Dorian LPG - Earnings Call - Q2 2021

Transcript

Speaker 0

Greetings, and welcome to the Dorian LPG Second Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally, a live audio webcast for 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, Doug. Good morning, everyone, and thank you all for joining us for our second quarter twenty twenty one results conference call. With me today are John Hajmataris, Chairman, President and CEO of Dorian LPG Limited John Likuris, Chief Executive Officer of Dorian LPG USA and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through 11/09/2020. 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 09/30/2020 that were filed this morning on Form 10 Q.

Also, 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 Hochipateris.

Speaker 2

Thank you. Good morning from John Lycouris in Athens, Tim Hansen in Copenhagen, Ted Young, Clay Webb and myself in Stamford, Connecticut. And thank you for joining us today for our financial year twenty twenty one Q2 earnings call. Following our AGM on Wednesday last week when two of our directors, Christina Tan and Tom Coleman were reelected and our regular quarterly board meeting on the same day, we expect to continue our focus on capital allocation and to pursue opportunistic share repurchases as well as consider dividends deleveraging further and other opportunities. I'm happy to report that our seafarers and shore staff are safe and continue to ably perform their duties.

With the cooperation of our customers, local and flag authorities and classification societies, we've been performing many statutory surveys remotely. In addition to the health benefit of reduced exposure, digitalization and remote monitoring enhance efficiency and reduce costs. During the quarter, our crew rotation has been successfully restored to normal levels. The industry wide crisis caused by disruption to the free movement of seafarers during the shutdowns has somewhat abated, though restrictions continue in many ports and they result in logistical challenges and increased costs. Our last quarter's results largely reflect the poor market of the previous April to June quarter.

Many analysts understandably based their forecast on the Baltic published rate and I would like to share a word of caution about that. The Baltic Index for LPG is a daily forecast by a panel of brokers reflecting their assessment, guess of the rate fixed on the spot fixture within ten to forty days on the route Middle East to Japan. As well as the obvious and the lag effect of time elapse between fixture and voyage completion, There are other inherent distortions which make extrapolating from the single route published Baltic rate and unreliable forecasting tool for time charter equivalent earnings. These include sailing speed, actual cost of bunkers, Panama and other port delays, routing changes for weather, deviation for extraordinary crew changes and or for guards and of course idle time. We have communicated our opinion to the Baltic and hope that they will open a dialogue with stakeholders with a view to making their index more useful.

U. S. Production is 10% below the all time high in January, but nearly 14% above the year's low in May, and exports are up 15% year on year through September 30. India's imports are up 14% year to date. U.

S. Storage is 10% above the five year average. These are some of the factors which together with fractionation capacity being added in The U. S. And PDH plants being commissioned in China, give me cause for optimism.

As usual on our calls, will hear an analysis of our quarterly financial from Ted and industry and market updates from John Liqueurs and Tim Hansen. Tim, over to you.

Speaker 3

Thank you, John. U. S. Exports continued to offset declining Middle East volume last quarter, but it was not enough to generate a global growth for the quarter. Global volumes decreased by 8% compared to 19 year to date.

The global volumes totaled 80,000,000 tons. It was a 2.6% year on year decrease. And American export volumes, however, have increased by 15% to 33,300,000 tons year to date, which compares to only 28,800,000 tons during the same period last year. In the third calendar quarter, U. S.

Export volumes hit record levels, growing 11% year on year to nearly 11,500,000 tons, the highest level ever recorded. Over the same period of time, our Middle East volume decreased by roughly 11.5% to 9,500,000 tons. Despite the initial weakness, the freight market improved during this quarter. The Baltic market index of the Middle East to Japan route began the quarter at around $30 per metric tons, rising steadily in early August to the low 60s per metric tons range before moderating in the middle 50s from mid August and until the end of the quarter. U.

S. Export appears to set the freight rate recovery into motion. American export volumes hit record levels in July at 4,300,000 tons, the strongest level ever recorded by a margin of 360,000 tons. Accordingly, U. S.

UTC liftings also peaked in July with 73 cargoes before stabilizing to an average of 65 cargoes in August and September. Record setting U. S. Export cargoes and as well as weather condition added to port congestions in Asia and India. Towards the end of the quarter, there were significant delays around the world.

South Korea, for instance, saw significant delays, adding about six days or about 10% to a normal round trip voyage from Q3 to old sand. Currently, many of the vessels cordless extended discharges in the Far East now also face delays in the Panama Canal. In ballast, there's up to eight days delays, and in latent, it's about four days delays at the moment. It adds to the ton days in the market and take out capacity. Although regional Middle East liftings were down, regular cargo flows in Qatar and The United Arab Emirates to India maintained a good pitching momentum.

Indian demand grew continues to grow. Imports grew by 4% year over year to about 4,000,000 tons. Meantime, vessel availability for cargoes into India diminished after the July 23, where Chinese flags and Hong Kong flagged vessels in addition to national affiliate companies were prohibited from doing business into India by the Indian government due to the military tensions between the two countries. The COVID-nineteen negatively impacted LPG demands in part of Asia during this quarter. Japan and South Korea demand registered steep declines due to subdued industrial demand, and the Chinese LPG imports also continued to fall 88.8% year on year despite record imports in July that totaled 2,300,000 tons, an all time record.

Program held the price advantage over naphtha in the Far East for most of the quarter before shrinking towards the September. Delayed winter stocking and the prospect of a coalition winter resulting from La Nina paint, however, a positive demand outlook heading into the fourth quarter. On LPG supply, U. S. NGL production forecasts continue to be revised upwards, and actual volumes have outperformed expectations.

Propane storage levels remains elevated compared to the last year. Given the continued wave of infrastructure additions completed year to date, U. S. Production and exports may continue to surprise to the upside due to the increased throughput capacity. Year to date, 1,600,000 barrels per day of new Y grade pipeline has been constructed to supply the 1,200,000 barrels per day of new infection capacity.

On export capacity, Targa's terminal expansion completed in August, adding another three to four cargoes of capacity. And the Lone Star NGL expansion at Galena is scheduled for completion this quarter, adding another 12 cargoes. There's no shortage of spare capacity from The U. S. Gulf.

And preliminary lifting numbers for the month of October stands at 94 cargoes.

Speaker 0

One moment, everybody. We lost Tim Hansen's slide.

Speaker 2

Operator, we can go back. We can go to John Lecouris, and we'll put Tim back on when he comes back. Hello?

Speaker 0

Yeah. Rejoining John Lecouris?

Speaker 2

Yeah. Please, we'll go we've lost him on the phone. So we'll go to John Liqueurs, and then when Tim comes back, at the end, we'll put him on to finish his remarks. He was almost done anyway. So John Liqueurs?

John. The floor is yours.

Speaker 0

Thank you John. During

Speaker 4

this quarter we completed dry docking and first vessel survey on the vessels Cougar and Cobra and expect to complete a further two vessels during this quarter. Dorian remains committed to improving environmental emissions. With the use of scrubbers, achieved a 98% reduction in sulfur oxide emissions and 80% of particulate matter emissions, as well as black carbon emissions normally released when burning very low sulfur fuel oil. We currently operate 10 scrubber equipped vessels including two fitted and trading since their 2015 deliveries. All scrubbers are hybrid systems except for one vessel, so they can operate in open or closed loop depending on local ECA conditions and regulations and the port requirements.

We are programming to retrofit two more vessels with scrubbers in the coming months to coincide with vessels five year special survey and dry docking cycles. Bunker fuel prices spreads have been volatile since March 2020. Lower sulfur fuel oil has traded from as low as 12% to more than 30% over the high sulfur fuel oil price, which in dollar terms amounts to $30 to $85 per metric ton. Such volatility has largely been the result of crude oil pricing in the world markets, refinery utilization and product surpluses in the markets, all impacted by COVID-nineteen. Once COVID-nineteen conditions improve and market sectors recover, we expect that fuel spreads will widen again to pre COVID-nineteen levels.

Even though vessel scrubber retrofits were rushed to meet the IMO twenty twenty commencement on January 1, the installations are designed to perform for the remaining life of the vessels and cannot be judged on the very short term during which they have been operational under extremely volatile economic and market conditions. We are keenly following the results of LPG fuel on the vessels currently being retrofitted and on the new building vessels as they commence commercial operations next year. Dorian has been at the forefront of this technology since twenty thirteen-twenty fourteen when many of our vessels were being constructed. We built most of our vessels to accommodate a future retrofit. In addition, we have carried out feasibility studies and tail retrofit plans.

However, the associated CapEx for a dual fuel retrofit amounts to more than three times that of a scrubber making commitment difficult. Once a number of these LPG as fuel projects are completed and pricing becomes competitive on the equipment and outfitting requirements, we hope to consider LPG as fuel and also when favorable economic conditions and LPG markets enable us to. According to DNBGR Energy Transition Outlook, the world energy emissions peaked in 2020 due to

Speaker 0

the

Speaker 4

COVID-nineteen pandemic, avoiding 75 gigatons of CO2 emissions by 02/1950. The maritime fuel mix is likely to see a reduction in the use of oils, increases in the uses of low carbon fuels and natural gas as well as electricity through batteries. Improving energy efficiency, increasing renewables and electrification, decarbonization, carbon capture and storage are some of the solutions that are being considered. Less than 10% of the current fleet on orders committed to alternative fuels like LNG, batteries, LPG, etcetera. Most decisions will be formulated in the next few years as fuels and engines transition and the availability of alternative green and blue fuels becomes available as fuel for existing vessels with fuel cost the main consideration against greenhouse gas reduction.

The close collaboration of the regulators, owners, charters and financial institutions in formulating future policy for all the stakeholders will be necessary to move industry towards carbon neutral fuels and zero emissions. The current VLGC fleet according to Clarksons comprises of three zero one vessels and the order book currently stands at 32 vessels or about 11% of the fleet, a rather manageable number we think. Two vessels are due to be delivered this year with 21 vessels expected in 2021 and '9 vessels in 2022. There are currently 27 vessels in the fleet, which are twenty five years or older and that number will increase to 30 vessels next year, assuming that there's no scrapping. The current fleet dynamic provides a highly encouraging backdrop for the VLGC freight markets.

And with that, my comments are over and I will pass it over to Ted Young, Chief Financial Officer.

Speaker 1

Thank you, John. My comments today will focus on our financial position and liquidity as well as our unaudited second quarter results. For the discussion of our second quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. At 09/30/2020, we had $145,000,000 of free cash. Since quarter end, as we previously reported, we completed the repurchase of the Captain John, which is now 100% debt free.

Pro form a for that principal repayment of $18,300,000 our cash balance would have been 126,700,000.0 and our debt at $628,000,000 As of Friday, October 30, our cash balance stood at $135,000,000 Following the repayment of the Captain John lease arrangement, we've reduced our debt service cost by about $2,600,000 per year. As we have previously discussed, we've made significant and favorable changes to our debt capital structure in the last six months. We refinanced the commercial tranche of our main bank facility with a lower interest margin and more flexible financial covenants, entered into a twelve year floating rate sale leaseback on the CRESC and now have repaid some of our higher cost debt. We currently amortize less than $52,000,000 per year, which is a significant reduction from the $64,000,000 that was required until recently. Following the new bank deal and the favorable interest rate environment, we took the opportunity after quarter end to blend and extend our largest swap position with a $200,000,000 notional value.

I'll get into the economics of that a little later, but it did result in a reduction of our fixed rate by nearly 85 basis points. Turning to our second quarter chartering results, we achieved a total utilization of 97.4 for the quarter with a daily TCE, that's TCE revenue over operating days as defined in our filings of $26,015 yielding a utilization adjusted TCE revenue per available day of about 25,330. In contrast to last quarter, this quarter saw steady month over month improvements in rates and utilization. Spot TCE per available day, which reflects our portion of the net profits of the Helios pool for the quarter was about $25,800 Also, overall, the Helios Pool reported a spot TCE, including COAs of approximately $24,560 per available day for the quarter. Daily OpEx for the quarter was $9,613 excluding amounts expensed for dry dockings.

It was $10,591 including those costs. Excluding dry docking, the increase was largely a function of higher crewing costs driven by crew crew change costs and certain incentive and retention payments to our seafarers. Our time charter in expense remained stable at $4,500,000 As a reminder, we do not include time charter in costs in our vessel operating expenses. Total G and A for the quarter was $5,900,000 and cash G and A, I. E, G and A excluding noncash comp expense, was about $5,500,000 roughly flat with the preceding quarter.

We continue to look for efficiencies in our cost structure in this challenging environment. Our reported adjusted EBITDA for the quarter was $22,300,000 Again, in contrast to the quarter ended 06/30/2020, where we made over 80% of the quarterly EBITDA in the first two months, we earned over half of our EBITDA during September, reflecting the fact that the financial impact of the stronger chartering market had its first noticeable impact at the end of the quarter. We view cash interest expense on debt as the sum of the line items, interest expense, excluding deferred financing fees and other loan expenses and realized gainloss on interest rate swap derivatives. On that basis, our total cash interest expense for the quarter was flat versus last quarter at $6,900,000 representing a full quarter of interest savings from the twenty fifteen AR facility refinancing and the Crest sale leaseback offset by a larger realized loss on our swaps. As I touched on, we did blend and extend our $200,000,000 notional swap, which resulted in extending its maturity by three years to 2025 and reducing the fixed interest rate from 1.933 to 1.091% or about 84 basis points.

We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost, fixed hedge and a small floating piece of 3.78. Please remember that as reporting matter, our realized and unrealized gainloss on derivatives also include the effect of our FFA portfolio. That said, 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 we believe that our current financial position will allow us to finance whatever future drydocking schedule best supports our charters. Although we currently hold a 68 plus percent economic interest in Helios, we do not consolidate its P and L or balance sheet accounts, which has the effect of understating our cash and working capital.

Thus, we believe it is useful to provide some additional insight in order to give a more complete picture. As of Friday, October 30, the pool had roughly $12,500,000 of cash on hand, reflecting the fact that the pool just paid a distribution a week prior. 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. Though the significant rate volatility caused us to curb our buyback activity, we remain committed to returning cash to shareholders and note that we still have approximately $50,000,000 remaining under our share buyback authorization. And we also 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'll pass it back to John Hadjipateras.

Speaker 2

Thank you, Ted. And

Speaker 0

I thought I would

Speaker 2

have got Tim back on. But in any case, I think he was very close to the end of his comments. So he can he'll have the opportunity to complete them with questions. So I'd like to open up for questions at this stage. Thank you.

Speaker 0

Thank you. Ladies and gentlemen, at this time, we will be conducting a question and answer session. Our first question comes from the line of Omar Nokta with Claussen Platou. Please proceed with your question.

Speaker 5

Hi, thank you. Hey, guys. I just wanted to just wanted to check-in with you on the capital allocation as you guys just discussed. Ted, you just brought it up. And John, in your opening comments, you mentioned that you obviously slowed down the share buybacks over the past few months, which makes sense given the uncertainty with the pandemic and the overall energy picture.

How are you guys doing things right now, especially post the John, you mentioned the AGM last week. Are you signaling that maybe we're at like maybe a pivot point that you're looking to recharge that remaining $50,000,000 buyback? Is that sort of on the horizon?

Speaker 2

I think that's a reasonable interpretation of my of our comments, yes.

Speaker 5

Okay, good. Well, that's fairly clear. Maybe following up then on that, you mentioned the buyback, the evaluating dividend, you're focused on deleveraging and other opportunities, I take are acquisition. That being a focus for both you and the Board. Are you able to maybe rank those in order of preference?

Maybe it sounds like buybacks are at

Speaker 2

the top of the list, but maybe you

Speaker 5

can give us a sense of ranking on those different elements?

Speaker 2

It's very difficult to do that, right? Because it changes day by day. At the moment I think you're right about what's at the top of the list. But, you know, I think that we have it under short term review constantly. So there's a lot of value today.

I think our stock and our peers and the whole industry is very undervalued. So you would expect that we'd be focusing on that I think first, but not exclusively.

Speaker 5

Yep. Good. Okay. Well, we'll see at the, you know, the weeks and months come. Just one follow-up or one separate topic and I'll hand it over.

You know, just, you know,

Speaker 2

on the chartering, you guys have always been partial to fixing ships on time charter. How has charter demand been here over the past couple of months, especially given the stronger market of late? Are you seeing opportunities to put some ships on charter here for the medium to long term? A little bit. Tim, are you back on?

Speaker 3

I'm back on, yes.

Speaker 2

Good. Tim, you can take that question. Also, if you want to take the opportunity to complete your comments, you can do that too.

Speaker 3

Well, I'm not exactly sure where

Speaker 2

Okay.

Speaker 3

But also. But on the time chartering side, yes, we have seen more activity and opportunities. And we have also seen rates recover from from where they were, like, six months back. So so, yeah, we we are looking at at some opportunities at the moment to see if we can if we can charter out a few ships as we also have a few expiring at the end of the year.

Speaker 5

Okay. Good. All right. Thanks, Tim, and thanks, John, for that. Thank

Speaker 2

you, Omar.

Speaker 0

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

Speaker 6

Hey guys. This may be something that Tim was going to address before he got cut off. But in the press release, you talked a little bit about the benefits of the ton mile expansion from U. S. Exports and sort of the negative impact on volume demands for VLGCs from the curtailment of OPEC.

But you also talked about the spread to NAFTA being positive and being a positive benefit for the fleet and the global fleet. So if you kind of look at that as a bit of a double edged sword, if OPEC starts pumping again and Libya comes back online and that starts to pressure naphtha, how do you sort of weigh the benefits to increase production out of The Middle East with potentially a lighter spread and then also maybe some substitution from U. S. Cargoes?

Speaker 2

Tim, you want to take a shot at that?

Speaker 3

Yes. Yes. I think I can see the if we have an increase in The Middle East, it's more positive than negative. It might affect, as you say, the naphtha or the G spread. But on the other hand, then LPG seems to find again new uses when the price of LPG also goes lower, which it will eventually when more is produced.

So I think overall, more tons in the market would be would still have a positive effect on efficacy, whether it is partly substituting in the naphtha criterion. Okay.

Speaker 6

And then was there any disruption sort of related with hurricanes and petrochemical disruption that impacted you at all during the quarter? Because it's just the rates were like I know we talked about how the Baltic doesn't reflect the sort of actualized returns that we can expect. But Clarksons TCE rates were maybe a little bit higher even on a lag basis. So I'm just wondering was there any weather related utilization impact or what sort of drove that?

Speaker 2

Yes, weather and And you have

Speaker 3

seen COVID.

Speaker 6

COVID? Just demand? Okay. All right. That's it for me.

Thanks guys.

Speaker 2

Okay. Thanks Sean.

Speaker 4

Thank you.

Speaker 0

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Speaker 2

Okay. Well, thank you very much once again, and everybody stay safe, and see you next time. Bye bye.

Speaker 0

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.