BW LPG Limited (BWLP) Q3 2018 Earnings Report, Transcript and Summary

Welcome to BW LPG’s Third Quarter 2018 Financial Results Presentation. We will begin shortly. You will be brought through the presentation by BW LPG’s CEO, Martin Ackermann and CFO, Elaine Ong. They will be pleased to address any questions after the presentation. [Operator Instructions] Certain statements in this conference call may constitute forward-looking statements based upon management’s current expectations and include known and unknown risks, uncertainties and other factors, many of which BW LPG is unable to predict or control that may cause BW LPG’s actual results, performance or plans to differ materially from any future results, performance or plans expressed or implied by such forward-looking statements. In addition, nothing in this conference call constitutes an offer to purchase or sell or a solicitation of an offer to purchase or sell any securities. With that, I am now pleased to turn the call over to BW LPG’s CEO, Martin Ackermann.

Thank you. Welcome to the presentation of BW LPG’s results for the third quarter of 2018, the financial period ending September 30. I am joined by our CFO, Elaine Ong as always and we appreciate your interest and we will take questions at the end of the call. The Baltic for VLGCs went up nearly 107% in the third quarter of 2018 compared to the previous quarter averaging $40 per ton or about $19,000 per day. The primary reasons for a rebound in the freight market for the third quarter are as follows. U.S. LPG production grew by 12.8% year-over-year, while domestic consumption fell by 5.5% enabling record U.S. seaborne exports in Q3 2018 to increase 30% year-on-year. Middle East seaborne export volumes increased 3% year-on-year due to increased production linked to higher crude oil prices and reduced domestic petrochemical demand. The tariffs from U.S. LPG into China and tightening of U.S. sanctions on Iran impacted trade rules and increased miles traveled. These demand factors combined with a negative fleet growth as 1 VLGC was sold for recycling and no new vessels were delivered in the third quarter were the primary reasons for the market improvement. Looking into the early part of 2019, we expect the front-end loaded newbuild deliveries to coincide with the normal seasonal weakness imposing pressure on geographical LPG price spreads and VLGC day rates. For the full year of 2019, we remain cautiously optimistic as the fleet supply growth should be absorbed by the sustained U.S. LPG production growth. Incremental cargos from Australia and stable Middle East exports is the effects from the re-imposed sanctions on Iran is offset regionally. Turning to Slide 4, we review the highlights of third quarter. We generated net revenue of $82 million based on daily rates of $20,200 for the VLGC segment, with VLGC contract coverage of 15% and total contract coverage of 18% for the quarter. EBITDA came in at $35 million for the quarter, netting a loss of $3 million or $0.02 per share. As announced during our Q2 earnings presentation on August 30, 2018, BW LPG entered into contracts to retrofit dual-fuel LPG propulsion engines on 4 VLGCs including future options. With the world’s first LPG fueled VLGCs, BW LPG continues its emphasis on reducing global emissions and promoting a fuel efficient alternative for the shipping industry. On October 8, 2018, BW LPG withdrew the proposal to combine with Dorian LPG and withdrew the candidates who were intended to stand for election to the Dorian LPG board. I will now turn to Slide 5 for the overview of our commercial performance. In the third quarter, TCE rates on our VLGC fleet averaged $20,200 per day, including off-hire and $20,400 per day excluding off-hire. Our VLGC spot earnings came in at $21,100 per day excluding waiting time compared to the Baltic spot rate index of $19,000 per day for the quarter. The fleet availability remains solid at 99% with a commercial utilization at 93%, reflecting a 7% waiting time for the available fleet. We strive to make it as clear as possible for you by reporting earnings per day on both calendar days and available days. Available days are simply calendar days less off-hire days where the vessels are technically not available. If we were to report our earnings on operating days which excludes off-hire and waiting time under the definition of one of our peers, our earnings would increase to $21,900 per operating day. This is however in our view an incomplete measure of performance and peer comparisons as more waiting days simply translate into higher earnings per day. To conclude, freight levels for the third quarter were still well below the levels needed to deliver our target returns. However, I am pleased to see that our fleet outperformed our listed peers on all performance measures again this quarter. Turning to Slide 6, on Slide 6 we see the global VLGC fleet stands at 263 vessels as of 31, October, 2018 after growing by eight vessels in the first 10 months of the year. The current order book to fleet ratio stands at 14%, with one more vessels set for delivery in 2018, 22 delivering in 2019 and 15 delivering in 2020. Although the order book remains sizable, we have been pleased to note that the current ordering has slowed down which we believe is key to the sustained recovery in freight rates. Our VLGC market share is 16%, including LGCs and newbuildings. Our total owned and operated fleet comprises 51 vessels. On Slide 7, we provide an overview of seaborne LPG trade in the third quarter of 2018. Global seaborne LPG trade grew by 5% year-over-year in the third quarter mainly due to stronger exports in the Middle East and North America supported by increased demand from India and Europe. Chinese imports were down 19% year-over-year due to trade tariffs and the outages of several PDH plants with volumes from North America declining by 89% year-over-year. On the export side North American seaborne LPG exports grew year-over-year by 30% to 8.8 million tons in the quarter with increases in volumes to Europe and Japan and South Korea. Middle Eastern seaborne LPG exports grew by 3% to 10.1 million tons primarily driven by increases from Iran and Saudi Arabia. Turning now to Slide 8, here we provide an updated snapshot of the EIA’s outlook for LPG balances in the U.S. In October 2018 EIA has revised its forecast for 2018 U.S. LPG net exports to 32 million tons, up from 31 million tons from its July update driven by lower domestic demand. This implies the production growth of 10% and net export growth of 17.4% for 2018. For 2019 U.S. LPG production is expected to grow by 9% while domestic consumption is expected to increase by 0.8% resulting in U.S. net export growth of 14.5%, a downward revision from the EIA July report that expected 16.6% net export growth for 2019. With that, let me turn you over to our CFO, Elaine Ong who will walk 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 $82 million compared to $70 million in the same quarter last year. This is mostly due to the recovery in LPG spot earnings, higher fleet utilization and lower operating expenses arising from a smaller fleet size. Charter hire expenses for the quarter increased mainly due to an additional charter-in vessel. We generated EBITDA of $35 million in the quarter compared to $18 million in the same quarter last year. We recorded a net loss of $3 million or $0.02 per share in the quarter. Turning to Slide 10, we provide a snapshot of our balance sheet and cash flow position. We continued to maintain our leverage ratio of 55% and we ended the quarter with cash and cash equivalents of $46 million. On Slide 11, you will see our net debt position at $1.2 billion at the end of the quarter. Total liquidity, consisting of available cash and un-drawn facilities was at $236 million. We currently have five debt facilities. The first is an $800 million facility with $327 million outstanding and $190 million of un-drawn credit. A $400 million ECA facility with $331 million outstanding, a $221 million ECA facility with $184 million outstanding, a third ECA financing at $290 million with $261 million outstanding and finally our new $150 million term loan with $140 million outstanding. With that I would like to hand it back to Martin to conclude our presentation.

Thanks Elaine. So if you please turn to Slide 12, then I can summarize our earnings presentation. We netted a loss per share of $0.02 in the quarter on net revenues of $82 million. On 30 August, 2018, BW LPG has entered into contract to retrofit dual fuel LPG propulsion engines on four VLGCs including future options. With the world’s first LPG fueled VLGCs BW LPG continues its emphasis on reducing global emissions and promoting a fuel efficient alternative for the shipping industry. On October 8, 2018, we withdrew the proposal to combine with Dorian LPG and we withdrew the candidates who are intended to stand for election to the Dorian LPG board. Looking ahead, we expect total contract coverage of 15% for the fourth quarter and 8% for 2018 currently. With freight rates in the third quarter of 2018 reaching and remaining above breakeven levels, there has been an encouraging renewed interest in time charter activity in the market. As winter approaches, we expect a normal seasonal weakness to coincide with newbuild deliveries early ‘19 putting some pressure on the market in the short-term. We expect that the worst is behind us and that the full year of 2019 will be stronger than 2018 supported by sustained U.S. LPG export growth and additional cargos from key regions such as Australia. Longer term, we remain our view that sustained U.S. LPG production growth and no further newbuild orders remain key to reopening global price spreads and balancing the VLGC market. With that, I would like to open the call for questions.

Thank you. [Operator Instructions] Your first question comes from Lukas from ABG. Your line is now open. Please go ahead.

Thank you. Good afternoon, Martin and Elaine. Martin, regarding your comment on increased interest in TCEs, can you elaborate a little bit more about what kind of duration is out there and what is your view on taking on additional fixed income coverage going forward?

Sorry, I couldn’t hear the last end of that since then you said fixing term coverage.

Yes. I mean, how do you feel about maybe increasing some of your fixed income coverage or the discussions that you are having at levels that you view as interesting or is it still just too low, so you rather keep the vessels in the spot market?

Thanks, Lukas and very relevant question. I mean, as I just said we have 8% of our fleet on contract for next year, so a fairly low level. And as I have been explaining previously the bid/ask gap between what has been available to us in the market has simply not been meeting the levels that we felt were attractive to enter into contract, but there has been quite high activity here in the last quarter. Most deals have been of 12 months duration. So I think the market is slowly getting towards a level where we can deliver a small return, maybe not an attractive return yet, but it’s certainly moving in the right direction and we are monitoring that also on our side. We are not in a hurry to increase our coverage, we are having very relevant discussions with the number of our clients and I am sure we will be able to provide more information to the market as we move into 2019.

Okay. And then you are as you say cautiously optimistic on ‘19 and then you mentioned maybe the seasonal effect in the first quarter, is that simply a function of maybe slightly lower volumes and more vessels being delivered in the particular quarter or do you right now see anything that might influence the quarter a bit on the soft side?

Yes. I think well, as you have seen over the last couple of years the seasonality impacts have been very limited, but of course with the market which is reverting back to more normal natures we would expect to see some of that seasonality come back into play even though of course the increase of U.S. exports versus historically predominantly 80 exports will probably minimize those fluctuations seasonally, but seasonality is definitely one factor. The other is how cold winter we are going to get this year, we don’t expect as colder winter as we saw last year in the U.S. which was much colder than normal, but that could be of course a negative draw on inventories as that came to fruition and otherwise we mentioned that we have 22 vessels delivering in 2019 and a large part of those ships are delivering in the first parts of the year. So the way we see this that the market will lightly be softer in the first parts also simply because we are still at not strong levels currently. So we think the market will build up across the year softer in the beginning and stronger towards the end.

Okay. And finally with respect to Iran, can you say what you see happening there in terms of volumes whether they are being still lifted and moved and what do you expect is going to happen forward? Is it going to be replaced or does it need to come from the U.S.?

The market in – yes, I mean, with the re-imposed sanctions, of course most of the operators and ship owners in the markets are unable to call Iran. So we will definitely see the impact of reduced export from the country. I think we are already seeing that not just in the LPG space, but across several products, but they might see a tiered market where you will see some owners, none of the listed ones, but some owners that we will be operating for these kind of volumes, but it will be in a much smaller scale, but I don’t think that if we do end up with a second tier market that would have proved positive again for the overall market. So we are not worried by Iran and as I also mentioned on the call, we think that increased volumes from other countries in the region will outweigh any reductions from Iran.

Okay. Thank you very much.

Yes, you are welcome.

Thank you. There are currently no more questions in queue. [Operator Instructions] There are currently no more questions in queue. We will now take questions from the webcast.

Okay. So there is a few questions on the webcast. Let’s start with a question [indiscernible] from Carnegie. Hi, Martin and Elaine. On your neutral view on the middle, Eastern LPG volumes despite Iran sanctions being re-imposed, where does the incremental volumes come from and in light of potential upcoming OpEx cut, how do you expect LPG volume could be affected?

Thank you for that, Maurice [ph]. I think I shared some light on that in my answer just now to Lukas on Iran, but I can try to elaborate maybe a little bit more where will the incremental volumes come from? We are seeing incremental increases from Saudi, from the Emirates, especially [indiscernible] will have more volumes coming out and to some extent, Qatar as well. So the other Middle East countries will all be adding positively to the volumes out of the region. And yes, I think we can go into details on the OpEx cuts and how we think that would be adjusting LPG volumes, because there is quite a lot of optionality in that question. So I think we are going to take that one offline with you either.

Sure, okay. So let’s do another question from the web, we have a question from Axel Styrman from Nordea. If WTI takes at around current levels do you expect this to reduce LPG export goal from the U.S. relative to your current forecast and what is the latest news on markets Hook volumes and potential ramp up of export there in the near-term?

Thank you very much. The first question is not easy to answer, but I mean I would say that when we look – if we look back 2 years and what we were saying then we were confidently saying that if the market on oil price can sustainably stabilize at 50 or above, we would be very optimistic for continued U.S. production growth and hence export growth especially vis-à-vis a very flat domestic consumption. And I think even though we have seen drops in the oil price recently, we are still far above the numbers we were looking at back then. So we remain quite optimistic on U.S. – continued U.S. production even at current levels of an oil price. So we definitely maintain our positive production look there. And then the only thing that can potentially delay that is infrastructure in what we have seen a little bit in the Permian and Eagle Ford basins where it has been at occasions difficult to get LPG as fast to market as one wanted to. For Marcus Hook I don’t have any other intelligence than what they have said publicly that they will honor their contractual volumes. We are probably thinking of that as five incremental shipments on VLGC equivalents in the first phase until they – you get their full capacity up and running.

Okay. We will do another question from the web here. It’s [indiscernible]. Do you think consolidation is needed in order to reduce the current supply overhang of ships or is demand growth alone enough to absorb the supply?

Although we have said it before both in words and actions that we are positive towards further consolidation in this market we show that with our acquisition of Dorian. We demonstrated it over the summer with our offer on Dorian in terms of the combination we proposed, but we don’t necessarily think it’s a direct receipt for the current supply overhang, we think it will be advantageous for the market overall. But we think that there is sufficient demand growth in the years to come and we also see that there is quite a number of ships looking at 2020 onwards, which will be over the age of 25% and ultimately will be recycled or put into storage. So we remain positive on the outlook of the market.

Okay. And then there is a question from Santiago Domingo Cebrian from Solventis He asks IMO 2020, could you give us more color on what actions you are going to take to face it scrubber or LPG retrofit engine. And he also asks about after dropping your bid on Dorian, are you thinking about new targets, any M&A expected in the coming years?

Well, to start with the last one which ties into the question or the previous question, we obviously do not announce any ideas about expected M&A going forward. As we have always been saying we have our eyes open. We don’t have to do anything. We are a sizable company as this. We have 51 vessels. We have a good, strong balance sheet, but of course we keep all options open in terms of continue to create value for our shareholders going forward. So unfortunately, it can’t be anymore precise than that. As to the IMO 2020, I mean, as we have said last quarter, we are enormously positive in terms of the refitting of the LPG installations of our engines. We think it’s a very good solution for the climax. It provides 11% superior fuel efficiency. So it reduces the volume of fuels. It reduces emissions. Drastically, it takes out all the SOCs, all particular matters. It reduces CO2 by 25% and I could probably go on and on about why LPG is a very positive fuel solution, not just to comply with IMO 2020, but simply as a fuel for the future. So, LPG propulsion is a big leap over and above IMO 2020, but of course we are starting with 4 ships. It’s a CapEx intensive exercise. If you compare it today to the pricing of every fuel oil versus the cost of LPG, it makes a lot of sense with LPG fuel engines, but of course, we are not obliging to the fact that it’s a fairly big investment, so ultimately we will need to see how the demand in the market will be for these ship types and we will continue to market this to our customers and clients. We are otherwise firm believers that 2020 regulations will be dealt with by far by switching to complying fuels as that is the long-term solution required to cleanup the industry and switching to a much cleaner fuel to reduce emissions and of course the sell-through impacts on the health and safety across the globe.

Okay, then there is no further questions from the web.

Okay. Well, then thank you very much everyone for joining our quarterly updates and we will speak again next quarter. Thank you.

Ladies and gentlemen, we have come to an end of today’s presentation. Thank you for attending BW LPG’s third quarter 2018 financial results presentation. More information on BW LPG is available online at www.bwlpg.com. Goodbye.