Dorian LPG - Earnings Call - Q3 2021

Transcript

Speaker 0

Greetings, and welcome to the Dorian LPG Third 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, Rob. Good morning, everyone, and thank you all for joining us for our third quarter twenty twenty one results conference call. With me today are John Hajibateras, Chairman, President and CEO of Dorian LPG Limited John Lecouris, Chief Executive Officer of Dorian LPG USA and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and replay of this call will be available through 02/09/2021. 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, 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 12/31/2020 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 Hadjimateras.

Speaker 2

Thank you, Ted. Good morning from Connecticut where John, Ted and I are speaking to you from different locations and from Copenhagen where Tim Hansen has joined. I appreciate all of you joining us this morning to discuss our third quarter results. Today, we're happy to announce a $100,000,000 self tender offer. Having considered various options, our Board decided the tender offer presents a very compelling way to return cash to our shareholders.

It accomplishes our main goal of making a meaningful distribution, while at the same time maximizing financial and option value for all our shareholders. We believe that investors will value the optionality of our approach as those who wish to receive cash can sell as much of their holdings as fits their needs and those who wish to increase their ownership have that flexibility as well. Through continued cooperation with our customers, various regulatory bodies and local governments, we've been performing our work remotely when possible during the ongoing pandemic. Digitalization and remote monitoring have enhanced efficiency, offsetting some of the higher costs associated from COVID while reducing potential exposure to the disease. Through these efforts, our seafarers and shore staff remained safe and able to perform their duties as we continue to focus on providing our customers safe, reliable and clean and trouble free transportation.

The financial results for the quarter are even better than we expected on last quarter's call on the potential effect that the combination of large amounts of U. S. Supply coming online, a heavy dry docking schedule for the global fleet and the potential impact of a cold Asian winter could have on the market. While rates have fallen dramatically from a busy peak, the market environment remains promising and we think that it is sustainable for some time. We expect that dry docking and maintenance on the global fleet will likely have a stronger impact this year than last year.

The wave of U. S. Infrastructure came online during 2020 that was weighted towards the end of the year introducing a large amount of spare export capacity and product supply to the market. At the same time, continued production cuts from OPEC plus are decreasing supply out of The Middle East leaving only U. S.

Product to meet global demand. U. S. LPG exports have returned to China where new PDH plants continue to start up. Indian and other export markets continue to grow.

We continue to be a believer in the cargo that our fleet transports. LPG is a clean and flexible fuel amongst those that will bridge the potential transition to alternative energy. Next, Ted Young will provide an analysis of our quarterly financials, followed by Tim Hansen on the markets and John Lecouris with an update of our environmental and operational activity. Ted, the marks yours.

Speaker 1

Thanks, John. My comments today will focus on our financial position and results and our liquidity, as well as some commentary on the self tender offer announced today. At 12/31/2020, we had 133,600,000 of free cash. As of Friday, January 29, our cash balance stood at $149,300,000 The increase since year end is reflected in the strong chartering results that we are currently seeing. Turning briefly to the tender.

At the tender price of $13.5 per share and based on the 49,900,000.0 shares outstanding currently outstanding, we would be repurchasing 7,400,000.0 shares or about 14.8% of the shares currently outstanding. Based on charters booked and our expected expenditures, we currently anticipate that we will generate roughly 50,000,000 to $60,000,000 of free cash flow this quarter, including the cash already generated in January. Thus, even after accounting for the $100,000,000 buyback, we would maintain a cash balance that is consistent with our approach to balance sheet management without any borrowings. In addition, the buyback is accretive to shareholders' equity per share, a key valuation metric for the investment community. Overall, we view this transaction as an efficient and highly accretive way to return capital to our shareholders.

Further details on the mechanics and logistics will be available later today via the SEC website. For the discussion of our third quarter results, you may also find that you still refer to the investor highlights slides posted this morning on our website. Turning to our third quarter chartering results, we achieved total utilization of 96.2% for the quarter with a daily TCE, that's time charter equivalent revenue over operating days as both those terms are defined in our filings of $42,298 yielding utilization adjusted TCE, that's TCE revenue per available day of about $40,690 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 $41,754 Overall, the Helios Pool reported a spot TCE including COAs of approximately $45,237 per available day. Our daily OpEx for the quarter was $9,189 excluding amounts expensed for dry dockings.

It was $9,487 including those costs. Sequentially, OpEx was down, reflecting overall strong cost containment. Our time chartering expense remained relatively stable at $4,400,000 As a reminder, we do not include time chartering costs in our vessel operating expenses. Total G and A for the quarter was $5,500,000 and cash G and A, I. E, G and A excluding non cash comp expense was about $5,000,000 which was down about 10% from the preceding quarter.

We continue to look for efficiencies in our cost structure. Our reported adjusted EBITDA for the quarter was 60,100,000.0 Similar to our chartering results, we saw steady month over month increases in EBITDA this quarter. As a reminder, we look at cash interest expense on our 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, total cash interest expense for the quarter was $6,000,000 representing a $900,000 reduction from last quarter. As I mentioned last quarter, we did blend extend our 200,000,000 notional swap, which resulted in our extending its maturity by three years to 2025 and reducing the fixed interest rate from 1.933% to 1.091%.

We also did a similar transaction on our $50,000,000 swap, which resulted in a decrease in rate from just over 2% to 1.145%. This swap remains at $50,000,000 notional until March 2022, at which point it will begin to amortize. So big part of the reduction that we witnessed was due to those favorable blend and extend transactions in the swaps. Overall, we continue to benefit from our hedging policy and the favorable pricing of our Japanese financing, leaving us with a current interest cost fixed hedge and a small floating piece of 3.71%. As a reporting matter, our realized and unrealized gainloss on derivatives also include the effect of our FFA portfolio.

The calculation of EBITDA in our filings, however, only adds back the interest on the realized gainloss, not the FFA piece. John will touch on our drydocking program, but our remaining drydocking commitments are quite manageable from a financial perspective. Although we currently hold a roughly 70% 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 of our financial condition. As of Monday, February 1, the pool had roughly $45,700,000 of cash on hand.

We feel that our liquidity and capital structure have positioned us well for any rate environment, and we believe that this allows our company to make capital allocations such as the one announced this morning from a position of strength. Our Board's decision to begin a $100,000,000 self tender underscores its commitment to shareholder value creation and aggressively returning cash to shareholders when appropriate. Assuming successful completion of this tender offer, we will repurchase roughly 16,300,000.0 shares, representing over 28% of the shares outstanding following our IPO in 2014. We continue to remain interested in accretive growth opportunities that meet our risk reward criteria as well. 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 over to Tim Hansen.

Speaker 3

Thank you, Chad. For the calendar year 2020, the global seaborne LPG volumes fell by over 2% year on year, 206,800,000 tons. For calendar quarter, volumes totaled 27,000,000 tons, a less than 1% decrease versus the same quarter in 2019. U. S.

Export growth continues to counterbalance the Middle East volumes that fell about 4,000,000 tons. Meanwhile, in 2020, American export volumes increased by 16% to 46,000,000 tons compared to only 39,700,000 tons last year. And for the second quarter in a row, U. S. Export volumes hit the record levels.

Year on year export volumes in the fourth quarter grew by 18.8% to 12,900,000 metric tons. The American export volumes hit a monthly record of 4,400,000 tons in October and a record again beaten in December with 4,500,000 metric tons. The cold Asian winter increased demand while new export capacity came online in December with BTP's expansions of the Netherland terminal being completed. The Baltic Market Index, the Ruston Ure Chiba route averaged $76 per metric tons in the last quarter. Rates increased as the quarter progressed, increasing from 55 per ton at the beginning of the quarter to over $100 per ton for the most of December.

Several contributing factors drove last quarter's rate strength. Delays in the Panama Canal caused waiting times to increase massively during the quarter. This was caused by heavily container traffic and an overall increase in transits. Also, related inefficiencies and U. S.

Gulf And Asian port delays caused by winter weather further increased the utilization of the fleet. In addition to the elevated number of ships out of trading due to drydock and other surveys. At the same time, global LPG demand increased substantially, particularly from Asia with an unusual cold weather leading to a relative shortage of gas in the region for residential and commercial purposes. Also high LNG prices in addition to drawn LNG cars from The U. S.

And creating a boom in the LNG market, incentivized substitution of LNG with LPG in industrial applications. With a resilient US LPG production and low inventory draws until December until Christmas, Mt. Vallejo priced competitively and opened the West East arbitrage in mid November, which remained open for the remainder of the quarter. The open arbitrage towards East made traditional Western based players send cargoes to the East as well as margins was better versus the cracker economics in Europe against Naphtha, which created additional turmoils. On the supply side, concerns over The U.

S. And gel production volumes remains. Propane storage levels are tracking well below both last year's levels and the trailing five months average. However, we continue to believe that U. S.

Supply misapplied the global demand gap left from the lower Middle East production due to Saudi cuts. Saudi Arabia have agreed to take a brunt of the new OPEC cuts in favor of Russia for February and March, which could remove four to five year old seized cargoes or about 200,000 tons of LPG to the market for the two months. Although rates have come off over the past weeks on the back of increased U. S. Prices, which have closed arbitrage and resulting in a few U.

S. Cargo cancellations, prices are now adjusting and look more positive. And we are seeing market activity picking up again. High utilization of the Panama Canal should continue, resulting in sustained delays and more regular VLGC ruling around the Cape Of Good Hope. We remain optimistic looking into 2020.

With that, I'll pass it on to John for environmental and fleet update.

Speaker 4

Thank you, Tim. In the last calendar quarter of 2020, we completed dry docking and third special survey on our vessel Captain John MP. In the past couple of weeks of January, we completed dry docking and first special survey on our vessel Commodore. We plan to fit two ships with scrubbers during this quarter, which will complete our announced scrubber program and carry out those vessels five year dry docking cycles. We expect outlays of 6,000,000 to $8,000,000 over the next couple of months quarters, sorry.

During 2020, crude oil prices saw an extreme volatility as have bunker fuel prices. The very less sulfur fuel oil price spread, however, has steadily priced at 20% to 25% premium above that of heavy fuel oil bunker fuel, even though in absolute dollars, this spread ranged from a high of $300 per metric ton down to $50 per metric ton. It currently stands at about $100 per metric ton. As we look back to IMO 2020 launch last year, we are now very confident that the decision to install hybrid scrubbers was justified, not only economically, but also environmentally. Our fleet of hybrid scrubber vessels overall averaged 0.04% to 0.07% sulfur oxide emissions, SOx emissions against the blended and problematic fuel oils of 0.50.1% show to shipping for the year.

As we have previously reported, scrubbers also reduced particulate matter and black carbon emissions by 80%, keeping in line with environmental sustainability. We continue to invest in our vessels performance and efficiency in achieving reduced emissions and lowering operating costs. An improved environmental footprint is very important to Dorian LPG and we hope to continue with additional energy efficiency technologies to our vessels, including dual fuel batteries and fuel cells. Dorian has been at the forefront of LPG dual fuel technology since 2013 and 2014 when first new building vessels were ordered and we followed that development closely since then. After the most recent LPG dual fuel retrofit get into regular service and when the first new building dual fuel vessels deliver from the shipyards, we hope to revisit this opportunity and consider our options.

Given the VLGC fleet age profile last year, it would have been a significant number of vessels for drydocking, which would have removed from trading. But this year, we expect to see even stronger trends. According to some brokers, as many as 90 ships could opt for dry docking maintenance this year, which would almost be one third of the current global fleet. With a strong freight rate environment in the second half of last year and increasing COVID-nineteen disruptions at the yards, many owners deferred maintenance, which is pushed now into 2021. Considering LPG dual fuel engine retrofits, ballast water treatment installation and some scrubber retrofits, more ships could be out of the global fleet this year for longer periods than last year.

The current fleet order book remains at reasonable levels and supports the VLCC market for the medium term. It currently stands at 39 vessels or about 13% of the fleet with about 21 vessels expended in 2021, 13 vessels in 2022 and nine in 2023. There are currently 30 vessels in the fleet that are aged 25 or older, which equals to about 10% of the current fleet. And with that, I will pass it over to John Hadjipateras.

Speaker 2

There we are. Thank you, John. Rob, do we have any questions?

Speaker 0

Thank you. With the prepared remarks completed, we'll now open the line for questions. Thank you. And our first question comes from the line of Sean Morgan with Evercore ISI. Please proceed with your questions.

Speaker 5

Hey, guys. So in light of this large buyback and return of capital to shareholders, I think you still have $50,000,000 reauthorized on the buyback authorization for the rest of the year or

Speaker 3

at least through the rest of

Speaker 5

the calendar year. How do you think about how aggressive you'll be in terms of timing of using that and to what extent you use it? Will it be just dependent on the path of the share price? And sort of how do you think about that reauthorization of the buyback in light of the change in circumstances with this big chunk of cash being used right upfront for this tender offer?

Speaker 2

Thanks for the question, Sean. No, it's there. It will remain as an authorization. And it will be as before evaluated on taking all the factors into consideration, the price, including the success hopefully of the tender and the market, the freight market.

Speaker 5

Okay. And then I got I have one here for Tim regarding the Panama Canal. You talked about this utilization spike between LPG vessels, LNG vessels and container ships. Do we see this as kind of a seasonal uptick for a one time event or is this sort of a new normal where all three of these vessel categories are using the Panama Canal to an extent that it's going to become sort of capacity constrained on an ongoing basis?

Speaker 3

Tim? I think for contain yes, I'm sorry. Can you hear me?

Speaker 2

Yes, I can hear you. Yes, go ahead. Yes,

Speaker 3

okay. Yes, I think there are some seasonality in it naturally, but container ships especially have increased throughout the year by, I think, 90 plus more passengers than the year before, and we see more container ships being fitted for the Panama and more lines going in that direction. So I think that's more on a continuous basis. We have seen dry cargo, for example, increase quite substantially, which has been which we expect to be somewhat seasonal due to the cold winter in Asia and lack of different types of coal losses in South America. And LNG also is somewhat seasonal, but we have seen an increase in transit throughout the year, but especially this cold spell that we have in Asia and which still is in Asia has drawn a lot more LNG in that direction.

But totally, we're seeing likely increase of passengers in the canal by more than 200 transit since 2019 and 2020. So overall, we believe that there will be more, let's say, delays in the Panama Canal, but it will also have some seasonality swings.

Speaker 5

Okay. And so in light of that, as you're managing the Dorian fleet, has that resulted in Dorian just waiting at the Panama Canal longer along with a lot of other global players? Or are you actually having to send ships around the long way around Africa from like The U. S. Gulf to Asia?

Speaker 3

We are sending ships around The Cape. Think that especially as the delays in the Panama Canal surge up to twelve to fourteen days. The economics actually from going on booked through the canal and waiting for that long justify sending ships around The Cape even from the North Part Of Asia. And still, are seeing eight to ten days delays. So maybe the inflection point moved a little bit south of the year, yes, we will send ships in that direction more because these delays also surge quite a lot and makes it hard to plan the next cargoes.

We can say also we have some Panama slots booked throughout the years, so we can schedule around those. But as you saw on new ESCs, the Panama Canal has changed the regulations for prebooking of Panama slots. So that is no longer possible for LPG carriers to prebook slots. So from twenty twenty one twenty twenty two onwards, sorry. So that will also change again the dynamics of the pan and economic trends in the future.

This year, there is a number of players who have Yes.

Speaker 2

Sean, you've been that obviously has a positive effect on the ton mile. So it's Right. Yes.

Speaker 5

Right. Okay. All right. Thanks guys.

Speaker 0

Thanks Sean. Thank you. The next question is from the line of Omar Nokta with Clarksonswateaux. Please proceed with your questions.

Speaker 6

Hi. Thank Hey, guys. Hope you're able to handle the snow okay. Obviously, just wanted clearly, $100,000,000 self tender offers is clearly the most aggressive shareholder reward program you guys have done since being public. And with the firepower you have, the earnings momentum and clearly the valuation, it makes a lot of sense.

But

Speaker 2

I wanted

Speaker 6

to ask, with that, how do you feel about reinvesting in the business? Clearly, the market has become or at least it appears to be very tight over the past, call it, a year, two years aside from the COVID window there that lasted a couple of months. Do you feel that the market is short on vessels? Clearly, there is some of that. But how do you feel about your positioning?

Do you think it makes sense to grow or are you more content with returning capital?

Speaker 2

Omar, we're not not excluding growth, but we are focused first on return. At this stage, it's much more compelling to do to return money to our shareholders than it is to acquire ships. That's sort of the very precise and concise answer to your question I think.

Speaker 6

Yes. No, that's fair. And maybe just thinking about the spot market, it's been fairly robust. And we haven't really seen much time charter activity, I think, maybe from my perspective. Is that the case as how you see it?

Do you see the period market opening up? Because I know in the past you've been more willing to put vessels on contract, but we haven't really seen that the past several quarters. How could you describe the period market right now?

Speaker 2

I'll let Tim answer that.

Speaker 3

Okay. Yes, I think we have seen some activity in October, November for shorter term time charters, so one to two years. I think still for the longer term deals that has been very limited. I think people is also looking ahead of what types of ships and what will the regulations and so on encompass. But long term before we saw the spike or the beginning of the spike, we did see quite a lot of renewable of ships, which for one to two year, which is normal for that time of year.

So all the contracts would come into renewal. I think also we saw a very difficult product market just leading up to fourth quarter calendar quarter. So at that time, most traders was very, very cautious of committing to anything. So that might have been the reason for you seeing a little bit less activity in that front than previous years.

Speaker 6

Thank you. And then just maybe just on maybe the topic of U. S. Exports. You touched on this a bit in opening comments.

I'm trying to think about it from, say, what happened this past summer when the VLGC market came to life after the spring shutdown. Things started to come to life despite the OPEC plus cuts or The Middle East cuts and The U. S. Made for a lot of those lost volumes and really grabbed some market share and that kind of sprung the LGCs to higher levels. With the Saudis now talking about taking off 1,000,000 barrels of crude here in February and again in March, did you see a similar situation arising that being a loss of Middle East cargoes being replaced with The U.

S?

Speaker 2

Tim, you want to have a jab at it?

Speaker 3

Yes, I think we could see something similar where the demand in the East is really is still there. So it's definitely not no appetite for the tons. Are definitely there. So tons are when we're seeing export cuts out of The Middle East, we expect them to be replaced by U. S.

And also on the back of we should see improved oil price and thereby making fracking more attractive in The U. S. As well. And we see you also saw this earlier the year that when tons are lacking, basically, the tons that could go into fracking will then go into the other demand in Asia. We think we see the cut of Saudis that these tons will be replaced and will be replaced in the East by U.

S. Tons, which should get more ton miles as well or will get more ton miles as well.

Speaker 6

It would be interesting to say that. Yes.

Speaker 2

Go ahead. I think the dynamic of the increased ton mile from that and from the canal has been very helpful. So we've seen continued volatility and this year we've got to be thankful for it because even though the volatility took us down to breakeven early last year, it brought us up to wonderful returns at the end of the year. Now, the market sold off again, but on average, I think probably we would be looking at prospects that are better even than we had anticipated last year for going forward.

Speaker 6

Yes. I agree with that definitely. And maybe John, just one final question and I've asked you this before on calls and you've been pretty firm with the response, but how do you feel about investing in new buildings today? Are there customers requesting that of you?

Speaker 2

No, we haven't seen that yet. And I do think the new building market is getting to an inflection point where I think that the prices have been either sliding or steady for a long time and the next move will be up. But I thought that before. So I don't think there's a rush to do anything, certainly not for us and certainly not for the rest of the market. We can handle the fleet can handle the demand that's there.

And it's a challenge going forward for not just our sector, but all sectors to know what kind of fuel mix to put into future when you're designing building ships for the future. In our case, in the LPG business it's a bit easier because the obvious answer would be LPG as a dual fuel. But we do look at it, we continue to look at it, but we're not there yet. We have and as I said before, we're prioritizing return to shareholders at the prices at a price of our stock, we continue to think the best way to do it is by what we've done we've announced today.

Speaker 6

Very good. Thanks, John. That's very clear.

Speaker 2

Thank you, Omar.

Speaker 0

Thank you. At this time, we've reached the end of allotted time for questions. And I will turn the call back to management for closing remarks.

Speaker 2

Thank you very much. I think my closing remarks is thank you all for joining us and I hope that you join us again next quarter and we have even better news for you then. Have a great day.

Speaker 0

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.