BW LPG - Q4 2023

Transcript

Lisa Lim (Head of Corporate Communications)

Welcome to BW LPG's fourth quarter 2023 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. Welcome to our 2023 Q4 presentation. I'm joined today by our CFO Samantha, and together we will take you through the slides. Q4 ended the strongest year on record for BW LPG. We achieved a Time Charter Equivalent income per available day of $76,000 in a steaming hot VLGC market, and together with a strong performance from our Product Services team, we had a net profit after tax of $162 million for the quarter, and a full-year impact of $493 million, our highest ever. After the first full calendar year in operation, as the new and expanded trading team, Product Services generated a net accounting profit of $18 million in Q4. This is after adjusting for G&A and tax provisions from the earlier announced $27 million quarterly profits.

We've also scheduled to return $30 million to the shareholders in Q2 this year, following a substantial cash generation during 2023. Given the strong quarter for our company, our board has declared a dividend of $0.90 per share, which brings our year-to-date dividend per share to $3.46, representing 98% payout of our annual earnings and an annualized dividend yield of 28%. The quarter was eventful also in other fronts. We are moving forward with our dual listing in New York, which likely will take place in second quarter this year on the New York Stock Exchange. We had roadshows in the US where we received strong interest in our company's and the sector's story, and we're confident that the listing in New York will expand our investor universe in the future and increase the liquidity in our share.

Our company also made a milestone announcement on the 30th of November with the announcement of a signed joint venture with our Indian partners Confidence Petroleum and Ganesh Benzoplast to invest in the development of a new LPG import terminal in India. In addition, and as part of the agreement, we have just concluded a $30 million investment in Confidence Petroleum, which gives us a strategic 8.5% ownership in the company to participate and get a foothold in the distribution of LPG in India. As we move into 2024, the VLGC market has again proven itself as exceptionally volatile, with rates dropping more than 90% in three weeks due to cold weather in the U.S., which increased U.S. LPG prices and halted the U.S. exports. At the same time, the sudden availability of more Panama Canal transit slots reduced the sailing distance and put pressure on rates.

However, since January, rates have increased sharply, and we're currently seeing rates in the $40,000 per day range in the Middle East as well as the U.S. Gulf, and with a contango in the FFA market for 2024. On the back of this, we maintain our positive view for the year, backed by sound fundamentals. Those are the highlights. Next slide, please. The massive volatility is something we have experienced previously, and if we move to slide six, we have compared this year's drop and recovery in rates with the year 2022 and 2023. The story has repeated itself, starting with a cold front in the U.S., which closes the LPG price arbitrage between the U.S. and the Far East, and a willingness to pay for shipping.

On top of this, we had a surprising turnaround in the availability of Panama Canal transit, as mentioned, which reduced the sailing distance and increased the supply of ships. However, like previous years, when the temperatures in the U.S. Gulf Coast normalize, the prices recalibrate, and the exports are restarted, which again push shipping rates up. We are also now seeing a busier transit program in the Panama Canal, driven by more container ships, which takes up capacity and is expected to reintroduce more inefficiency to the VLGC fleet. Turning to slide seven. The U.S. exports for February are record high, and driving the recovery of the rates together with the fleet inefficiencies absorbing capacity. Looking at the FFA market illustrated by the red line on the left-hand side of the slide, it is pricing second half 2024 in the $50,000-$60,000 per day range.

The newbuilding deliveries have been a focal point over the last years, and the pace in new vessels hitting the water is coming off sharply after the first quarter this year and remains limited for the next 24 months. We do, however, monitor the large number of VLAC newbuilding orders this quarter for 2027 delivery, which may bring uncertainty to the development of the VLGC market in the longer term if the ammonia export projects do not materialize or are delayed. Turning to slide nine. We have reduced our forecast for North American exports for the year following the cold snap in January. In the Middle East, we anticipate Middle Eastern exports to be stable this year before they start growing on the back of the massive LNG expansion in the region from 2025, 2026, 2027 onwards.

To sum up, we maintain our positive view for 2024 based on solid underlying fundamentals and added by returning inefficiencies in the fleet, especially around the Panama Canal, and abating new building deliveries. Turning to slide 12, please. Moving on to the financial performance for our core shipping segment. We achieved a historical high TC performance of $76,000 per available day for the fourth quarter. This figure includes fixed-time charters and derivative hedges. The spot fleet achieved a TC of $108,300 per day, excluding the waiting days. For the first quarter this year, around 83% of our available days are fixed at an average of $55,000 per day.

As highlighted earlier, we saw a sharp decline in spot rates down to less than $10,000 per day in January, which impacts the guidance rate together with a number of previously fixed ships ending up sailing transatlantic voyage from the U.S. after long ballast from the Far East. We anticipate that we will recoup these ballast costs for the voyages in the next quarter. Looking at our coverage for 2024, 23% of our fleet is already fixed under time charter, with an average daily rate of $41,500. We balanced our TC-in and TC-out commitments for 2024 and have already secured a $23 million profit. And additionally, 14% of our days are hedged with derivatives at an average of $56,500 per day. And with this, I'm pleased to let Samantha take you through Product Services update and our financials. Over to you, Samantha.

Samantha Xu (CFO)

Thank you, Kristian. Good morning. Good afternoon to everyone. Let me continue to add some colors to the Product Services performance. The net asset value of Product Services increased by $80 million to $62 million at the end of December. The increase comes from positive gross profit after netting off other expenses. In Q4, Product Services generated a gross profit of $32 million, which includes $50 million of unrealized cargo and derivatives gains, offset by $17 million realized loss during the quarter. The loss includes the depreciation from Product Services leasing vessels. Other expenses of $14 million largely comprise G&A expenses, including bonus provision and income tax provisions. The reported net profit does not include the unrealized Mark-to-Market valuation of physical shipping position, which was excluded from the accounting result. Our internal valuation of these TC-in contracts at the end of December was $84 million.

This positive value reflects the continued strong development in the 12-month forward freight market for VLGCs, which is the period we use to evaluate freight position in Product Services. Due to an increased volatility in the LPG product and freight market back in Q4, we reported a higher average VAR of $8 million on a well-balanced trading book, including cargo, shipping, and derivatives. We continue to see good collaboration and synergy between Product Services and our shipping business through improved information flow, optionalities, and enlarged footprint. Focusing on the profit, Product Services is also progressing in expanding the physical presence in key markets as we aim to broaden the platform and trading portfolio. Please go to the next slide, please. So moving to the financial highlights. In Q4, we reported a net profit after tax of $162 million on a consolidated basis.

This includes $16 million in profit from BW LPG India and $18 million in profit from Product Services. The net profit also includes a downward adjustment of $4 million related to the effect of IFRS 15 for the quarter, as the TCE for the straddling voyage over the quarter end is recognized on a load-to-discharge basis. We reported an earnings per share of $1.14 this quarter, mainly contributed by our core shipping segment. This translates into an annualized earning yield of 31% when compared against our year-end share price. We reported a net leverage ratio of 21% in Q4. The board declared a Q4 dividend of $0.90 per share. We have in total declared $3.46 per share, including Q1-Q3, or a 98% payout ratio in year 2023.

The dividend payout reflects our commitment to return value to our shareholders as we continue to deliver a high dividend yield of 28% when calculated on our share price at yesterday's closing. Our balance sheet ended the quarter with a shareholders' equity of $1.6 billion. We continue to see a healthy headroom for more than $400 million, comparing broker valuation with our fleet's book values. Our annualized Q4 return on equity and capital employed were 42% and 33%, respectively. In Q4, our daily OPEX came in at $8,200 per day due to slightly higher-than-expected maintenance and repair expenses. For 2024, we expect our own fleet's operating cash break-even to be about $17,600 per day. This is $1,000 per day lower than previous quarter, driven by early debt repayment. On slide five, it provides a summary of our liquidity and financing structure. Excuse me.

On a consolidated basis, we ended the year with close to $500 million in liquidity, consisting of $162 million in cash, net of $126 million held in broker margin accounts, and $295 million in unrevolving credit facilities. As of end December, ship financing debt outstanding was $311 million, of which $257 million was term loans and revolving credit facility of $54 million. Looking at trade finance, $319 million, or 48% of our $660 million line, has been used as of end Q4, with $85 million related to trade advances drawdown and $234 million in letter of credit, leaving a healthy headroom for further growth. As of January 2024, we upsized our trade finance line to $746 million with the two additional lenders, increasing our headroom further to support future growth.

In terms of overall repayment profile, excluding short-term trade advances, settlements are well spread out with no major repayment until 2026. So with that, I'd like to conclude our Q4 update. Giving it back to you, Lisa.

Lisa Lim (Head of Corporate Communications)

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 questions verbally. Please note that participants have been automatically muted. Please press unmute before speaking. Hiya.

Yep. So we have one written question here from Johanna Fagerstedt asking if you could elaborate on how increased ammonia new buildings may bring uncertainties to the VLGC market.

Kristian Sørensen (CEO)

Yes. Thank you for the question. Ammonia has, for several decades, already been carried on board LPG vessels. To date, the midsize LPG vessels, which are the workhorses of the ammonia market. These new VLAC new buildings are essentially VLGCs, which are specced up and also have strengthened the tank structure to carry up to 98% ammonia. But they can also shift the trade into LPG if the ammonia trade is not as lucrative or attractive as they expect. These ships can, in theory, also trade LPG.

Lisa Lim (Head of Corporate Communications)

We have a question. Jorgen Lian, please go ahead.

Jørgen Lian (Senior Equity Analyst, Shipping)

Yes. Hello, Kristian and Samantha. This is Jorgen from DNB Markets. I just wanted to ask if we can have a discussion on some more flavor on the considerations around the payout ratio this quarter on the dividend versus the EPS number you reported?

Kristian Sørensen (CEO)

Yes, sure, Jorgen. First of all, we do, of course, not like to disappoint the market. But the fact is that we have a dividend policy which aims for an annual payout ratio of 75% of our shipping segment's NPAT if the net leverage is between 20%-30%, and 100% if it's below 20% net leverage. And we have a net leverage of 21%. And consequently, the board decided to pay out 98% of the NPAT for the year, which generates a dividend yield of 28%. So it's in accordance with our dividend policy, where we have an aim for an annual payout ratio.

Jørgen Lian (Senior Equity Analyst, Shipping)

Okay. Thank you. And secondly, if I may, the IFRS effects that you see with the very volatile markets, do you have any flavor on how that looks to be shaping up into sort of next quarter, considering the guidance and what you've seen so far?

Samantha Xu (CFO)

Yes. Sure, Jorgen. From IFRS 15 impact perspective, first of all, let's put it that way. It's very difficult to anticipate what kind of effect it brings to the quarter until the quarter has ended because it very much depends on the vessel deployment, the loading and discharge locations as well. And given that we have had, how do I say, both negative adjustments in the previous quarter and Q4, we see that the negative impact should be less so, if not a reversal, in this quarter. But as you can appreciate, I'm sure that from your side, you know very well as well, it's really hard to model this kind of impact out.

Jørgen Lian (Senior Equity Analyst, Shipping)

Okay. Thank you.

Lisa Lim (Head of Corporate Communications)

We'll move to the next question here from Aksel Stierman. Kristian, you mentioned a risk that VLEC new builds potentially may trade in LPG, but you then referred to the ammonia trade. I assume you meant VLAC new builds.

Kristian Sørensen (CEO)

Yeah, you're right. Actually, it's my English, which is a bit broken. So it's VLACs ammonia carriers, not the ethane carriers.

Lisa Lim (Head of Corporate Communications)

We have a question here from Desmond Vimol. When do you expect environmental regulations concerning the slower ship speeds to materialize?

Kristian Sørensen (CEO)

Well, the world fleet of VLGCs have already kind of reduced speed somehow on some of the vessels. So you can see, for instance, our fleet trading in and out of India is down to 14 knots these days. So we already now see the impact of slower speeds. So I would say that this is already ongoing.

Lisa Lim (Head of Corporate Communications)

Should you have questions, please type them into the Q&A channel. 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. Once again, we have a question from the channel.

Yeah. A question from Vasilis Theodorou. What is your estimate of negative ton-mile demand impact for full year 2024 due to increased Panama Canal transits?

Kristian Sørensen (CEO)

Negative ton-mile demand, you can say that if you turn it the other way around, if the ships are sailing from the U.S. via South Africa towards the Far East, it's approximately 50% longer voyage on a round voyage. So I think that is kind of the rule of thumb that you can have. So it's depending on where you discharge in Asia, of course. But if you go all the way to Japan via South Africa, back and forth, it's about 50% longer distance, and then more down to 45% if you go to the more western parts of Asia.

Lisa Lim (Head of Corporate Communications)

We have a question here from Nick Linnan. You had some tax expense in the fourth quarter of 2023. Can you explain what drove this? Sorry, another question went away.

Samantha Xu (CFO)

Nick, this is Samantha. I think you're referring to the tax we have disclosed for product services that stands out in Q4. Maybe just a little bit, the way we accrue taxes on a quarterly basis, and at the year-end, we would true it out, the tax provision for the year. So that is basically the full-year impact of the tax reflected in Q4, as you can see that we generated a positive profit for product services. So from a tax rate perspective, we have different tax rates in where the business was conducted, respectively in Singapore and Spain. So it's under a different tax scheme as well. So the effective tax rate, it's very difficult to calculate until at year-end. So I will be happy to get back to you if you're interested after I've done some fact-finding for 2023.

Lisa Lim (Head of Corporate Communications)

Then we have a question from Oskar Vatnan. What is your view on demand from China? What is the latest on PDH utilization?

Kristian Sørensen (CEO)

Well, our view on the demand from China is that, of course, we recognize that the Chinese economy is on a slower pace than what we, let's say, have been used to over the last years. The imports, especially last year, was very, very high despite all this because we know that they have a political goal to capture more of the petrochemical market. And we can see that the PDH demand is increasing, but it's not like a it's not like a linear increase going straight up. So for the moment, you asked also about the PDH utilization rate, I believe, which I don't have the latest, but it's been down to 60%-70% we have seen. So there is definitely upside potential there. But I don't have the latest number in front of me just now, so I need to get back to you on that.

All in all, very positive for the increase of LPG imports to China, despite the economic challenges that they have.

Lisa Lim (Head of Corporate Communications)

Once again, 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. Once more, 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 a quick question from Nick Linnan here. How many VLAC orders do you see in the order book?

Kristian Sørensen (CEO)

Well, the vessels on order with ammonia lifting capacity is 73, as far as I can see from my list here. So these are both VLGCs with ammonia lifting capacity. And then there are these VLACs, which have a strengthened tank structure and load more ammonia. And in combination, it's 73 in total in our list.

Lisa Lim (Head of Corporate Communications)

Once more, 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. Once more, 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. We have one question coming in.

We have one question from Desmond Vimol. Do you plan on repurchasing any more shares?

Kristian Sørensen (CEO)

Samantha?

Samantha Xu (CFO)

Yes.

Kristian Sørensen (CEO)

Will you reply on that?

Samantha Xu (CFO)

Sure. As you know, we had a repurchase program announced in May 2023. We have already repurchased back $13 million worth of a share and the remaining $37 million to go. Prior to that, we also had a $15 million repurchase program in 2022, which we have finalized. We will continue to evaluate and get back to the investors.

Lisa Lim (Head of Corporate Communications)

We have another question here from Nick Linnan. What do you think is current US LPG export capacity?

Kristian Sørensen (CEO)

Well, we can see that in the U.S. Gulf, they have increased the export capacity by removing the restrictions on nighttime berthing on Targa and Enterprise terminals. So they have increased that up to we count close to 100 liftings in the Gulf Coast region per month on a regular month only. And then in addition, you have the U.S. East Coast, where there is another 10% or not 10%, but 5% of the U.S. export volumes are currently exported from the U.S. East Coast. And then you have on the West Coast of Canada and the U.S., it's another 2-2.5 million tons on an annual basis as export capacity.

So what we have seen also is that according to Fearnleys, the ship broker, it's about 6.5 million tons, which are exported on midsize vessels, which in theory can be which are occupying the berth. So if you exchange them with VLGCs, in theory, you can probably increase the VLGC lifting capacity out of the states even more. But we do see that the American terminals are very efficient if they need to export more than what we anticipate. For instance, what we have seen now in February is higher than what we expected. And so about 100 berthings per calendar month in the US Gulf Coast alone is what we see, approximately.

Once more, 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. Participants have been muted. Please press unmute before speaking.

Okay. That rounds off our quarterly earnings presentation. Thank you, everyone, and see you next quarter.

Lisa Lim (Head of Corporate Communications)

We have come to the end of today's presentation. Thank you for attending BW LPG's fourth quarter financial results presentation. More information on BW LPG and BW Product Services is available at bwlpg.com and bwproductservices.com, respectively. Have a good day and a good night.