BW LPG Limited (BWLP) Q3 2017 Earnings Report, Transcript and Summary

Welcome to the BW LPG's Third Quarter 2017 Financial Results Presentation. We will begin shortly. You will be brought through the presentation by Martin Ackermann, CEO; and Elaine Ong, CFO of BW LPG. They will be pleased to address any questions raised after the presentation. [Operator Instructions] We will begin the presentation now. Please go ahead.

Thank you very much. Welcome everyone to the presentation of BW LPG's results for the third quarter of 2017, the financial period ending September 30. I'm as always joined by our CFO, Elaine Ong. We appreciate your interest in our results and encourage your queries at the end of the call. Third quarter of 2017 was the most challenging quarter since 2009, as we received rates average $7,600 per day or $22 per ton on the benchmark Baltic route. Against this week market backdrop, BW LPG generated daily earnings of $10,790 per day on its spot fleet and fleet by time charter equivalent earnings of $15,200 per day. Freight rates have improved in the fourth quarter and currently stand at $30,000 per ton driven by the emergence of workable average loss economics on the back of variety of crude oil prices and very strong Indian LPG demand. Turning to Slide 4; we review the highlights of the third quarter. The company recorded a loss due to falling spot rates and weaker fleet utilization. We generated net revenue of $70 million based on daily rates of $15,200 for the VLGC segment and $13,600 for all LGCs with total contract coverage of 26%. EBITDA came in at $80 million, 55% lower quarter-on-quarter. We generated a net loss of $27 million or $0.19 a share. Our book value leverage remains stable at 55% and below the offer bound of our 40% to 60% target. In October we established our joint venture with Global United in India, the two VLGCs owned by the JV will both be converted to Indian flag [ph] by the end of the year to secure Indian employment. In November we signed a term sheet for a new $150 million five-year senior secured term loan with a view to refinancing our existing $150 million of unsecured facility which is coming due in March 2018, Elaine would speak more on this later on in the presentation. I'll now turn to Slide 5 for an overview of our commercial performance in the third quarter. TCE rates on our VLGC fleet averaged $16,200 per day in Q3 basis available days with a contract coverage of 26%. Our LGC fleet generated TCE rates of $14,300 per day for the quarter based on available days. Focusing on our VLGC chartering performance, our CoA portfolio accounted for 7% of VLGC revenue days and generated TCE rates of $34,560 per day. Our CoA coverage was slightly lower this quarter relative to our previous guidance future to Hurricane Harvey while we expect CoA coverage to bounce back to roughly 500 days in the fourth quarter. We do not have any fixed rate CoA coverage hitting into 2018. Our time charter portfolio accounted for 19% of the VLGC revenue days with a blended time charter rate of $31,270 per day because of some short-term charters and expiring legacy contracts. Our spot fleet generated $10,790 per day based on the utilization rate of 82% and calculates that as revenue days divided by calendar days. This utilization figure also takes into account slow steaming to provide our investors with a most accurate depiction of the true utilization of our fleet. In other words, 88% commercial utilization which includes 7% waiting and 5% slow steaming upto the 100%. Switching to our LCGs, we operated roughly 55% of our ships on time charter and the remainder on the spot market. Our total coverage for 2018 stands at 12% for the entire fleet. Now switching to Slide 6, we see the global fleet of VLGCs stands at 259 vessels after growing by 7 vessels in third quarter and by 19 year-to-date. No vessels were scrapped during the quarter on options for two additional newbuildings under previously announced order were exercised. Further two vessels were set for delivery in 2017 with 10 delivering in 2018 and 14 vessels in 2019. Our VLGCs market share is 18.1%. Including LGCs newbuildings, our total fleet comprises 53 vessels with an average age of seven years. On Slide 7 we provide an overview of seaborne LPG trade in the third quarter. Seaborne LPG trade expanded by 5% year-on-year in Q3, as strong Indian and north Asian import growth more than outweighed declines in Latin America and European imports. U.S. seaborne LPG export volumes were 24% higher year-on-year reaching 6.7 million tons while middle eastern LPG export volumes continued the decline totaling 9% year-on-year to 9.6 million tons. Seaborne volumes remained steady quarter-on-quarter with cargo cancellations and disruptions to plant exports out of the U.S. Gulf Coast due to Hurricane Harvey adversely impacted the trade. Turning to Slide 8; we have oughted [ph] how we'll illustrate the U.S. LPG supply demand balance due to recent changes to EIA's reporting on the hydrocarbon gas liquids. We now only show production, consumption and seaborne exports to provide a clear view of each where historical statistics is up 2016 represent data from the August statistical review for production and consumption for water borne LPG for seaborne exports. In 2017, 23 expect total seaborne U.S. LPG exports of 28.8 million tons or growth of 14% year-on-year. For 2018 we modeled LPG production growth of 7% and domestic consumption growth of 1%. We thus expect seaborne U.S. LPG exports to grow by 7.5% to 31 million tons. We also expect that the U.S. market will require higher overall level of LPG stocks in 2018 to avoid repeating what happened in 2017, our domestic U.S. LPG prices strengthened too much rendering U.S. LPG on competitive replacement in international markets and leading to carbon cancellations. Even our incremental U.S. LPG export growth forecast of 2.2 million tons next year. We believe this can generate the management roughly 10 VLGC equivalents which would match gross VLGC fleet growth next year. Our export forecast may increase through the U.S. LPG market require a small inventory build than what we model and we'll be dependent on actual domestic production and consumption growth rates. With that let me turn you over to CFO, Elaine Ong, who will talk you through the financial position and our results.

Thanks, Martin. Starting with our income statement on Slide 9, our net revenue for the quarter was $70 million compared to $80 million in the same quarter last year, despite a larger fleet; this is mostly due to lower spot rates and lower fleet utilization. Charter hire expenses for the quarter decreased, as we operated one less charter in VLGC. Chartering expenses were decreased in 2018 as we delivered three VLGC to their owners through the year. Operating expenses were approximately $6 million higher year-on-year, reflecting nine more vessels in our own fleet; this was partially offset by reductions from our ongoing cost saving initiative. We generated EBITDA of $18 million in the quarter compared to $33 million in the same quarter last year. Finance expenses were higher by $4.5 million due to incremental interest bearing debt of $401 year-on-year. We recorded a loss of $27 million or $0.19 per share in Q3. Turning to Slide 10; we provide a snapshot of our balance sheet and cash flow position. We continued to maintain a strong balance sheet with a steady book leverage ratio of 55%, the same through the year while still generating positive cash flow from operations in a very challenging market environment. We entered the third quarter with cash and cash equivalents of $56 million. On Slide 11, you will see our net debt position at $1.3 billion at the end of the quarter. Total liquidity consisting of available cash and undrawn facilities was $311 million at the end of the quarter. We currently have five debt facilities; the first is the $800 million facility with $363 million outstanding and $240 million of undrawn credit. Second, we have the $400 million ECA facility with $352 million outstanding. Next, we have the $221 million ECA facility with $196 million outstanding. Our third ECA financing is the $290 million with $275 million outstanding. Last, we have the $150 million unsecured revolving credit facility coming due in March 2018 that we're working on refinancing. This facility has $135 million outstanding today and $15 million of undrawn credit. We sign a committed term sheet for a new $150 million five-year senior secured term loan on November 8, and are currently in the documentation stage with our potential lenders. The facility will be secured by five vessels, we expect the cost of this financing to LIBOR plus-150 basis points with an 8-year amortization profile and we'll provide an official update on the status of this refinancing in the coming months. With that, I'd like to hand it back to Martin to conclude our presentation.

Thank you very much, Elaine. So if you please turn to Slide 12; I would summarize the presentation, and then we can open up for questions. We generated a loss per share of $0.19 in the third quarter on net revenue of $70 million and EBITDA of $18 million. In time charter interview of the senior building for two years and extend of the time charter in agreement on the VLGC for one year at a reduced rate. We established our India joint venture and expect both VLGCs to be Indian flagged by the end of the year. On course to refinancing our March 2018 facility at the attractive cost of LIBOR plus 150 basis points, with this refinancing we would have no further debt maturities until November 2020. Looking ahead we expect total contract coverage of between 32% to 39% for the remainder of the year and 12% for 2018. For domestic inventories building back upto near the five-year average, and weekly data point to a normalization of LPG production after Hurricane Harvey, the U.S. LPG markets focus will now shift to winter heating demand, as well as evidence will continue to keep the auction [ph]. Recent data suggest that [indiscernible] activity could be leveling out in the short-term and that any further efficiency gains will be offset by the increase in marginal comps to achieve them which is evidenced by the drop in the number of horizontal rigs at service and the flattening of production from new wells per rig in most major shale formations. While domestic U.S. auction of crude oil, natural gas and thus LPG is expected to continue growing, U.S. CMP companies that only head one-third of the 2018 production and been ready to scale back drilling activity should oil prices retreat to unprofitable levels. Over the next two years we forecast the yield to see freight market to find fundamental support from roughly 3% net paid growth and continue mid-single-digit demand growth per year, as well as arbitrage trade support from recovering oil prices owing to OpEx willingness to extend the current production cost and reduces discipline in the short-term. This concludes our results update for the third quarter of 2017 and we appreciate your interest in our market updates. With that, we'll open up the line for questions. Thank you very much.

[Operator Instructions] We will take our first question from Eirik Haavaldsen from Pareto Securities. Please go ahead.

Good morning. Just a quick on your time charter coverage for 2018 or CoA coverage for 2018 which -- obviously there is no development versus the past quarter; there have been some rumors recently about one year time charters, can you give them the indication or comment on what has happened on that front after Q3?

Well, I mean there has been -- we have seen some longer term time charters concluded recently but the levels that we have seen leave some upside on the table in the later years and that I mean specifically on the optionality that owners would have to give; so on those specific deals we have not wished to participate. Most contract discussions today still revolve around floating rate structures, so spot market like exposure except for the difference that in the spot market it would have no scheduling risk or risk that our ships ultimately end up competing as -- against us as relays [ph], as well as waiting time ahead of the charter; so we haven't done and urged to secure any coverage in that direction. We look at floating rate structures over the premium to compensate us for scheduling risk and risk premium over the east of Suez market, but there aren't many of those contracts out there at this point in the time. And I can also possibly say that we can also -- go ahead.

So that means that I mean, if we see one year time charters now in the market, I think there have been some -- perhaps all the fixtures and around $20,000 or so or even a bit more for one year time charters; would that not be interesting to you at this point?

I think that's probably at a level where it starts to become interesting and for various reasons, the one that haven't been concluded, we have not participated in those but I mean -- those levels are starting to sound interesting, if it's only a 12-months contract and with no optionality attached to it.

Thank you. And just quickly Elaine, could you please repeat the margin on the refinance or the one you expect to complete shortly, I didn't quite catch it.

It's LIBOR plus 150 basis points.

Fantastic. Thank you very much.

We will now take our next question from Peder Jarlsby from Fearnley Securities. Please go ahead.

I was just going to follow-up a bit on Eirik's question; in terms of -- we've seen the rates particularly in the western market have quite solid rates, just to make sure on the city; correct. But you haven't seen any more constructive talks following the rate hike than you did in the third quarter; so there is still nothing out there of interest for you guys?

I think we don't want to go into details on the specific discussions but we are of course speaking to a number of our current contract partners who we've been working with for many years. So there is definitely a will on both sides to continue the contracting but right now up until recently the gap between [indiscernible]. So discussions are ongoing but currently it seems like, as I said just before most contract discussions are all around the floating rate structures.

Okay. So there is no change to mentality from the charters point of view even though rates have been above cash breakeven levels?

I think generally the sentiment for 2018 is more positive than 2017. And -- but of course, third quarter has been the tough quarter and that may have caused some uncertainty overall which is -- maybe creating a little bit of short-term in our witness right now.

Okay. And just a final one on the senior secured; I think you said that you have collateral in five vessels. Could you give -- talk a bit about if this is the last unencumbered vessels you have in your fleet or are there more in there?

There is a couple of more in there but this is -- this facility is going to be financed with five of the younger ships that's unencumbered, existing pool.

Okay. And the one you say younger, what are we talking about?

Well, we have a pool of combination of vessels that are in the 2007 and onwards. I don't have all the details right now but that's what we can give you.

[Operator Instructions] We will take our next question from [indiscernible]. Please go ahead.

Just wondering, you said you had taken one ship on two-year charter during the quarter and I was wondering could you say a little bit of the rate structure on that; is that floating rate or is it a fixed rate?

The short answer to that is no. I can't give you any details on the specifics of our time charter rates. And -- but it's generally part of our charter in-suite renewal and we did see an opportunity to take in a newbuilding from high quality yard, this was from HSI and at a rate that worked for both parties. And as a general comment, we prefer for the ships to be under our control, one of them competing against the market. So the same rational applies to the Nimbo [ph], a ship that has been in our fleet for more than 10 years and we felt that we could operate the vessel profitably for another year at a new reduced time charter in rate.

Is the renewed rate on Nimbo [ph] plus the redelivery of YUYO Spirits who they reason for time tick in the charter expense system?

That's probably getting a top two detail on the commentary but we're very pleased with the rates that we have on both, Nimbo [ph] and Oriental King.

Okay. When did you take on the Oriental King?

We took her straight out of yard, off the top of my head, it was early October, I'm not exactly sure of the date but it's accounted for in the days in the back of our presentation; so those have used it.

Our next question comes from Lukas Daul from ABG. Please go ahead.

Martin, could you just repeat what you said about the utilization of the fleet; I didn't catch it.

So I think we are very detailed on the utilization; so on that we're looking at Slide 5, although our presentation where we say that we have total fleet utilization rate of 82% on the VLGCs and 91% on the LGCs; that number is a combination of fleet availability and commercial utilization. So the comment we made is, when we talk about utilization is that our commercial utilization figure also takes into account folks slow steaming of 5% this quarter, as well as waiting time of 7% this quarter; and that gives us a total of 88% commercial utilization for the fleet. Does that make sense?

Yes, it does. So, thanks for that. And then sort of extrapolating that utilization into -- what you are saying about 2018; you're basically saying that the increase in U.S. exports is about sort of absorb the new VLGC is getting delivered in '18. So my question is, what are your sort of utilization projections for 2018 given where we are starting from?

Yes, that's good question. Of course we have that in our model, I'd prefer not to give that specifically but it is moving towards higher utilization than what we had in 2017, that's probably as far as I would like to push it.

Okay, fair enough.

Of course, the key reason why we put -- we disclosed the numbers and searches [ph], it's of course for investors to be -- and U.S. analysts to look at what is the true utilization and full potential of the fleet which is of course why we don't describe the waiting time and the slow season time and I'm not sure all shipping companies do that norm; I think the norm is probably only to take out the waiting time but I think it's probably easier for you guys if you 100 to start with, then you can take out slow.

Exactly, that's a good point. So -- I don't know, if you want to sort of discuss where the delta would potentially be because U.S. exports, okay, it's going to absorb the new capacity. And then where are we going to see a more positive development to lift the transaction curve? That I guess really is the question here.

Yes. And -- I mean, we should not see growth of 3% over the next two years and demand growth of say 6% a year. So fundamental tightening of 2% to 3% per year through 2019 is probably the way to look at it.

And then on the CoA; you know, a while back it seemed like that the LPG shipping market is -- cannot lift without CoAs and here we are two years late around your CoAs coverages coming down and you are fine with that? Is somebody else bidding for what you used to have in CoA as a different terms or is it just everything being absorbed in the spot market?

I think yes and no. Most of our CoAs are -- as far as I'm aware, just expiring at the end of this year and we will have to find new ways of servicing those existing contract partners. Then there has been a development at the market where most discussions have been evolving around floating rate structures because there has been too wider gap between [indiscernible] and floating rate structures have seen to be the way to go about that; plus for us as I mentioned before, what it provides us is more or less spot market exposure but added with risk of scheduling and risk of waiting and most important, probably needing ourselves as we let in the market. We just haven't found real attraction to any of those arguments recently.

And then finally, your LGC spot performance is better than your VLGC spot performance, looking at the daily earnings. Could you sort of elaborate a little bit on that?

Yes. That's a good point. And I think we have a very small LGC fleet, so it's a much smaller market; so of course, here it's been short-term time charters that's been converted into two spot and I think that the way it's almost a reflection of that. I mean this market is equally under pressure as the VLGC market but of course, it's with much less liquidity; so I think it's -- that's probably the reason why you see these differences.

[Operator Instructions] The first question comes from [indiscernible]. What is your scrapping estimate for 2018?

I think we have two to four ships as made in for scrapping next year. I'm just struggling to see if I can find it in my note somewhere; yes, two to four ships. Was that the only question?

Another question from Gautam Khuranna from Drewy [ph] U.K., Drewy [ph] Maritime Financial Research. You talk about an increased level of LPG arbitrage following the rise in crude oil prices; could you provide some color on this?

Well, rising brent prices lifted the Asian propane price and that supported some arch rates, recently and I think that's probably the most color we can go into; I mean then otherwise we should just talk about our outlook based on production growth. And then you're looking at the U.S. production growth, again where we're saying 7% which is a little bit lower than EIA's recent number of 8.6%. And we think the main four factors driving that is the flattening and declining of our central rig counts in the major basins and less productivity in terms of well drills per rig. And a cost inflation in the Permian, and of course, most of the sale produces E&P company, so emphasizing returns over growth now. So for these reasons we still see strong production growth next year but probably at a lower rate than what EIA is forecasting. And if U.S. production growth rising to 7% from 3% year-on-year, we don't exactly think that sounds pessimistic to us and if our forecast turn out to be too conservative, we have 90% of our VLGC revenue days on the spot market next year. So we do stand to benefit quite greatly from strong U.S. production as do it does obvious to see on us; but a base case in which incremental U.S. exports a loan balance, the order book seems to be just fine for us after the three-year strong fleet growth of 50%.

Thank you. There are no further questions.

I think that's -- I mean, I know the question was mostly about DR [ph], but -- we've seen lately that the propane came down a bit but the back end that have occurred, are holding up. So I think the market overall is thinking constructively view on Asian propane price.

As there are no other questions; I would now like to hand the coverage back to today's presenters. Please continue.

Thank you very much. So this concludes our result update for the third quarter of 2017. And we appreciate your interest in our market updates; and as always, we'll speak to you next time. Thank you very much.

We have come to the end of today's presentation. Thank you for attending BW LPGs third quarter 2017 financial results presentation. More information on BW LPG is available online at www.bwlpg.com. Goodbye.