BW LPG Ltd

OSE:BWLPG

Earnings Call Analysis

BW LPG Reports Strong Q3 2023 Results

BW LPG's Q3 2023 results are marked by a record-high average daily TCE of $63,100 and a net profit after tax of $22 million, or $0.85 EPS, despite a $24 million downward IFRS adjustment. Investors are rewarded with a substantial $0.80 dividend per share, equating to a 23% annualized yield. Strong U.S. exports, Middle East growth, Chinese PDH plant development, disruptions in the Panama Canal prolonging voyages, and a positive VLGC freight market forecast contribute to the optimism. BW LPG's payouts since IPO have led to a 28% annual return for reinvested dividends. Product services report a $12 million increase to a $44 million net asset value, reflecting a robust 12-month forward freight market for VLGCs.

Historic Dividend Performance and Investor Returns

Investors in the company have seen significant returns, with the share price providing a robust 28% annual return when dividends are reinvested back into the company's shares over the past decade.

Robust VLGC Segment Performance amid Macros and Geopolitics

Despite challenges posed by complex geopolitical and macroeconomic landscapes, the company's VLGC segment achieved historic highs in 2023, with a substantial third-quarter increase of 30% across all rate indexes. This growth was primarily driven by high import volumes to China and active trade between the U.S. and the Far East.

Operational Disruptions and Panama Canal Impacts

Operational disruptions, particularly at the Panama Canal due to low water levels, have led to restrictions on transits and could result in a 50% increase in sailing days for fleets operating between the U.S. and the East, further affecting spot rates but also increasing costs for owners and traders.

Positive Market Outlook with New Vessels Delivery

The supply-demand model forecasts a promising future for the VLGC market, with a majority of the new VLGCs scheduled for delivery already completed. The company anticipates growth in LPG exports from North America and the Middle East, although rate fluctuations remain unpredictable.

Solid Financial Performance and Strategic Hedging

Financial outcomes for the third quarter show a robust net profit of $122 million, driven by strong performance across the core shipping and product services segments. With earnings per share at $0.85 and a declared Q3 dividend of 80% per share, the company continues to yield value for shareholders. Additionally, significant parts of the fleet are fixed under time charter equivalent (TCE) contracts, with the average rates and profit for the upcoming year already secured, as well as hedging strategies in place to mitigate risk.

Conclusion of the Earnings Call

The earnings call wrapped up without further questions, highlighting the company's transparent communication and available resources for additional information on their financial results and services.

Earnings Call Transcript 2023-Q3

[Lisa Lim, executive]

Welcome to BW LPG's Third Quarter 2023 Financial Results Presentation. Bringing you through the presentation today are CEO, Kristian Sorensen; CFO, Samantha Xu; and EVP, Niels Rigault.

[Operator Instructions] Before we begin, we wish to highlight the legal disclaimers shown on the current slide. This presentation, held on Zoom is also recorded. I now turn the call over to Kristian.

[Kristian Sørensen, executive]

Thank you, and hello, everyone, and welcome to our Q3 earnings release. I'm happy to be joined today by our CFO, Samantha, and our Head of Commercial Niels.

To start off with the highlights, we are pleased to report our highest historical daily TCE at an average of $63,100 per available day. We reported net profit after tax of $22 million, equivalent to earnings per share of $0.85. This is after a downward IFRS adjustment of $24 million. For the third quarter, we are also pleased to announce a dividend of $0.80 per share, which translates into an annualized yield of 23%.

Due to the requirements in connection with our U.S. listing process, we can no longer refer to non-IFRS terms like trading profit for Product Services results or in our dividend policy. And the revision of the dividend policy was necessary since last quarter. Like previously, the revised dividend policy will still be based on the shipping performance and the net profit after tax generated by the shipping segment, while also adjusting for product services performance, cash and capital requirements.

We're happy to answer any questions after the presentation regarding the dividend policy. For the third quarter, 100% dividend payout is sourced from our shipping earnings with an upward adjustment of $0.02 and moving over to subsequent events for the quarter. BW Tokyo is delivered to BW LPG this month after exercising an attractive purchase option earlier this year. The vessel will be on a 6-year time charter starting in Q1, securing a return of capital employed of approximately 18% over the time shorter period.

In addition, we're pleased to announce that we have entered into an agreement to sell the BW Princess with delivery first quarter next year. The sale is expected to generate approximately $64 million in liquidity and a net book gain of $20 million.

Further, we're also increasing our operated VLGC fleet which will expand to 45 vessels as China Gas is joining the pool in the fourth quarter by adding on LPG dual fuel vessel. And then looking at our market outlook, we reiterate our positive view for 2023 and 2024, although high volatility remains. And the key reasons for this include energy prices that are conducive to continued strong U.S. exports and steady export growth for the Middle East. Further, new PDH plants, which are coming on stream in China, supporting the demand side of the market, and we also see continued growth in the residential sector in the developing world.

We also see delivery of LDCs to slow down after the summer of '24, and shipyards are booked until first half of 2027. And of course, the much talked about disruptions in the Panama Canal that will continue to absorb capacity from the VLGC fleet. We have recently experienced how ongoing challenges relating to low water levels and persistent drought conditions lead to further restrictions on Canal transits. As mentioned in the earlier presentations, have lower priority than LNG carriers and container vessels, forcing them to sell alternative longer voyages from the U.S. to Asia, via Suez or South Africa. And these longer hauls extend the selling days by up to 50%.

While the factors mentioned above, paid a positive picture for the VLGC shipping market, it's also important to remind ourselves that things can change quickly. We are watchful of the current uncertain macroeconomic environment and how much this can impact the current strong market environment. Those are the highlights.

Next slide, please. Under the current partly conditions, the VLGC sector is generating a dividend potential, which is unprecedented for the segments. Depending on the view of the markets, we have simulated and illustrated the dividend deal potential in this slide. We're also pleased to have returned more than 70% of our earnings and dividends since the IPO 10 years ago. Based on the current share price, we have a 28% annual return to our investors if you had reinvested the dividends in the share during the same period.

And with that, I'll hand it over to Niels to cover the commercial slides.

[Niels Rigault, executive]

Thank you, Kristian, and hello, hello to everyone listening. I'd like to turn the focus to Slide 8 in our presentation. Predicting the future is always complex. Particularly when macroeconomics, geopolitics and climate issues are raised at the same time, shadowing an effect-based logical forecast as we experienced this year. 2023 has proven surprisingly robust for the VLGC segment, making a historic high. In the third quarter alone, we witnessed a remarkable 30% increases across all rate indexes, largely driven by sustained high import volumes to China and the widening of the [ range ] between the U.S. and Far East had also incurs active trading between the regions.

As Kristian mentioned, a major point of discussion is the Panama Canal. We have observed significant impacts on spot rates due to operational disruptions. At the end of the second quarter, the main reservoir of the canal experienced critical low water levels. Sequent lack of seasonal rainfall lead the canal authority to limit transits for serving water resources. This limitation on the [ LSG ] transits -- as mentioned, Kristian could result into a 50% increase in sailing days for the fleet trading between U.S. and the East. However, it is crucial to note that the inefficiencies leading to the high rates also translates into increased costs for owners and traders, and burden not easily passed on to the end users.

Looking forward, our supply-demand model suggest a positive outlook for the VLGC market. Of the 43 VLGC new building scheduled for the delivery this year, 75% have already been delivered. We anticipate further growth in the ops export from North America and the Middle East. However, it's important to recognize that several unpredictable factors could significantly influence rate fluctuations as we saw in 2023.

Moving on to Slide 11. Our fleet composition remains robust with 4 to 5 VLGCs despite active sales. As Kristian mentioned, we finalized the sale on other ship this quarter at record levels scheduled for delivery at the end of the first quarter next year.

In addition, we are pleased to welcome Sino Gas to our pool contributing to the first dual fuel ship of contributing the first new full ship in the fourth quarter of this year. Their addition underscores the benefits of scale in this volatile market.

Let's move to Slide 13. Our time charter equivalent performance for the third quarter was $63,100 per day for the entire fleet. This figure includes fixed time charters and derivative hedges. The spot fleet achieved a TCE of 81,300 per day excluding waiting days. Given the current market volatility we remain focused on optimal managing our risk. For the fourth quarter, around 79% of our available days are fixed at an average of 73,000 per day. Our spot rate currently stands at 104,000 per day, and we expect a strong final earnings for Q4, reflecting the exceptional hot spot market.

For '24, 90% of our fleet is already fixed under TCE with an average daily rate of [ 41,300 ]. We have balanced our TCE in and out commitments in '24, securing a $23 million profit. Additionally, 30% of our days are hedged with derivatives at an average TCE of 59,000 per day. Before handing over to Samantha for the financial overview, I'd like to provide a brief update from Product Services.

In 2023, they have handled approximately 7 million tonnes of physical LPG and about 20 million tonnes of derivatives. Next year, we anticipate a 30% increase in volumes. They have expanded into the midsized space, securing 2 TCEs, allowing us to tap into the new market beyond the VLGC segment.

On FOB product contracts, we have renewed our U.S. Gulf equity commitment, but also secured a term contract in the Middle East, diversifying our exposure and mitigating Panama Canal risk.

Now I'll pass the microphone to Samantha for a closer look at our financials.

[Samantha Xu, executive]

Thank you, Niels, and hello to everyone on the call. So let me continue to add some color to the product services performance. The net asset value of product services increased by $12 million to $44 million at the end of September. This $12 million net profit comprised $34 million realized gain from trading operations and $22 million unrealized mark-to-market losses from cargo contracts and hedging derivatives. This reported net profit does not include the unrealized mark-to-market valuation of our 5 TCE vessels. Our internal valuation of these TCE contracts at the end of September was $65 million. This positive value reflects the continued strong development in a 12-month forward freight market for VLGCs, which is the period we used to evaluate 3 positions in product services.

As you can see, the value at risk bar is relatively stable, and the portfolio is well balanced between cargoes, shipping and derivatives from a trading book perspective. We continue to see good collaboration and synergy between product services and our shipping business through improved information flow, optionality and enlarged footprint while focusing on profit. Product Services are also progressing in expanding their fiscal presence in key markets as we aim to broaden the platform and trading portfolio.

Next slide, please. Starting with the income statement. On a consolidated basis, for the third quarter, we reported a net profit after tax of $122 million. This includes $16 million profit from LPG India and $12 million in profit from product services. The net profit also included a downward adjustment of $24 million related to IFRS 15 adjustment, as Kristian has just mentioned. This is because the TCE for the straddling that voyages over the quarter end is recognized on the low to discharge basis. We expect that IFRS 15 adjustments will increase in future periods if freight rates continue to increase from the current level and if the total voyage days increase as the Panama Canal restriction persists. We reported an earnings per share of $0.85 this quarter, the majority of which was contributed by our core shipping segment of approximately 78%.

We reported a net leverage ratio of 22% in Q3. This was due to a heightened working capital requirement from increased product services activities. The Board declared a Q3 dividend of 80% per share, which represents 103% paydown of Q3 and year-to-date shipping NPAT. Our balance sheet ended the quarter with shareholders' equity [ $152 million. ] When adjusting for $480 million excess in broker valuation over book value, we reached an adjusted and per share of NOK 150, an uplift from book value of about $3 per share after adjusting for minority interest in BW India and product services. Our positive free cash flow of $75 million this quarter was derived mainly from our strong operating cash flows, but offset by a buildup in working capital. Our return on equity and capital employed for Q3 was 32% and 24%, respectively.

Next, we move on to some key statistics on our shipping business. Our daily OpEx came in at $8,500 per day, mainly due to higher maintenance and repair expenses. For 2023, we expect our operating cash breakeven for our own fleet to be about $18,600 per day. This is $500 per day lower than our Q2 report, driven by early repayment for debt.

Coming to Slide 16, it provides a summary of our liquidity and financing structure. On a consolidated basis, we ended the quarter with close to $0.5 billion in liquidity. Including $190 million of available cash after netting of $110 million held in broker margin accounts and $196 million in undrawn revolving credit facilities.

As of the end of September, ship financing debt outstanding was reduced to $326 million, this follows a $110 million repayment of a revolving facility after conversion from term loan. These initiatives align with our strategy to reduce that cost and maintain funding flexibility.

On the trade financing side, $172 million or 26% of our current $660 million line have been utilized with $86 million related to advances tonne and another $86 million in left credit issuance, leaving a healthy headroom for growth. We remain on track to expand our lending group further and up our trade financing line to $800 million.

For perspective, these limits will allow us to trade up to 8 million tonnes of physical LPG per annum from the U.S. to the Far East under current market conditions. On this note, let me open the floor for questions. Back to you, Lisa.

[Lisa Lim, executive]

Thank you, Samantha. We will begin our Q&A session now.

[Kristian Sørensen, executive]

So with no further questions. I think we can round up the session and thank everyone for dialing in and listening to us this time. Thank you.

[Lisa Lim, executive]

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