BW LPG Limited (BWLP) Q4 2017 Earnings Report, Transcript and Summary

Welcome to BW LPG’s Fourth 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 after the presentation. [Operator Instructions] We will begin the presentation now.

Thank you, Anna. Welcome to the presentation of BW LPG’s results for the fourth quarter of 2017, the financial period ending 31st of December. I’m joined by our CFO, Elaine Ong. We appreciate your interest in our results and we will take questions at the end of the call. VLGC rates improved in fourth quarter of 2017 averaging $14,100 per day or $30 a ton on the benchmark Baltic route, compared to $7,600 per day or $22 per ton for the previous quarter. This is due to improving geographic LPG price spreads with Asian LPG prices being led by significant restocking demand ahead of the winter heating season as well as rising crude prices and delays in receiving U.S. source cargos. Turning to slide four, we will review the financial highlights for financial year 2017 and the fourth quarter. Starting off with the fourth quarter. Our net revenues were $79 million, a decrease of 12% relative to fourth quarter of 2016, which was mainly driven by weaker spot rates. EBITDA was $26 million, 27% lower year-on-year. Net loss was $19 million for the quarter or $0.14 a share. Moving on to the full year highlights. The Company recorded a loss due to falling spot rates and weaker fleet utilization. We generated net revenue of $335 million, based on daily rates of $18,600 per day for the VLGC segment and $12,600 per day for our LGCs with total contract coverage of 31%. Our EBITDA came in at $126 million, while net loss was $45 million or $0.30 a share. Our book value leverage remained stable at 56% ,in line with our target range of 40% to 60%. We also made divestments of five vessels for a total of $185 million, selling vessels above long-term parity values, generating additional free cash and reducing our average fleet age in the process. In October 2017, we established our joint venture with Global United India, and the two ships to that joint venture now delivered. I’ll now turn to slide five for an overview of our commercial performance in financial year 2017 and the fourth quarter. Focusing first on the fourth quarter. Coming out of the weakest quarter since 2009 and facing into a rising freight market which was slightly offset by rising bunker prices, our spot fleet earnings was $12,200 per day and fleet wide earnings was $18,400 per day. Nearly 40% of our revenue days in fourth quarter of ‘17 were fixed in the preceding quarters at rates higher than the market at the time of fixing. We continued to operate in both basins east and west of the Suez Canal, serving a broad base of customers. Our CoA portfolio accounted for 13% of the VLGC revenue days and generated rates of $34,700 per day. This is in line with the probable minimum guidance and it’s nearly three times that of the spot market for the same period. We do not have any fixed rate CoA coverage heading into 2018. Our LGC fleet generated rates of $14,600 per day for the quarter and we operated roughly 72% of our ships on time charter and the remainder on the spot market. For the full year, our spot fleet generated $13,600 per day based on the utilization rate of 87% and calculated as revenue days divided by calendar days. Switching to LGCs, we’re operating 62% of our ships on time charter and the remainder on the spot market. Now, please switch to slide six. We see that the global fleet of VLGCs stand at 270 vessels currently after growing by 25 vessels in 2017 and by four vessels in January this year. Three vessels were recycled in 2017 and one during the first quarter of this year, while 14 new buildings were ordered in 2017 and another seven already this year. Global order book now stands at 36 vessels or in total 13% of current fleet per delivery over the next three years. Our VLGC market share is 17% with an average of 7.5 years, versus the global fleet age of nine years. On slide seven, we provide an overview of seaborne LPG trade in the fourth quarter. VLGC seaborne LPG trade remained relatively flat at 16.5 million tons with imports from India and China more than outweighing declines from Japan and South Korea. U.S. seaborne LPG export volumes were 22% higher quarter on quarter, reaching 6.7 million tons. Middle Eastern LPG export volumes continued to decline, falling by 5% quarter-on-quarter to 7.9 million tons. Turning now to slide eight. In 2017, we have received seaborne trade increase by 2.5% to 7 million ton with North America offsetting exports decline in the Middle East. While the Middle East Gulf East route remains key. The increase in supply from North America illustrates the growing importance of the U.S. Gulf East crude. China and India continue to see healthy import growth with Indonesia seeing a 17% year on year increase in imports. Turning now to slide nine. On this slide, we provide an updated snapshot of the LPG balances in the U.S. that also includes the forecast for 2019. U.S. LPG production grew by 2.9% in 2017, while domestic U.S. consumption declined by 3.6%. For 2018, we have maintained our U.S. production growth forecast of 7% versus EIA 7.5% and corresponding 85 million tons. Similarly, we have maintained our net U.S. LPG export growth forecast at 7.5%, which corresponds to U.S. LPG exports of 29 million tons in 2018. With the relative resilient oil prices supporting healthy production growth rates, we remain cautious towards factors of less productivity in terms of wells drilled per rig, cost inflation, and shale producers emphasizing return over growth and we remain more optimistic on continued U.S. LPG production growth and recovering oil price fundamentally, supporting the arbitrage trade and in turn VLGC freight market. So, with that let me turn you over to Elaine who will walk you through the financial position and our results.

Thanks, Martin. Starting with our income statement on slide 10. Our net revenue for the quarter was $79 million compared to $90 million in the same quarter last year. This is mostly due to lower spot rates and lower fleet utilization. Charter hire expenses for the quarter decreased mainly due to lower hire rates for our charter in vessels. Operating expenses saw a slight increase of $1.4 million, due to a bigger fleet relative to Q4 2016. We generated EBITDA of $26 million in the quarter, compared to $35 million in the same quarter last year. Finance expenses were slightly higher by $1.7 million due to incremental interest-bearing debt from the Aurora acquisition. We recorded a loss of $19 million or $0.14 per share in the quarter. Turning to slide 11. 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 56%, while still generating positive cash flow from operations in a very challenging market environment. We ended the fourth quarter with cash and cash equivalents of $57 million. On slide 12, 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 $267 million at the end of the quarter. We currently have five debt facilities. The first is the $800 million facility with $378 million outstanding and $210 million of undrawn credit; then, we have the $400 million ECA facility with $348 million outstanding. Next, we have the $221 million ECA facility with $193 million outstanding. The fourth is $290 million ECA financing with $274 million outstanding. Lastly, I’m pleased to provide you with an update on the $150 million unsecured revolving credit facility coming due in March 2018 that we have been working on refinancing. We signed a view U.S. $150 million, five-year senior secured term loan agreement in February this year. The facility is secured by five vessels. The all-in cost is LIBOR plus 170 basis points with an eight-year amortization profile. With that, I’d like to hand you back to Martin to conclude our presentation.

Thank you, Elaine. So, if you please turn to slide 13, I will summarize the presentation, and then we can open up for questions. We generated a loss per share of $0.30 for the financial year on net revenue of $335 million and EBITDA of $126 million. The Board will not propose the final dividend for the second half of 2017, which is fully consistent with our policy of paying out 50% of NPAT. We delivered the BW Boss to our joint venture in India in January 2018 and the two vessels for the JV are now fully delivered. We signed a five-year senior secured term loan of $150 million at the attractive all-in cost of LIBOR plus-170 basis points and with this refinancing, we will have no further debt maturities until November 2020. Looking ahead, we expect total contract coverage for 2018, up 14%. Freight rates remain at unsatisfactory levels, despite a recovery from Q3 and we see further recovery being dependant on increasing U.S. production, continued demand from Asia and geographic LPG price spreads supporting trade. We remain confident on the long-term fundamentals for LPG and continue to monitor the order book for 2018 and beyond. This concludes our earnings presentation for the fourth quarter and full year of 2017. And I would like to open the line for questions.

We will begin our question-and-answer session now. [Operator Instructions] We will now take questions from the conference call first. Your first question comes from the line of [Jorgen Liam with ZMB] [ph]. Please go ahead.

I have a quick question regarding the CoAs that have been rolling off during ‘17. I’d like to get your input on how the CoA coverage has perhaps been a contributor in terms of how you are available to play this spot market in terms of speculative cargos out of Atlantic? Do you have any flavor on that?

It’s an interesting question. And I think what you are hinting at here is that the CoAs truly have been both the curse and a blessing for us over the past couple of years. They have provided sound coverage, but we did have challenges at times to predict exactly how much uptake under our CoAs we would have. And of course the CoAs enabled us also to position our ships into both east and the west markets. So, going into a market now where we don’t have any CoA coverage, we are relying fully on the time charter availabilities and of course our spot exposure. But, I would like to emphasize that we have fairly large fleet. We have most of the fleet, only 14% contract coverage this year. So, we have 86% of the fleet that’s trading in the spot market, which means that we have ships in any of the basins at any given time. So, I think we are able to service the clients there to that question.

And just a quick follow-up to that. So, in terms of the spot performance that you guys have reported in the previous quarters, would you say the CoA coverage has contributed anything to that or…

Yes, in some quarters yes and no. But mostly it has been -- the CoA coverage has actually affected our spot performance negatively or flat. So, definitely, I don’t see this as a hindrance going forward. I think the -- I can maybe just elaborate on the spot performance. To take that there, this quarter was not satisfactory. And as I mentioned on the call, the main reason attributable to our performance was that we are carrying 40% of the revenues from fixtures made in Q3. Even some in Q2 and of course in a rising market, you are always lagging little bit behind.

[Operator Instructions] Your next question comes from the line of Lars Østereng, Arctic Securities. Please go ahead. Lars Østereng: Hi. Yes. I’m just looking at your slide showing the U.S. LPG disposition. And I wanted to know how you think about, let’s say domestic demand, because you forecast flattish growth in U.S. LPG demand. And when I look at EIA’s forecast, they forecast somewhat steeper growth, high single digit in fact in both 2018 and 2019. So, I just wanted to know how you think.

Yes. There have been a few delays on some of the domestic demands on the pet chem side, and I think that’s probably the main factor to us keeping flattish number into ‘18, as well as the fundamental decline in domestic LPG for heating and retail.

There are currently no more questions in queue. [Operator Instructions] The next question comes from Lukas Daul from ABG. Please go ahead.

Martin, I was wondering, we have already seen 7, 8 new build orders so far in 2018. What do you think of that? Do you think that’s going to continue? And at what level are you sort of being concerned about the balance in 2020?

Yes. As I talked about, the order book now stands at 30% and then we do indeed have seen a flurry of orders coming here in the early month of 2018 as well as in the end of 2017. And all those orders seem to come towards the end of the year and then beginning of this year. So, in totality, it’s not frightening. But of course, we’re certainly not encouraging anyone to order, or any more ships as there is, as we have talked about many times, quite a big overhang of ships. When we listen to the market, right now, it does seem like ordering has slowed down for the time being and we don’t have any immediate rumors of any more activity on that front. And as always, I encourage anyone that’s interested in investing in VLGC segment to buy stocks in any of the listed companies on either OSE or the New York market. To your question on 2020, I mean, when we get to 2020, there will be 33 ships that will be over 25 years old. So, I think recycling is the thing to -- that we think a little bit about here. And as I also mentioned during the call, we have already seen three ships recycled in ‘17 and already one in ‘18 and we’re hearing another one being rumored for sale. So, I’m hopeful that the recycling will help us towards a sooner rebalancing.

You sounded a little bit more sort of constructive on the scrapping potential going forward. But if you do a review of the fleet, would you sort of put a number of what you think the potential could be for this year and next year in terms of vessels leaving the market?

No, I think we would like to keep that to ourselves. And I think we just let people count the amount of ships over 25 years of age. And the one thing I’ll say is that of course, you have tightening regulations. You have ballast water treatment systems, the ballast water maritime convention in effect here in September ‘19 and you have 2020 coming up as regards to new sulphur limits. And of course any owner that have an old ship that’s coming up for a dry dock whether it’s a survey an immediate survey, past 23 years is faced with a significant CapEx. And we think some of these owners will hopefully think twice before making strong investments or deciding whether to set the ships for recycling. So, there might be some support to find in 2020, but we’re definitely -- we are still not overly optimistic; we are cautiously optimistic as I have been saying many times. And I still think that we have an overhang of ship that it will take time to absorb.

And you’ve been able to sort of sell or divest some of your vessels at pretty healthy prices, I’d say. Is there a potential for doing more of this kind of transactions?

We always keep our eyes out for divesting vessels at the right price and of course above long-term median prices. But, I think the fact that we are reasonably large player in this market enables us to have our eyes on the ball all the time and follow any opportunity that arises. And that might be why we have a slight advantage to follow all these opportunity, and then execute on some of them because it’s not a very liquid market, as you know.