BW LPG Limited (BWLP) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to BW LPG's Third Quarter 2020 Financial Results Presentation. We will begin shortly. Bringing you through the presentation today will be CEO, Mr. Anders Onarheim; CFO, Elaine Ong; EVP, Commercial, Niels Rigault; and EVP, Technical and Operations, Pontus Berg. 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 CEO, Anders Onarheim. Please go ahead.

Thank you and welcome to the presentation of our results for the third quarter and the period ending September 30 this year. As usual I am joined by our CFO, Elaine Ong, our EVP, Commercial, Niels Rigault and also with us today is EVP, Technical and Operations, Pontus Berg. Thank you for taking the time and we will take questions at the end of the call. The good old saying that when the going gets tough, the tough get going, I think that's been I think motor I think for all of the whole shipping community and certainly it has also been that for us. And I am going to start by really thanking and complementing the whole team from officers and crew and colleagues for I think great efforts in very, very difficult times. I think also against a very tough quarter, I think the team has delivered not just a solid Q3 result, but also they delivered the world's first VLGC that is powered by LPG propulsion technology, of that we're very proud. We have had to navigate COVID-19 restrictions, oil price disruptions, and uncertainties in both workplace and daily lives. And as I said also as last quarter, COVID-19 has made crew changes almost impossible. Inspections were difficult to conduct and volatile markets kept the commercial team certainly on their toes. So again I am very proud to lead such as a competent team. If we go to Slide 4, the star for the quarter is clearly BW Gemini. This is the world's first Very Large Gas Carrier to be retrofitted with the pioneering LPG propulsion technology. The Gemini is currently on a historic Trans Pacific voyage on full LPG propulsion to the Enterprise terminal in Houston. We really think that LPG as a fuel is a promising solution for sustainable shipping. And as you know, we have committed over $100 million to retrofit 12 of our VLGCs with this new technology, because we think it actually makes sense from and environment point of view, operational point of view, and economic point of view. We are pleased to bring BW Gemini to you in the form of an Augmented Reality Model. You can download using your mobile device. A video is also available on YouTube and on our website. So to Page 5, the highlights. Again I think we delivered a solid quarter despite significant volatility. The freight rates on our VLGC fleet averaged $26,800 per day and generated a net profit after tax of $25 million or earnings per share of $0.18. So far this year we have now achieved the year-to-date return on equity of 19% and generated $400 million of free cash flow. And I'll continue to focus on returns and again I see the community very often talking about net asset value. In our business we really think, focus on return on equity which on capital employed is really what matters. We are also happy to announce that we continue to return cash to our shareholders. The Board has declared a Q3 cash dividend of $0.15 per share amounting then to $21 million. With this dividend, we have year-to-date paid $0.15 per share. This represents 42% of our cumulative earnings per share so far this year. Our dividend policy remains the target to payout ratio of 50% on an annual basis and this of course leaves room for some upside in excess of 50% in the last quarter, but again that's for the Board to decide. Turn to Page 6, so our rates collapsed to OpEx levels at the end of the second quarter and recovered to above 40% later. And of course this makes a huge selling [ph] for the commercial team. And $8000 you really start wondering you know if you said secure more at 15 or even 18 or 20. So it was a tough quarter for us to make decisions. Of course the V-shaped recovery in the market makes Q3 the weakest quarter in this year and we can already say that looking ahead. So our day rates including both spot and time charter earnings averaged $26,800 per day in the third quarter. And again, this allowed us to continue to generate returns for our shareholders with the return of capital employed of 6% and return of equity 8% for the quarter. We have significantly also paid down our debt. Our net leverage ratio has decreased from 54% in the third quarter of 2019 to 44% this year. So again, we manage both so we can earn good money, take down our debt, pay dividends and still put some in the bank. Now Niels Rigault will take you through the market view and the commercial update. Niels?

Thank you, Anders, and good afternoon, morning, and Happy Friday to all of you. Today VLGC freight market is strong. It seems like the work is behind us with rates stabilizing at around $50,000 per day. This is supported by resilient U.S. export, recovery from the Middle East, widening arbitrage and reduced fleet supply due to shipping inefficiencies and drydocks. We have fixed approximately 80% of our Q4 spot and time charter available days at an average rate of around $36,000 per day on a discharge-to-discharge basis. We have upgraded our views for the medium term and we now have optimistic views for 2021. We do believe that the U.S. LPG production remains sensitive to oil and gas prices, but that has to be more resilient in a low price environment. In the medium term based on recovering in the Middle East follows the OPEC+ production cuts. Medium term VLCG fleet market also continued to be supported by shipping inefficiencies from port delays, bunkering delays, crew changes and heavy drydock schedule. We expect that over 23% of the fleet will be drydocked next year. Slide 9. In Q3 the U.S. LPG exports continued to offset falling supplies from other regions. We have seen both Q3 and year-to-date import rate to China to fall. However, we now see Chinese import recovering with incremental demand from the [indiscernible] plants. The decrease in Chinese import was offset by strong import into the other regions. Year-to-date imports to both Japan and South Korea have increased significantly. India continues at the most consistent and meaningful driver of LPG demand and is now the second largest LPG importer after China with LPG demand at 12% year-to-date. Notably, India started to import from the U.S. since last year. The duration of the voyages is more than 4 times compared to the voyages from the Middle-East supporting ton mile demand. Since 2011, number of cargos imported into India has increased from 70 to 270, an annual growth rate of 19%. BW LPG has chosen to take part in the Indian growth story and has increased our presence with more TC [ph] fixtures and additional sales of one vessel into our JV India. Turning to Slide 10, about U.S. LPG production, you will see robust US LPG productions despite lower oil and gas production compared to 2019 levels. U.S. LPG production has been strong. According to EIA, as of the 6th of November, average daily U.S. LPG production is 2.6% higher compared to same period as last year. This is supported by higher gas content in oil-directed productions, higher amount of NGL and infrastructure developments which reported more oil [ph] gathering, processing and transportation of NGL. As a result, we have upgraded our view towards 2021, U.S. LPG productions and export under current oil and gas prices. At Slide 11, you will see EIA short-term energy outlook released in November. EIA restates a growth in U.S. LPG exports by 90% in 2020 and have revisited its forecast for 2021, export up by $1 million from its October release. Turning to Slide 12, the newbuild order book has increased by five vessels in Q3. It now stands at 12% of the current fleet. I'm glad to see that over 70% of the order book is LPG proportion. But we want to continue to stress that there is no reason to order new ships to make the fleet more efficient. More than 150 existing VLGCs can be retrofitted. From an environmental standpoint newbuilds does end up justified this Q2 savings with actually [ph] payback period of over 15 years contra and retrofit of 6 months. Slide 13, due to the uncertainties of technology we will develop to meet the 2030 IMO targets marketed from benefit from second hand vessels compared to ordering new ships today. And newbuilding prices have softened while the second hand prices have firmed up and prices are well about newbuilding equivalents. Also following the V-shaped recovery in the VLCG spot market we have also witnessed a similar recovery in VLGC time charter market. In this [indiscernible] and current FFA market indicates for calendar 2021 VLGC rates to be above $35,000 per day. Despite the volatility and uncertainties in the market, we have maintained high commercial utilization at 97.6%. In addition, a well positioned fleet with strong earnings from our time charter coverage has also protected us in the market downturn. In Q3, we had one time charter contract being cancelled with the cancellation fee recognized for Q3. We have fixed the ship again after 12 months TC [ph] which will be recorded in Q4. That was it from me, and our EVP of Technical Operations, Pontus will take you through the technical updates. Thank you.

Thank you very much Niels. Turning to Page 18, as mentioned by Anders and seen on Slide 6, we continue to deliver really strong technical and operational performance in the quarter despite the unprecedented challenges from the world around us. Our planned drydocks and retrofits remained largely on track. Our final scrubber installation on BW Carina was successfully completed in October on time and budget. The retrofitting of BW Gemini is now completed. She is fully certified by DNV-GL. BW Leo and Orion have completed their drydocking and will being their gas and sea trials shortly. Leo is supposed to start towards the end of next week already. BW Gemini is on her first ever LPG propelled Trans-Pacific voyage on bound to Huston for loading at Enterprise. She will there lift the largest ever LPG cargo on a single keel following our retrofit and modification works at Yiu Lian shipyard in Shenzhen, where after she is very likely to turn back to Far East. Crew changes remained challenging. We have managed this well with contract over runs on a declining trend. We have completed around 900 crew movement year-to-date. However, still 35 crew members are over a three month delay. All in all, the technical operational teams on board and offshore performed extremely well all things considered. With that short update, I will turn over to our CFO Elaine Ong, who will walk you through the financial position and results.

Thank you, Pontus. Here on Page 20 is an overview of our income statement. Our TCE income was $101 million for the quarter and $413 million for year-to-date September. Included in our TCE income for the quarter is negative $3 million impact related to the effects of IFRS-15 where spot voyages that straddled the quarter end are now accounted for on a low to discharge basis. Vessel operating expenses came in at $7,600 per day for the quarter, and $7,500 per day for year-to-date September. This includes additional crew costs due to the impact of COVID-19. Our operating expenses remain in line with our expected run rate for this year. EBITDA came in at $67 million for the quarter and $307 million for year-to-date September, representing a strong EBITDA margin of 66% and 74% respectively. As previously highlighted, with effect from 1st Jan 2020, we revised our vessels useful life from 30 years to 25 years. The impact is an increase in depreciation of approximately $6 million per quarter. Profit after tax this quarter was $25 million or $0.18 per share. For year-to-date September, our profit after tax was $167 million or $1.21 per share yielding an annualized return on equity of 19%. Turning to page 21, we provide a snapshot of our balance sheet and cash flow statement. Our vessels book values supported by broker valuations stood at $1.8 billion at the end of the quarter. Shareholders' equity was $1.2 billion or $8.42 per share. During the quarter we generated $89 million of net cash from our operating activities and ended the quarter with $100 million of cash. Out $300 million revolving credit facility remains undrawn, giving us $400 million of available liquidity at quarter end. Turning to page 22, the strong cash flows generated over the last 12 months with minimal capital expenditures, over the same period have allowed us to paydown debt, thereby reducing our leverage. Our net leverage ratio decreased by 10% over the last 12 months from 54% at the end of Q3, 2019 to 44% at the end of this quarter. This is even after paying out $166 million in dividends for 2019 and the first half of this year. Our all in cash breakeven for 2021 is $25,300 per day, which is the average TCE needed in 2021 to cover all of our cash costs, including drydockings and the equity portion of our fleet CapEx upgrade. Page 23 provides an overview of our liquidity and debt position. Our net debt position at the end of the quarter was $954 million. Of this, $202 million relates to lease liabilities arising from our time charter in vessels, while all borrowings relating to our trade finance facilities were fully paid. The remaining $861 million debt outstanding relates to our five term loans. In October this year, we will fully repay the $150 million term loan. With this, we will have no major balloon payments due in the next five years. On this note, I'd like to hand the time back to Anders to conclude our presentation.

Thank you, Elaine. So I will summarize. You can see that on Page 25. So again, despite many challenges for the quarter, it was still I think we delivered a solid results, $0.18 per share or $25 million. I think at the back of these strong earnings and again take into account our balance sheets liquidity CapEx and updated market outlook; I think we are very happy to pay a dividend of $0.15 per share, margin at $21 million. And combined with the $0.35 paid for Q1 and Q2, the dividend is 42% in our year-to-date net profits. As a matter of fact, the dividend announced today, the company has since its IPO declared 63% of accumulated earnings as dividends, so that's not bad. As you gather by now, we're quite excited and proud to be the first one to have an LPG powered vessel in operation and on our way to Houston for loading. And we remain firmly committed to the retrofitting of the other 11 vessels, with this new technology. We want to take the lead and we're doing that. So subsequent to the quarter, at quarter end we have exercised that option then to purchase the bareboat and bare charter vessel BW Empress in October 2020. And as Elaine said, we also fully repaid the $150 million term loan, and we will have no major balloon payments during the next five years. Finally, I would like to provide a summary of our outlook on the VLGC market. As you've heard from Niels, we have upgraded our market outlook under current oil and gas prices. We are now cautiously optimistic for the 2021 VLGC market. This is supported by resilience U.S. LPG exports, reduction in fleet supplies, due to increased efficiencies relating to the COVID-19 restrictions and a high drydocks schedule in 2021, as well as a recovery in the Middle East LPG exports, according to the current OPEC+ production agreements. Having said all that, the market remains extremely volatile and recovery to higher oil and gas price environment will certainly reiterate a more positive outlook. We've seen some, positive development shortly, lately, but again, it's -- we know that this market is quite volatile, so we will just try to steer us solidly and as steadily as we can. So with that, I'd like to open up the call for questions. Thank you.

Thank you. Thank you, sir. [Operator Instructions] We have a question from the line of Lukas Daul. Please ask your question.

Thank you and good afternoon gentlemen on the line. Can you say how much you have paid for the Empress when they were buying it back?

Do you want to tell Niels or not.

I don't think it will, I think it is the reason why we took the purchase option, I think this is a very lucrative purchase option, so it's still below the market, so…

Yes. Okay, so maybe a little bit easier question then. Anders when you talked about the heavy drydocking schedule for next year, could you sort of compare how this is being affected by sort of COVID, or the logistic issues around it? If you sort of, say, in a normal market, this would have taken X days next year because of AMB [ph] this is going to take Y days, could you sort of shed a bit of light on that?

I don't think I can give you X and Y days, but I mean, it's clearly I think, what we talked about internally at least, is I think we see almost a 20% increase or slowdown call it that. But again, and it's so difficult of course sometimes it's purely because it's impossible to get diverse, and because of COVID. Also, of course, the market, I would say has been, this year, probably stronger than most of us in the industry expected. And I think that also has perhaps affected, and made the decision easier to, postpone and push back. So, but it's -- so I don't know, Niels if you can quantify it more than that, but I think it's, because I think it's difficult, there are many, many reasons for it. But clearly, we're very happy to see that we've been able to complete our drydockings now on time and budget. So, Niels, do you want to add anything to that?

I mean may be on the docking pump [ph] this is one, but we see that obviously, it’s a huge, it's a lot of inefficiency there and the winner is the one which could handle this I bet and I think that we're doing our best to be actually efficient in an efficient market, if I can say it like that.

Okay, so for the quarter that you have due for a special survey next year, excluding those that are doing the dual-fuel conversion, what do you sort of assume they will spend in the shipyard measured by days.

Elaine, want to take that?

If you would allow me, we will spend as much as we normally spend and we will take as long time as we normally take. The only thing that is complicating things is that service engineers that we need to fly in that because the competencies isn't available locally, we need to plan a lot ahead because they all need to spend the two weeks sitting in quarantine in some hotel somewhere, and that's of course, a small added cost, but it's minimal and won't be visible in the numbers anywhere. So we don't, we haven't seen any delay so far this year. What we have done is, we have delayed to actually go into drydock because we have needed to plan a little bit better and get a grasp of the situation. But so far no issues and we are actually tomorrow docking in another ship in Dubai drydocks where we again expect no deviation from an ordinary budget and time and cost.

Okay. And then one sort of unrelated question on India, that you mentioned as a sort of a big growth market, now also taking volumes from the U.S., I mean, what has led to that switch and how do you sort of expect that to develop going forward?

Niels, why don’t you take that?

Yes. I mean, obviously the two biggest buyers of LPG in the Middle East is China and India and India has preliminary bought all their LPG from the Middle East, but they also see the prices in U.S. and that it makes sense also for them to buy U.S. products and ship it to India. So it's, as I said, we have now for the first time see actually, now LPG going from U.S. into India, which is obviously good news for us, shipowners.

Okay, thank you and have a good weekend.

Thank you.

Thank you.

Please go ahead sir.

Yes, let's take some questions from the webcast. So let's start with a question a from Petter Haugen. He says, good afternoon. Could you expand on why you upgrade your 2021 outlook, despite the EIA expects a 10% decline in net exports from the U.S.? Is expected improvement from Middle East sufficient to counter U.S. declines or do you believe EIA is too pessimistic?

I can start, but then Niels you can continue. I think first of all, of course, we do our own estimates, we look at what the EIA does and we and we also watch very closely, what happens over the infrastructure in the U.S. and everything else. And I think, so we have based on what we see, in terms of both the infrastructure, we've seen also this year that despite lower oil production, we've seen higher LPG production and so I think it's a combination of many factors, but I think again, and but we're also saying we're not -- we're going out, I'm not saying we're super bullish, but we've upgraded our view and I think it's based on many of these factors. And we still see also the demand side, quite good. We're seeing the demand picking up in India has been very strong, we’re seeing it in China. And, so I think it's a combination of many things that have made us upgrade our view. So Niels, do you want to specify some more or?

I think you brought it up. I mean, I think for everyone, the U.S. production has been much stronger than everyone had anticipated, due to the fall of all oil prices. And so I mean, we -- the prices are positive and we also think that inefficiencies which we have experienced this year will also continue next year. As I said, 23% of the fleets will drydock next year. So that will have an impact on supply and as I said, if India continues to buy U.S. products, it's four times the ton mile compared to what they used to do. So yes, I think that's the main drivers that we are more optimistic for next year.

Okay, thank you. We'll go on to our next question from the webcast then from Nick Linnane. He asked, how much have Asian LPG imports been increased due to lower refinery production of LPGs this year? Yes, how much extra demand in tons or ships?

Niels, do you want to try?

I was thinking that, that was a terrific question for you Iver, you know the answer.

Okay. So yes, we have that refinery runs are down by around 20% and around -- so in terms of that's about half a million tons of LPG which is, yes, I don't know how much?

It difficult, but you could fill it in. And I'll mention again, India and maybe it is all definitely that the refineries due to the COVID went down and this is a huge import of LPG which was needed because of the shortfall from the refineries and I think the same thing happened in Brazil.

Yes, okay. We have one more question on the same. It's for Elaine, I think, what is your annual debt amortization requirement going forward?

I think if we take into account the $150 million term loan that was paid off in October on a go forward basis, we are looking at just under $100 million.

Okay. Then there's another question from Maria [indiscernible] on the webcast here. She says, thank you for good presentation. It says in your presentation that estimated GC [ph] coverage is 24% for 2020. What is the average tenure on the GC contract?

Niels?

Well, that's the question for TCE, I didn’t fully understand the kind of the question.

The TCL is TCL [ph].

Okay, yes. We have 14% for 2021. And what was, I mean? Sorry, the average of the next 10 years?

Yes, but mostly one year contracts. Right, but there's some longer ones.

Okay, I'll get it. Okay I'll take it yes. So the majority is a one year contracts, but yes, we have some of them are over two years or 24 months. Yes, the majority is one year. Okay the length of the contract. Okay, go it. And in LPG that's the norm is basically a 12 month contract. That's also where the traders, they are doing their product contracts for 12 months, and that's reasonable. So they do their shipping for the 12 months.

But I think it's also what we choose, because I mean, sometimes even we are offered perhaps, longer contracts, but at levels that we don't find that attractive.

No, sure.

Okay, then I think we have one more question on the phone line.

Yes. So we have a question from the line of Eirik Haavaldsen from Pareto Securities. Please ask your question.

On the Empress, do you intend to keep her unlevered at this point?

Elaine?

Hi, Eirik. Hi, good morning and good afternoon. Yes, I think for the time being when we probably will keep on a little bit.

Yes and then on the works [ph] into the India JV, roughly what kind of level are you, can you just slow starts, what -- because I don't believe it's been disclosed what the price or value there is?

Eirik we will prefer not to be disclosing that.

Okay, and then finally, then on your time charter coverage for 2021. You haven't really, there's not a lot of change since the last report. But there's been, I mean, a lot of broker chatter and gossip as recently as this week. You remember to fixed out two ships at $36,000 a day. So is there any reason why -- or are those reports wrong? I guess you're seeing them as well. What are you doing now on the time charter side for 2021, if you can elaborate a little bit?

Niels, I think that question is for you then.

Yes, this is so far. I mean, if you look at it just for the Q3, our coverage is 14%. Yes, we have increased a little bit further our coverage for next year and as has been reported a little bit in the market, the focus has been India, as I've mentioned. Yes, sorry?

Yes and I think as you said, Niels, I think I mean, I think you can take the same. I think we really think the Indian market is very interesting and I think we want to increase our presence in that market. And so I think that you can see, that is also one of the reasons and of course, again the levels are attractive in our view and we believe the Indian market is really going to remain in a growth market here for quite some time if we took off.

But is your JV essential for that business? I mean, do you, because not that many of your, at least publicly listed certainly competitors are as active in that business, and of course we see the premiums that are being reported. So is this, this JV when you now inject another ship into it and obviously we see as you say that Indian LPG demand is growing tremendously, longer distances is that -- is this a market that is more difficult to tap into for others that don't have that presence?

Yes, I think that's true in many ways. I think, of course, also Indian Flag make a difference within first, right of refusal, but I think, it does help us. It does give us I think you know an edge or some of our peers. And again, and I think you can expect us continue to focus on India as an important market for us. And whether that means, we expand at India operation, but we will definitely focus on this because we think again this is -- LPG is great for India and India is good for LPG shipping.

No, no just to add to what Anders said, I mean obviously with the JV and we chose to our Indian clients. So it's…

Yes, finally one housekeeping question for Elaine, with the Empress now then back in your fleet, does that mean that the charter higher expense line on your P&L will be zero from now on?

No, we still have, we will spend one more ship on the charter expense line without the Empress. Thanks, Eirik.

Okay. Thank you. Thank you, everyone.

Thank you.

We have another question on the line from Dennis Anghelopoulos. Please ask your question.

Hi, guys, just one followup on the remaining CapEx. It's our understanding that the payments that are made, essentially the total CapEx has been made so far, that goes into prepayment accounts and doesn't flow out of the cash flow. Could you sort of if that's true, could you elaborate on what actually the remaining cash outflow is, if it's not exactly the same as the remaining CapEx to be paid?

Elaine?

Yes, I could do that. On the CapEx to be paid, I guess, if you're looking at the chart, we have $30 million that has been paid, sorry $40 million has been paid, $30 million of which is propulsion related for the 2020 plans. And then we have another $21 million coming due in the 2021 plans for the LPG retrofits.

Okay, but how much of that's going to be cash outflow in the – because that's sort of the thing I'm trying to get, we have CapEx 115 remaining to be paid is just as that what we should plug into our models, 115 in the cash flow or…?

Are you plugging into the go forward number or you're plugging into the current number?

I'm just talking about, when we model it in cash flow, right, we say how much goes essentially into cash outflow for the investment. Yes, go ahead…

So when you look at Page, so on Page 18 of our presentation, the remaining CapEx to be paid in 2020 will be $21 million and $86 million in 2021. So that's -- there's a table at the bottom of Page 18.

Yes, okay. No, I understand that. But I just because from the previous quarter that didn't match with your cash flow statement, then there as an explanation we got was because it was that you were forwarding them to the prepayment account, and then it was going to…?

These are the numbers that will match now.

Okay, perfect. Thank you very much. That was just a clarification I wanted. Sorry for that.

Thank you.

Thank you.

Okay, we're going to do one more question from the webcast. Is Panama Canal congestion an issue in the market for VLGCs currently? If so, how long do you typically have to wait on each side and how long do you expect this to continue? Is it mostly COVID related or other reasons? Anders maybe you can answer that?

Sure. We actually don't have to wait then because we are very prudently pre booking all our northbound slots. And the delays have been if you come, I mean if you actually show up at the Panama Canal on books, it was a little bit over a week. I think we were up closing in on 10 days at the most, but it has softened a little bit after the canal has cleared some backlogs off the bad weather and massive loadings and traffic afterwards. But yes, it is mostly due to COVID and Corona and a crunch on people in the area as well. But we do still pre book.

Okay then, we have no more questions on the webcast.

[Operator Instructions]

Okay, it sounds like there are no more questions. Thank you very much for listening in and we will continue to try to deliver results throughout the year. Thank you.

Thank you, sir. We have come to the end of today's presentation. Thank you for attending BW LPG’s third quarter 2020 financial results presentation. More information on BW LPG is available online at www.bwlpg.com. Good bye.