BW LPG Ltd

OSE:BWLPG

Earnings Call Analysis

BW LPG Posts Record Annual Profit, Expands Fleet

BW LPG recorded their highest ever annual net profit after-tax of $493 million, ending Q4 with $162 million. The strong financial results led to a $0.90 per share dividend, culminating in a 98% payout ratio for the year with a generous yield of 28%. Despite a 90% drop in spot rates at the start of 2024, the company's outlook remains positive, forecasting VLGC rates of $50,000 to $60,000 per day for the second half. They plan to dual list in New York, potentially increasing investor interest and share liquidity. Furthermore, a strategic move into the Indian LPG market through a joint venture and an 8.5% stake in Confidence Petroleum was announced.

Robust Financial Position and Shareholder Returns

The company ended the year in a strong financial position, with a significant liquidity of $0.5 billion, comprising both cash on hand and undrawn credit facilities. With a conservative net leverage ratio of 21%, the company is well-positioned to meet its obligations, as there are no major debt repayments due until the year 2026. This financial prudence has translated into considerable returns for shareholders, as evidenced by the generous dividend declaration totaling $3.46 per share for the year 2023, representing an impressive 98% payout ratio and a high dividend yield of 28%. Additionally, the company maintains a disciplined dividend policy with a threshold based on its net leverage, aiming at a payout ratio of 75% of the Shipping segment's NPAT when the net leverage is between 20% and 30%.

Operational Excellence and Revenue Assurance

Despite marginally higher daily operating expenses (OpEx) of $8,200 due to maintenance and repair costs, the company expects a decrease in the operating cash breakeven for its owned fleet to about $17,600 per day in 2024, down from previous estimates. This is partly attributed to early debt repayment measures. Looking into the future, around 83% of the company's available days in the first quarter are fixed at a favorable average rate of $55,000 per day, which is expected to offset a temporary dip in January's spot rates and help recover ballast costs in subsequent quarters. Additionally, 23% of the fleet for the year 2024 is already on a time charter with an average daily rate of $41,500, further establishing a $23 million in profit from balanced time charter commitments.

Positive Market Outlook Amidst Sector Dynamics

The company has observed some macroeconomic and sector-specific challenges, such as fluctuations in export markets and changes in Panama Canal transits affecting shipping rates. However, strong U.S. exports and fleet inefficiencies are seen to help in the recovery of rates, and the FFA (Forward Freight Agreement) market forecasts healthy daily rates for the latter half of 2024 . While the introduction of new VLAC newbuildings could bring some uncertainties to the market, the versatility of these ships to switch between ammonia and LPG trade provides a degree of adaptability. The company remains optimistic for the year 2024, citing solid fundamentals and strategic positioning to capture market opportunities .

Earnings Call Transcript 2023-Q4

[Lisa Lim, executive]

Welcome to BW LPG's fourth quarter 2023 financial results presentation.

Bringing you through the presentation today are CEO Kristian Sorensen and CFO Samantha Xu.

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 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, Lisa. And hi, everyone, and welcome to our 2023 Q4 presentation.

I'm joined today by our CFO, Samantha. And together, we will take you through the slides.

Q4 ended the strongest year on record for BW LPG. We achieved a time charter equivalent income per available day of $76,000 in a steaming hot VLGC market. And together with a strong performance from our Product Services team, we had a net profit after-tax of $162 million for the quarter; and a full year NPAT of $493 million, our highest ever. After the first full calendar year in operation as a new and expanded trading team, Product Services generated a net accounting profit of $18 million in Q4. This is after adjusting for G&A and tax provisions from the earlier announced $27 million quarterly profits.

We're also scheduled to return $30 million to the shareholders in Q2 this year following a substantial cash generation during 2023. Given the strong quarter for our company, our Board has declared a dividend of $0.90 per share, which brings our year-to-date dividend per share to $3.46, representing 98% payout of our annual earnings and an annualized dividend yield of 28%.

The quarter was eventful also in other fronts. We are moving forward with our dual listing in New York, which likely will take place in second quarter this year on the New York Stock Exchange. We had road shows in the U.S., where we received strong interest in our company's and the sector story. And we're confident that the listing in New York will expand our investor universe in the future and increase the liquidity in our share. Our company also made a milestone announcement on the 30th of November with the announcement of a signed joint venture with our Indian partners Confidence Petroleum and Ganesh Benzoplast to invest in the development of a new LPG import terminal in India. In addition and as part of the agreement, we have just concluded a $30 million investment in Confidence Petroleum, which gives us a strategic 8.5% ownership in the company to participate and get a foothold in the distribution of LPG in India.

As we moved into 2024, the VLGC market has again proven itself as exceptionally volatile, with rates dropping more than 90% in 3 weeks due to cold weather in the U.S. which increased U.S. LPG prices [ and halts ] to the U.S. exports. At the same time, the sudden availability of more Panama Canal transit slots reduced the sailing distance and put pressure on rates. However, since January, rates have increased sharply. And we're currently seeing rates in the $40,000 per day range in the Middle East as well as U.S. Gulf and with a contango in the FFA market for 2024. And on the back of this, we maintain our positive view for the year, backed by sound fundamentals.

Those are the highlights. Next slide, please.

The massive volatility is something we have experienced previously. And if we move to Slide 6, we have compared this year's drop in recovery in rates with the year 2022 and 2023. And the story has repeated itself, starting with the cold front in the U.S., which closes the LPG price arbitrage between the U.S. and the Far East, and a willingness to pay for shipping. On top of this, we had a surprising turnaround in the availability of Panama Canal transits, as mentioned, which reduced the sailing distance and increased the supply of ships. However, like previous years, when the temperatures in the U.S. Gulf Coast normalizes, the prices recalibrate. And exports are restarted, which again push shipping rates up. We are also now seeing a busier transit program in the Panama Canal driven by more container ships, which takes up capacity and is expected to reintroduce more inefficiency to the VLGC fleet.

Turning to Slide 7. U.S. exports for February are record high and driving the recovery of the rates together with the fleet inefficiencies absorbing capacity. And looking at the FFA market, illustrated by the red line on the left-hand side of the slide: It is pricing second half 2024 in the $50,000 to $60,000 per day range.

The newbuilding deliveries have been a focus point over the last years. And the pace in new vessels hitting the water is coming off sharply after the first quarter this year and remains limited for the next 24 months. We do, however, monitor the large number of VLAC newbuilding orders this quarter for 2027 delivery, which may bring uncertainty to the development of the VLGC market in the longer term if the ammonia export projects do not materialize or are delayed.

Turning to Slide 9. We have reduced our forecast for North American exports for the year following the cold snap in January. In the Middle East, we anticipate Middle Eastern exports to stable -- to be stable this year before they start growing on the back of the massive LNG expansion in the region from [ '25, '26, '27 ], onwards. And to sum up: We maintain our positive view for 2024 based on solid underlying fundamentals and [ aided ] by returning inefficiencies in the fleet, especially around the Panama Canal, and [ abating ] newbuilding deliveries.

Turning to Slide 12, please. So moving on to the financial performance for our core Shipping segment. We achieved a historical high TCE performance of $76,000 per available day for the fourth quarter. This figure includes fixed time charters and derivative hedges. The spot fleet achieved a TCE of $108,300 per day, excluding the waiting days.

For the first quarter this year, around 83% of our available days are fixed at an average of $55,000 per day. As highlighted earlier, we saw a sharp decline in spot rates down to less than $10,000 per day in January, which impacts the guidance rate together with a number of previously fixed ships ending up sailing transatlantic voyage from the U.S. after long ballasts from the Far East. We anticipate that we will recoup these ballast costs for the voyages in the next quarter.

Looking at our coverage for 2024. 23% of our fleet is already fixed on a time charter, with an average daily rate of $41,500. We balanced our TC in and TC out commitments for '24 and have already secured a $23 million profit. And additionally, 14% of our days are hedged with derivatives at an average of $56,500 per day.

And with this, I'm pleased to let Samantha take you through Product Services update and our financials.

Over to you, Samantha.

[Samantha Xu, executive]

Thank you, Kristian. And good morning, good afternoon to everyone.

Let me continue to add some colors to the Product Services performance. The net asset value of the Product Services increased by USD 18 million to USD 62 million at the end of December. The increase comes from positive gross profit after netting off other expenses.

In Q4, [ Product Services ] generated a gross profit of USD 32 million, which includes USD 50 million of unrealized cargo and derivatives gains, offset by USD 17 million realized loss during the quarter. The loss includes the depreciation from Product Services' leased-in vessels. Other expenses of USD 14 million largely comprised of G&A expenses, including bonus provisions and income tax provisions.

The reported net profit does not include the unrealized mark-to-market valuation of physical shipping position, which was excluded from the accounting result. Our internal valuation of these TC-in contracts at the end of December was USD 84 million. This positive value reflects the continued strong development in the 12 months forward freight market for VLGCs, which is the period we use to evaluate freights position in Product Services.

Due to an increased volatility in the LPG product and freight market back in Q4, we reported a higher average VaR of USD 8 million on a well-balanced trading book including cargoes, shipping and derivatives. We continue to see good collaboration and synergy between Product Services and our Shipping business through improved information flow, optionalities and enlarged footprint. Focusing on the profit: Product Services is also progressing in expanding the physical presence in key markets as we aim to broaden the platform and trading portfolio.

Please go to next slide, please. So moving to the financial highlights. In Q4, we reported a net profit after-tax of USD 162 million on a consolidated basis. This includes $16 million in profit from BW LPG India and $18 million in profit from Product Services. The net profit also includes a downward adjustment of USD 4 million related to the effect of IFRS 15 for the quarter, as the TCE for the straddling voyage over the quarter end is recognized on a load-to-discharge basis.

We reported an earnings per share of $1.14 this quarter, mainly contributed by our core Shipping segment. This translates into an annualized earning yield of 31% when compared against our year-end share price. We reported a net leverage ratio of 21% in Q4.

The Board declared a Q4 dividend of $0.90 per share. We have in total declared $3.46 per share, including Q1 to Q3, or a 98% payout ratio in year 2023. The dividend payout reflects our commitment to return value to our shareholders as we continue to deliver a high dividend yield of 28%, when calculated on our share price at yesterday's closing.

Our balance sheet ended the quarter with a shareholders' equity of USD 1.6 billion. We continue to see a healthy headroom for more than $400 million comparing broker valuation with our [ fleet book values ]. Our annualized Q4 return on equity and capital employed were 40 -- 42% and 33%, respectively.

In Q4, our daily OpEx came in at $8,200 per day due to slightly higher-than-expected maintenance and repair expenses. For 2024, we expect our owned fleet operating cash breakeven to be about $17,600 per day. And this is $1,000 per day lower than previous quarter, driven by early debt repayment.

On Slide 5, it provides a summary of our liquidity and financing structure. On a consolidated basis, we ended the year with close to $0.5 billion in liquidity, consists of $162 million in cash, net of $126 million held-in-broker margin accounts; and $295 million in undrawn revolving credit facilities.

As of end December, ship financing debt outstanding was $311 million, of which $257 million was term loans and revolving credit facility of USD 54 million. Looking at trade finance: $319 million or 48% of our $660 million line has been used as of end Q4, with $85 million related to trade advances drawdown and $234 million in letter of credit, leaving a healthy headroom for further growth. As of January 2024, we upsized our trade finance line to $746 million with the 2 additional lenders, increasing our headroom further to support future growth. In terms of overall repayment profile, excluding short-term trade advances, settlements are well spread out, with no major repayment until 2026.

So with that, I would like to conclude our Q4 update; give it back to you, Lisa.

[Lisa Lim, executive]

Thank you, Samantha.

We will open the floor for questions now. [Operator Instructions] [ Haya ]?

[Unknown Attendee]

Yes. So we have one written question here from [ Johanna of Nero ] asking if you could elaborate on how increased ammonia newbuildings may bring uncertainties to the VLGC market.

[Kristian Sørensen, executive]

Yes. Thank you for the question. Ammonia has for several decades already been carried onboard LPG vessels. And then today, it's the mid-sized LPG vessels which are the workhorses of the ammonia market. And this new VLAC newbuildings are essentially VLGCs which are specced up and also have strengthened the tank structure to carry up to 98% ammonia, but they can also shift their trade into LPG if the ammonia trade is not as lucrative as -- or attractive as they expect, so these ships can, in theory, also trade LPG.

[Lisa Lim, executive]

We have a question. Jørgen Lian.

[Jørgen Lian, analyst]

Kristian and Samantha, this is Jørgen from DNB Markets. And I just wanted to ask if there can be -- can we have a discussion and some more flavor on the considerations around the payout ratio this quarter on the dividend versus the EPS number you reported?

[Kristian Sørensen, executive]

Yes, sure, Jørgen. And first of all, we do, of course, not like to disappoint the market, but the fact is that we have a dividend policy which aims for an annual payout ratio of 75% of our Shipping segment's NPAT if the net leverage is between 20% and 30% and 100% if it's below 20% net leverage. And we have a net leverage of 21%. And consequently, the Board decided to pay out 98% of NPAT for the year, which generates a dividend yield of 28%, so it's in accordance with our dividend policy where we have an aim for annual payout ratio.

[Jørgen Lian, analyst]

Okay. And secondly, if I may, this -- the IFRS effects that you see with the very volatile markets. Do you have any flavor on how that looks to be shaping up into sort of next quarter, considering the guidance and what you've seen, so far?

[Samantha Xu, executive]

Yes, sure, Jørgen. From IFRS 15 impact perspective, first of all, let's put it that way. It's very difficult to anticipate what kind of effect it bring [ to the quarter has ended ] because this very much depends on the vessel deployments, the loading and discharge locations as well. And given that we have had, let me say, both negative adjustment in the previous quarter and Q4, we see that the negative impact should be less so, if not a reversal, in this quarter, but as you can appreciate, I'm sure that from your side you know very well as well it's really hard to model this kind of impact out.

[Unknown Attendee]

Then we'll move to the next question here, from Axel Styrman. "Kristian, you mentioned the risk that VLAC newbuilds potentially may trade in LPG, but you then referred to the ammonia trade. I assume you meant VLAC newbuilds."

[Kristian Sørensen, executive]

Yes, you're right. Actually it's my English which is a bit broken, so it's VLACs, ammonia carriers, not the ethane carriers.

[Unknown Attendee]

We have a question here from [ Desmond Burmil ]. When you do -- when do you expect environmental regulations concerning the slower ship speeds to materialize?

[Kristian Sørensen, executive]

Well, the [ world fleet ] of VLGCs has, have already kind of reduced speed somehow on some of the vessels, so you can see, for instance, our fleet trading in and out of India is down to 14 knots these days. So we already now see the impact of slower speeds and so I would say that this is already ongoing.

[Lisa Lim, executive]

[Operator Instructions] Once again, we have a question from the channel.

[Unknown Attendee]

Yes, a question from [ Basilis Deodoro ]. What is your estimate of negative ton-mile demand impact for full year 2024 due to increased Panama Canal transits?

[Kristian Sørensen, executive]

So negative ton-mile demand. You can say that, if you turn it the other way around, if the ships are sailing from the U.S., via South Africa, towards the Far East, it's a 50% -- approximately 50% longer voyage on a round voyage. So I think it's that is kind of the rule of thumb that you can have. So it's depending on where you discharge in Asia, of course, but if you go all the way to Japan, via South Africa, back and forth, it's about 50% longer distance; and then more down to 45% if you go to the more western parts of Asia.

[Unknown Attendee]

And we have a question here from Nick Linnane. You had some tax expense in the fourth quarter of 2023. Can you explain what drove this -- sorry, another question [ went to it ]...

[Samantha Xu, executive]

Nick, this is Samantha. I think you're referring to the tax we have disclosed for Product Services. That does -- stands out in Q4. Maybe just a little bit: The way we accrue tax is on a quarterly basis. And at end -- at the year-end, we would [ trued up ] the tax provision for the year. So that is basically a year -- the full year impact of the tax reflected in Q4, as we -- you can see that we generated a positive profit for Product Services. So from a tax percentage and tax rate perspective, we have different tax rates in where the business was conducted, respectively, in Singapore and Spain, so it's under different tax scheme as well. So the effective tax rate, it's very difficult to calculate until at the year-end. So I will be happy to get back to you, if you're interested, after I have done some fact finding for 2023.

[Unknown Attendee]

Then we have a question from [indiscernible]. What is your view on demand from China? What is the latest on PDH utilization?

[Kristian Sørensen, executive]

Well, our view on the demand from China is that, of course, we recognize that the Chinese economy is on a slower pace than what we, let's say, have been used to over the last years. And the imports, especially last year, was very, very high and despite of this because -- we know that they have a political goal to capture more of the petrochemical market. And we can see that the PDH demand is increasing, but it's not like a linear increase going straight up. So for the moment -- and you asked also about the PDH rate, utilization rate, I believe, which I don't have the latest, but it's been down to 60%, 70%, we have seen. So there is definitely upside potential, but I don't have the latest number in front of me just now, so I need to get back to you on that but all in all very positive for the increase of LPG imports to China despite the economic challenges that then -- that they have.

[Lisa Lim, executive]

[Operator Instructions]

[Unknown Attendee]

We have one more question from Nick Linnane here. How many VLAC orders do you see in the order book?

[Kristian Sørensen, executive]

Well, the vessels on order with ammonia lifting capacity is 73, I -- as far as I can see from my list here. So these are both VLGCs with ammonia lifting capacity. And then there are these VLACs which have a strengthened tank structure [ and can load more and more ]. And then -- and in combination, it's 73 in total in our list.

[Lisa Lim, executive]

[Operator Instructions] We have one question coming in.

[Unknown Attendee]

We have one question from [ Desmond Burmil ]. Do you plan on [ repurchasing ] any more shares?

[Kristian Sørensen, executive]

Samantha, will you reply on this?

[Samantha Xu, executive]

Yes, [indiscernible], sure. As you know, that we had a share repurchase program announced in May 2023. And we have already repurchased back USD 13 million worth of share and a remaining USD 37 million to go. And prior to that, we also had a USD 15 million and -- repurchase program in 2022, which we have finalized. We will continue to evaluate and then -- and get back to the investors.

[Unknown Attendee]

We have another question here from Nick Linnane. What do you think is current U.S. LPG export capacity?

[Kristian Sørensen, executive]

Well, we can see that in the U.S. Gulf, they have increased the export capacity by removing the restrictions on nighttime berthing on Targa and Enterprise terminals -- so they have increased that up to -- we count close to 100 liftings in the Gulf Coast region per month, on a regular month only. And then in addition, you have the U.S. East Coast, where there is another 10% and -- or not 10%, but 5% of the U.S. export volumes are currently exported from the U.S. East Coast. And then you have -- on the west coast of Canada and the U.S., it's another 2 million to 2.5 million tonnes on an annual basis as export capacity. So what we have seen also is that about -- according to [ Furness ], the ship broker, it's about 6.5 million tonnes which are exported on mid-sized vessels, which in theory can be -- which are occupying the berths. So if you exchange them with VLGCs, in theory, you can probably increase the VLGC lifting capacity out of the States even more, so -- but we do see that then the American terminals are very efficient, if they need to, to export more than what we anticipate. For instance and what we have seen now in February is higher than what we expected. And then so about 100 berthings per calendar month in the U.S. Gulf Coast alone is what we see, approximately.

[Lisa Lim, executive]

[Operator Instructions]

[Kristian Sørensen, executive]

Okay, that rounds off our quarterly earnings presentation, so thank you, everyone. And then see you next quarter...

[Lisa Lim, executive]

We have come to the end of today's presentation. Thank you for attending BW LPG's fourth quarter financial results presentation. More information on BW LPG and BW Product Services are available at bwlpg.com and bwproductservices.com, respectively.

Have a good day and a good night.