BW LPG - Q3 2023
November 14, 2023
Transcript
Kristian Sørensen (CEO)
Thank you, and hello, everyone, and Welcome to our Q3 earnings release. I'm happy to be joined today by our CFO, Samantha, and our Head of Commercial, Niels. To start off with the highlights, we are pleased to report our highest historical daily TCE at an average of $63,100 per available day. We report a net profit after tax of $22 million, equivalent to earnings per share of $0.85. This is after a downward IFRS adjustment of $24 million. For the third quarter, we're also pleased to announce a dividend of $0.80 per share, which translates into an annualized yield of 22%. Due to the requirements in connection with our U.S. listing process, we can no longer refer to non-IFRS terms like trading profit for Product Services results or in our dividend policy.
The revision of the dividend policy was necessary since last quarter. Like previously, the revised dividend policy will still be based on the shipping performance and the net profit after tax generated by the shipping segment, while also adjusting for Product Services performance, cash, and capital requirements. We're happy to answer any questions after the presentation regarding the dividend policy. For the third quarter, a 100% dividend payout is sourced from our shipping earnings, with an upward adjustment of $0.02. Moving over to subsequent events for the quarter, BW Tokyo is delivered to BW LPG this month after exercising an attractive purchase option earlier this year. The vessel will be on a six year time charter starting in Q1, securing a return of capital employed of approximately 18% over the time charter period.
In addition, we're pleased to announce that we have entered into an agreement to sell the BW Princess with delivery first quarter next year. The sale is expected to generate approximately $64 million in liquidity and a net book gain of $20 million. Further, we're also increasing our operated VLGC fleet, which will expand to 45 vessels, as Sino Gas is joining the pool in the fourth quarter by adding one LPG dual fuel vessel. And then looking at our market outlook, we reiterate our positive view for 2023 and 2024, although high volatility remains. And the key reasons for this include energy prices that are conducive to continued strong U.S. exports and steady export growth from the Middle East.
Further, new PDH plants, which are coming on stream in China, supporting the demand side of the market, and we also see continued growth in the residential sector in the developing world. We also see a delivery of VLGCs to slow down after the summer of 2024, and shipyards are booked until first half of 2027. Of course, the much talked about disruptions in the Panama Canal that will continue to absorb capacity from the VLGC fleet. We have recently experienced how ongoing challenges relating to low water levels and persistent drought conditions lead to further restrictions on canal transits. As mentioned in the early presentations, VLGCs have lower priority than LNG carriers and container vessels, forcing them to sail alternative longer voyages from the U.S. to Asia via Suez or South Africa. These longer hauls extend the sailing days by up to 50%.
While the factors mentioned above paint a positive picture for the VLGC shipping market, it's also important to remind ourselves that things can change quickly. We are watchful of the current uncertain macroeconomic environment and how much this can impact the current strong market environment. Those are the highlights. Next slide, please. Under the current market conditions, the VLGC sector is generating a dividend potential which is unprecedented for the segment. Depending on your view of the market, we have simulated and illustrated the dividend yield potential in this slide. We're also pleased to have returned more than 70% of our earnings and dividends since the IPO 10 years ago. Based on the current share price, we have a 28% annual return for our investors if you had reinvested the dividends in the share during the same period.
With that, I'll hand it over to Niels to cover the commercial slides.
Niels Rigault (EVP of Commercial)
Thank you, Kristian, and hello, hello to everyone listening. I'd like to turn the focus to slide eight in our presentation. Predicting the future is always complex, particularly when macroeconomics, geopolitics, and climate issues are raised at the same time, shadowing and fact-based logical forecasts as we experienced this year. 2023 has proven surprisingly robust for the VLGC segment, making a historic high. In the third quarter alone, we witnessed a remarkable 30% increases across all rates indexes, largely driven by sustained high import volumes to China, and the widening of the arbitrage between the U.S. and Far East has also encouraged active trading between the regions. As Kristian mentioned, a major point of discussion is the Panama Canal. We have observed significant impacts on spot rates due to operational disruptions.
At the end of the second quarter, the main reservoir of the canal experienced critical low water levels. Subsequent lack of seasonal rainfall led the canal authority to limit transits, preserving water resources. This limitation on VLGC transits, as mentioned by Kristian, could result into a 50% increase in sailing days for the fleet trading between U.S. and the East. However, it is crucial to note that the inefficiencies leading to the high rates also translates into increased cost for owners and traders, a burden not easily passed on to the end users. Looking forward, our supply demand model suggests a positive outlook for the VLGC market. Of the 43 VLGC new building scheduled for delivery this year, 75% have already been delivered. We anticipate further growth in the LPG export from North America and the Middle East.
However, it's important to recognize that several unpredictable factors could significantly influence rate fluctuations, as we saw in 2023. Moving on to slide 11. Our fleet composition remains robust, with 45 VLGCs despite active sales. As Kristian mentioned, we finalized the sale for another ship this quarter at record levels, scheduled for delivery at the end of the first quarter next year. In addition, we are pleased to welcome Sinogas to our pool, contributing to the first dual fuel ship, contributing their first dual fuel ship in the fourth quarter of this year. Their addition underscores the benefits of scale in this volatile market. Let's move to slide 13. Our time charter equivalent performance for the third quarter was $63,100 per day for the entire fleet. This figure includes fixed time charters and derivative hedges.
The spot fleet achieved a TCE of $81,300 per day, excluding waiting days. Given the current market volatility, we remain focused on optimally managing our risk. For the fourth quarter, around 79% of our available days are fixed at an average of $73,000 per day. Our spot rate currently stands at $104,000 per day, and we expect strong final earnings for Q4, thereby reflecting the exceptional hot spot market. For 2024, 90% of our fleet is already fixed under TCE, with an average daily rate of $41,300. We have balanced our TCE in and out commitments in 2024, securing a $23 million profit. Additionally, 13% of our days are hedged with derivatives at an average TCE of $59,000 per day.
Before handing over to Samantha for the financial overview, I'd like to provide a brief update from Product Services. In 2023, they have handled approximately 7 million tons of physical LPG, and about 20 million tons of derivatives. Next year, they anticipate a 30% increase in volumes. They have expanded into the mid-size space, securing two TCEs, allowing us to tap into the new market beyond the VLGC segments. On FOB product contracts, we have renewed our U.S. Gulf equity commitment, but also secured a term contract in the Middle East, diversifying our exposure and mitigating Panama Canal risk. Now, I pass the microphone to Samantha for a closer look at our financials.
Samantha Xu (CFO)
Thank you, Niels, and hello to everyone on the call. So let me continue to add some colors to the Product Services performance. The net asset value of Product Services increased by $12 million to $44 million at the end of September. This $12 million net profit comprised $34 million realized gain from trading operations, and $22 million unrealized mark-to-market losses from cargo contracts and hedging derivatives. This reported net profit does not include the unrealized mark-to-market valuation of our five TCE in vessels. Our internal valuation of these TCE in contracts at the end of September was $65 million. This positive value reflects the continued strong development in a 12-month forward freight market for VLGCs, which is the period we use to evaluate free positions in Product Services.
As you can see, the value at risk, VaR, is relatively stable, and the portfolio is well-balanced between cargoes, shipping, and derivatives from a trading book perspective. We continue to see good collaboration and synergy between Product Services and our shipping business through improved information flow, optionality, and enlarged footprint. While focusing on profit, Product Services are also progressing in expanding their physical presence in key markets, as we aim to broaden the platform and trading portfolio. Next slide, please. Starting with the income statement. On a consolidated basis, for the third quarter, we reported a net profit after tax of $122 million. This includes $16 million in profit from BW LPG India and $12 million in profit from Product Services. The net profit also include a downward adjustment of $24 million related to IFRS 15 adjustment, as Kristian has just mentioned.
This is because the TCE for the straddling that voyages over the quarter ends is recognized on a load to discharge basis. We expect that IFRS 15 adjustments will increase in future periods if freight rates continue to increase from the current level and if the total voyage days increase as the Panama Canal restriction persists. We reported an earnings per share of $0.85 this quarter, the majority of which was contributed by our core shipping segment of approximately $0.78. We reported a net leverage ratio of 22% in Q3. This was due to a heightened working capital requirement from increase to Product Services activities. The board declared Q3 dividend of $0.80 per share, which represents a 103% payout of Q3 and year-to-date shipping impact. Our balance sheet ended the quarter with a shareholders' equity of $1,522 million.
When adjusting for $480 million excess in broker valuation over book value, we reached an adjusted NAV per share of NOK 150, an uplift from book value of about $3 per share after adjusting for minority interest in BW India and Product Services. Our positive free cash flow of $75 million this quarter was derived mainly from our strong operating cash flows, but offset by the build-up in working capital. Our return on equity and capital employed for Q3 was 32% and 24% respectively. Next, we move on to some key statistics on our shipping business. Our daily OpEx came in at $8,500 per day, mainly due to higher maintenance and repair expenses.
For 2023, we expect our operating cash break-even for our own fleet to be at about $18,600 per day. This is $500 per day lower than our Q2 report, driven by early repayment for debt. Coming to slide 16, it provides a summary of our liquidity and financing structure. On a consolidated basis, we ended the quarter with close to $500 million in liquidity, including $190 million of available cash, after netting off $110 million held in broker margin accounts and $196 million in undrawn revolving credit facilities. As of the end of September, ship financing debt outstanding was reduced to $326 million. This follows a $110 million repayment of a revolving facility after conversion from term loan.
These initiatives align with our strategy to reduce debt cost and maintain funding flexibilities. On the trade financing side, $172 million, or 26% of our current $660 million line, have been utilized, with $86 million related to advances drawn and another $86 million in letters of credit issuance, leaving a healthy headroom for growth. We remain on track to expand our lending group further and upsell our trade financing line to $800 million. For perspective, these limits will allow us to trade up to 8 million tons of physical LPG per annum from the U.S. to the Far East under current market conditions. On this note, let me open the floor for questions. Back to you, Lisa.
Lisa Lim (Head of Corporate Communications)
Thank you, Samantha. We will begin our Q&A session now. Should you have questions, please type them into the Zoom chat box. You can also click the Raise Hand button to ask your questions verbally. Please note that participants have been automatically muted. Please press unmute before speaking. The first question, over to you, Glenn.
Operator (participant)
Thank you, Lisa. Our first question comes from Nick Linnane, and he asks: What percentage FFA coverage on total available days do you have in Q4 2023, and at what rate?
Niels Rigault (EVP of Commercial)
Well, that's a question for me. Now, as I mentioned, I mean, we do manage our risk is important, and for the remaining of the year, we have about 8% covered under FFAs, and on TC equivalent, that will be around $35,000 per day.
Lisa Lim (Head of Corporate Communications)
The next question comes from Petter Haugen. Please proceed.
Petter Haugen (Equity Research Analyst, Shipping)
Good afternoon, guys. Okay, I have a few questions, but just to clarify that first question, the $35,000 on the FFA side, is that what you have covered the 8% at, or is it a differential from something else?
Niels Rigault (EVP of Commercial)
No, that's the, that's the average TCE we have for those 8%.
Petter Haugen (Equity Research Analyst, Shipping)
Okay. Okay. Understood. Thank you. Well, firstly, the slide number 10 you're showing now, you had a similar slide last quarter, but then you only included 2023 outlook. So, I'm referring to the expected growth of LPG exports from North America in particular. The 12% on the slide for 2024 growth and 9% for 2025 growth, is that your honest opinion?
Kristian Sørensen (CEO)
Yeah, I can answer that, Petter. Yes, it is, and we can see historically that, we've been too conservative on, on the production export capacity from the States. What we have seen recently is that the wells, as they become more mature in the States, are more gaseous than we believed. And we also see a higher level of productivity from the producers in the U.S. And on the top of that, we're also on the same slide, you know, we can see we are positive, although at a more moderate level for the Middle East exports.
Petter Haugen (Equity Research Analyst, Shipping)
Mm. Yeah, according to my models, you wouldn't have sufficient ships to carry all that cargo, actually. But that's a problem for next year. Going forward then, just a quick question on the ethane, the VLEC is coming now. Do you expect them to do any conventional LPG trade, or will those be observed in or be employed in the ethane market solely?
Kristian Sørensen (CEO)
Yeah. They will be employed in the ethane market, so they're not gonna participate in the LPG trade. No, I mean, we see already the existing ships even though the LPG market is at record levels, we have not seen them at all, entertaining the market, so-
Petter Haugen (Equity Research Analyst, Shipping)
Thank you. That's interesting. In terms of the... Just a final question on the LPG exports. On the terminal capacity side, so Enterprise and Targa and all those guys, do they come with sufficient export capacity, in your opinion, to meet those growth rates?
Kristian Sørensen (CEO)
Well, yes, they, we believe so, but we can also see that they are planning to invest more in their capacity. And, obviously, that also goes for Targa and the other terminal operators in the U.S. So we can see that the terminals, as well as the big oil companies like Exxon and Chevron, they keep on investing in the U.S. shale oil and gas story, which we see as a bullish sign going forward.
Petter Haugen (Equity Research Analyst, Shipping)
Thank you. A final one from me, I'm sorry for all the questions, but on Product Services, that's been one of the... Well, it's still a fairly new side of your company. And if I'm reading the report right now, the forward book stood at $34 million of mark-to-market as per end Q2. That has now almost doubled to $65 million as per end Q3. And just to make sure that I understand that correct, that's the mark-to-market of all forward exposures in the Product Services?
Kristian Sørensen (CEO)
Samantha, would you like to reply on that?
Samantha Xu (CFO)
Yes, indeed, Petter. So that's our internal valuation based on the position we took in for the five chartering vessels versus the current market value of the shipping positions.
Petter Haugen (Equity Research Analyst, Shipping)
Understood. And as you've guided previously, there is not significant gross positions in the Product Services forward book, is it?
Samantha Xu (CFO)
Can you repeat your question, Petter?
Petter Haugen (Equity Research Analyst, Shipping)
No, I'm just trying to make sure that... Well, trying to understand is better wording, to I suppose. Doubling the forward value of the entire book within a quarter without taking directional bets is, I suppose, difficult. But from my understanding, previously, you do not take large directional bets within the Product Services portfolio. So this is, so yeah, my understanding is that the increases in the forward value is predominantly driven by good trading more than directional risk-taking.
Samantha Xu (CFO)
This is directly driven by the fair value of the shipping position.
Petter Haugen (Equity Research Analyst, Shipping)
Okay. So then-
Kristian Sørensen (CEO)
Yeah
Petter Haugen (Equity Research Analyst, Shipping)
... would that be a significant uplift of a net long position? Is that-
Kristian Sørensen (CEO)
Yeah, it's-
Petter Haugen (Equity Research Analyst, Shipping)
Yeah
Kristian Sørensen (CEO)
...Petter, let me just add, you know, it's not like they have added much length or anything to the shipping portfolio. It's just that we, from a mark-to-market basis, and this is driven again, very much by the spot market and the way shipping is valued on the back of what's happening, you know, around the Panama Canal and so on. And that has driven up the market-to-market valuation of the shipping positions that and the portfolio that Product Services have.
Petter Haugen (Equity Research Analyst, Shipping)
Okay. Okay, that's all for me. Thank you.
Operator (participant)
And from the chat, we have a question from Tom Vidar Skjesol. He asks: "Can you elaborate on the decrease in expected time charter in days in 2024 versus 2023?
Niels Rigault (EVP of Commercial)
Should I take that one question?
Kristian Sørensen (CEO)
Yeah, Niels, you can go for that.
Niels Rigault (EVP of Commercial)
Okay. Well, I wish I had more length for next year, but, I mean, the main reasons, too, is that two of our ships we had on TC IN, we also had purchase options, which we, you know, declared because they were very favorable and also decreased our cash breakeven. Secondly, is that obviously there are several ships expiring next year. We are in the middle of negotiating renewals, but, you know, the time charters market for the next two, three years indicates the market to be around $50,000-$60,000 per day. So it's quite elevated. So.
Operator (participant)
Okay. We have a follow-up question from Tom Vidar Skjesol. He asks: "Have you considered repayment of paid-in capital as an element or alternative to ordinary dividends?
Kristian Sørensen (CEO)
I can answer that, and the answer is no.
Operator (participant)
Okay. Lisa, I have no further questions on the chat.
Kristian Sørensen (CEO)
Samantha, would you like to add something or?
Samantha Xu (CFO)
No, I think that there is no difference it makes to the EPS, what is the return of capital or treasury share.
Lisa Lim (Head of Corporate Communications)
Once again, should you have questions, please type them into the Zoom chat box. 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. Glenn?
Operator (participant)
We have another question from George Hulse, and he asks: "Why would you not return excess capital to shareholders?
Kristian Sørensen (CEO)
Well, excess capital, we are returning as much dividend as we can every quarter. So, I think, you know... And we believe we have a fairly generous dividend policy. So it's to return excess capital over and above what we pay in dividends is not what we intend to do.
Lisa Lim (Head of Corporate Communications)
Should you have questions, please type them into the Zoom chat box. 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. Once again, should you have questions, please type them into the Zoom chat box. 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 some questions from the chat box. Glenn, please.
Operator (participant)
A follow-up question from Nick Linnane, and he asks, "I think why people are asking about return of capital is that return of capital does not attract withholding tax, whereas ordinary dividends do.
Kristian Sørensen (CEO)
Okay. I, Samantha, would you like to reply on that, or?
Samantha Xu (CFO)
Yeah, I think-
Kristian Sørensen (CEO)
I mean-
Samantha Xu (CFO)
We have different ways of returning to the values to the shareholders, paying out consistent dividends to the shareholders, as well as continuing our share buyback program at the right level, are ways to returning. So that we will continue to evaluate that at the right timing. So it's not, it's not something that we have not considered.
Kristian Sørensen (CEO)
Yeah, and share buybacks is, of course, another alternative, which we have done previously, and can happen again, if we believe the share price is trading in the territory where we see that as a good alternative to also paying dividends.
Operator (participant)
We have another question from Gerald Dicus, and he asks, "Do you anticipate the U.S. listing earlier on April 1 or at the end of Q2 2024?
Kristian Sørensen (CEO)
Samantha, do we have any more specific dates than Q2 2024?
Samantha Xu (CFO)
Well, we are working very proactively on a very demanding timetable, but we're committed to the timeline of Q2 2024. Please allow us this room to manage, but we are very confident about Q2 2024.
Operator (participant)
From George Hulse, he asks: "Do you see any room for consolidation in the LPG space with so many new buildings coming?
Kristian Sørensen (CEO)
Good question. We always look for ways to consolidate, but it's easier said than done. And especially so when the asset prices are at the levels where they are now. So, we hope that we, in the future, will also continue to be a consolidator in the LPG space. At the moment, it's hard to calculate how some of the asset prices that we see in the market.
Niels Rigault (EVP of Commercial)
There's not enough ships out there.
Kristian Sørensen (CEO)
But again, this is something we continue to observe, and if we find the opportunity right, we will do it like we have done before, and be a consolidator in the market.
Operator (participant)
George also follows up with another question on newbuildings, and he asks, "Newbuilding prices, are they likely to come down?
Kristian Sørensen (CEO)
It's a good question, but well, newbuilding prices is a little bit like the shipping market. It is volatile, but right now, we see the yards being very, very confident. I mean, the capacity of the yards is about 30% less than what we have seen in the past. And as we mentioned now, ordering today, you will get your ship in, well, maybe if you're lucky, first or second half 2027. So the yards are not in the hurry to take down the prices. But I mean, everything which goes up also goes down one day. The question is, is when?
But, the likelihood for prices to keep at current level is, well, it's difficult to see that they will drop in the near future.
Samantha Xu (CFO)
George, please go ahead.
George Hulse (Managing Partner)
Yeah, I would just agree with Kristian, that new build prices are unlikely to come down anytime soon. As he rightly points out, the market capacity of shipbuilding is not the same as the previous market from 2003 to 2007. So with all the new buildings being increased, well, there've been new buildings ordered by the independents. So this, this is really my point, is how the independents will monetize those assets. Do you not see a case for taking some of them over with part cash, part payment, in a way to grow your company, via the shipping side?
Kristian Sørensen (CEO)
Yeah, thanks for the question. Of course, without being too specific, about what kind of opportunities we evaluate and consider at any point in time, we are always trying to use various ways of, let's say, currencies, to see whether we can consolidate the market. So but again, this is easier said than done, especially now when the prices are at a very high level historically, and we struggle to identify profitable growth opportunities, you know, on the back of the elevated asset prices, if that answers the question.
George Hulse (Managing Partner)
I think it does, so thank you.
Operator (participant)
Okay, we're going back to Gerald Dicus, and he asks, "Do you expect again a Q4, in Q4, a write-down of $24 million?
Kristian Sørensen (CEO)
Samantha, would you like to comment on the IFRS for Q4?
Samantha Xu (CFO)
Well, the only thing is certain is that there will be adjustment coming from IFRS 15. And as for how much and what direction, I would say that it very much depends on the vessels routing and how their loading and discharge day compare with the quarter end. So I would say that there will be likely a revision of a certain degree of this quarter, but there will be further adjustments of a Q4, depends on how the voyages ends and straddle over to Q1 2024.
Operator (participant)
Nick Linnane asks, "Of the 11 VLGCs you show are still to be delivered in Q4 2023 on page eight, how many do you think will actually be delivered in Q4 2023 versus pushed into Q1 of 2024?
Kristian Sørensen (CEO)
Niels, would you like to give a comment on that?
Niels Rigault (EVP of Commercial)
Yeah. So we have around 25% still to be delivered this year. But we do see that there are inefficiencies in the yards, and we see more and more ships being pushed towards Q1. Now, how many of them, it's difficult to say, but I'm quite certain that some of the ships will be pushed into Q1.
Operator (participant)
We have a question from Matthias Gedrika. He asks, "Do you consider to temporarily change the route for some of the ships to use Suez Canal or the way around Cape?
Niels Rigault (EVP of Commercial)
Yes, well, another good question, and that comes back to the Panama Canal. Right now, we ballast our ships to either Suez or Cape. Obviously, the ships which are ending up in Korea and Japan, we still could bid for the Panama Canal slot for a month ahead. But if we clearly see that we don't get those slots, we will also start ballasting ships from Japan and Korea back to around Cape. And we also see that the rest of the owners doing the same. They don't wanna be stuck in the Panama Canal. Any further questions?
Lisa Lim (Head of Corporate Communications)
If you have questions, please type them into the Zoom chat box. 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.
Niels Rigault (EVP of Commercial)
With no further questions, I think we can round off the session, and thank everyone for dialing in and listening to us this time. Thank you.
Lisa Lim (Head of Corporate Communications)
We have come to the end of today's presentation. Thank you for attending BW LPG's third quarter 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.