okay. Yes, we do see demand for time charters. Lately, there's been the Indian PSUs, oil majors, been very active on the time charter front. And there's been several fixed for 2 years. And as I mentioned during the call, we have just fixed [ treaty ] for 2 years at mid $30,000 per day. And we do see that the market is improving. And if you just look at the FFA for '22, the market is -- are expecting the rate to be around mid-30s. I think that's...

[Lisa Lim, Head of Corporate Communications]

[Operator Instructions]

[Anders Onarheim, Chief Executive Officer]

Okay. If there are no more questions, then I would just like to thank everybody for calling in, and we appreciate your interest. Thank you very much.

[Lisa Lim, Head of Corporate Communications]

We have come to the end of today's presentation. Thank you for attending BW LPG's Third Quarter 2021 Financial Results Presentation. More information on BW LPG is available online at www.bwlpg.com. Have a good day and good night.