BW LPG - Q1 2023
May 23, 2023
Transcript
Anders Onarheim (CEO)
Utilization 97%. This is despite taking some cover early this year at lower levels, as Q1 is often challenging. This year certainly has been different. The payoff from investing in our 15 dual-fuel propulsion vessels is now becoming more and more visible. In addition to the environmental benefits of using LPG as fuel, it also makes commercial sense as burning LPG is cheaper than burning compliant fuel. We are now experiencing great interest in our retrofitted ships from our customers. The sale of BW Thor in March generated additional liquidity of $54 million and a net book gain of $17 million. Q1 was also the first full quarter after the combination of BW Product Services and Vilma LPG Trading. Product Services delivered a net result after tax of $3 million and traded about 1 million tons of physical LPG during the quarter.
In sum, the above activities contribute to our strong liquidity position of $532 million and net leverage ratio down to just below 21%. With this liquidity position, we're able to return more dividends to shareholders. For Q1, we announced a dividend of $0.95 per share, equal an annualized dividend yield of 43%. If this continues, that's less than two and a half year payback. This is, of course, not a promise for the future. The board has also resolved to initiate a new share buyback program for the purchase of up to $50 million. We will conduct this either through an open market purchase or a tender offer. Details and execution will be provided when the new share buy program is launched. Switching to our market outlook. We're still positive, we expect volatility to remain.
The current oil price is conducive to continued strong export growth from the U.S. and steady growth from the Middle East. We also see the margins for Chinese PDH plants have been improving, which is important for LPG demand. We expect fleet inefficiencies to continue to lend support to rates. 36 VLGCs are due to drydock from June to the end of 2023. Waiting times at the Panama Canal are likely to increase as the world's merchant fleet expands in the coming years. Recently announced capacity expansion for U.S. LPG export terminals also enable more LPG to be shipped in the years ahead. Clearly positive for our market. Finally, before I hand over to Niels, after the end of Q1, we sold and delivered BW ODIN and BW Austria.
These two sales generated additional liquidity of approximately $130 million, they result in a combined net book gain of approximately $26 million. Those were the highlights. Niels will now take you through the market and shipping performance segments. Niels.
Niels Rigault (EVP Commercial)
Thank you, Anders. Greetings to all of you. Let's turn to Slide six in the presentation. The VLGC freight market had a very strong performance in the first quarter of 2023. The average spot TCE for the first quarter was set at $70,000 per day. Historically, the second strongest market performance for the first quarter and is significantly higher than previous years, surpassing expectations. Initial fears of a market downturn due to poor Chinese PDH margin, global economy outlook, new vessels delivery were proven wrong. Will this continue going forward? While we can't say for certain, we think there are good reasons to be optimistic, and I would like to highlight six of them. One, strong U.S. export growth. Record high inventories and expected decline in domestic consumption indicate robust U.S. export potential. Two, sustained Asian demand.
Asian LPG demand remains strong, exemplified by increased run rates on Chinese PDH plants, driven by improved operating margin. Three, market inefficiencies. Various inefficiencies within the LPG trade, including congestions at the Panama Canal, port delays, weather condition, and geopolitically and regulatory factors continue. Four, observation of new building fleets. Although 28 VLGCs are still scheduled for delivery in 2023, the impact of this supply growth is expected to be partly mitigated by the dry docking of 36 VLGC throughout the year. Increased new building prices. Rising prices of new building vessels contribute to high time charter freight rates. Finally, six, market dynamic shifts. Notably, a significant shift has occurred in the LPG shipping, where traders and oil majors have transformed into shipowners, re-resulting in a market increasingly oriented towards long shipping, reducing incentives to drive down rates.
If we take a slightly longer view of the VLGC market, we see a significant slowdown in fleet growth in 2024, with just 40 new buildings expected to be delivered. Furthermore, considering the substantial LPG export expansions in both the U.S. and the Middle East, coupled with shipyards being fully booked until the second half of 2026, this scenario presents a promising opportunity in the LPG shipping sector. Now let's move to Slide 11 to discuss our performance. Our TCE performance for Q1 2023 achieved a new record since our company listing in 2013. However, we did not expect the market to be so volatile and strong. At the start of this year, spot rates developed very much in line with seasonal trends, and conventional data implied that this would continue.
As a result, we took cover in the TC and the paper market to protect the downside which lowered our performance compared to the overall spot market. Our remaining TC out coverage for 2023 is 30%-31% with an average rate of $38,900 per day. Our TC-in book for 2023 is covered with a $29 million profit. For 2024, we currently only have 4% coverage, but we see strong demand from the market to fix two to three years time charter at historically strong rates. Our LPG retrofits are popular due to their fuel efficiencies and could obtain 13% to 15% unlevered returns for those TC contracts. For the second quarter, we have booked 90% of our available fleet days at an average rate of $50,000 per day.
The lower fixed Q2 number compared to Q1 is due to the market dip we saw in March and April. The current spot market is on average $80,000 per day. We expect to finalize the remaining days of Q2 at a strong note. The FFA market for Middle East, Japan indicates TCE at mid to high $50,000 per day for the remainder of the year. That was it. Kristian, over to you.
Kristian Sørensen (Deputy CEO and Head of Strategy)
Thank you, Niels. Before we move to the product services part, we believe it's worthwhile to also say a few words about our strategy, which remains steadfast by building a robust return-focused company by actively searching for attractively priced investments in shipping, as well as LPG trading and onshore infrastructure projects. On the technologies, technology side, BW LPG pioneered into the dual-fuel LPG propulsion technology through our retrofit program. A technology which today represents a fuel saving of approximately $6,000 per day. We're strong believers in the LPG dual fuel technology, as well as closely monitoring the developments on the ammonia side. Accordingly, we will continue to look for opportunities to create shareholder value through attractive asset play transactions as well as using our time charter portfolio and derivatives to adjust our market exposure.
Looking at our India business, it's been instrumental in our efforts to participate in the upside potential of the Indian LPG market. We regard our presence in India as a beachhead of strategic importance we expect to build further upon. If you flip to the Product Services update on the next slide, you will see that we report a net profit after tax in line with our April trading update of $3.1 million. After depreciation of $17 million for the five time chartering vessels. You can expect Product Services to continue its conservative short-term approach to the markets while we prepare for an activity ramp-up in the medium term. Some of you have asked us about the synergies between shipping and trading.
As guidance for first quarter, our Product Services division takes about 20% of our available ships for that specific quarter, with a total physical volume of about 1 million tons traded. With that, over to you, Elaine.
Elaine Ong (CFO)
Thanks, Kristian. A very good day to all of you. On a consolidated basis, we reported a total of $225 million in gross profit for Q1. This was largely driven by the strong TCE earnings from our shipping segment on the back of the sudden reopening of China with low inventories. EBITDA came in at $176 million, which represents an EBITDA margin of 78%. We recorded $17 million of gains from the disposal of the BW Thor during the quarter. This brings us to a full year net profit after tax of $131 million, $3 million of which came from our Product Services segment. Our net leverage ratio came in at 21%, just above our 20% guidance for a payout of 100% of NPAT.
Nevertheless, our board has still decided to declare a Q1 dividend of 95% per share, equating to a payout ratio of 100% of NPAT. At the end of March, we had $329 million of cash and $2.6 billion in total assets, of which $1.7 billion relates to the carrying value of our vessels. Compared to the latest second-hand broker valuations, we have a healthy headroom of $380 million in excess of our book values. Our positive free cash flow of $171 million this quarter was derived mainly from our strong operating cash flows and a net positive investing cash flow of $50 million, mainly from the sale of BW Thor.
The positive cash flows were used to repay our term debt to return value to our shareholders, both in dividends paid and our continued share buyback. Our return on equity and capital employed for Q1 were 33% and 24% respectively. We ended the quarter with a total equity of $1.6 billion, which translates to an NAV per share of $11.38 or NOK 119 per share. We move on to the financial performance of our two operating business segments, starting with our shipping business per day statistics. Our VLGC fleet generated $200 million in TCE income or $58,700 per calendar day for the quarter, which is a historical record high. Daily OpEx came in at $8,600 per day, largely due to higher maintenance and repair expenses.
Our shipping segment ended the quarter with a profit after tax of $128 million. For 2023, we expect our operating cash break-even for our total fleet, including our chartered-in vessels, to be at $23,100 per day. Shifting focus to our expanded Product Services business. In Q1, we traded approximately 1 million metric tons of physical LPG, generating $25 million in gross profit. Depreciation relating to the amortization of five right-of-use assets was $18 million, resulting in a $7 million EBIT for this quarter. Other expenses comprise of the interest component of the ROU liabilities, G&A expenses, and estimated taxes approximates $4 million for the quarter. Net of depreciation and other expenses, our Product Services business reported a profit after tax of $3 million this quarter.
Our trading portfolio reflected an average daily Value at Risk of about $5 million for Q1 based on the standard 95% confidence level. Our committed capital in this business remains unchanged at $100 million, which includes $50 million in a Revolving Working Capital Facility used mainly to finance margin calls on our paper hedges. Slide 15 provides a summary of our liquidity position. On a consolidated basis, we ended the quarter with over half a billion in liquidity, made up of $209 million in cash, net of $38 million held in broker margin accounts, and $241 million in undrawn Revolving Credit Facilities. Ship finance debt at the end of March is at $413 million after all our scheduled repayments of existing term loans. Our Revolving Credit Facilities remain undrawn.
On trade finance, we have expanded our facilities to $580 million with support from multiple banks across Europe and Asia. We are on track to further expand our lending group and upsize our lines to $800 million. At the end of March, only $278 million or 48% of our current $580 million in lines have been used. $71 million related to advances drawn and $207 million in Letter of credit issuances. On this note, let me open the floor for questions. Back to you, Lisa.
Lisa Lim (Head of Corporate Communications)
Thank you, Elaine. We will begin our Q&A session now. Should you have questions, please type them into the Zoom chat box. You can also click on the Raise Hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. We have one question from Eirik Haavaldsen. Please unmute.
Eirik Haavaldsen (Head of Equity Research)
Yes. Hi. I was a little bit curious about Niels' remark on the two to three year time charter opportunities. You said 30% to 50% unlevered return on those. Did I understand that correctly?
Anders Onarheim (CEO)
Niels, do you wanna answer that?
Niels Rigault (EVP Commercial)
Yeah, that was correct.
Eirik Haavaldsen (Head of Equity Research)
Uh, and is...
Niels Rigault (EVP Commercial)
Level
Eirik Haavaldsen (Head of Equity Research)
Then are you referring to the vessel, I mean, just the vessel value or the kind of dual retrofit cost value?
Niels Rigault (EVP Commercial)
No, the vessel value with the retrofits.
Eirik Haavaldsen (Head of Equity Research)
Okay. You have ample opportunity to do two to three year time charters that give you 30% to 50%-I, I-unlevered return at present.
Niels Rigault (EVP Commercial)
Eirik, no, I think, there was. It's 13 to 15.
Eirik Haavaldsen (Head of Equity Research)
13 to 15.
Niels Rigault (EVP Commercial)
We would love to have Yeah, we would love to have 30 to 50, but I'm afraid.Okay13 to 15 is what we have to settle for. We still like that.
Eirik Haavaldsen (Head of Equity Research)
That's still very good. What's it gonna take you to exercise on a few of those opportunities? How is the development there been for the past three to six months in terms of, you know, liquidity and freight rate direction? 'Cause it's only going higher. It's following the spot market. It's not, that's the way we're seeing.
Anders Onarheim (CEO)
Yeah. I think that's right. It has been increasing, and I think also we're also seeing more requests, you know, for these, you know, three-year opportunities. Niels, why don't you expand a little?
Niels Rigault (EVP Commercial)
No, that's true. I mean, we can clearly see that. I think the market is a little bit surprised how well all the new building deliveries have been absorbed into the market. We clearly see that the demand for time charter coverage are increasing. Players are out there happy to fix the two to three years time charters.
Kristian Sørensen (Deputy CEO and Head of Strategy)
Maybe we should add also, I mean, I think we are quite pleased to observe that our retrofits are actually getting premium rates over new builds at the moment.
Niels Rigault (EVP Commercial)
Yes.
Kristian Sørensen (Deputy CEO and Head of Strategy)
I think it's a testament to the fact that we're operating 16 ships with the LPG, and we're getting great experience, and I think our customers are appreciating that.
Eirik Haavaldsen (Head of Equity Research)
Yeah, clearly. Just one question on your cash position, which obviously is rich. What is if we should... You know, what's a fair assumption in terms of a reasonable cash position to hold? I mean, cash management is suddenly becoming a big topic in commodity shipping. It hasn't really been like that or that hasn't been the case for a long time. I mean, what's your plan on with all the cash? Other than the dividends.
Anders Onarheim (CEO)
Well, I mean, we have, you know, we have announced also that or the board has started a new share repurchase program. Of course, we will continue to evaluate opportunities, investment opportunities versus, you know, returning cash to shareholders. That's, that's a constant discussion we're having with the board. And yes, it's a strong position and, you know, with our current leverage also, over time, I would expect our cash position to be slightly lower. For now, we still think we see good opportunities. Kristian mentioned, you know, our position in India is providing us with interesting opportunities there and, as usual, we're quite slow in making investment decisions.
We wanna make sure the returns work out for us.
Eirik Haavaldsen (Head of Equity Research)
Yeah. Finally, on your dividend, you include your sales gain in your dividend. Not all your peers or not all companies do that, but we should continue to expect you doing so, I assume.
Anders Onarheim (CEO)
Yes, you can expect that.
Eirik Haavaldsen (Head of Equity Research)
Okay. Thank you very much.
Lisa Lim (Head of Corporate Communications)
All right. Should you have questions, please type them into the Zoom chat box. You can also click on the Raise Hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. We have Peter Hogan. Please unmute.
Peter Hogan (Account Manager)
Yes. Hello, guys. I have a few questions. Well, we can start with the Panama Canal situation. It seems as if it's, well, you mentioned that it's still, it's still tight and there is still waiting time. Could you elaborate a little bit more on the recent development there? Perhaps also in terms of the longer term outlook here, have you seen anything which could lead you to believe that the sort of structural under capacity could be alleviated?
Anders Onarheim (CEO)
Niels, do you wanna answer that?
Niels Rigault (EVP Commercial)
Yeah. No, we certainly continue to see that the Panama Canal is first of all, very volatile when it comes to waiting days. You know, normally we would think that Q1 will slow down a little bit traffic using the Panama Canal. We do see that it jumps from a couple of days to suddenly 15 days waiting. We do see that, you know, even though people are talking about the economy slowdown and maybe less container ships using the Panama Canal, we still see that trade are still on. The Panama Canal can't just expand even further. We see more ships coming, but the constant is the Panama Canal.
Another thing which we also see, which is due to, which is a little bit our concern, is that we see the weather. No, not the weather. The water level in the Panama Canal is very on the low side, which means that the capacity for the Panama Canal will probably decrease further. The data we have today, it looks like the delays and the inefficiency with the Panama Canal will continue.
Peter Hogan (Account Manager)
Would that also then make it sort of natural to conclude that incremental growth out of the U.S. Gulf would need to be going below Cape of Good Hope?
Niels Rigault (EVP Commercial)
Yes.
Peter Hogan (Account Manager)
Now it's sort of...
Niels Rigault (EVP Commercial)
Yeah. Sorry.
Peter Hogan (Account Manager)
No. Yeah. Okay. On the margin here, we'll model for 15,000 nautical miles to Southeast Asia instead of the 10,000 through the canal, which is, I suppose, great for you guys.
Niels Rigault (EVP Commercial)
We'll let you have your own model. but, we hear you.
Peter Hogan (Account Manager)
On the new building side, well, as mentioned, by Eirik, you do have a lot of cash, and building new buildings. That's one way to lower that cash position. What would it take for you to do so, to go to the odds and order newer ships now? If you did, what would be the cost and delivery time for the first one?
Anders Onarheim (CEO)
I think what it would take for us to order newer ships would be that we see a, either a drop in new building prices, or new technology that can, you know, we can justify making, you know, the 25-year investment. We believe that at the moment, there is still enough uncertainty, and even though within the LPG segment, you can argue that we've sort of found at least a good intermediate solution with the ME-LGIP. We still think the risk reward is not attractive enough at these levels to invest in new buildings. Again, new technology, new fuels, new designs and as Kristian mentioned, we're studying ammonia very closely.
If we see opportunities that, you know, will give us good returns, we will look at that. At the moment, we are very pleased with just having, you know, low cash break-even when we see a lot of the newbuilds require much higher rates to provide, you know, appropriate returns. I don't know, Niels or Kristian, do you want to add anything to that?
Kristian Sørensen (Deputy CEO and Head of Strategy)
No. Only that, you know, ordering new buildings today, the delivery seems like today it's second half 2026. That could quickly change up to 2027. I mean, if the dry bulk and tanker market start to ordering.
Peter Hogan (Account Manager)
Are we pushing $110 now on the new building prices?
Kristian Sørensen (Deputy CEO and Head of Strategy)
Yes.
Anders Onarheim (CEO)
Yeah.
Peter Hogan (Account Manager)
That was interesting. $110 from the Clarksons view I'm looking at, they quote $103.
Anders Onarheim (CEO)
Yeah.
Kristian Sørensen (Deputy CEO and Head of Strategy)
Yeah.
Peter Hogan (Account Manager)
That's the last time, but the, yeah. The.
Niels Rigault (EVP Commercial)
The only cost is still higher, and I think so. Of course, coming down to, you know, coming down to $90, we might start looking at it.
Peter Hogan (Account Manager)
Okay. We'll watch out for 90. I'm making a note here. Okay. The final question from me on the Vilma Product Services. You mentioned that, Kristian, that in the sort of intermediate outlook you aim to increase that activity. Could you sort of specify that in perhaps number of tons you expect to trade, sort of going forward, into 2024?
Niels Rigault (EVP Commercial)
Well, it's hard to be too specific on the, on the, you know, the exact volume. As, as previously guided last year, you know, we traded about 5 million tons in total. First quarter was about 1 million. It's, it's also about, you know, what opportunities we see out there. Of course we have an ambition to grow the business. The risk reward is obviously a part of this. The ambition is to grow the business from, you know, last year's volume. Exactly how or when we will do it, that, we need to, we need to come back to you on that.
Peter Hogan (Account Manager)
Let's say that was to use the financing, now being increased from, well, from the back of my head, some $500 million to $800 million, an increase of some 40%. Is that sort of the range of what you think about, or is it more like 4% growth?
Niels Rigault (EVP Commercial)
No. I mean, it's definitely more than 4% growth. It's, if it's 40, that remains to be seen. Again, we have growth ambitions and, but we will like with most of the other activities that we, that we engage ourselves with, we, you know, we want to build this step by step.
Peter Hogan (Account Manager)
In terms of profitability going forward, the $3 million on net profit this quarter, is that representative going forward as sort of, if we were to model this on a quarterly basis?
Anders Onarheim (CEO)
I think it's Anders, I think it's, you know, we're gonna be careful to, you know, say what's normal. We've only operated for a full first quarter. I think, you know, over time, we will give more guidance on that. We certainly as we said before, we certainly have ambitions to earn at least the same return on equity here as we have, you know, on the shipping business. It's also we view this in, you know, in the, in the total context. As Niels and Kristian have both mentioned, this is giving us, you know, also great benefit on the shipping side. We also see that when looking at other types of investments, Product Services can play an important role also in that.
I think we're gonna be careful to go out and already now say what you can expect.
Peter Hogan (Account Manager)
Thank you so much. That was all from my side.
Lisa Lim (Head of Corporate Communications)
Once again, should you have questions, please type them into the Zoom chat box. You can also click on the Raise Hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. We have one question from the Zoom chat box. Over to you, Glenn.
Glenn Lodden (Senior Manager)
Thank you, Lisa. We have one question from Anders Karlsen. Can you say anything about the purchase price for the BW Messina?
Anders Onarheim (CEO)
Yes, we can say. It's, we paid low to mid $60 for the BW Messina. It shows again the value of having options. If you want to put that in a context of newbuild equivalent, we're talking about low $80s. Patrick, at those levels, you know, we'd probably be slightly more aggressive in general.
Glenn Lodden (Senior Manager)
Okay. Thank you. There are no further questions from the chats.
Lisa Lim (Head of Corporate Communications)
Okay. Once again, should you have questions, please type them into the Zoom chat box. You can also click on the Raise Hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking.
Anders Onarheim (CEO)
Okay. I would just like to thank everybody for listening in, and we will get back to work here. We want to deliver another good quarter next quarter. We need to get busy again. Thank you so much.
Lisa Lim (Head of Corporate Communications)
We have come to the end of today's presentation. Thank you for attending BW LPG's first quarter 2023 financial results presentation. More information on BW LPG and BW Product Services are available at www.bwlpg.com and www.bwproductservices.com respectively. Have a good day and a good night.