BW LPG - Q4 2022

Transcript

Niels Rigault (EVP)

At a discount using purchase options through the TC in fleet. BW Kyoto had a Japanese yen purchase option. We took the advantage of the historical weak yen and declared the option at an attractive arbitrage compared to today's high asset values. We also declared the purchase option of Messina at an attractive price to be an excellent candidate to retrofit with LPG propulsion in the future. We keep benefiting from our TC in fleets and continue to explore arbitrage opportunities in the time charter market. We have now locked in $27 million net profit for 2023 on the TC in book. The 2023 propulsion time charter rates remain strong at $40K-$50K per day, depending on the propulsion technology.

Our LPG retrofits continue to have a good interest in the market, we have recently fixed out one of them for a three-year TC to an oil major at premium compared to a new building LPG propulsion vessel. This quarter, we have taken a big step on the BW LPG spot pool, growing the total pool to over 30 vessels, making it the largest VLGC spot pool in the world. We thank Vitol, Exmar, and BW Product Services for their trust in the pool ability to continue outperforming the market, we welcome more owners to join. An expanded pool for BW LPG allow us to provide even better services to our clients. In addition, it gives us better market intelligence and creates an additional revenue stream for the business. Let's move to slide 13 and talk about our performance.

New for this quarter, we illustrate the net gross profit generated for our TC In and TC Out position. As mentioned, we have secured $27 million net profit for 2023 for existing TC In book. The remaining backlog of the TC Out book is expected to generate an additional $47 million in time charter revenues. We have covered 30% of all our 2023 days at $38K per day, with 84% fixed for the first quarter at $56,000 per day. For 2023, we will repeat a positive market outlook despite the order book. We continue to expect extreme volatilities and abnormal seasonality. This was observed in the first quarter when spot rates quickly bounced back to over $70,000 per day, driven by robust demand from China and export growth from the U.S.

In hindsight, we were a bit conservative and early when taking the coverage for the first quarter. With 70% spot exposure for the rest of the year, a positive market outlook and a large diversified fleet, we are confident that we will be able to navigate through the market and 2023 will continue to be a strong year for us. Let's turn to slide 14, talk about the TC In fleets. We made another slide to illustrate the earnings power of the TC In fleets. As an example, at $40,000 per day, our current TC In fleet can generate around $30 million in a year. Now we have nine vessels on time charter at average rates of $27,600 per day. For my last slide, please turn to slide 15 to give some context on our business in India.

We have eight VLGCs sailing under the Indian flag and do about 20% of all LPG imports into India. Seven of them are trading in the TC market at an average rate of $35K per day, and one is serving the strong spot market and is currently installing a scrubber during her dry dock. All ships were dry dock due within 12 months, and six of them have completed their dry dock within budget. BW India is a perfect example illustrating our strategy for maximizing the return on our assets. The lean organization structure, the low cost operation and stable earnings allow BW India to achieve a strong return on equity of 19% for 2022. With such a not-noticeable presence in India, we are regularly presented with new business opportunities and are constantly evaluating how we can best develop these prospects for BW India.

This includes both infrastructure and downstream activities. With that, I will hand the floor over to Kristian.

Kristian Sørensen (CEO and Head of Commercial)

Thank you, Niels. Yes, as Niels says, we have several transactions to report since last quarter, but it remains important for us to show the great benefits we and other shipping companies obtain from burning LPG as marine fuel. It's cleaner, cheaper, and comes with a higher energy equivalent than VLSFO. Burning LPG on our own fleet of 15 dual fuel VLGCs is an important step on our decarbonization journey. It is with excitement we can say that the VLGC segment is a shipping segment which has fully embraced the new technology, with owners taking active investment decisions leading to a more environmentally friendly shipping industry. Moving on to our newly expanded business unit, BW Product Services, on slide 17.

We are very pleased to advise that the company acquisition, integration of the Vilma Oil team, its trading portfolio and time charter vessels have been concluded in a successful way. In addition to BW Product Services presence in Singapore and Oslo, we have now also opened a new office in Madrid. Through the transaction, BW LPG have increased the fleet under our commercial control with five vessels. In 2022, the combination of BW Product Services old trading portfolio and the acquired Vilma Oil portfolio represented a total of five million tons of physical LPG cargos traded. The charging activities between BW LPG and Product Services are done on market terms to ensure optimal commercial decisions are made on both sides. There is no obligation either side to charge the spot vessels if more attractive alternatives are available in the market.

However, as an example of our improved optionality, we swiftly secured off-the-market employment for a handful of our vessels in January when the freight market softened and our trading team needed the logistics flexibility that our fleet provides. As you will see from our financials, the Vilma Oil transaction came with a price tag of approximately $50 million for 85% of the company. The remaining 15% is held by key employees in BW Product Services. In addition, we have earmarked another $50 million as a working capital revolver for our trading activities. In order to give a correct picture of BW Product Services trading portfolio and its activities, we value all except the Time Charter In positions based on the mark-to-market principle on a 12 months forward-rolling basis.

We believe looking 12 months forward gives a good estimate of the value of the portfolio, given the liquidity and availability of benchmark reference prices. This means that positions extending beyond 12 months are not reported in the financial accounts. However, since the mark-to-market valuation of the trading portfolio fluctuates from day to day and week to week, we will endeavor to announce a quarterly trading update after the expiry of each quarter so that our investors and analysts can manage their expectations ahead of our regular earnings release. In addition, we will also give a range guidance on the average VaR, value at risk, last quarter. With that, Elaine, over to you.

Elaine Ong (CFO)

Thanks, Kristian. A very good day to all of you. Before I walk you through the key financial highlights, let me explain some changes made to how we present our financial results in light of our recent acquisition of Vilma Oil's LPG trading operations in November. You will see that Product Services performance is now presented on a gross basis, showing gross revenue and cost of goods sold. This provides better insights into the financial performance of Product Services increased trading activities. We have also included segment reporting in both our quarterly and annual reports, which will show the achieved TC income of our shipping segment and the gross profit of our Product Services segment. Turning to the numbers. On a consolidated basis, we reported a total of $568 million in gross profit for the full year 2022.

This was primarily de-derived from the strong TC earnings of our shipping segment. EBITDA came in at $408 million, which represents an EBITDA margin of 72%. We recorded $21 million in gains from the disposal of four vessels during the year. We ended 2022 with a full year net profit after tax of $239 million and an earnings per share of $1.68. With our net leverage ratio at 24% this quarter, our board has declared a final dividend of $0.52 per share, equating to a payout ratio of 75% of fourth quarter NPAT. This brings our total dividends for 2022 to $1.28 per share, which translates into a 76% payout ratio on our full year NPAT.

Our board has also further enhanced our dividend policy to target a quarterly payout ratio of 100% NPAT when the net leverage ratio is below 20%. At 31st December, we had $236 million in cash, $2.5 billion in total assets, of which $1.7 billion relates to the carrying values of our vessels. Based on the latest secondhand broker valuations, we still have a healthy $320 million headroom in the market values of our vessels over their carrying values. Our positive cash flow of $654 million this year was derived mainly from our strong operations with minimum CapEx as our LGIP retrofit program was completed by the first half of the year.

During the year, we also received $183 million in sales proceeds from the sale of four vessels and a further $80 million as new equity from an external investor into our Indian subsidiary. The positive cash flows were used to repay our debt and for the expansion of our Product Services business. Our return on equity and capital employed for 2022 were 16% and 12% respectively. We ended the year with a total equity of $1.6 billion, which translates to an NEV per share of just under $11. Going forward, we also provide a breakdown of the financial performance of our two operative segments. Starting with our shipping business, our VLGC fleet generated $40,600 per day for 2022.

Daily OpEx came in at $8,400 per day, largely due to higher manning expenses, escalation in cost of lubricating oils due to higher oil price, and inflationary pressure on the cost of stores and spares. Our shipping segment generated a strong TC income of $568 million in the year. Looking at 2023, we expect our operating cash break-even for our total fleet, including our chartered-in vessels, to be at $22,600 per day. Shifting focus to our expanded product services business, in 2022, we lifted a total of 22 cargos, generating $730 million in gross revenues. Following this expansion, we lifted eight cargos in December alone, locking in approximately $200 million in gross revenues.

Our Product Services team now operate a trading portfolio with a daily value at risk range of $5 million-$8 million based on the standard 95% confidence level. The 95% confidence level implies that we expect only a 5% probability that the trading portfolio will incur a change in value of more than the expected value at risk in the day. All in, we have committed $100 million in capital for this business, $50 million to acquire Vilma Oil's trading operations, and $50 million in a revolving working capital facility used mainly to finance margin calls on our paper hedges. Slide 20 provides a summary of our liquidity position. For better clarity, we have also separated our financings by business segments.

On a consolidated basis, we ended the year with almost half a billion dollars in liquidity, made up of $221 million in cash and $240 million in undrawn revolving credit facilities. Ship financing debt at the end of December is at $428 million after all our scheduled repayments of the existing term loans this year. Our revolving credit facilities remain undrawn. On the trade financing side, we have increased our facilities by over $200 million and now have $522 million in place at the end of 2022. Our trade finance lending group has also expanded from four to nine banks spanning across Europe and Asia. We look forward to further expand this lending group as we aim to upsize our lines to $800 million.

At the end of December, only $219 million or 42% of our current $522 million in lines have been used, with $53 million related to advances drawn and $166 million in letters of credit issuances. On this note, let me open the floor for questions. Back to you, Lisa.

Operator (participant)

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 Anders Carlsson. To Elaine, what is the purpose of increasing credit lines to $800 million?

Elaine Ong (CFO)

Hi, Anders. Good day to you. I think we are looking to expand our Product Services business in the coming days. As a result, we are trying to make sure that there is sufficient financing facilities available to support the growth in the Product Services business now that we have a much bigger team.

Operator (participant)

Thank you, Elaine. 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. 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 mute before speaking. We have no questions online. Anders?

Anders Carlsson (Co-Founder and CEO)

Well, if it was this crystal clear, I mean, I'm happy to end it here. Often I know it takes a few minutes before, you know. We always like to ask some difficult questions. If you have some, please come with them.

Operator (participant)

Should you have questions, please type them into the Zoom chat box. Otherwise, click on the Raise Hand button to ask your question verbally. Please note that you have been automatically muted. Please press unmute before speaking. We have one question, raise hand, from Desmond. Please go ahead, Desmond.

Speaker 5

Good morning. Good morning. I apologize. My question in the chat didn't go through. Could you provide a little insight of where you see the inflationary environment impacting the company the most right now?

Kristian Sørensen (CEO and Head of Commercial)

Yeah. I can start, Elaine, you can add, too. I mean, I think first of all, of course, we are well hedged, you know, on our interest rates wise. You know, of course, we are, you know, predominant in the spot market, so we will not, you know. It is not as important to us as it would be, for instance, in the LNG sector, where, of course, you have long contracts, you need to really take that into account. For us, it does not have any direct strong impact. Elaine, do you wanna elaborate a little bit or?

Elaine Ong (CFO)

I think you've covered most of it. You know, our revenues and our costs are predominantly in U.S. dollars and, you know, and we've hedged over 90% of our interest costs over the next four to five years. We're in a pretty good place right now.

Speaker 5

Thank you.

Niels Rigault (EVP)

Should I... Yes, there is a question here, I think, you know, on the Vilma trading. Do you want to comment on that, Kristian?

It's a question from Eirik Haavaldsen. Could you please provide some more color on how to think about Vilma trading earnings going forward?

Kristian Sørensen (CEO and Head of Commercial)

Well, as mentioned, we will come up, or we will present a trading update at the end of the quarter. We can say that it looks positive so far. First quarter is always a difficult quarter from a trading perspective, but it looks, it looks positive. We will come back with more details sometime first half April, if all going according to plan.

Niels Rigault (EVP)

I see there's also a question for Christian Falnes, I think. Will the interim shares be canceled? As of now, there's not been a made a decision, but that... For now, they will not be canceled. That's something we discuss every board meeting.

Operator (participant)

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 you have been automatically muted. Please press unmute before speaking.

Kristian Sørensen (CEO and Head of Commercial)

Well, seems like there's no more question. Thank you very much for your attention, and I wish you all a great day going forward.

Operator (participant)

Thank you. We have come to the end of today's presentation. Thank you for attending BW LPG's fourth quarter and full year 2022 financial results presentation. More information on BW LPG is available online at www.bwlpg.com. Have a good day and a good night.