Navigator Holdings - Earnings Call - Q3 2020

Transcript

Speaker 0

Thank you for standing by, ladies and gentlemen, and welcome to the Navigator Holdings Conference Call on the Third Quarter twenty twenty Financial Results. We have with us Mr. David Butters, Executive Chairman Mr. Harry Deans, Chief Executive Niall Nolan, Chief Financial Officer and Mr.

Oyvind Lindemann, Chief Financial Officer. At this time, all participants are in a listen only mode and there will be a presentation followed by a question and answer session. Must also advise you, this conference is being recorded.

Speaker 1

Not limited to future expectations, plans and prospects for both the financial and operational perspective. These forward looking statements are based on management assumptions, forecasts and expectations as of today's date and are, as such, subject to material risks and uncertainties. Actual results may differ significantly from our forward looking information and financial forecasts. Additional information about these factors and assumptions are included in our annual and quarterly reports filed with the Securities and Exchange Commission. Now Assin, why you take over the call?

Thanks, David. Good morning to everybody in the call.

Speaker 2

I hope you're well and keeping safe. At the September, in line with the prevailing government advice, we reopened our company offices on a phased Team A, Team B basis with staggered working hours to both reduce risk and to maintain social distancing. This turned out to be a temporary measure, however, as the second wave of COVID-nineteen started to take hold in late September, and we subsequently had to close our offices again. Once more, we're running our business remotely from numerous home offices worldwide. This week, the prospect of the Pfizer vaccine provided a glimmer of hope for all of us and was a welcome shot in the arm for the global economy.

We all live and hope that this vaccine or one of the others that are currently on the development fastback will prove to have good efficacy and will be quickly rolled out globally, much to the relief of everyone. U. S. LPG production and exports have been remarkably resilient throughout this pandemic, and there's no sign of that abating. In fact, the recent modest uptick in U.

S. Rig counts helps further underpin confidence, and they are very pleasing to note that despite the impact of the weather headwinds on petrochemical supply from hurricanes Laura, Zita, Etowah that the business continued to be profitable in Q3, albeit at lower levels. We have built on the momentum of Q2 with a net income of $1,500,000 and an adjusted EBITDA of $31,900,000 in Q3. Our ethylene terminal joint venture was profitable for the quarter, helping to more than offset the impact in the shipping business of the weather disruptions in The U. S.

Gulf. The quarterly and year end to date operating revenue, net income and pandemic struck before rallying to the low 90% levels in May and June. Unfortunately, that recovery in utilization rates are short lived as Hurricane Laura knocked out over 25% of The U. S. Global olefins capacity for an extended period of time, causing rates to fall back to just under 80% for Q3.

Although October was also impacted, thankfully utilization rates have since started to recover and are currently hovering in the mid- to high 80% levels. The record twenty twenty hurricane season was, in many respects, a pre release. I am pleased to report that we've been able to dramatically reduce the overdue crew changes by completing a significant number of crew reliefs. Currently, we have less than 50 seafarers who have overdue leave, and we continue to work hard to reduce the backlog whenever and wherever possible. We are working pragmatically with the flag states and classification societies as we resolve the many practical inspection and drydock challenges that have been caused by this pandemic.

Our Morgan's Point joint venture ethylene terminal continues to exceed our expectations and has had an impressive quarter, both in terms of profitability and throughput. We have now exported just over 300,000 tonnes from the terminal. The terminal complex is working extremely well, and we're impressed by the workmanship, the quality and the performance of the installation. As you can see from the photographs and the supplemental information pack, construction of the ethylene tank is progressing safely on budget and on time, with commissioning and start up scheduled for December year. We expect the first ethylene tonnes to be loaded into the tank in mid December, which will be a key milestone and a crucial step this.

The long and short of it is that the company now has a much improved balance sheet and has significantly boosted our liquidity to around $120,000,000 with a clear loan expiry runway till March 2022 and with no maturities over the next seventeen months. Now in his prepared remarks, we'll provide much more color on our recent refinancing success. Q3 has been a mixed quarter for our business with considerably mostly weather related headwinds, which have impacted our overall utilization rates, some of which lingered well into October, but then as the stable cash flows from this infrastructure investment with its take or pay contracts start to hit our bottom line. On the terminals to historical lows and with the imminent ramp up of several new North American export facilities in late twenty twenty and the 2021, including our Morgan's Point Efton JV, the Repauno terminal and the Prince Rupert facility. We believe these factors will help firm vessel utilization rates.

This, coupled with an improving ethylene arbitrage and increasing demand for ethane and LPG in China, will help boost exports and should, all things being equal, be good news for the Handysize segment and for Navigator Gas.

Speaker 3

We are in a poor position to capitalize on these opportunities. EBITDA for this third quarter was 31,900,000 with $4,400,000 being generated from the operation of the terminal and $27,500,000 the result of an increase in average charter rates, which rose to just under $700,000 per month or $22,892 per day from just over $650,000 per month or $21,466 per day for the 2019. Average charter rates across the nine months of this year averaged $21,733 per day, an increase despite any negative impacts of COVID-nineteen from the $21,000 a day achieved during the equivalent nine months of last year. However, although charter rates continue to see some upward pressure, primarily as a result of the effects of Hurricanes Laura and Delta, as Eloyden will refer to later, this reduction in utilization had a revenue also reduced by $900,000 due to an increased number of days that the vessels were in drydock during the quarter. Five vessels completed drydockings, taking a total of 112 when vessels would have been unavailable for charter relative to sixty four day drydocking days during the third quarter of last year.

This increase in drydock activity was as a consequence of drydocks being delayed earlier in

Speaker 2

the year as a result

Speaker 3

of COVID-nineteen. Seven dry dockings in total have been undertaken during the nine months of 2020 at a total cost of $8,000,000 or thousand $672 per day incurred in the comparative 2019. General and administrative costs increased by $1,900,000 for the three months ended September 2020 and $2,900,000 year to date. This year to date increase related to $1,000,000 on foreign exchange losses on our on the revaluation of an Indonesian nuclear bank account, which should not be repeated and may reverse, a $1,000,000 increase for audit and related fees and $600,000 for additional top up insurances for the Marine Export $8,000,000 primarily as a result of reductions in U. S.

LIBOR, which has now fallen since September 2019 by 180 basis points on our approximate $760,000,000 of variable interest rate debt. The share of result of equity accounted joint venture, I. E, the terminal generated a profit of $3,100,000 for the third quarter, our first quarterly profit following the long term throughput agreements becoming effective on 06/01/2020. Net income for the third quarter was therefore $1,500,000 or $03 per share compared to a loss for the 2019 of $2,900,000 or a loss per share of $05 During the most recent quarter, we entered into an agreement to amend the terminal credit facility to allow nearly true up of $34,000,000 This amount was drawn down on October 8. We also concluded the refinancing of one of our vessel loan revolving credit facilities on September 24, which provides additional available liquidity of $120,000,000 We had a further $6,100,000 as restricted cash supporting the cross currency interest rate swap relating to our Norwegian kroner bond, although since the quarter end and as a result of further strengthening of the Norwegian kroner versus the U.

S. Dollar, this restricted cash has reduced to $3,000,000 as of yesterday. During the quarter, we also refinanced our $100,000,000 unsecured Norwegian bond with a new five year like for like bond. This bond, which matures in 2025, attracts an interest rate of 8% per annum. Importantly, as Harry referred to, the company does now not have any debt facilities maturing until April 2022.

Finally, with respect to the construction of the Ethylene terminal, have contributed a further $7,500,000 during the third quarter and an additional $2,000,000 since the quarter end, both fully funded by drawdowns from the terminal facility. Following these drawdowns, along with the initial true up of $34,000,000 the aggregate amount now drawn under that facility is $51,000,000 out of the total available amount of. And with that, I'd like to hand you over to Ivan.

Speaker 4

Thank you, Nite. As Harry mentioned initially, we were on a roll during the summer months, ramping up the ethylene export terminal with record breaking export volumes of competitively produced U. S. Ethylene. Utilization levels were in excess of 90%, and our specialized fleet enabled Asian post COVID Phase I demand to flourish.

Ethylene as well as propane were required for the production of personal protection equipment such as face masks or as landfill. From August, onefour or 25% of the entire U. S. Ethylene production were shut in preparation for LoRa's landfill. The hurricane did make landfall right in the middle of the ethylene heavy Lake Charles area.

Luckily, minimal physical damage occurred at the petrochemical industrial parks. However, the shutdowns were prolonged due to slower repairs of the local electricity grid and continuing scare of additional hurricanes. Only after Hurricane Zita made landfall in October, in August through October, U. S. Domestic ethylene prices rose as there were little to no excess production available.

It went from its lowest level of $09 per pound in the summer, reaching above $0.30 per pound during the hurricane period. Exports through the terminal reduced, which directly impacted our ethylene fleet. The vessels that have been balancing back to U. S. Gulf for ethylene prospects have to either face idle time or look for alternative employment opportunities within the semi or fully rebuilt fleet, resulting in possible arbitrage of more than $400 a tonne today, which is widening by the day.

Consequently, there's been a noticeable uptick in activity and discussions for November and particularly December on both freight and terminal throughput. Our utilization has recently improved from the lows of the hurricane season, hovering today in the mid- to high 80% level. U. S. Natural gas liquid production remains strong, which is positive, ensuring competitively priced feedstock for The U.

S. Ethylene producers. It also bodes well for continuing ethane exports as well as LPG exports. It underpins their prospects of full volumes going through the terminal once the tank is operational. The annual nameplate capacity of 1,000,000 metric tons of ethylene gives about 80,000 tons per month ignoring any seasonality.

If we assume that the majority of these molecules will head Transpacific to cater for Asian demand, then this translates to about 15 Handysize vessels. And that is a huge difference compared to the vessel demand from that terminal during the lows of the hurricane season, which were at three to four vessels. The quoted market rates for handysize ships have been moving sideways since May, including through the recent hurricane volatility at about Lee in an environment with stronger oil appetite going forward. And this enables gas to play out its rightful role, a viable substitute for oil products with the added bonus of reducing greenhouse gas emissions. With that, I will hand you back to the operator.

Speaker 1

We would be ready to open the conference to questions and answers, please.

Speaker 0

You. And your first question comes from

Speaker 2

You

Speaker 5

mentioned in the release that the hurricane or the hurricane impacted the shipping business in the Gulf Coast, but you also mentioned it affected the terminal. Are you able to quantify what kind of impact that is, let's say, fourth quarter?

Speaker 2

I think

Speaker 4

during the point, Omar, the issue with these hurricanes is plural, is that the production capacity shut in took a long time before they return or are returning back to normal. So the impact of months have been kind of second half August, September, October. We've seen stronger throughput in November, and we expect that to be back up to expectations for December. So December, probably looking at similar levels as we saw in June, July.

Speaker 1

Okay. And if we just think of

Speaker 5

it in terms of numbers, in the third quarter, you got $4,400,000 of EBITDA, dollars 3,100,000.0 of earnings. Is that repeatable, you think, with what we've seen so far for the fourth quarter?

Speaker 3

I think it may be given what we've seen in October and the November, that might be on the slightly on the high side, but not significantly so.

Speaker 5

Okay. And then just generally, how do the terminal contracts work when it comes to like these types of events, storms, hurricanes? Are they take or pay, hell or high water type contracts? Yes, they are.

Speaker 6

Okay, great. And then

Speaker 5

just one other follow-up. I just wanted to ask what's ballasting into the Gulf. Yes.

Speaker 4

So the Lunar Pool, as we discussed last call as well, is fully operational. It commenced April 1. And today, all the 14 ships are in the pool and performing accordingly. So it's the Luna Pool consists of ethylene ships, specialized ships. And of course, the pool is formed in order to better service the ethylene customers and, of course, also The U.

S. Gulf ethylene exports, including from Targa Terminal and our own joint venture terminal. So of course, when there are less ethylene to be exported from there, it will impact the pool, but the whole concept of a pool is collaboration and sharing of earnings. So therefore, through the pool, we were, during this time, more likely or we were more likely to have the right asset at the right location for other cargoes. So if we only had our own ships, and let's say, we navigate the ballasted and most of them back to U.

S. Gulf, we didn't have any other ships available for other opportunities.

Speaker 6

Actually, I wanted to it made me think there, follow-up on Omar's last question there. In some ways, was the Luna pool a little bit or did it drive down utilization across the fleet a little bit? Because obviously, the Liverpool is carrying ethylene specifically, and so you have to have vessels dedicated to that, whereas maybe in the past, if an ethylene cargo isn't available, then you can just take propane or something else. And so as a function of dedicated cargo commitments, did you maybe forego business that might have kept utilization otherwise a little bit higher?

Speaker 4

I don't think so, Ben. It's a complex question. With the 14 ships, clearly, the ambition is to trade with ethane and also ethylene. So whether the pool was in place or not and you are facing this volatility that the hurricane caused less exports in that one particular cargo grade, with the pool or not, we would be chasing other opportunities and working very hard to find alternatives. The point with the pool is that we have a more global footprint.

Therefore, the chances are more likely that we can find other alternatives. So I wouldn't say that the pool has been detrimental in utilization for Navigator during this time. I think it would have been more or less the same, probably a little bit worse if we hadn't had the

Speaker 1

pool. Okay. When you get back to the ethylene, you have to stop, clean and refrigerate. And it's a process that takes time and money. So in the case where you are temporarily down, such as that was caused by the hurricanes, your choice is to just sit there and wait until it clears and the ethylene becomes available because it's just too expensive and time consuming to take a spot cargo of propane, do that cargo and then come back to do the ethylene, much more expensive.

So that causes an extra delay, if you follow me.

Speaker 6

Yes, sure. So you probably would not have picked up a to be temporary.

Speaker 1

They extended longer than we expected because the electricity was down longer than people had expected.

Speaker 5

Right, right.

Speaker 6

Is there in the release, you had mentioned a new multiyear contract on a vessel, I believe, with a Chinese counterparty. Any color that you might be able to provide there with respect to rate at all?

Speaker 3

This was in our Q2 actually announcement. Think we put it in it's a three year contract at higher than mid $30,000 rate per day.

Speaker 6

Got you. Okay. So it wasn't incremental to 2Q. Okay. That's helpful.

And then lastly for me, this is a little bit more strategic, I guess, David or Harry. As you look at the company, and you've made a lot of progress taking delivery of a lot of ships. Obviously, the terminal has come along nicely, but yet the share price has languished at levels below sort of where you traded initially after the IPO for some time here.

Speaker 1

A couple of years, what Navigator has gone through from sanctions to tariffs to the coronavirus shutdown, global shutdown, negative pricing of oil and then back to back hurricanes right down the mainstream of where the petrochemical complex is located. And yet, we're generating profit. What it has done is put a kind of a fog over the future, the fog being simply a more difficult time, a period in which to focus on where we anticipated going. Now I think a great event occurred this week with the Pfizer vaccine. Now we know a vaccine can be, whether it's the Pfizer one or another one or multi, it clarifies some of that fog.

It takes it away. People need exporting more and more of the intermediate chemicals, the olefins, the propylene, ethylenes. And the infrastructure required for that is still in its infancy. I mean, our little terminal, it's not little, it's just, you know, a world class terminal, but it is the beginning. I see far more of that type of infrastructure required.

More infrastructure required on the receiving end and more companies willing to start crackers for export. I mean, is doing that. Now with the second propylene facility being built in Texas solely for export. So no, I look, everyone has taken a step back because of all of these convergent factors that were unforeseeable. Black swans coming so common that they are no longer black swans.

They're common day events. But I think we've gotten through them. The conviction of where The U. S. Petrochemical industry had some setbacks, but they were unforeseen and unforeseeable.

But no, I think we're fully convinced that we've got the right kind of position. And yes, we're disappointed in the interest the stock price, but I think we're not alone, and I think these things do pass. Perhaps we're entering into a new phase where focus may be on value stocks such as a Navigator versus a growth stock. But I think if one looked at it, we are a combination of both the solid growth opportunities as well as great value. So I don't think we've changed at all.

I think we're committed and we're I'm as excited as ever, but disappointed on these things that we couldn't see. Harry, do you have any comments from that?

Speaker 2

Well, thanks, David. Yes, think you covered it very well. I think, Ben, our strategy is on track, and it's starting to deliver. As you can see from the terminal, in the next when we get that tank on stream, that should be doubling the capacity through that terminal going forward. So we're all frustrated about the spread price, but that's life, isn't it, Ben?

Speaker 0

Thank you. And your next question comes from Sean Morgan from Evercore. Please go ahead.

Speaker 5

Hey, David. So I think one of the things you said in your response just now that you kind of view yourself as a value but also a growth company. If we look at the sort of CapEx and cash requirements, say, three vessels that need drydocking and probably, I think, you said only $4,000,000 of additional capital needs to be paid in sort of in light of this idea of growth that you made that capital available? Or is it just kind of going back to what you said about Black Swans and being prepared for rainy days?

Speaker 1

Well, what has to be prepared for the rainy days? I mean, we've been just hit so frequently that these black swans are in place. But no, look, policy strength and building up is obviously key. And yet being prepared to have additional capital for these potential expansions. Clearly, if the I mean, the most obvious capital requirement early on will be to consider whether or not we need to expand

If things go as we anticipate and continued volumes ramp up, we'll need more money for that. But that's pretty obvious for anyone who looks at this situation. Don't think expansion, again, it's a logical thing that we would be doing. So I don't know if this answers. Do we have enough of that?

No, probably not. We would hope that as these things unfold and the visibility hopefully, this begins the period of visibility of earnings And our share price would respond. We would see the kind of appreciation that one would expect with the growth and value orientation. And that we'll be able to fund and keep apace with what

Speaker 5

Maybe hinting at another footprint, but maybe that's kind of further down the road. So for my last question, I just also you said that there was some disruption in terms of utilization in October, and we were given kind of a current rate of mid- high 80s utilization. So one months point in, there's we have about 50% this quarter on the books. So what does it look like right now in terms of the blended utilization for the November and October?

Speaker 1

Yes. October

Speaker 4

was higher than the third quarter, but we see the trend going north through November and also into December. So where it is at today is the mid-80s, high-80s percent level.

Speaker 2

But at the average level, typically, the best debottleneck is a free debottleneck where you split the assets, and we're pretty confident we can at least get 10% additional capacity at our current footprint Morgan's Point. And then the next best one is if you expanded an existing facility because the cost per tonne of installed capacity is dramatically reduced. So that's a good opportunity. But equally, in this marketplace, with low share prices and low profitability, there's other opportunities out there as well in the traditional shipping market. So we're looking at all those options and assessing them, but there's nothing imminent in the pipeline today.

Speaker 5

Okay. All right. Thanks a lot. Thanks.

Speaker 0

And your final question comes from Randy Giveans from Jefferies. Go ahead.

Speaker 4

I

Speaker 1

guess two questions

Speaker 7

for me. First, any updates on Repauno or Pembina? Know those have been kind of in the pipeline for quite some time here. So seeing if you have any news on those.

Speaker 4

Yes. Pembina, Randy, still on schedule to commence operations back end of first quarter, maybe April. So no change there and no change in the volume or the specifications requiring then four to five or six depending on the destination of that Canadian volume, the incremental demand of handysize ships. That is going as far as we are aware, talking to Pembina and looking what they publish publicly. So that's what in the initial phase, and learn to walk before they run, I suppose.

And they have publicly stated that they intend to start exporting, which is obviously we're interested in and will impact our business from at the same time frame as Pembina. So I think we'll come back end of first quarter next year. If you have Pembina, Repauno, pulp starting, you will have a big kicker in our segment.

Speaker 1

Got it. All right. And then I

Speaker 7

guess one more quick modeling question. In terms of interest expense, that continues to fall here in the last three or four quarters. So is this kind of current number, the 9.8 or so, a fair run rate, which we use for the fourth quarter? And same for G and A, that has certainly bounced around this year. Where is that going to shake out this quarter and then maybe a run rate for 'twenty one?

Speaker 3

Yes. So the interest charge should be something similar to Q3. There's been a slight further reduction in interest rates from Q3. The Indonesian rupee $1,000,000 should probably well, certainly, it's unlikely to repeat itself. As of today, it has rebated somewhat, so there should be somewhat of a reduction in that.

The terminal additional insurance will remain as is and the audit and related fees will be something be repeated to some extent, but not that full amount. That was partly a catch up.

Speaker 0

And we now have no further questions.

Speaker 1

Good. Well, thank you for joining us this morning, and we welcome you back in a few months' time. Thank you.

Speaker 0

Thank you. That does conclude today's presentation. Thank you all for joining.