BW LPG - Earnings Call - Q3 2024

Transcript

Operator (participant)

Hi everyone, a warm welcome to BW LPG's third quarter 2024 results. The presentation today will be given by our CEO, Kristian, and our CFO, Samantha. Afterwards, we will open up for a question and answer session. Before we begin, I would like to highlight the legal disclaimers displayed on the current slide. Please also note that today's call is being recorded. I will now give the word to Kristian.

Kristian Sørensen (CEO)

Hi everyone, and thank you for taking time to join us today as we present our financial results and recent events. It's been another eventful quarter for our company, so let's turn to slide four for the highlights and our market outlook. Our TCE income per available day ended at $46,800, somewhat lower than the previous quarter, but above our guidance of $43,000 per day. The market went through a roller coaster during the quarter, with rates fluctuating in the range from low $20,000 per day and back into the $50,000 per day within a short period of time. In addition to a great job done by our chartering team by navigating through the ups and downs, we are pleased to see that our downside protection through our time-charter portfolio and FFAs took out quite a lot of this volatility.

We're also very happy with the new ships starting to enter our fleet, and as of today, we have five out of the 12 acquired Avance Gas ships safely delivered. As explained in this slide, another four ships are expected to be delivered, which arrive in time with right to receive dividends for Q3. The board has declared a dividend of $0.42 per share, which translates to 100% payout of the NPAT from our shipping activities. Moving on to Product Services, and as per our trading update in October, our trading activities benefited from a considerable uptick in the 12 months forward mark-to-market valuation of the trading portfolio, reflected in a net accounting profit of $58 million.

Although we're glad to see that the forward trading portfolio is becoming more valuable, the volatility in the trading market may drive the portfolio valuation up or down before the positions are realized, and it's important to understand that it is the profitable realized trading positions which matter as we move forward when they are eventually converted to cash in the bank accounts. Two subsequent events since end September were the refinancing of our $400 million revolving credit facility, which is now replaced by a new seven-year and larger facility of $460 million. Samantha will comment more on this later.

In addition, we recently announced two sale and purchase transactions where we sold the 2007 vintage vessel BW Cedar from our India subsidiary at around $65 million, while declaring a purchase option on the 2019-built BW Kizoku at just below $70 million, which is equivalent to a newbuilding price in the mid-$80 million. This is a strong testament to our business model, which creates optionality, we think, along the way, allowing us to harvest profits. Our market outlook for Q4 and next year is positive, as the export levels from the US Gulf have stabilized after a period of maintenance and slightly reduced exports.

However, it is important to note that a small market like the VLGC market is quite sensitive to only a few cargoes being added or taken out of the market, and at the moment, freight rates in the US Gulf seem to have found an equilibrium level ±$40,000 per day. There is currently little to no delays around the Panama Canal, which means that there is an upside potential from today's rate level the way we see it. Let's turn to page six for a closer look at the market fundamentals. The market volatility we have been through lately is well illustrated in this slide. When you see the rate movements against the variation in U.S. Gulf Coast loadings on the right side of the slide, it shows how finely balanced the VLGC market is at the moment with no delays in Panama.

I used to say that our market is driven by three engines: exports from the U.S. Gulf, exports from the Middle East, and the availability of Panama Canal slots for VLGCs. The next round of U.S. export capacity increase starts second half next year as Energy Transfer increased their ethane and LPG export capacity at the Nederland terminal in the U.S. Gulf. The Enterprise terminal follow-up in 2026 with their planned expansion, and we estimate that the North American export will increase another 10 million tons from 2024 to 2026 on the back of increased production of oil and natural gas in the U.S., combined with increased terminal capacity. Looking at the Middle East, the growth in export volumes is expected to ramp up from 2026 as Qatar commences the expansion of their new LNG trains. Abu Dhabi's LNG project is coming a bit later. We expect 2028.

Looking at the Panama Canal, it remains a wild card in our market, and unexpectedly, we can see that the number of container vessels passing through the canal so far in Q4 has come down, leaving more slots available for VLGCs and consequently more VLGCs sailing the shortest route from the US Gulf to Asia. Whether we will see more congestion in Panama is hard to predict, but the number of daily slots in the Neo Panama Canal locks is fixed at 10 transits totally both directions combined, so it takes only a couple of additional container or LNG vessels to pass through to tilt the availability of slots in the other direction. Let's turn to slide eight for a look at the LPG demand side.

The picture is pretty much unchanged since our last update, and directionally, the Asian region continued to grow their appetite for LPG in the residential sector in the Indian subcontinent as well as Southeast Asia, while the petchem sector in China specifically continued to expand their consumption of propane as feedstock. The trade pattern which has developed over the last years on the back of increased LPG demand in India deserves attention. The country is absorbing close to 50% of the Middle East exports, and all countries further east in Asia are increasingly dependent on sourcing LPG from the U.S., underpinning the growing need for long-haul shipping. If you look at the VLGC fleet and the new buildings, there is good visibility on the new building deliveries over the next 18 months, and for 2025, we have 13 vessels on our list over new building deliveries.

Worthwhile to note is that the number of ships going into dry docks in 2025 will more than double from this year as we count approximately 80 ships due for dry dock next year, and then I leave the floor to you, Samantha, for an update on the financials.

Samantha Xu (CFO)

Thank you, Kristian, and hello everyone. Coming to slide 11, we're very pleased to share that we deliver a solid shipping performance in a volatile quarter. For Q3, we achieved a 98% fleet utilization and a TCE of $46,500 per calendar day or $46,800 per available day. Maintaining a healthy time charter and FFA portfolio has been a key for success. In this quarter, the portfolio represents about 45% of our shipping exposure. For the fourth quarter, we have fixed 90% of the available days, about $36,000 per day. Looking at 2024, our time charter out fleet generates a profit of around $31 million of our time charter in fleet. The remaining of our fixed time charter out portfolio is estimated to generate $69 million for 2024. Next slide, please.

As shared in our earlier trading update, Product Services spoke to a strong quarter and yielded a net profit of $58 million. The result was contributed by gross profit of $71 million after netting off G&A and tax provisions. The gross profit includes an unrealized mark-to-market gain of $86 million, which consists of open cargo positions and hedges. This is offset by $14 million of a realized trading loss. The unrealized gain is expected to be realized in the future periods, although some volatilities are expected to impact the final realized result to be higher or lower. At the end of Q3 2024, Product Services book equity position arrived at $128 million. We would also like to highlight that the reported book equity does not include the unrealized physical shipping position of $17 million, which was based on our internal valuation.

You can recall we have announced a multiple-year term contract with our Enterprise Products Partners back in Q2. The related physical volume has started to phase in our 12-month rolling Mark-to-Market valuation. As such, we expect greater volatility in our unrealized position in the future quarters. For Q3, our average VAR was $5 million on a well-balanced trading book, including cargoes, shipping, and derivatives. Coming to our financial highlights, on the back of a good performance from both shipping and Product Services, we reported a net profit after tax of $120 million in Q3, including a profit of $12 million from BW LPG India and $58 million from Product Services. Profit attributed to equity holders of the company was $105 million, which translates to an earnings per share of $0.79. This translates into an annualized earning yield of 23% when compared against our share price at the end of September.

We reported a net leverage ratio of 21% in Q3, an increase from 12% reported at the end of June. The net leverage ratio change was driven mainly by increase in short-term trade finance and margin requirements, deposit pay for Avance Gas fleet acquisition, and increase in lease liability from the exercise of purchase option for BW Kizoku. These factors impacting the net leverage ratio, as outlined above, are mostly temporary. The delivery of Avance Gas fleets commenced in November and is expected to complete by the end of this month. When the fleet delivery finalizes, we would expect that our net leverage ratio will gradually increase to an approximate range of 30%-35% as we draw down on our financing facility. For Q3, our board has declared a dividend of $0.42 per share, a 100% payout of shipping NPAT.

This excludes the dividend to be paid to newly issued shares to Avance Gas shareholders and ensures that the existing shareholders are fully paid for. This also shows our confidence to deliver growth to our business and our continuous commitment to return value to our shareholders. The balance sheet ended the quarter with a shareholder equity of $1.6 billion and our annualized Q3 return on equity capital employed were 30% and 26%, respectively. Looking at our year-to-date OpEx, it arrived at $8,400, a slight reduction from the previous quarter reported. For 2024, we expect our own fleet operating cash break-even to be about $18,800 and $22,800 for the whole fleet, including time charter vessels.

As you can see, we continue to have a healthy repayment profile with outstanding shipping loan at $216 million, of which $120 million is a term loan for BW LPG India, only due to be refinanced in 2026, a very manageable position. On the liquidity side, we ended the quarter with a strong position of $750 million, paving the way for the Avance Gas fleet delivery. The vessels' delivery has been smoothly taking place since November and scheduled to be completed at the end of this month, as mentioned earlier. Post-delivery, our liquidity is expected to remain healthy at a level of $552 million, supported by our shareholder loan and the seven-year revolving facility of $460 million newly signed in November this year. We will also evaluate and start refinancing our vessels in early 2025 following the Avance Gas fleet's delivery.

We are very confident to maintain a healthy leverage and financing structure as well as a sustainable repayment profile with a larger fleet. On the Product Services side, trade finance drawdown stood at a moderate level of $248 million, or 30% of our available credit line, leaving a healthy headroom for the growth. With that, I conclude my update. Back to you, Kaia.

Operator (participant)

Thank you, Samantha. We would now like to open the call for your questions. Should you have any 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. Yes, Petter Haugen, you have raised your hand. The floor is yours.

I have. Thank you. Good afternoon. Quick question on the process of taking those vessels from Avance. To what extent should one expect cost to come in earlier than revenues? Is it more or less back to back, or should we, for instance, use a month of sort of overlap here? Yeah, that's the first question.

Kristian Sørensen (CEO)

Thanks, Petter. I can just start off with saying that, of course, we pay for the ships now, and when you fix the ships for the next voyage, we will not get, we are not able to invoice before the vessel is about to discharge as per normal shipping practice. So there will be, like normal, a delay, you can say, because we are not able to invoice our charterers before the voyage that the ships have performed is finished.

Okay. So yeah, I understand there will obviously be a cash flow effect here, but in terms of your P&L bookings, I suppose.

Okay.

Yeah.

Samantha, I don't know if you would like to say anything about that, or?

Samantha Xu (CFO)

Yeah, maybe just from a, well, commercial side, Kristian has just explained maybe a little bit from a financing perspective, as the vessel is being delivered, we will be drawing down our financial facilities to finance each of the vessels. I think the details, Petter, you can very well refer to the earlier deal structure to get a sense of how much each needs to be drawn down. I won't be able to give you an absolute number as the delivery is spread across November to the end of December.

Okay. Thank you.

Additionally, you would know that the depreciations will come in as we take ownership as well.

Yes, naturally. Yeah. Okay. Thank you. Just one more from me then, because from the asset market, it seems as if prices are still holding up to, well, more or less the same levels that we saw in the first half of the year as well. If you were to do something on the newer side now, how do you think that is going to compare to the Avance transaction? Is it any sort of data points that we could use to either mark the current resale price up or down from the Avance transaction?

Kristian Sørensen (CEO)

I think the market for the assets and, let's say, sale and purchase market is pretty much unchanged for the new ships since last quarter. So I think there is no real change from the last, I would say, six to eight months in terms of valuation for newer ships or new buildings, if that answers your questions.

It does, Kristian. Thank you. That was all from me.

Okay.

Operator (participant)

Thank you, Petter. Jørgen Lyan, you've raised your hand. Please go ahead.

Thank you. Hello, Kristian Sørensen. You are now taking on a bit more debt as part of the VLGC acquisition from Avance, and you have a pretty rigid net leverage ratio dividend policy. So just any question or any more information about what we potentially need to account for to adjust the net leverage for the short-term effects that you mentioned, Samantha, or is that sort of set in stone on how to think about the dividend payouts going forward?

Kristian Sørensen (CEO)

I can start off by saying that the dividend policy is what it is, but it's always up to the board to finally declare the dividend. So it's not—I mean, there's no change in that respect. So I wouldn't—it's hard for the management to comment any further on the future dividend payouts, but the dividend policy is what it is.

All right. And Samantha, I don't know if you have anything to add on or if that's then irrelevant in terms of the net leverage ratio where you talked about short-term events or short-term impacts from Product Services?

Samantha Xu (CFO)

Yeah, I think, Jørgen, you are referring to my comments about Q3, the elements that are driving up the leverage ratio. I have to mention a couple of things that, for example, the Product Services are drawing on the trade finance and the margin finance, etc. As you know very well, that that's a reflection of a slight, how to say, a slide of time of the number of cargoes that are carrying on our balance sheet that will change by days. So that's what I meant as a temporary effect, similarly for the purchase of a BW Kizoku as well. So that's due to the accounting rules that we have to gross it up, which drive up the leverage ratio once we take over of the vessel, and then it would just be normal asset.

All right. Thank you. And then finally for me on the Product Services part of the business, just to make sure that we understand correctly, but the way you booked this is sort of on a 12-month forward-looking basis, right? So when we're talking about length in the unrealized positions, that would be sort of a fair working assumption.

Kristian Sørensen (CEO)

Yes. So the positions are, the forward positions are spread as we always have over a 12-month forward rolling period. That's right.

Okay. Thank you.

Operator (participant)

Thank you, Jørgen. Then we have raised hand from Climent Molins. The floor is yours.

Hi, good afternoon. Thank you for taking my questions. I wanted to start by asking about the Q3 TCE. Considering the guidance you provided alongside Q2 earnings, it seems the Load-to-Discharge accounting had a positive impact on earnings. Could you talk a bit about that? And secondly, do you expect Load-to-Discharge accounting to, once again, have an impact on Q4 earnings relative to the guidance you provided?

Kristian Sørensen (CEO)

Are you now referring to the IFRS adjustment?

Exactly. Yeah.

Yeah. So I can say on a general basis, and then Samantha can also fill in here, that when the market is going up, the mechanism is that there is a negative IFRS adjustment. When the market is going down, you have a positive IFRS adjustment. So that is the way IFRS is smoothing out the fluctuations during the year. So that's just to kind of explain the mechanism on a general basis. And then, Samantha, if you could just comment on the IFRS adjustment for this quarter specifically.

Samantha Xu (CFO)

Yeah. So I think, Kristian, you captured most of the elements impacting IFRS 15. So it also, of course, has something to do with when the cargo is, when the vessels are being, how to say, laden or in a last voyage. In such a case, often we are not able to give a forward-looking estimate. It can only, after we have closed the quarter, we know exactly what's the impact. So I would say, to answer your question, is that, yes, there will be impact. As for the quantum as well as the direction, it's hard to give you a view on that, Clement.

Makes sense. Thanks for the call. And given the sale of the Cedar, should we expect net proceeds to be distributed from the Indian sub to the parent, or is there any appetite to buy another vessel in the sub level? And secondly, could you provide an update on the infrastructure investments in India?

Kristian Sørensen (CEO)

Yeah. So on the sale of the Cedar, it's something which will take place, the delivery will take place in Q1. So then we will decide on how to distribute the net proceeds as and when we get to that point in time. So we will get back to you in the next earnings release on how we have dealt with that. When it comes to the infrastructure investments, there haven't been any major change since last time, but we are proceeding according to plan and hope to and expect to start the first phase of the construction of the terminal on this side of the new year all going well.

That's helpful. Thank you. That's all for me. Thank you for taking my questions.

Operator (participant)

Thank you, Climent. Appreciate your questions. Next question comes from August Klemp. Please go ahead.

Thank you. A question kind of following up on Jørgen's question about product services. Can you give some color on sort of—I mean, Q3 was a fantastic result in the P&L with a very large ARB and kind of more normalized rate, should we call it. Rates have been sort of flattish into Q4 while the ARB has come down. Can you talk a little bit about sort of, in general, the environment this leaves for the Product Services division? Is it more difficult to extract value at this point? And secondly, seeing as it's unrealized, a large portion of the gain in Q3, which you will then realize kind of in the following quarters here, is there an argument to be made for paying out more than 100% of shipping NPAT because you will have a cash flow contribution from Product Services as well? Thank you.

Kristian Sørensen (CEO)

Thanks, August. I can start with the last one. I mean, if you look at how we distributed the profits from Product Services and the capital return to us as shareholders, I think you will get kind of the answer to your last questions there. And I think with regards to-actually, if you can repeat your first question, August, because that was-I lost my mind here now.

That was a bit long. Sorry. No, it's more about the market environment for Product Services now that the ARB has come in quite a lot while shipping rates are more or less flattish from Q3.

Yeah, I would say it's hard to guide exactly on how Product Services is performing from week to week and month to month, but they have many handles to pull. They have physical cargoes, FOB cargoes. They have outlet positions in Europe and Asia where they have deliveries and commitments fixed on certain price mechanisms. They have derivative positions and shipping positions. So they have, I would say, a wide range of ways to create profit and value, even though the market is, like you say, in a state where the ARB is coming down and the shipping is also kind of flattish. So I would say, on a general basis, it's hard for us to comment specifically how they may perform in a market like this, except for that they have many ways of positioning themselves depending on the prevailing market conditions.

So I'm sorry, it's hard to be more specific, August.

No, no, that's great. Thank you very much. And then finally, just kind of a housekeeping question. G&A was down quite a lot this quarter. Any guidance there for Q4 and maybe also for depreciation as you take over the Avance vessels?

I can just start off with the G&A because I think what we are doing is that we are accruing for bonus, tax, etc., which is based on realized profits, and that will go a little bit up and down during the year because we do this on a quarterly basis, adjusting it, so I think you have to see the G&A over the year to get the full picture of how the G&A is playing out because there are certain elements of bonus, tax, etc., which is being adjusted from quarter-to-quarter, and Samantha, would you like to add anything there?

Samantha Xu (CFO)

Yeah, I think that's correctly said. I think if you're referring to contrast with the previous year, I would say that there are no drastic changes expected as we've seen last year.

Okay. Thank you very much.

Operator (participant)

Thank you, August. I don't see any more raised hands, but if there are more questions you would like to ask verbally, please raise your hand. We have, during the Q&A session, also answered a few incoming questions on the chat channel. Are there any more Q&As you would like to raise on the chat? If not, I will round off the Q&A session.

Kristian Sørensen (CEO)

Yeah, it seems like we have answered all the questions here now. So I'd like to thank everyone for joining us, and I think that concludes our third quarter 2024 results presentation. So thanks, everyone, for dialing in, and we wish you a good rest of your day wherever you are in the world.