Dorian LPG - Earnings Call - Q1 2021

Transcript

Speaker 0

Greetings and welcome to the Dorian LPG First Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website, which is www.dorianlpg.com.

I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead.

Speaker 1

Thank you, Shimali. Good morning, everyone and thank you all for joining us for our first quarter twenty twenty one results conference call. With me today are John Hajbateras, Chairman, President and CEO of Dorian LPG Limited John Lequillis, Chief Executive Officer of Dorian LPG USA and Tim Hansen, our Chief Commercial Officer. As a reminder, this conference call webcast and replay of this call will be available through 08/11/2020. Many of our remarks today contain forward looking statements based on current expectations.

These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward looking statements are reasonable, we cannot assure you that any forward looking statements will prove to be correct. These forward looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended 06/30/2020 that were filed this morning on Form 10 Q.

In addition, please refer to our previous filings on Form 10 ks where you'll find risk factors that could cause actual results to differ materially from those forward looking statements. With that, I'll turn over the call to John Hejibateris. Thank

Speaker 2

you for joining us today. It has been a challenging quarter, particularly in our mission to keep more than 500 seafarers safe while facilitating crew movements whenever and wherever possible. With COVID conditions and regulations fluctuating around the world, we have taken advantage of windows to move people off and their replacements on to our ships, observing the protocols which are mandated and more when considered necessary or desirable. Our legacy has held a seafarer at the core of our business. Indeed, we see seafarers as essential to the world economy.

But during this pandemic, many of them have had to make sacrifices, some by extending their tour duty and others by not getting back to work when they're ready. We have increased our focus and intensity in our efforts to ameliorate these hardships. Following our strong performance last fiscal year, the New Year has begun positively and we remain optimistic. Concern about forward U. S.

Production volumes has waned to a large degree. We continue to strongly believe in LPG as an environmentally friendly fuel. Though we have witnessed and are prepared for further disruption, we do not see permanent demand destruction. Dorian LPG stands strongly positioned to service our customers and create shareholder value with our young eco fleet, a strong balance sheet and ample liquidity. Our Board continues to evaluate capital allocation options, including dividends, acquisitions, debt reduction and stock buybacks.

The format of our call today is a little different from previous calls. John Lecouris will focus on a subject that investors have been increasingly interested in and sensitive to. He will brief you on the company's environmental and energy efficiency profile and activities as well as update you on our fleet and the world fleet. Fluctuating COVID conditions were not the only volatility we have been coping with during this quarter, and I'm introducing our CCO, Tim Hansen, who will review the seesaw of the spot market. Finally, Ted will present the quarter's financial results and recent events.

John? Thank you, John.

Speaker 3

At Dorian LPG, the commitment to address environmental issues started back in twenty twelve-twenty thirteen when the first new building vessels were ordered. We had considered the marine industry's fundamental objective was to align with and advance the IMO initiatives regarding the promotion of environmentally sustainable shipping. Pollution control and prevention were part of the IMO's mission and vision statements. Currently, the IMO decarbonization strategy aims to reduce greenhouse gas emissions by at least 50% by 2050 when compared with 02/2008. The vessels built by Dora and LPG in 2014 through 2016 were equipped with eco engines, ballast water treatment systems, scrubbers and LPG fuel features, which were novel and implemented new technologies.

Many of these features were integrated in the vessel design and engineering phases in advance of regulatory frameworks and rule implementation. There were an early response in the advancement of sustainable shipping by managing emissions and pollution at the new building stage. The Dorian LPG fleet as built has an attained fleet average energy efficiency design index, EDI code, of 5.96 grams of CO2 per ton mile versus a regulation requirement for the fleet of 7.72 grams CO2 per ton mile. The first annual emission report was submitted by the entire shipping sector to the IMO data collection system for calendar twenty nineteen. Each ship over 5,000 gross tons, had to submit data, obtain a certificate of compliance and was issued an international energy efficiency certificate.

The data collected from each vessel is extensive and covers, among others, observed distances, fuel consumptions, engine running hours and other environmental parameters. That data is used to monitor and report the CO2, SOX, NOx particulate matter emissions produced by each vessel and to assess each vessel's ship efficiency and performance. The data will regularly provide rolling average indexes and establish a good guide of vessel and fleet management over time. A main metric calculated from the data is the annual and quarterly reported energy efficiency operational indicator, EEOI, which shows the grams of CO2 emission per ton mile for each vessel and for the fleet in total. The average efficiency ratio, AER, metric is derived from the vessel's IMO DCS data and uses fuel consumption, distance traveled and design deadweight as parameters and calculates the carbon intensity in grams of CO2 per ton mile.

This metric is selected by the members of the Poseidon Principles representing financial institutions in the maritime sector and is applicable to commercial ship lending facilities. The Dorian LPG fleet reported for calendar twenty nineteen an EEOI of 17.7 grams of CO2 per ton mile and an AAR of 7.93 grams of CO2 per ton mile compared with the Poseidon Principles 2019 trajectory value for the same type of vessel in size of 8.6 grams of CO2 per ton mile. With these results, Doyle would qualify for a sustainability margin adjustment under the 2015 amended and restated facility as reported. The company is a signatory to the twenty eighteen Global Maritime Forum's call to action in support of decarbonization and plans to pursue actively those objectives. Now we'll review the technical update of the fleet.

We have completed a hybrid scrubber retrofit installation on the vessel constitution, including dry docking and fresh pressure survey. Eight vessels are now retrofitted with hybrid scrubbers and completed dry docking special surveys during the last twelve months, including two vessels which were fitted with ballast water treatments. Dorian operates a total of 10 scrubber vessels, including two which were fitted during their 2015 delivery. We are programming for the retrofit of two scrubber vessels in the coming months to coincide with vessels upcoming five year special service and dry dockings. Dorian remains committed to improving environmental emissions, which with the use of scrubbers achieve significant reductions emissions as well as black carbon and particulate matter emissions that normally are released by vessels burning low sulfur fuel oil.

The current VLGC fleet according to Clarksons comprises of two ninety nine vessels of which about 10% is either idle in storage or undergoing repairs. The order book currently stands at 34 vessels or about 11% of the VLGC fleet with four vessels due to be delivered this year, 21 vessels expected in 2021 and nine vessels in 2022. Included in the 2022 deliveries are the three LPG fueled new building vessels, the LGC orders, which were announced by AW Shipping and ADNOC Wanhua joint venture aimed to service a ten year LPG supply contract. There are currently 27 vessels in the fleet, which are twenty five years and older. With that, I finish my comments and I will pass it over to Tim Hansen, Chief Commercial Officer.

Tim?

Speaker 4

Yes. Thank you, John. Thank you for day. Global seaborne LPG volumes year to date held steady compared to last year, growing less than 1% year on year to a total of 53,800,000 tons. Volumes during the 2020 totaled 26,800,000 tonnes, which was a 2,700,000 year on year decrease.

U. S. Export growth have largely been counterbalanced by decline in Middle East volumes. Through the second quarter, American export volumes increased by 17.8% to close to 22,000,000 tonnes compared to the same time last year. On a quarterly basis, U.

S. Volume grew 5.2% to 10,800,000 tonnes in the 2020 versus the same period in 'nineteen. Over the same period, however, the Middle East volumes decreased by roughly 8%. April marked the record months for the global volumes, which recorded an all time high of 9,800,000 tonnes. Not surprisingly, U.

S. Cargoes also marked record activity with 74 cargoes before stabilizing to an average of 65 cargoes in May and June. Middle East cargoes in April was also strong, but declined significantly through the quarter end. The Baltic market index on the Rasanur Chiba route fell from fifty two forty seven metric tons within the April. However, the increased U.

S. And Saudi exports combined with the China liftings, their tax on U. S. Origin LPG and the Chinese PDH buyers returning to the market after the extended Lunar New Year and COVID lockdown helped push the Baltic back up to $60 per tonne at the April. In April, with the lockdown spreading, Europe saw the lowest number of VLGC parcels in two years and on the back of reduced demand for petchems and plastics as well as travel restriction in Turkey, a reduction in natural gas was seen.

In May, U. S. Production and exports declined due to the foreign crude prices. However, the Mont Belvieu prices held up due to nervousness of shortage as well as sorry and with a low crude price, naphtha became more attractively priced than propane for the European crackers as well as steam crackers in Asia. The high export from The U.

S. And Algeria along with increased Saudi exports in April hitting the Asian market in May made an abundance of products available in Asia, which closed the arbitrage from The U. S. And reduced The U. S.

Liftings for May. Saudi exports announced for May also reflected the cuts in crude and was significantly reduced from April levels. Lack of shipping demand both East and West started to create lengths and pulling freight rates, which was accelerated by multiple trader relets. Newbuilding deliveries in Q1 as well as less vessels than expected going into drydock also impacted the length of the shipping market and the fall in TCA was something somewhat arrested by simultaneous fall in the bunker prices. The spread of HFO and those of the fuel oil also narrowed partly due to the lower overall prices of the fuels as well as more availability of those of the fuel oil.

With Asia and Europe slowly opened up in the second half of the quarter along with cautious optimism on forward demand and with less volatile crude oil prices making contentment prices in Asia possible, LPG again started to replace naphtha in European crackers and towards the end of the quarter also in Asian crackers. The PDH demand also started to increase, which helped the demand for shipping. Shipping rates through May and June dropped down to a base level and Samoan has started to slow steam as well as ballasting via cape. At the end of the quarter, drydocking again slowly picked up and helped the market turnaround. It took some time to clear the lens, however, and started to build on rates, which only started towards the end of the quarter.

The impact of increased demand as well as the stabilizing of U. S. Production have been apparent throughout July with a rapid recovery of The Baltic from low 20s at the June to low 60s at the July. On the supply side, concerns over U. S.

NGL production volumes has decreased. Protein storage levels are healthy. They are standing 10% higher than this time last year, while production has averaged 4% ahead of last year and last week's production was reported 6% higher than in 2019. Given the wave of infrastructure additions completed during the first calendar quarter, going forward, we believe that The U. S.

Production may continue to surprise on the upside. On the demand side last quarter, Chinese LPG imports declined declines continued mainly due to the COVID-nineteen lockdowns, falling 8.7% year on year, while Indian, South Korean and Indonesian demand grew significantly. Indian imports grew by 16% year over year to 3,800,000 tonnes, while South Korean volumes grew 7.9 year on year to 2,200,000 tonnes and Indonesian importers grew 29.1% year on year to 1,800,000 tonnes. While the propane naphtha spread favored naphtha for most of the quarter adversely impacting industrial LPG demand, the spread has more recently turned in favor of the LPG cracking economics. Thus, we remain quite constructive on the market fundamental at this time, but we acknowledge the potential for unforeseen disruptions.

With this, I will pass on to Ted.

Speaker 1

Thanks, Tim. My comments today will focus on our financial position and liquidity as well as our unaudited first quarter results. For the discussion of our first quarter results, you may also find it useful to refer to the investor highlights slide posted this morning on our website. We finished the quarter with nearly $158,000,000 of free cash and short term investments, which reflects an increase of about $94,600,000 from last quarter's $63,000,000 We generated $34,400,000 of that from operations, reflecting the strong chartering results realized during particularly the first part of the quarter, dollars 26,800,000.0 from the two debt transactions that we completed, as well as $33,300,000 of cash transferred from our restricted cash account as a result of the implementation of the new financial covenants in our 2015 amended and restated facility. On the last point on 07/14/2020, we received the final approvals required to implement a new set of covenants, which among other things eliminate the interest coverage ratio covenant, reduces the minimum cash requirement to $27,000,000 from $40,000,000 and eliminates the upward ratchet mechanism on the shareholders' equity covenant.

In return for these improvements, we did agree to a modestly higher value to loan covenant, 145% versus 135%, where we have a tremendous amount of headroom under that particular covenant as we are currently well over 200 as it relates to this facility. We are extremely pleased with the all around improvement in terms that we received under the 2015 AR facility, which recognized our strong performance through the cycle and rewarded us with improved financial flexibility. Importantly, in July, we also gave three month notice to the lessor of the Captain John that we plan to repurchase the vessel in October by repaying the debt to be outstanding at that point about $18,300,000 and applying the seller's credit from the inception of the transaction of twenty six point six million dollars When we complete the payout of the Japanese financing arrangement for the Captain John, which carries a fixed 6% interest rate, we will realize annual savings of $1.4475 in principal and about $1,100,000 in interest and other commissions. These savings equate to about $300 per fleet day, that's calendar days plus TCN days for clarity. Turning to our first quarter chartering results, we achieved a total utilization of 82.3% for the quarter with a daily TCE, that's TCE revenue over operating days as those terms are defined in our filings of $41,249 yielding utilization adjusted TCE or TCE revenue per available day, again available days defined in our filings of about $33,935 We estimated industry utilization for the quarter at about 87%, which which reflected the slowdown in industry activity that Tim's already touched on, following some fairly high utilization in April and May.

Spot TCE per available day, which reflects our portion of the net profits of the Helios pool for the quarter, was $34,535 Also, the overall Helios pool reporting as an entity achieved a spot TCE, including COAs of approximately $37,000 per available day for the quarter. Our reported chartering results were reduced by about eight twenty nine dollars per available day due to the reallocation of pool profits as a part of the periodic assessment of relative speed and consumption of the pool members. In addition, the Helios pool had a small exposure to Zenrock, the Singapore based commodity trader that has filed for insolvency and we recognized the pro rata impact on our results in this quarter. Daily OpEx for the quarter was $8,295 a day, excluding amounts expensed for drydocking. It was $86.86 including those costs.

On a sequential basis, we saw a modest decrease in our OpEx from last quarter's $8,556 a day. Again, that number excluded drydocking costs. Our total G and A for the quarter was $11,300,000 and cash G and A, I. E. That's G and A excluding non cash compensation, about $9,400,000 This amount included annual employee bonuses awarded during the quarter in the amount of $4,000,000 which means that normal G and A was about $5,400,000 This number was a little higher than we would normally expect as we incurred about $300,000 of G and A costs related to our transition from an emerging growth company, and as we completed our first fully integrated audit this past fiscal year just ended.

We do hope to reduce these costs going forward. Our time charter expense per day was slightly elevated because we had eleven days overlap between the Laurel Prime and the Astamos Earth. Our reported adjusted EBITDA for the quarter was $41,100,000 To give some indication of the chartering market environment, we generated roughly 90% of our EBITDA during the first two months of the quarter. We look at cash interest expense on debt as the sum of the line items of interest expense excluding deferred financing fees and other loan expenses and realized gainloss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $6,900,000 which was slightly below the guidance we gave in our remarks at the end of last quarter.

We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost fixed hedged in a small floating piece of 4.11%. That will decline a bit further after we complete the payoff of the Captain John in October. As a reporting matter, I'd like to point out that our realized and unrealized gain and loss on derivatives as reflected on the face of our P and L also include the effect of our FFA portfolio. The calculation of EBITDA in our filings adds back only the interest on the realized gainloss, not the FFA piece. John has already touched on our drydocking program, but I would add that our current financial position allows us to finance whatever drydocking schedule best supports our charters.

Our cash flow and liquidity remains strong. Since quarter end through to 07/31/2020, our restricted and unrestricted cash and short term marketable securities is up at about 160,000,000 Although we currently hold a 76 plus percent economic interest in Helios, we do not consolidate its balance sheet accounts, which has the effect of somewhat understating our cash and working capital. Thus, we believe this use will provide some additional insight in order to give a more complete picture. As of Friday, 07/31/2020, the pool had roughly $20,000,000 of cash on hand, reflecting the fact that pool had just paid a distribution at the end of the prior week. We feel that our liquidity and capital structure have positioned us well for whatever rate environment we face in the coming months, and we believe that allows our company to make capital allocation decisions from a position of strength.

As John noted, we've elected to deleverage, which we believe represents an excellent use of shareholder funds as it permanently reduces our cash cost per day, particularly with the backdrop of some global uncertainty. We still have over $50,000,000 remaining under our share buyback authorization and we remain interested in accretive growth opportunities that meet our risk reward criteria. We will continue to be prudent in deploying cash, but our financial position allows us to act quickly on meaningful opportunities as they may arise. With that, I'm going turn it back to John Hajdeberis.

Speaker 2

Thanks, Ted. We're happy to take some questions.

Speaker 0

With the prepared remarks completed, we will now open the line for questions. And our first question comes from the line of Omar Nokta with Clarksons Plateau Securities. Please proceed with your question.

Speaker 5

Thank you. Hey, guys. Hi, Omar. Hi, Hi, there.

Speaker 0

I just wanted

Speaker 5

to ask, obviously, the market's gotten much stronger here over the past six, seven weeks. And you've talked a good amount about, and it was in the release, the fact that the propane naphtha spreads have reverted back to kind of where they were prior to the disruptions. But we haven't really seen that reversion back where regional prices between propane here in The U. S. Versus Europe and the Far East worldwide, they're still fairly tighter.

But despite that, rates have strengthened and we've now reached 50,000 a day plus on the spot market. I guess, one, is it are you surprised at just how strong the market has gotten without those differentials in place? And then two, does that make you nervous or cautious on the outlook?

Speaker 2

Omar, we're always nervous and cautious. But I think that team has got has a good answer for the generic ARB question that you're really putting here, right? You're saying if you're on paper, there doesn't seem to be an ARB. Can we how is it that the freight rates are supported? Tim, you want to have a go at that?

Speaker 4

Yes. First of can say the ARP is not massively wide, but it has been enough that we have seen the petchem buyers in Europe come back to the market and do the shift. So whether the ARPU is as strong as it was before is questionable, of course, but it has been enough to support the shift. And it actually went pretty quick when we saw the rest of the Europe also returning and the demand going up also for in Turkey for also gas and others. It created this kind of surge where everybody was scrambling for those tonnes.

But I think also the return of the market has been, as I touched upon a little bit, there was a little bit more discipline from the owners when the market fell to OpEx levels with slow steaming and holding back a bit on the fixing. And I think with a big and quick change, maybe someone was caught a little bit out by surprise and that didn't see it changing that quickly. And that helped, of course, the markets went back pretty quickly. I think it always kind of goes in waves where the ships are. This was enough the imbalance of the shipping was maybe not should maybe not have gone to the OpEx levels, can say, because the market was actually not as long as it was it seems, the negative sentiment of the market made the rates go so deep.

Speaker 5

That's my question. That does. Appreciate that. Thanks for that color. We've seen obviously and we've been seeing reports that and looking at the fixtures that vessels are being fixed five, six weeks ahead of time.

In the second quarter where we had the COVID-nineteen disruptions and a slowdown in just overall trade, utilization was 80% as you highlighted for the spot fleet. How are you guys thinking about where utilization is heading in the third quarter? Can you see it recovering back to that 90% plus that it had been at to the prior quarter?

Speaker 2

Yes. Again, I'll defer to Tim.

Speaker 4

Yes. Definitely, of course, with the tighter market and the higher rates and fixing further ahead, the utilization is coming back. I think also the way that you look at these 80 is what was booked at the June. If you look at like operational idling time, it was still in the low 90s at that point. So I think but yes, of course, the market will tighten and the idle time will be less when the market is at the stage that it is at present.

Speaker 5

Okay. And just to make sure I heard you correctly, you're saying that we by the June, was back into the low 90s?

Speaker 4

No, I'm saying that the 80% that is calculated here is the financial I think time, doesn't take what was fixed into June or July at that time.

Speaker 5

Okay. And then, Ted, on the financial side, clearly, you guys have built up a lot of cash and liquidity. I did want to ask about the sale leaseback on the Captain John MP. You've exercised the option. And just want to make sure I understand it correctly, you're basically going to you're going to give the owner $18,300,000 of cash.

They will also take the $26,600,000 of restricted cash. And so that totals somewhere in the mid-40s. Is that that looks to be kind of the carrying value of the ship, at least in your financials. What are your thoughts or plans with this vessel going forward? Is it one that you want own and just have it all cash?

Will you refinance? Or do you intend to sell it?

Speaker 2

For the moment, that's our thoughts are that the ship is going to be all cash. But I think Ted wants to clarify a little bit from your question, Yes, just

Speaker 1

to be clear, there it's a seller's deposit, Omar, the time there is no restricted cash. So basically, all that's going to happen is they're going to we're going to pay them $18,300,000 and they sort of notionally kept the deposit at the time. So we'll pay off the $18,000,000 and that's all that will happen. And then as you point out, it will be debt free. And as John just touched on, that gives us a lot of flexibility to do whatever we want with it.

Speaker 5

Okay. And the plan, I guess, is to have a bit more flexibility in exchange for the $18,000,000 of cash, you'll just effectively have a debt free vessel

Speaker 4

with a low

Speaker 2

Debt free ship.

Speaker 1

Correct. Correct. It lowers the breakeven a bit and Yes.

Speaker 5

Okay, cool. Well, I appreciate the market color and financial color. I'll leave it there. Thanks guys.

Speaker 1

Thanks, Omar. Appreciate it. Take care.

Speaker 5

And

Speaker 0

our next question comes from the line of Morgan with Evercore. Please proceed with your question.

Speaker 6

Hey, guys. So going into this sort of COVID disruption, it looks

Speaker 3

like you

Speaker 6

spent a fair amount of focus on sort of building the war chest of cash. And I'm reticent to say that we're sort of through COVID, especially in light of potential second waves. But with the rates market sort of improving for VLGCs, possibly lapping some of the worst parts of the market disruption. How are you starting to think about sort of the capital deployment? I think you have $50,000,000 left on the authorization.

The focus be to continue deleveraging, potentially buyback? Or what are you guys thinking sort of in light of the changing market?

Speaker 2

Ted, do you want to take that?

Speaker 1

Sure. I think, Sean, glib answer is probably a bit all of the above. I think I don't think anyone should read anything into the fact that we plied a lot of excess cash into the paying off to John is any belief that our shareholder that our buyback activity should be curtailed. I think it was a smart move at the time and we like it. I think going forward, it's going to be fact and circumstance dependent.

Obviously, things look good at the moment, as Tim has pretty well outlined. And I think as our confidence grows in the near term outlook, we may depending on the stock price responds or doesn't respond, we'll certainly look at buybacks. We still could pay down some debt, but we're really happy with where we're sitting and we'll have to see what other opportunities may present themselves in terms of potential opportunities to grow the fleet or whatever else. So I think the point of this financial flexibility is to give us full optionality and I think that's what we've achieved and not trying to dance around the question, but it's going to be fact and circumstance dependent.

Speaker 6

Okay. And then I think you have two commitments right now remaining for the scrubbers. And you did obviously a long preamble on ESG and you believe that scrubbers are an important part of ESG focus. But is there any thought now with the lower spread to high sulfur to low sulfur fuel oil and most likely not like a massively resurging fuel demand, especially in light of probably more work from home and other changes. Would you consider trying to delay those scrubbers or cancel those scrubbers?

Is there any contract optionality to that? Or are you just going to continue to do that when possible?

Speaker 0

John?

Speaker 2

Yes, John L.

Speaker 3

Hi, Simon. Yes, there is optionality and there is flexibility precisely. We will do it whenever it's suitable and it fits the scheduling of the ships and we do have a number of ships that need to be dry docked and special surveyed, etcetera, and we will try to combine it. It adds days to the works, but it is effectively, as we said before, an advantageous solution environmentally and also fuel wise. We understand that the spreads are smaller in actual terms.

However, as percentage, they are still around 20% cheaper than the compliant fuel of today to buy high sulfur fuel oil. So that spread may change in the future. We understand that fuel oil has been sought after to distill and crack additional low sulfur fuel oil. However, at some point, things are going to reverse back and we may see those spreads change again. So it's a moving market as we see it.

Speaker 6

Okay. So even right now, those are economically attractive.

Speaker 3

And

Speaker 0

we have reached the end of the question and answer session. And we'll now turn it back over to John DeCarris for any closing remarks.

Speaker 2

Thank you very much, and thank you all for coming to the call, and stay safe, and see you next quarter. Bye bye.

Speaker 0

And this concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.