BW LPG Limited (BWLP) Q4 2023 Earnings Report, Transcript and Summary

Welcome to BW LPG's Fourth Quarter 2023 Financial Results Presentation. Bringing you through the presentation today are CEO, Kristian Sørensen 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: 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 US, 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 three weeks due to cold weather in the US, which increased U.S. LPG prices and halts to the US 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 US 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 US, which closes the LPG price arbitrage between the US 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 US 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. The US exports for February are record high, and driving the recovery of the rates together with 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 VLCC 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 the Middle Eastern exports to be stable this year, before they start growing on the back of the massive LNG expansion in the region from 2025, 2026, 2027 onwards. And to sum up, we maintain our positive view for 2024, based on solid underlying fundamentals and added 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 waiting days. For the first quarter, 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 trans-Atlantic voyage from the US after a long ballast from the Far East. We anticipate that we will recoup this ballast cost for the voyages in the next quarter. Looking at our coverage for 2024, 23% of our fleet is already fixed under time charter, with an average daily rate of $41,500. We've balanced our TCE-in and TCE-out commitments for 2024 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 am pleased to let Samantha, take you through Product Services update and our financials. Over to you, Samantha.

Thank you, Kristian. And good morning, good afternoon to everyone. Let me continue to add some colour to Product Services' performance. The net asset value of Product Services increased by, US$18 million to US$62 million at the end of December. The increase comes from the positive gross profit after netting off other expenses. In Q4, Product Services generated a gross profit of US$32 million which includes US$50 million of unrealized cargo and derivatives gains, offset by a US$17 million realized loss during the quarter. The loss includes the depreciation from Product Services' lease-in vessels. Other expenses of US$14 million largely comprise of G&A expenses, including bonus provision, and additional income tax provisions. The reported net profit does not include the unrealized mark-to-market valuation of physical shipping position which was excluded from the accounting result. Our internal valuation of these TC-in contracts at the end of December was US$ 84 million. This positive value reflects the continued strong development in the 12-month forward freight market for VLGCs, which is the period we use to evaluate freight positions in Product Services. Due to the increased volatility in the LPG product and freight market that in Q4 we reported a higher average VAR of US$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 US$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 US$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 US$1.6 billion. We continue to see a healthy headroom for more than $400 million comparing broker valuation with our fleet's book values. Our annualized Q4 return on equity and capital employed were 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's 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 US$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 two 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.

Thank you, Samantha. We will open the floor for questions now. [Operator Instructions]

Yeah. So we have one written question here from Johanna Nero [ph] asking if you could elaborate on how increased ammonia new buildings may bring uncertainties to the VLGC market? Kristian Sørensen: 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 new buildings 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.

We have a question. Jørgen Lian [ph]. Please go ahead.

Yes. Hello, 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: Yeah, sure Jørgen. 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.

Okay. Thank you. 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?

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.

Okay. Thank you.

Then we'll move to the next question here from Axel Styrman [ph]. Kristian, you mentioned the risk that VLEC newbuilds potentially may trade in LPG, but you then referred to the ammonia trade. I assume you meant VLAC newbuilds? Kristian Sørensen: Yeah, you're right. Actually, it's my English which is a bit broken so it's VLACs ammonia carriers, not the ethane carriers.

We have a question here from Desmond Burmil [ph]. When you do -- when do you expect environmental regulations concerning the slower ship speeds to materialize? Kristian Sørensen: Well, the world fleet of VLGCs have already 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.

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

Yeah, a question from [indiscernible]. What is your estimate of negative ton-mile demand impact for full year 2024 due to increased Panama Canal transits? Kristian Sørensen: So negative ton-mile demand, you can say that if you turn it the other way around if the ships are sailing from the US via South Africa towards the Far East, it's a 50% -- approximately 50% longer voyage on a round voyage. So I think 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.

And we have a question here from Nick Liname [ph]. You had some tax expense in the fourth quarter of 2023. Can you explain what drove this?

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 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.

Then we have a question from [indiscernible]. What is your view on demand from China? What is the latest on PDH utilization? Kristian Sørensen: 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. The imports especially last year was very, very high despite of this, because, you 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, 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 they have.

[Operator Instructions]

We have one more question from Nick Linnane here. How many VLAC orders do you see in the order book? Kristian Sørensen: Well, the vessels on order with ammonia lifting capacity is 73, 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 load more and more. And in combination it's 73 in total in our list.

[Operator Instructions] We have one question coming in.

We have one question from Desmond Burmil [ph]. Do you plan on repurchasing any more shares? Kristian Sørensen: Samantha, will you reply on this?

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

We have another question here from Nick Linnane. What do you think is current US LPG export capacity? Kristian Sørensen: Well, we can see that in the US 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 months -- on a regular months only. And then in addition you have the US East Coast, where there is another 10% and -- or not 10% but 5% of the US export volumes are currently exported from the US East Coast. And then you have -- on the west coast of Canada and the US, 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 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.

[Operator Instructions] Kristian Sørensen: Okay that rounds off our quarterly earnings presentation so thank you everyone. And then see you next quarter

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.