BW LPG - Q2 2024

Transcript

Lisa Lim (Head of Investor Relations)

Welcome to BW LPG's second quarter twenty twenty-four 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. Should you have any, please type them into the Q&A function in your Zoom panel. You may also use the raise hand option. 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 (CEO)

Thank you, Lisa. And, hi, everyone, and welcome to our twenty twenty-four Q2 presentation. Thank you for taking time to join us today as we present our financial results and recent events. It's been an eventful period for our company, so let's turn to slide four. Before we talk about the more recent events, let's focus on the Q2 numbers, where we are pleased to report another good quarter for our fleet, with Time Charter Equivalent in line with our guiding over $9,000 per day. We're also happy to report another profitable quarter for our trading activity in Product Services, with a net accounting profit just below $16 million.

As you will see from slide 16, with our usual waterfall illustration of product services performance, there was a $29 million profit from realized positions, which were offset against an unrealized net loss from physical and paper hedging positions. Following our good results, our board declared a dividend of $0.58 per share, which corresponds to a 100% payout of our shipping NPAT of $0.48, plus $0.10 top up from product services. The biggest news is the subsequent event of last week, where we announced the acquisition of the 12 Avance Gas VLGCs for a total transaction price of $1.05 billion. This transaction is a major milestone and shows our capacity to strike transactions with big scale and strategic significance. It also propels BW LPG forward as a leading VLGC shipping and LPG value chain player.

On the next slide, we will look at the highlights of the transaction, which was enabled by our successful listing on the New York Stock Exchange, which has boosted the liquidity and robustness in our share. Looking at the market outlook, we are currently in the market, which is on its way back from the summer doldrums, with the spot rates bottomed out around $30,000 per day from the US Gulf because of disruptions in the terminal's lifting program after the Hurricane Beryl. The demand side in the consuming market east of Suez continues showing robust growth, and the FFA market is pricing December liftings around $50,000 per day. More about the market developments later in the presentation. Let's turn to page five for a repeat of last week's announcement.

For us, as a company, we have historically had a clear preference for growing our fleet with vessels on the water without adding capacity to the global fleet. We did so when we acquired the Maersk VLGC fleet in two thousand and thirteen, as well as the Aurora LPG fleet three years later. So for us, this transaction was of the same scale and strategic magnitude, where we overnight create a much bigger footprint commercially and a much larger company for the capital market to invest in. Through the transaction, a larger fleet will give us commercial advantages of scale, more flexibility, and market power. Moreover, the acquired twelve vessels will contribute to renewal of our fleet, and we will own and operate fifty-three VLGCs by the start of twenty twenty-five, where twenty-two are dual fuel.

However, to do this transaction at this point in the cycle, it was essential for us to use our share as currency in a way which is accretive to our shareholders. Out of the total purchase price of $1.05 billion, of which $500 million in debt, we will effectively fund 60% of the net asset value by issuing 19.22 million new shares at $17.25, equaling $333 million. Avance Gas will have a 40-calendar-day lock-up period of the shares received when the vessels are delivered ship by ship in the fourth quarter. Consequently, we are increasing our total shares outstanding by 15%, while adding more than 40% earnings power through the expansion of our own fleet.

The balance of the net asset value in the transaction is to be financed by cash at hand and draw down our current revolvers. The transaction is fully funded and financed, with BW Group providing us with a revolving unsecured shareholder loan of up to $350 million, allowing us to comfortably take over the 10 Avance vessels with bank loans and swiftly refinance. The sale lease back facility, currently financing two of the vessels, will be novated soon. On a like-for-like basis, post-transaction, our liquidity will remain at a healthy level of $343 million before any refinancing effect to optimize the liquidity position. Net leverage ratio is expected to increase to 30%-35%, a healthy and more optimal level than the 7%-12% range we have reported the last two quarters.

on our positive market view, this illustrates the attractiveness and the creativeness in this fleet acquisition, which expands our market-leading business platform while we maintain a robust balance sheet. Let's turn to the next slide to look at the latest market developments. After a slow couple of months over the summer, the U.S. exports have picked up from the delays caused by Hurricane Beryl, and the export volumes from the Enterprise and Targa terminals in the U.S. Gulf are catching up with the backlog. The most recent report from Gibson Shipbrokers shows an uptick of 10 VLGC export cargoes from July to August, meaning the number of VLGC loadings in the U.S., including the East Coast, will arrive at 104 for the month of August.

The price differential between the US and the Far East is currently around $230 per ton, leaving room for higher freight rates on the back of a tighter availability of ships, as we have seen over the last weeks. Heading into the winter season, the forward market is pricing the Houston Chiba benchmark leg at around $50,000 per day, and this is without any Panama Canal delays for VLGCs, indicating an upside on the rates should the canal become more congested. If you look further out on the horizon, there are firm expansion plans from the three big terminals on the US Gulf Coast, starting second half next year, and we view these billion-dollar investments as positive for shipping demand when coupled with continued demand growth in the Asian markets.

In the Middle East, the annual export volumes are pretty much stable, with seasonal reduction in export volumes over the summer due to maintenance and higher domestic consumption. According to Gibson's, the number of VLGC cargoes has fluctuated between 55-60 per month since May. What is interesting is that around 50% of these volumes end up in the increasingly important Indian market, which leaves the import markets further east in Asia, more dependent on cargoes from the US, which in turn is supporting shipping. For a period of time, there have been mixed signals from the overall Chinese economy, but the Chinese import demand for LPG, and in particular propane, continues to grow on the back of scheduled PDH plant expansions.

As a final comment on the status of the LPG market, there's a lot of focus on the demand growth in India, in China and the Indian Subcontinent, while the rise of the Southeast Asian market is overlooked by many observers. This region, with growing population and prosperity, imported around 13 million tons of LPG last year and is surfacing as a considerable consumer of LPG, which also sources significant volumes from the U.S. Looking at the supply side of the VLGC market, we have entered a period of modest fleet growth for the next 18 months. In addition, if you look at the fleet profile for vessels 15 years and younger, there are 35 VLGCs going into dry dock this year, while the number increases to 65 next year, which under normal circumstances, will reduce the global fleet capacity.

With that, I leave the floor to you, Samantha.

Samantha Xu (CFO)

Thank you, Kristian, and hello, everyone. So let's have a closer look at the shipping performance. For the second quarter, 2024, we delivered a TCE of $48,000 per calendar day and $49,700 per available day. A continued solid performance on shipping. We have a healthy coverage through our time charter and FFA portfolio, which represents about 39% of our shipping exposure. For the third quarter, we have fixed 86% of the available days at about $43,300 per day. For 2024, our time charter out fleet generates a profit of around $27 million over the time charter in fleet. The remaining of our fixed time charter out portfolio is estimated to generate $68 million for year 2024.

Coming to product services, we're pleased to share that it delivered another quarter of a strong performance. In Q2, product services yielded net profit of $16 million, contributed by a gross profit of $25 million after netting of G&A and tax provisions. After deducting share capital returns concluded in Q2, the net asset value entered, ended in June at $69 million. The gross profit of $25 million includes a realized gain of $29 million, as mentioned, offset by $5 million of unrealized cargo and derivative loss. Due to increased fiscal forward volume from the new multi-year term contract with Enterprise Products Partners being phased in and included in the 12 months rolling mark-to-market valuation, we may see larger movements in unrealized positions in the future quarter as cargo price fluctuates.

The reported net profit does not include the $31 million unrealized fiscal shipping position based on our internal valuation. For Q2, we reported an average VaR of $5 million on a well-balanced trading book, including cargoes, shipping, and derivatives. Going on to our financial highlights. On the back of good performance from both shipping and Product Services segment, we reported a net profit after tax of $85 million in Q2, including profit of $12 million from BW LPG India and $16 million from product services. Profit attributable to equity holders of the company was $77 million for the quarter, which translated to an earnings per share of $0.58. This means an annualized earnings yield of 12% when compared against our share price at the end of June.

We reported a net leverage ratio of 12% in Q2, an increase from 7% reported at the end of March, mainly driven by our cash position changes. As we progressively take delivery of the newly acquired 12 VLGCs, which mostly estimate to be in Q4, we expect that our net leverage ratio will gradually increase to an approximation of 30%-35% range as we slowly draw down on our revolving credit facilities. For Q2, the board declare a dividend of $0.58 per share, a 100% payout of the company NPAT, or a 121% of shipping NPAT. This reassures that our continuous commitment to return value to our shareholders as we deliver growth to our business.

The balance sheet ended the quarter with a shareholder equity of $1.6 billion, and our annualized Q2 return on equity and on capital employed were 21% and 17% respectively. Yesterday, OPEX per day arrived at $6,800, a slight reduction than last quarter. For '24, we expect our own fleet's operating cash break-even to be about $17,800 and $22,300 for the whole fleet, including the time charters. As you can see, we continue to have a healthy repayment profile, with outstanding shipping loan at $230 million, of which BW LPG India term loan of $127 million is only due to be refinanced in 2026, a very manageable position.

On the liquidity side, we ended Q2 with a strong position of $578 million, which paved the way for the announced Avance Gas fleet acquisition. The vessels' delivery will be carried out from fifteenth of September to end December. By the time when all the vessels have been delivered, our liquidity is expected to remain healthy at a level of $343 million, with the estimate that $235 million is drawn from our current revolvers. We also expect to gradually draw down the revolving shareholder loan of $350 million, in part or in full, to fund the vessels redelivery, to fund the vessels' delivery, excuse me. The shareholder loan makes sure the transaction can progress swiftly, and that we can refinance with an improved term post-vessel delivery.

We expect the net fleet refinancing to be initiated as soon as possible while working on other refinancing projects to optimize the balance sheet. We're confident to maintain a healthy leverage and financing structure, as well as a sustainable repayment profile with a growth fleet. On the product service side, trade finance draws stood at a moderate level of $159 million or 20% of our available credit line, leaving a healthy headroom for growth. With that, I would like to conclude my updates, and back to you, Lisa.

Lisa Lim (Head of Investor Relations)

Thank you, Samantha. We will open the floor for questions now. Should you have questions, please type them into the Q&A channel. You can also click 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 Petter. Petter, please go ahead.

Petter Haugen (Analyst)

Good afternoon. Yeah, this is Petter Haugen from ABG, asking. In terms of the cost side of taking over those 12 VLGCs, could you give some specific guiding on just how we should model that going into Q3 and further into Q4, potentially also impacting in Q1?

Kristian Sørensen (CEO)

Hi, Petter. Cost side, can you be a bit more specific what you are thinking of?

Petter Haugen (Analyst)

Well, in terms of doing inspections and so forth, I would assume that the handover would take longer than what a normal turnaround would be. And if there are any planned non-revenue-making days needed for the transaction to sort of go along. Or if it's no cost, Kristian, that's just fantastic.

Kristian Sørensen (CEO)

Well, the way it works is that this contract is that these vessels, the transaction is done on standard sale form terms in shipping, where you inspect with an underwater inspection and have the delivery of the vessel at the same time as you pay for the ships, and then the ship is in our hands. So it... There is no difference from a regular sale and purchase transaction to this transaction in that respect. If that-

Petter Haugen (Analyst)

Yeah, I understand. But in terms of the revenue, the revenue days in this time period-

Kristian Sørensen (CEO)

Yeah

Petter Haugen (Analyst)

... So are you capable of fixing prior to the inspection and the delivery for sort of effectively not having lost revenue days when taking over the ships?

Kristian Sørensen (CEO)

The ships are at Avance cost until we have taken delivery. They can deliver the ship typically in Asia, and then we ballast the ship into the Middle East, and load or goes back to the US Gulf. It depends on the position of the ship, but all the cost for the vessel up until delivery to BW LPG is as per normal sale and purchase transactions for the sellers at the sellers' expense. Of course, the inspection is on the regular, let's say, procedure around that is at our cost, but this is nothing. I mean, there's no material cost to be thought of in this respect on our side.

Petter Haugen (Analyst)

Okay, that's helpful. Thank you. And if I just follow up on a quick one on the market outlook. So this time you talk about the future growth for the next three years, which is as long, well, at least in what I can read, longer than what you normally have guided for. Could you shed some light on what sorts of considerations you have been making to make statements now going into 2026? And perhaps also shed some light on why you think U.S. LPG export growth is going to be in the high single-digit territory also in the coming few years?

Kristian Sørensen (CEO)

Yeah, sure. I mean, we usually take our view, you know, have a view two to three years out in time, based on our own data collection. I think, you know, the way we see, and I said this before, the way we see that the big terminals and the big players in the U.S. Gulf are gearing up and investing, and also guiding on their volumes, is on top of our own data gathering, supporting this. We have, you know, we source our data from various sources.

Of course, we also take a look at what the big infrastructure players in the U.S. Gulf are planning for, because this is obviously having a big impact on the capacity and what they also see as the potential for exports going forward.

Petter Haugen (Analyst)

Okay, thank you. I'll hand it over.

Thank you, Petter. Eric, you're next. Please go ahead.

Yeah, hi. Just a question, because you've taken some coverage recently, but obviously now with another 12 vessels, you're kind of naked going into 2025, 2026. So with your, at least on a percentage basis, so as you're increasing your financial leverage, should we expect you to also then maybe be a bit more aggressive on time charters now going into peak season? Or will you be happy with, you know, 15% coverage with a much bigger fleet?

Kristian Sørensen (CEO)

Yeah. I think without promising anything or guaranteeing anything, like I have guided on previously, you know, we are quite, we're quite happy with the coverage that we've had over the last years, which has been in the range, you know, 35, a little bit higher, percent. So, so I think, you know, for us, we like to have exposure to the market, but we also want to and have always had a certain downside protection, being somewhere in the 30%-40% range of our fleet capacity. So I think that's kind of what I can say at the moment. But, yeah, if that answers your question.

Yeah, no, that's good. And just to follow up on the cost question, but more so on your efficient G&A, should we expect, I mean, the addition of Avance those vessels, will it do a lot to your organization, or is it just something you'll swallow with the team you have now?

Yeah, we're able to absorb that basically with the team we have now. So there is no plans to increase the number of people or the G&A in any way.

Excellent. Thank you very much.

Hopefully to the contrary.

Good.

We have another question from Johanna. Johanna, please go ahead.

Joana Pinheiro (Reporter)

Hello, thank you. I'm Johanna Pinheiro, reporter for Argus Media. I'm curious to know how BW sees the new announcement from Panama Canal for long-term slot allocation reservation. So I would like to understand how BW thinks that will impact the market, and how it will if it's interested in securing some slots as well. Thank you.

Kristian Sørensen (CEO)

Yeah, thanks for the question. You know, we have actually spent quite a bit of time trying to decipher this and what it means for us. The conclusion is that I don't think we will be in for this tender. I think it's more designed for container ships and the likes, which are shuttling back and forth the way we see it.

Joana Pinheiro (Reporter)

... if I can just a follow-up, because that is going to use up about 40% of those slots that go for auctions. So can we expect that to be included? There will be more or less vessels or less slots around for auctions? So is that a factor at play here?

Kristian Sørensen (CEO)

You know, the Panama Canal is basically designed for container ships, and you can say LNG carriers are also prioritized above VLGC, so we're quite... And the Panama Canal is a big black box and a wild card in our market. So, what's happening there has a big impact, but for the dynamics in the market. But it's hard for us to also justify going in on a tender where you book slots, because we don't, you know, we are in a market where you have the charter's option to discharge in Europe or go to Asia or other parts after loading, or the world after loading in the US.

I think for us, we are, as it looks now, at least, better off to play the spot market, so to say, in the Panama Canal.

Joana Pinheiro (Reporter)

It's okay. Thank you.

Thank you. Alex, please go ahead. Axel, please go ahead.

Axel Styrman (Analyst)

Yes, thank you. Axel Styrman from Kepler Chevreux. So a question related to the product services division. Do you plan to ramp up the activity now as you grow the VLGC fleet to such a big scale as you're doing?

Kristian Sørensen (CEO)

We announced an extension of the Enterprise contract last quarter. There are no plans to further expand on a contract basis more than we already have announced.

We will now move on to questions from the Q&A channel. Kaya, over to you.

Yeah. So we have one question here from the audience, asking if you could elaborate on how much additional free cash flow, earnings you expect to generate from the larger fleet post-acquisition and the long-run dividend per share, assuming TCE remains approximately at current levels.

Samantha Xu (CFO)

Yeah, thanks for the question. I think first of all is that without a doubt, adding twelve vessels to the fleet is definitely increasing the revenue generation potentials. We expect this fleet to perform at a similar level of our existing fleet as well as on the cost front as well. So I think that would likely give you a very good guidance in terms of you know, based on our cash break-even and the market, where it is trending, our guidance on the coverage, et cetera, will probably give you a very good idea where the free cash flow will likely land following the market fluctuations.

As from a dividend perspective, we will, as we share many times, this is at the board's discretion. We would largely follow the dividend policies, while maintain to distribute values back to the shareholders as much as possible. I hope that answered your questions.

Yep. And then we'll go over to a question from Dasha here, asking in terms of terminal export capacity, is it pre-booked, or do you pay spot for terminal pricing?

Kristian Sørensen (CEO)

Yeah, I can just answer in, you know, in general, you-- if you enter a term contract with the terminal, the export terminals in the U.S. Gulf, you have a pricing mechanism which is agreed on a case-by-case basis, depending on the negotiations with the terminal, which again boils down to flexibility, volume, duration, and so on. And if you play the spot market, then of course, you are exposed to the supply and demand there and then when you want to buy the cargo. So this is quite, as in any other market, I think, quite normal.

Dasha is following up with a second question: What are the specific projects, expansions you're looking at, which should increase LPG export capacity in the U.S., Canada?

Yeah. So if you look at our slide, we are mentioning Enterprise, Energy Transfer. We also know, I mean, that in Canada there are plans for ramping up the exports on the West Coast of Canada. So I think there's a fairly long list of expansion plans on the terminal infrastructure side in the U.S. and Canada for over the next years. Argus actually have in their last, since you had Argus on the line here just now, had in the last monthly review, they had a long list of they showed the different expansion plans which are confirmed in the U.S. Gulf. So I think the companies are quite open about this since they're also stock listed.

Then we have a question from Aman here asking, "We see most ship owners in LPG are opting to order new build, very large ammonia carriers. Does BW LPG also have any plans or intend to focus on VLACs or ammonia trade?

Thanks for the question. If you go back in time, we were one of the biggest shipping companies in the ammonia space, actually. These ships, the last ship I think was sold in two thousand and nineteen. That was large gas carrier, which is the size below VLGCs, so we are not strangers to trading in ammonia. At the moment, we do not have any ammonia lifting capacity on our ships, except for in the Indian fleet, which are tied up in trading LPG from the Middle East to India, so we are absolutely believers in the ammonia case going forward, but we do not have any VLACs on order at the moment, but let's see what the future brings.

Like I said, we are no strangers to trading and lifting cargos in the ammonia space.

Aman is also following up on that answer. There are concerns for oversupply in LPG shipping, especially for VLGCs, with forty-something VLACs scheduled for delivery in 2026, 2027. Any thoughts of how it would impact the earnings?

Like in any other shipping market, if you have overcapacity in the fleet, of course, that will impact the rates negatively, so it depends on how the LPG volumes are expanding in the period from now up to 2026, 2027, and also, of course, how the much-talked-about ammonia projects are materializing in the same period and towards the end of this decade, so this is, I would say, a million-dollar question, and like in any other shipping segment, of course, overcapacity is a challenge if that occurs.

Next, a question from Knut. He has two questions. The re-domiciliation to Singapore, tax-wise, will the company still be assumed to be outside the exemption method according to Norwegian tax legislation? Second question: When will the new shares related to the Avance Gas transaction be issued?

I can start off with replying to number two, and then I leave to Samantha to reply the first question. So the Avance Gas will receive their shares when the ships are being delivered. So every ship has a pre-agreed portion of shares and cash to be paid before they are delivered to us. And then for the next question, I leave that to Samantha to reply on, please.

Samantha Xu (CFO)

Yeah, Knut, maybe I would ask you to elaborate a little bit on what you mean by the exemption methods about the Norwegian tax legislation. But basically, there is no change as for the investors domicile in Norway, how the tax status has changed. Still, now we have a re-domicile to Singapore, there is no withholding tax applied for dividend paid from the BW LPG to the investors around the world. And as for either as a dividend or in the case of a share buyback, all the proceeds will be taxable based on the investor's tax status. I hope that answered your question.

And then we have another question from Trond, asking, "The fleet taken over from Avance is younger than your current fleet and probably more fuel efficient. How will this impact on your average OpEx?

Kristian Sørensen (CEO)

Yes, we hope that it will impact positively on our OpEx. So, and like you say, the fleet is a few years younger on the average than our current fleet. So, that's also one of the parts we found attractive with this transaction. So we hope that we can benefit from that, and also from the scale when adding 12 more ships to our fleet.

Lisa Lim (Head of Investor Relations)

Final call. Should you have questions, please type them into the Q&A channel. You can also click the Raise Hand button to ask your question verbally. Please note that participants have been auto-muted. Please press unmute before speaking. There being no questions, over to you, Kristian.

Kristian Sørensen (CEO)

We had one question just at the end here: Is there more analyst coverage in the USA? We are working on it. So we hope that more equity analysts in the States will take up coverage of our share and company, especially now that we are growing in size. So that's something we are working on.

... Yeah, and then we have a question from Damian: how many shares of the company belong to owners, directors, and how many are traded on New York Stock Exchange and also stock exchange, approximately?

I think, you know, there is an overview. We report on this, so it's something you can find on our website or we can, if you send a mail to our IR email, we can reply to you on that, if that's fine, Damian.

We have one question from Johanna: How has ETS impacting the market so far?

I would say that ETS has impacted the market in the sense that there is more focus on newer vessels, and of course, the fact that we now have 22 ships with dual-fuel technology on the water by the end of the year is something which is to our advantage in that sense, so overall, it's shifting the focus and the preference in the market slowly towards more fuel-efficient and environmentally friendly vessels with the latest technology.

No more questions.

Okay, everyone, then I'd like to thank you all for joining us today, and thank you for your support, and we see you again next quarter.

Lisa Lim (Head of Investor Relations)

Thank you for attending BW LPG's second quarter 2024 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.