Ardmore Shipping - Q4 2019
February 11, 2020
Transcript
Operator (participant)
Good morning, ladies and gentlemen. Welcome to Ardmore Shipping Fourth Quarter and Full Year 2019 Earnings Conference Call. Today's call is being recorded, and an audio webcast and presentation are available in the Investor Relations section of the company's website, ardmoreshipping.com. We will conduct a question-and-answer session after the opening remark. Instructions will follow at that time. A replay of the conference call will be accessible any time during the next two weeks by dialing one, eight, seven seven, three, four, four, seven, five, two, nine or one, four, one, two, three, one, seven, zero zero eight, eight. and entering the pass code one, zero, one, three, nine, one seven, eight. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Anthony Gurnee (CEO)
Thank you. Good morning, and welcome to Ardmore Shipping's Fourth Quarter and Full Year 2019 Earnings Call. First, let me ask our CFO, Paul Tivnan, to discuss forward-looking statements.
Paul Tivnan (CFO)
Thanks, Tony, and welcome everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you'll find a link to this morning's fourth quarter and full year 2019 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions. Turning to slide two, please allow me to remind you that our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements, and additional information concerning factors that would cause the actual results to differ materially from those in the forward-looking statements is contained in the fourth quarter and full year 2019 earnings release, which is available on our website. Now, I will turn the call back over to Tony.
Anthony Gurnee (CEO)
Thanks, Paul. Let me first outline the format of today's call. To begin with, I'll be discussing quarterly highlights and then key industry developments. After which, Paul will provide a summary of our performance, an update on tanker market activity, and supply-demand fundamentals, and a detailed financial update. Then I'll conclude the presentation and open up the call for questions. Turning first to slide four. We're reporting adjusted net profit of $2.5 million or $0.08 per share for the fourth quarter, as compared to a net loss of $5.7 million or $0.17 per share for the third quarter, reflecting substantially improved tanker market conditions.
Product tankers have had an excellent run since October, with rates building progressively month by month as a result of the IMO 2020 demand overlay, winter market conditions, and ongoing fundamental demand growth, coupled with limited supply growth. For the fourth quarter, our MRs earned $17,700 per day, and our chemical tankers, $14,300. And so far, for the first quarter of 2020, the MRs are earning close to $20,000 and chemical tankers, $19,600, with 55% and 65% fixed, respectively. So at least as of now, things are looking very good. Having said that, it's clear that the tanker market has hit a major air pocket in the form of the coronavirus outbreak, which is reducing China oil consumption and thus tanker demand, but also with knock-on effects such as long-haul product arbitrage trading, offsetting the demand decline.
On a human level, the situation is, of course, very worrying, and we're not alone in hoping that the virus will soon be contained and further illness minimized. On a business level, the full impact is still a matter of conjecture, with views ranging from a temporary drop to a more extended systemic decline. Despite this uncertainty, what we can say is that Ardmore has been delivering strong earnings with a fleet of 25 modern, fuel-efficient ships, employed 100% in the spot market, where each $1,000 a day increase in rates translates into $0.27 in EPS. In keeping with our current dividend policy of paying out 60% of earnings from continuing operations, the board has authorized a quarterly cash dividend of $0.05 per share.
Our priorities for the year ahead remain largely unchanged, to continue building on our already strong operating performance, to reduce debt, and to maximize long-term value through good capital allocation, of which an effective dividend policy is an integral part. Turning next to slide five on key industry developments. There are three salient issues to discuss. First, IMO 2020, second, the coronavirus outbreak, and third, the very strong product tanker fundamentals, which we believe are being overlooked. Product tankers are clearly benefiting from IMO 2020. Demand for compliant fuels, in other words, VLSFO and MGO or gas oil, has surged since October, leading refineries to increase throughput and redirecting feedstocks to increase gas oil production. Global availability of compliant fuels is now adequate, but there's still plenty of disruption, and we think this will persist for many more months.
Price differentials between HSFO and VLSFO have declined to less than $200 per ton, and in fact, VLSFO pricing is now close to the levels that HSFO pricing was a year ago. While on the other hand, the price differential between VLSFO and gas oil is very narrow, resulting in heightened demand for gas oil, as many owners, Ardmore included, are choosing this lower-risk option over what, in many cases, are VLSFO blends of questionable quality. Another point is that operational delays resulting from fuel quality have reduced effective supply, as have ships now stuck in China awaiting scrubber installations. The coronavirus outbreak, we believe, is temporarily impacting the tanker market, but what we mean by temporary, we don't know yet.
China oil consumption is reportedly down 20%, but there are also reports of the government initiating policies and funding to get industry and consumer activity back on track as soon as possible. Surplus Asian jet fuel is already being shipped to the Western Hemisphere, and we expect other product slate imbalances, oil price volatility, and futures pricing in contango to drive additional oil trading activity, benefiting MRs in particular. One thing that we believe is being overlooked is that product tanker supply-demand fundamentals continue to be strong, which will drive a continued upturn once we get past the coronavirus outbreak. Oil consumption growth is robust despite near-term demand concerns, with the January IEA figures forecasting a 1.2 million barrel a day increase in 2020.
Positive secular trends, such as refinery expansions and increasing trade complexity, continue to drive product tanker demand growth above that of other tanker sectors. Added to that, the product tanker order book remains at historical lows, with owners hesitant to order new vessels in the face of pending regulatory change and capital constraints. We don't usually comment on share price, but today we're going to make an exception. When thinking about the impact of the coronavirus on tanker company values, it's worth keeping in mind that these values are underpinned by hard assets with 20-year useful lives. In this context, the across-the-board 40% drop in tanker stocks over the past few weeks is, in our opinion, overdone, to say the least. On that note, I'll hand the call back over to Paul.
Paul Tivnan (CFO)
Thanks, Tony. Moving to slide seven for a summary of our quarterly performance. As Tony mentioned, charter rates have had a good run since October due to IMO 2020 demand overlay on top of existing strong fundamentals. Ardmore's fleet average TCE in the fourth quarter was $16,900 per day, which is made up of $17,725 on the MRs and $14,280 per day on the chemicals, both up significantly from prior periods. Looking ahead, charter rates have been strong for the first few weeks in January. As of today, for the first quarter, we have 55% of our days booked on the MRs at $19,800 per day. The fleet continues to perform very well operationally, both dry dockings and operating expenses are coming in under budget for the year.
We have two further dry docks scheduled for the fourth quarter—for the first quarter, the dry dock of the Ardmore Dauntless being completed earlier in January. We completed the refinancing announced in December. In total, we have refinanced 12 vessels for $201.5 million in the aggregate with our existing relationship banks. Cash balance at the year-end was $51.7 million, with $11 million available under our revolving credit facilities. Turning to slide eight for an update on tanker market activity. Product tanker rates are benefiting from a significant increase in demand associated with IMO 2020. Overall, charter rates are up 45% since the third quarter, and we've noticed increased cargo volumes in all regions, particularly exports from the U.S. Gulf, the Arabian Gulf, and Northeast Asia.
The surge in demand for compliant fuels has resulted in significant regional imbalances and trading activity. Notably, Singapore inventories are in decline, while U.S. inventories are building. On the back of increased demand for compliant fuels, many refineries have diverted feedstocks to produce more gas oil and VLSFO, supported by strong margins for distillates. Finally, the strong crude tanker market enticed some ships to move to dirty trades. In total, 36 LR2s moved from clean to dirty during the fourth quarter. As Tony mentioned, the bunker fuels market has settled in after a short period of volatility and dislocation. The price differential between HSFO and VLSFO has settled in below $200 a ton globally, and scrubber premiums have reduced accordingly. The coronavirus outbreak has temporarily resulted in a softening of charter rates.
China oil consumption is estimated to decline as the virus continues, and early estimates are that China will cut refinery throughput by up to 1.8 million barrels a day in February. However, global efforts to contain and manage this issue are intensifying, and we would expect conditions to improve in the near term. Overall, the charter market outlook remains positive. Global refining throughput is forecast to increase by 1.1 million barrels a day in 2020, supported by a recovery in refined product demand. Price volatility, imbalances, and dislocations should continue to support demand for product tankers. On slide nine, we take a closer look at the underlying product tanker supply-demand fundamentals, which continue to be positive. Oil consumption growth is increasing, with an estimated growth of 1.2 million barrels a day in 2020, up from 1 million growth in 2019.
Refinery capacity additions in export-oriented locations expected to average 1.7 million barrels per day per year for the next seven years. Supply of vessels is expected to be well below demand growth. Low order books, continued scrapping, and regulatory uncertainty around propulsion technology and greenhouse gas emission targets is curtailing new orders of ships. Looking in more detail at the newbuild order book, as of today, there are 171 product tankers or 5.8% of the fleet, delivering between the first quarter of 2020 and the first quarter of 2023. We are forecasting 89 product tankers to deliver for the full year 2020 and expect scrapping to be in the range of 30-40 product tankers per year. As of today, there are 95 product tankers over 23 years old, which supports the scrapping estimate.
Taken together, product tanker fleet growth, net of scrapping, is expected to be approximately 1.5% in 2020, down from 3.3% in 2019, and splitting out MRs on their own, we expect this fleet to grow by 1.6% this year. The chemical tanker market outlook is also positive, with a historically low order book of 4.2% and fleet growth net of scrapping expected to be 1.4% in 2020. Overall, as you can see on the chart in the upper right, product tanker ton mile demand is forecasted to increase by 4.8% in 2020, in line with the long-term average and up meaningfully from the past few years. We believe the strong fundamentals will provide a solid foundation for a sustained upturn in product and chemical tanker rates.
Moving to slide 11, we take a quick look at fleet days. We're expecting 8,907 revenue days in 2020. We completed one dry docking in the fourth quarter, which accounted for 15 dry docking days, and we will complete three dry docks in the first quarter, an estimated 70 dry dock days, including repositioning. Turning to slide 11, we take a look at our financials. As you will see on the second line, we're reporting a net profit from continuing operations of $2.5 million or $0.08 per share. Total overhead costs were in line with expectations at $4.3 million for the quarter, comprising corporate expenses of $3.6 million and commercial and chartering expenses of $700,000.
As mentioned before, in many companies, the commercial and chartering costs are incorporated into voyage expenses, which means that our corporate cost is the comparable overhead. For the first quarter of 2020, we expect total overhead, incorporating corporate and commercial, to be $4.7 million, which includes both cash and non-cash items. Depreciation and amortization was $9.4 million for the fourth quarter, and we expect depreciation and amortization for the first quarter to come in at $9.8 million. Interest and finance costs were $6.5 million for the fourth quarter, comprising cash interest of $5.5 million, amortized deferred finance fees of $500,000, and we also wrote off $500,000 of deferred finance fees relating to the refinancing in the fourth quarter.
We expect interest and finance costs for the first quarter of 2020 to be approximately $5.8 million, including amortized deferred finance fees of $500,000. Moving to the bottom of the slide, operating expenses came in on budget at $16 million for the quarter. Standard OpEx for the eco design MRs was 6,795 per day. Eco mod MRs came in at 6,813 per day, while the chemical tankers came in at 6,498 per day. And looking ahead, we expect operating expenses for the first quarter to be approximately $15.4 million. Turning to slide 13, we take a look at charter rates. On the left-hand side, you can see the strong recovery in rates since the third quarter and year-on-year.
As mentioned, MR rates are averaging 19,800 in the first quarter to date, with 55% of the days booked up substantially from the third quarter. Spot MRs earned an average of 17,725 in the fourth quarter, while the fleet average came in at 16,900 per day. The chemical tankers have also rebounded strongly. Charter rates for the chemical tankers were 14,284 per day for the quarter, up from 10,617 in the third quarter. On slide 14, we have our summary balance sheet, which shows at the end of December, total debt and leases was $420.1 million, while our book leverage was 54.7%. Turning to slide 15, we remain focused on maintaining a strong balance sheet and liquidity position.
Our cash at the end of December was $51.7 million, with an additional $11 million available under our revolving credit facilities. In the fourth quarter, we mentioned that we finalized the two new credit facilities for $201.5 million in the aggregate to refinance 12 ships on attractive terms. The first facility is for $140 million to refinance eight ships and includes a $40 million revolver, and the second facility is a $61.5 million term loan to refinance four ships. We are continuing to pay down debt. All the debt and leases is, are amortizing at approximately $38 million per year.
Finally, as you know, LIBOR has been reducing, and with 90% of our debt and leases being LIBOR-based, every 25 basis points reduction in interest rates is expected to contribute an additional $1 million in earnings or $0.03 in EPS annually. And with that, I will turn the call back over to Tony.
Anthony Gurnee (CEO)
Thank you, Paul. To sum up then, we're reporting adjusted net profit of $2.5 million or $0.08 per share for the fourth quarter. TCE earnings are continuing strong well into the first quarter. Our MRs are at close to 20,000 a day, and the chemical tanker is at 19,600, with 55% and 65% fixed, respectively, and that's up substantially from the fourth quarter. Along with everyone else, we're deeply concerned by the coronavirus outbreak and hope it will soon be contained and further illness minimized, but also along with everyone else, we're waiting to get a better sense of how it's going to impact our business. In the meantime, our fleet's been performing very well under this uncertainty, including, most recently, some very good fixtures, actually, even in Asia.
In keeping with our current dividend policy, we're declaring a quarterly cash dividend of $0.05 per share, representing 60% of earnings from continuing operations. Admittedly, we're not very happy about paying a cash dividend when our price, our share price is trading at a substantial discount to NAV, but that's our current policy. Our priorities for the year ahead are to stay focused on building our operating performance, reducing debt, and maximizing long-term value through good capital allocation, of which an effective dividend policy is an integral part. To conclude then, the impact of the coronavirus outbreak is on everyone's minds and is still, conjectural at this point.
But once this period of uncertainty is over and the trajectory of the virus outbreak is known, we would expect to see a sharp rebound in product tanker rates to levels merited by the very strong underlying fundamentals... And with that, we're happy to open up the call for questions.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up the handset before pressing the key. To withdraw your question, please press star then two. Our first question is from Jon Chappell from Evercore. Go ahead.
Jon Chappell (Senior Managing Director)
Thank you. Good afternoon, guys. Tony, maybe opened, opened a couple can of worms there. So you say you never comment on your stock price, and then you did, and then you showed a little bit of frustration at the end about, you know, sticking with the dividend policy, given where the stock price is. So, understanding the policy is the policy is, and you did what you say you're gonna do, and, and I think that's great. That shows, you know, good long-term, confidence in the company. What is the flexibility around buybacks at this point? You know, Paul spoke about the liquidity, your debt amortization's down a little bit. This is obviously a, an anomalous, time period, and it provides good opportunity. So should we expect to see a little bit more activity on the buyback?
Anthony Gurnee (CEO)
Look, Jon, I think it's a good point you're making, and I think you're sensing our mood correctly. Share buybacks are one of our four basic alternatives in terms of capital allocation. We can buy ships, we can buy back shares, we can pay down or buy back debt, and we can pay a dividend. So we just, you know, we like to think of it in that context and try to figure out on balance, what's the best thing to do at the time in order to focus on long-term value.
I mean, you know, the dividend in particular is frustrating because where we're trading, you know, we hear various views from different investors on the topic, perhaps more now so than ever before, and some are quite impassioned about it. You know, capital allocation is always on our mind, and it's something that is an open point of discussion. You know, our own view is that, you know, when it comes to dividend policy, you know, we try to think of it in an overall capital allocation framework in order to build long-term value.
You know, we don't really like to get into, you know, the discussions around signaling and, you know, appealing to certain investors either way, with dividends or signaling about share buybacks, because, you know, we think that's just a short-term value focus, and it's not something that we ascribe to.
Jon Chappell (Senior Managing Director)
Yeah. I, I think being consistent is important. I just think every once in a while, there's these situations where the market provides you an opportunity, and being able to be nimble is, is useful. Just two other quick ones on the drydocking. So first quarter drydocking is given the strength of the market, maybe it seems a little poorly timed. And then, you know, we've been hearing about delays in, in certain yards, whether it's on drydockings or new builds, et cetera. Is there any potential or desire at this point to maybe push back some of the last two drydockings for 1Q into what could potentially be a seasonally softer period, or any opportunity from the yard to push that back?
Anthony Gurnee (CEO)
It's a good question. It's something that we do discuss. The reality is that we try to line up the dry dockings to maximize the, you know, the interval between them. On the intermediate surveys, there is more flexibility. However, typically, we're, you know, it's really just a question of should we put them in earlier because the market's so bad right now? And we did a bit of that last year. But now that the market's strong, we don't really have the flexibility to push them out. Those that are delayed actually can't trade in China, so it's not like they can kind of go out again, if in fact, they're waiting for a dock, you know, for a survey.
You know, sticking to the schedule and, you know, getting to a good location globally, you know, in terms of part of the world that works from a trading pattern standpoint and also a cost-effectiveness standpoint, that's really where the value is.
Jon Chappell (Senior Managing Director)
Okay. Last one, super quick, Paul. I was writing furiously, but I missed the OpEx number for 1Q. If you can just repeat that, please.
Paul Tivnan (CFO)
$15.4 million, Jon.
Jon Chappell (Senior Managing Director)
All right. Thanks, Paul. Thanks, Tony.
Paul Tivnan (CFO)
Yep. Thanks, Jon.
Operator (participant)
Our next question is from Randy Giveans from Jefferies. Go ahead.
Randy Giveans (SVP Equity Research)
Howdy, gentlemen, how's it going?
Anthony Gurnee (CEO)
Hey, Randy.
Paul Tivnan (CFO)
Hey, Randy.
Randy Giveans (SVP Equity Research)
Yeah, quick questions for me. Obviously, rates, you know, fallen dramatically year to date. Time charter rates, they're down, but clearly not as much. Any updates on chartering out or even chartering in vessels in this market? And then, kind of further down the line, with decreasing time charter rates, how have asset values been impacted by the current market weakness?
Anthony Gurnee (CEO)
You know, really good question about charter rates and opportunities. You know, obviously, we wouldn't, if we weren't interested a month ago in chartering out, I think we're certainly not interested today. Because, you know, I think the most important point to make here is that whether you call it an air pocket, a speed bump, you know, a temporary decline or whatever, we do think that the impact of the coronavirus is finite. And when that's over, we've got very strong underlying fundamentals. So we're believers in the market, and we certainly wouldn't be chartering out at today's levels. Does this represent an opportunity over the next couple of months to charter in? That's a real possibility. In terms of asset values, you know, the S&P market is a slower moving market.
So far, there are no indications that people are pulling back in a big way or sellers are willing to drop prices to accommodate buyers at lower levels. It seems to be still more or less business as usual, but it's early days.
Randy Giveans (SVP Equity Research)
Got it. Okay. So asset values have moved down. Your NAV on the last call was closer to $11. I'll infer the difference there. And then historically, your chem tankers earn about $2,000 a day less than your MRs. That said, obviously, the first quarter to date rates, they're roughly in line. So can you talk a little bit about the kind of dynamics around that? And then following that, what's your average kind of full year 2020 break even rate for the MRs versus the chem tankers?
Anthony Gurnee (CEO)
I'll let Paul answer the break-even rates in a second. But, yeah, no, look, we're really pleased with the current performance of the chemical tankers. It's a relatively small percentage of our fleet. It's six, six out of 25 ships. And so as a sampling size, there can be some variability in terms of performance there. But as we look at the individual performance, it is a mix of front haul, back haul at the moment. We think that those numbers are reflective of real performance. One point to note is that these are super fuel efficient ships and on long haul voyages, which they typically do in a higher fuel price environment, they're going to do even better. So I think that's playing in here as well.
And I think also, you know, there was a lag effect in the sort of, you know, the end of 2019, where the chemicals were kind of catching up with the MRs, and they have now.
Paul Tivnan (CFO)
Randy, on the break even levels, they're actually about the same. So the break even across the fleet for 2020, net income is about $15,600. Some of the MRs are obviously older, some of them are newer, so they're actually quite close in terms of the chems and the MRs. And then the fleet average break even is a little bit higher than that. It's around $16,200. So, there are the two numbers, 15,600 on net income across the fleet and just over 16,000 on the cash break even.
Randy Giveans (SVP Equity Research)
Excellent. Thanks so much. That's it for me.
Anthony Gurnee (CEO)
Thanks, Randy.
Paul Tivnan (CFO)
Thanks, Randy.
Operator (participant)
Again, if you have a question, please press star then one. Our next question is from Omar Nokta from Clarksons Securities. Go ahead.
Omar Nokta (Head of U.S. Securities)
Hi. Thank you. Hi, Tony and Paul. Tony, I know you said in your comments that you don't want to tip your hat necessarily as to, you know, what you're thinking about buybacks and dividends and whatnot. But, you know, to go back to maybe Jon's initial comment, you did sound a little ho-hum and referred to the 60% payout as your, you know, your current policy. Can I take that to mean that you and the board are maybe reevaluating the 60% payout?
Anthony Gurnee (CEO)
I wouldn't infer anything from it other than, you know, what I was trying to say. What I will say is that, you know, our board, you know, we do discuss dividend policy at most meetings, at least informally, and we expect that'll continue. More and more, my own view is that we need to think of it in terms of capital allocation and try to come up with a capital allocation policy that's geared toward building long-term value and explain where dividends fit into that, rather than just focus on dividends and what it means and what it's signaling about the business.
Omar Nokta (Head of U.S. Securities)
That's fair. And when you think about the... You know, you've refinanced the debt, Paul, and, you know, you do have the payout. Based on the guidance, you're gonna have, it looks like a sizable cash build. As you think about progressing through the year, do you have sort of a perspective on what you want to do with that excess cash? Is it maybe just retaining it now on the balance sheet to start? Or do you want to maybe prepay debt further? Kind of what, what's the thought you think on the excess cash here in the near term?
Paul Tivnan (CFO)
Yeah, great question, Omar. I mean, I think, you know, if the market continues at least where January has been, we're in for a pretty strong year. And, you know, I think we've had 2019 obviously would be, would-
Operator (participant)
We've lost our speaker line. One moment while he calls back and reconnect. ... Pardon me, this is the operator. We've reconnected the speakers, and we'll continue. Please proceed.
Paul Tivnan (CFO)
Hi, guys. Apologies about that. Some technical challenges this side. So just picking up on Omar's question, in terms of what we'd expect to do with excess cash that we would make this year. The point that I was making was, 2019 is shaping up, at least based on January's numbers and allowing for some movement on coronavirus, that we should be a profitable year, and we would build a lot of cash. You know, I would expect, based on, you know, three or four, at least three years of a tough market, 2017 and 2018 in particular, that we would look to accelerate that reduction in line to where we should have been, and then after that, I would say. So that's probably the immediate priority, Omar.
Omar Nokta (Head of U.S. Securities)
Okay. No, thanks, Paul, for that color. You know, maybe one, just one final question. You know, it looks like, you know, clearly the guidance for 1Q is very strong at close to $20,000 a day, and, you know, we said that that seems probably a bit higher than what index averages have been. It would you chalk that up to just maybe, you know, good old-fashioned execution, or was there something maybe one-time in there, like buying fuel at the right time, right place, or just, you know, basically good execution?
Anthony Gurnee (CEO)
I'm sure Gernot would is dying for me to say it's just good execution, and I think it's partly that, but also, I think the market's been stronger perhaps than people realize. So, you know, I don't think we'll be alone in producing pretty good numbers. So I don't know, Paul, if you have anything more to say.
Paul Tivnan (CFO)
No, I think it's, as you said, Gernot would probably take a fair amount of credit, but, I think the market-
Anthony Gurnee (CEO)
And his team.
Paul Tivnan (CFO)
The market's been good in many places, so.
Omar Nokta (Head of U.S. Securities)
Yeah, there's just been a lot of maybe disjointedness in the December period, where people were having to procure excess VLSFO or MGO, and it sort of impacted, to an extent, expectations. But yeah, no, I'd say good results overall, and, yeah, maybe, maybe that'll continue for, for others. Thanks for answering my question.
Anthony Gurnee (CEO)
Thanks, Omar.
Paul Tivnan (CFO)
Thanks, Omar.
Operator (participant)
This concludes our question and answer session. The conference is now concluded. Thank you for attending today's presentation.