Dorian LPG Ltd. (LPG) Q3 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Dorian LPG Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website, which is www.dorianlpg.com. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you. Mr. Young, you may begin.

Thank you, operator, good morning. Thank you all for joining us for our third quarter 2017 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; and John Lycouris, Chief Executive Officer of Dorian LPG USA. As a reminder this conference call webcast and a replay of this call will be available through February 6, 2017. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer to you to our fiscal third quarter 2017 results filed this morning with the SEC on Form 10-Q, where you'll find risk factors that could cause actual results to differ materially from these forward-looking statements. With that, I'll turn over the call to John Hadjipateras.

Good morning and thank you all those joining us today. After my very brief intro Ted will review our financials, and John Lycouris will update you on the broader market and our operating environment and finally we will take questions. Dorian is the largest owner of ECO VLGC, we own 22 VLGCs, all built through high specifications at two of the world's best shipyards. The Helios Pool, we co-founded and jointly owned with Phoenix is the second largest LPG pool in the world, its fleet comprises of 25 VLGCs, including 18 owned by Dorian, four owned by Phoenix tankers and three entered by Oriental Energy, which is one of the largest PDH plant operators and LPG Importers in China. We have four VLGCs on time charter outside the pool and two on time charter within the pool, three of these have a duration of greater than two years. Collectively time charters account for approximately 23% of our fleet’s available calendar days in fiscal 2017. For the quarter ended December 31, 2016, our pool VLGC utilization rate was 98.1% and our overall VLGC utilization rate was 98.4%. As a reminder, we calculate fleet utilization as defined in our filings by dividing our total operating days in a period by the total available days in that period. The average TCE for our fleet, including time charter ships was $17,796 per day and for our pool ships $14,088 per day. Global LPG import volumes have continued to expand. Since the OPEC production cut and the increase in oil prices we have seen a very solid spot chartering environment and with much more modest fleet growth in 2017 compared to 2016 this market environment will hopefully allow, the 24 new buildings expected this year to be absorbed without significant market disruption. Activity during the quarter improved steadily with vessel utilization and profits growing sharply during the three month period. Rates and vessel utilizations have continued to perform strongly through the month of January. And we remain guardedly positive about the current overall environment. I’ll hand over to the call to Ted now, to discuss financial results for the quarter.

Thanks John. The quarters results reflect the improvement that the LPG market has experienced due to the improved outlook for LPG shipping and more favorable commodity prices. Before I move on to discuss the results for the quarter I wish to remind you that we look at our business from a long-term perspective. For the quarter ended December 31, 2016 we reported total revenues of $35.7 million, representing net pool revenues from the Helios LPG pool, charter hire and voyage freight revenue earned through our VLGCs. As we previously described, we report our share of the Helios results as net pool revenues in our income statement, which represents our percentage participation in the pool revenues, less pool voyage expenses and pool general and administrative expenses. Our share of net pool revenues for the quarter was $22.3 million. John also already mentioned our chartering performance and I would add that those numbers were slightly reduced due to drydocking of two of our vessels. Our voyage expenses were $1.2 million for the quarter a 73% reduction from the three months ended December 31, 2015. The decrease is due to the increase in number of our vessels operating in the Helios LPG pool, and our voyage expenses are netted against revenues. Vessel operating expenses for the quarter were approximately $17.1 million or $8,456 per vessel per calendar day, which is calculated by dividing the vessel operating expenses by calendar days for our VLGCs for the relevant time period. For the comparable three-month period in 2015, our OpEx per day for VLs was $8,180. The year-over-year increase of $276 per day in our VLGCs was related principally to a $311 per day increase in cost relating to additional repairs and maintenance incurred and spares and stores purchased primarily for the two VLGCs that underwent drydocking during the quarter. Thus excluding the effect of the drydocking our daily running costs were roughly flat year-over-year reflecting our continued focus on efficiency. We are pleased with our performance but remain vigilant on our costs. General and administrative expenses for the quarter were approximately $5.2 million, a $2.3 million reduction compared to the same period in 2015 of $7.5 million. Excluding non-cash comp expense, cash G&A for the quarter was $4 million, which is consistent with our expectations and roughly $2.2 million below the same period last year. The reduction is mainly driven by $1.4 million for certain non-capitalizable costs incurred prior to vessel delivery in the prior quarter that did not recur in this period. But the G&A reduction was also due to various cost savings measures that we have undertaken in the more challenging rate environment. Depreciation and amortization for the quarter totaled $16.4 million, which principally related to depreciation on our operating vessels. Our reported interest and finance cost for the quarter was $7.3 million, which was comprised of interest expense on our debt, amortization of financing costs and other financing expenses compared to $4.6 million for the same period last year. The increase of $2.7 million during this period was mainly due to a $1.6 million increase in interest incurred on our long-term debt, amortization and other financing expenses. The other piece of our cash interest expense booked within realized loss on derivatives amounted to $1.3 million, a decrease of $0.7 million versus last year. Due to our prepayment of the interest swaps related to the RBS facility during the quarter. We paid $8.1 million in cash, which represented a discount to the then fair market value of those swaps. We also had an unrealized gain of $24.4 million from the changes in the fair value of the interest rate swaps related to the 2015 facility due to the increase in forward LIBOR rates in addition to the termination of the RBI swaps. The unrealized gain on derivatives amounted to $0.45 per share for the quarter. I’d like to caution that the figures I am about to provide you are non-GAAP numbers. In order to provide you with an estimate of our earnings before the effects of the swap termination, which affected both realized losses and unrealized gains we estimate that our reported EPS would have been $0.06 per share and our adjusted loss per share, which excludes the unrealized gain or loss on the swaps would have been $0.09 for the quarter. We currently have approximately 67.6% of our existing debt facilities hedged. During the quarter we, as we’ve discussed we terminated the interest rate swaps for RBS, which is therefore now currently unhedged, thus the 2015 facility is 78% hedged. The current weighted average LIBOR rate on the 2015 facility is approximately 1.48% including the hedge portion, while the RBS facility has a weighted average floating LIBOR rate of 1.3%. Overall for the quarter we reported net income of $5 million or $0.09 a share, and an adjusted net loss excluding the effects of the unrealized gain loss on the swaps of $19.3 million or $0.36 in loss per share. Our EBITDA as defined in our bank balance for the quarter was $13.9 million and we also repaid $15.4 million of bank debt under our two bank facilities. During the fiscal third quarter we generated approximately $5 million of cash from operations, a decrease of roughly $32 million in the prior year. This increase is primarily attributable to lower year-over-year TEs [ph] but also the impact of the $8 million that we applied to terminate the RBS swaps. As of December 31, 2016, we had total outstanding indebtedness of $787.7 million including $684.3 million drawn under the 2015 debt facility and $103.4 million under the RBS facility. Please note that in accordance with new FASB guidance, our deferred financing fees are no longer shown both as an asset and an increase in the debt balance in the liability side of the balance sheet. However, the footnote does reflect the full principal debt balance of $787.7 million. The RBS facility amortizes $9.6 million per year in principal while the 2015 facility amortizes approximately $56.4 million per year. We finished the quarter with $31.8 million in unrestricted cash and equivalents and $50.8 million of restricted cash. We are in compliance with all financial covenants under the two loan facilities and I would note in particular, we continue to have ample headroom under our LTV covenants, which is reflected with a disciplined approach that we took to financing the business. Following the termination of the RBS swaps, we have reduced our cash breakeven cost per calendar day below $23,000 a day, again the calculation of this includes special OpEx, cash G&A, cash interest expense and principal amortization. We remain focused on managing our liquidity and risk profile to allow us to operate our business in all economic and market climates. With that, I will turn it over to John Lycouris.

Thank you, Ted. For the year ended 2016, global seaborne LPG volumes amounted to nearly 90 million metric tonnes compared to about 85 million metric tonnes 2015, that is a 5% increase. LPG export volumes from the U.S. and the Middle East increased significantly in 2016, reaching the levels of 25.4 million and 38.7 million metric tonnes and registering a 23% and a 9% increase, respectively, over calendar 2015. Far East LPG imports into 2016 were 19% higher than in 2015 and China accounted for two-thirds of this increase followed by South Korea where the PDH and Petrochemical feedstock plants and consumers were accounted for the main increase in LPG imports. Over the last two years, as prices of LPG and crude oil collapsed, the small and mid-sized industrial plants in China which do not receive LNG subsidies, switch fuels from LNG to LPG adding in 2015, 5 million metric tonnes and in 2016 4 million metric tonnes of LPG demand which we expect to persist over the next few years. For most of calendar 2016, LPG prices in the Middle East and U.S. have remained relatively flat and only began trending upward after the OPEC oil production cuts agreement. During the last quarter of this year and in view of the winter heating season. The West-East arbitrage became profitable, notwithstanding higher LPG pricing at Mt. Belvieu, and in particular for cargoes transiting the new Panama Canal that took advantage of the shorter steaming time and the backwardation of the Far East Index market. The rig count in the U.S. has continued strengthening, from 553 from our last report to 659 currently, which when coupled with the strong draws on propane inventories in the U.S., down to 72 million barrels from our pervious report of 100 million, signals gas market supply shortages and renewed activity in energy exploration and production. The addition of the Phillips 66 Export Terminal at Freeport, Texas will increase further export of LPG from the U.S. Gulf in 2017 by four to eight VLGC cargoes per month. While the 2018 – in 2018 we expect Marcus Hook and enterprise to complete some expansions into our export capacities adding, five to nine VLGC cargoes a month. The new Panama Canal VLGC traffic were second only to contain the vessels and accounted for about 30% of total canal transits. VLGC fleet utilization steadily increased over the quarter to a high 90%, notwithstanding the significant number of new building VLGCs added to fleet. The order book stands at about 15% of the VLGC fleet while the over 20 year old VLGC vessel stand at 15% of the fleet as well. In view of stronger prices in the demolition markets, older VLGC vessels may become attractive candidates for demolition and removed from the fleet in the coming months. During the quarter, we completed special service and drydockings of our Captain Markos NL and Captain John NP is in time and budget including environmental and commercial upgrades which improved our efficiencies and extend their trading flexibility. To summarize, we continue to see both LPG supply and demand growth which will help to absorb the fleet growth and establish LPG as a mainstream fuel and feedstock to the global energy markets and the world economy. Thank you.

Thank you, John. So we're now ready to take questions. Operator, please open for questions?

We will now be conducting a question-and-answer session [Operator Instructions] Our first question comes from the line of Spiro Dounis with UBS Securities. Please proceed with your question.

Hey, good morning gentlemen, how are you?

Good morning.

Good morning and how are you?

Good, good. I just want to start up on the utilization rates, it seems like pretty strong numbers of 98% and I guess, little surprising to us we figured they get better but not quite that strong, just get all the reports out there on cancelled cargoes in the struggling environment. So curious what does that tell you about the current rate environment where it’s going or just maybe how these vessels are trading, it seems like in non-environment where rates are down this level, where utilizations that high.

Yes, Spiro, its been high utilization rates even through the zap of the low rates in the middle of last summer, relatively speaking I think it dipped below 90% but not much and I think it indicates that it’s a factor of increasing trade which John alluded to and which has been absorbing the huge number of ships that we had delivered last year at a more successfully than perhaps would most of us thought they might be. So I think it is a confidence building going forward, the order book is stippling down and I think its one of the best indicators we have.

Got it, got it. Second one just kind of stepping back a bit here, one of your peers in the tanker space made a decision that its actually sale leaseback on some of their older vessels. And I guess the plan there obviously is to create some dry powder for opportunities into the press market, just wondering if that’s something you’d consider doing with some of your older vessels or if there’s leverage you think you’d pull first, do you really see a churn coming in the market?

Yes, Spiro. It is along with everything else, we continually look at possibilities and we have looked at that as well.

Got it. Appreciate the color. Thanks guys.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Noah Parquette with JPMorgan. Please proceed with your question.

Hey, thanks. I want to just ask is what you saw on the market after the little pop in spot rates over the last month or so. Did you see any interest for charters and what length did you see?

We saw opportunistic interest from charter who were kind of momentarily shaken by the market Mini-Spike list day. So I think there was – that we haven’t really seen an increase in real interest other than [indiscernible] that is other than opportunistic than bottom fishing I think that’s what we fair to say at this time.

Okay. And I just want to ask I mean – trying to get some thought what do you think the Trump administration would have some of those impact on your business if any?

Well, at the moment, at least until the last weekend I think business in general was benefitting from some – Trump euphoria. But please don’t ask me, this speculates further than that. I don't think…

Okay.

I don’t think no one in the White House what’s coming in the next half an hour…

Okay.

Half of us trying to get what’s going on.

Fair enough, I understand. Okay, that’s all I have. Thank you.

Thanks. Noah.

Thanks. Noah.

Thank you. Our next question comes from the line of Mike Webber with Wells Fargo. Please proceed with your question.

Good morning, guys. This is Donald stepping in for Mike. Thanks for taking my call.

Thank you.

Hi, Donald.

There's been a dearth of VLGC transactions in S&P markets lately, but with 20 years of peers acquiring another firm sort of implied asset values in the $50 million range. Do you think that's reflective of a market clearing price moving forward? And then in a broader context where do you think we are within the current asset cycle?

Yes. I think we're obviously off the bottom, but still closer to the bottom than the midpoint. If you refer to the takeover of Aurora that was – of course that was a great fight that they got for those ships, I mean that BW got in that acquisition. I don't think it's reflective of what you could achieve in a second-hand market. I don’t think you could buy a ship at that new building equivalent for sure.

Okay. That's fair, thank you for that. And then just a follow-up on sort of spot market rates. So we've seen a bit of a pop with rates moving to the high-teens and low 20,000 per day level which has been counter seasonal. One, where do you attribute that counter seasonal strength to? And then do you think that sustains itself into Q1 of this year?

Yes. Well, already the first month of Q1 has been quite strong. We attributed to the – we attribute the rise to the increase in the ORB. It really came about following the OPEC price increases and whereby the prices here it didn't rise as much, although propane has risen all over, but it hasn't risen as much as the prices it did in the Middle East. So that’s what we are accreted to and so far the quarter looks promising. Like we said in our remarks we are cautiously optimistic. And going back for a moment on how these M&A transactions don't necessarily reflect values, I just want to point out also that the dry ship transacted on a VLGC through web I think maybe three ship, four ships at over $80 million. So it's quite has been market as you know in terms of S&P.

All right. As always thank you for the market color. That’s it from me.

Thank you.

[Operator Instructions] Our next question comes from the line of Peder Nicolai Jarlsby with Fearnley Securities. Please proceed with your question.

Good morning, guys. So the year utilization remains very solid. So our take is now that the market largely hinges on the challenging product market. In light of the OPEC cuts, how do you see, call it, the product market developing going forward or when do you think we'll see a normalized product market?

Well, you know what? That’s a really difficult question. And John Lycouris is here and he’s got his birthday today, so I'm going to let him answer it as a birthday present.

It’s my pleasure. Good morning, Peder.

Good morning.

As you realized the excess cargos and capacitors coming out of the United States is finding a good home in the Far East and in China which is a combination of petrochemical and home demand, and in India which is mainly home demand. So the products I think are well priced in the Far East and that's what underpins the demand. And we expect that this market is going to continue especially if oil – crude oil remains high. It will always mean that naphtha will be at levels which are less competitive than propane. So we have to see how things develop in the next few months that the way the pricing has developed I think it underpins the propane market.

Yes. Peder, let me just add.

Yes.

In addition to PDH which we all are banking on in China, we’ve had PDH plants coming up in Korea and Japan, which have had a positive impact. We had increased penetration of LPG not only in India which again was anticipated in quality, but also in other counties South East Asia, notably Indonesia and Vietnam and Bangladesh. So I think that the benefits of LPG in terms of air quality both in home use and in auto gas sectors are being – we getting an increasing footprint, let’s say, and more recognition of the benefits, the clean air benefits of this.

Okay. No, no, I agree. So basically what you're saying now is that it basically comes down to more confidence in the U.S. NGL production side that we actually need to get some confidence there and see some downward pressure on prices for these markets, but product markets to call it normally.

Which is sort of developing that way, right now.

Yes. Sorry, just two more quick one on the asset value. So, if you look at the order book post 2017, it’s basically non-existents. But there has been some rumors of larger new building orders as of late. So my question is basically if you expect any of these large orders to materialize, and secondly, where do you see new building prices now basis Korea, Japan? Yes.

Right. I can’t tell about the new building prices. Also that one of the orders that has been reported I think it’s very unlikely to materialize judging by the past performance of the principles involved. But again it's difficult to speculate on that and especially on forward prices of new building. I would imagine that today something in the low 70s – low mid 70s would probably be where I would have a new building price.

Okay. Perfect. Thank you very much guys.

You’re welcome.

[Operator Instructions] Our next question is a follow-up from Spiro Dounis with UBS Securities. Please proceed with your question.

Hey, sorry guys. I just had one more on drydocking. And I also want to wish John a happy 30th birthday. Never looked better, buddy.

Thank you. Thank you, Spiro.

Just as far as drydocking goods, I don't think we should have another one I think till 2018. I guess, one is, is that correct? And just as you're thinking about ballast water treatment, I think most of your fleet obviously is good for a while, but would that be one that maybe triggers that?

That's a good question, Spiro. It is 2018, the next one, and all our ships have ballast water treatment systems except the captains; the two captains that have been drydock now or grandfathers for the next five years. And the one coming up in 2018 may have to consider ballast waster treatment unless we carry on the drydocking and special survey sooner than anticipated that is sooner than 2018 and sooner than the September 2017 date.

Okay. So maybe strategically might make sense to move that forward. Give any sense of what that would cost on the VLGC numbers are all over the place, just curious what you guys are thinking?

Near a $1 million, I think.

Near a $1? Okay, now that sounds consistent. Perfect. I appreciate the color. Thanks again.

Thanks, Spiro.

Thank you, Spiro.

There are no further questions at this time. I would like to turn the call back over to Mr. John Hadjipateras for closing remarks.

Thank you all very much for joining us this morning and talk to you next time. Bye-bye.

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.