Ardmore Shipping Corp (ASC) 2022 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Ardmore Shipping's First Quarter 2022 Earnings Conference Call. Today's call is being recorded, and an audio webcast and presentation are available on the Investor Relations section of the company's website at ardmoreshipping.com (Operator Instructions)

At this time I would turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Thank you. Good morning and welcome everyone to Ardmore Shipping's First Quarter 2022 Earnings Call. Let me first ask our CFO, Paul Tivnan to describe the format for the call and forward-looking statements.

Thanks, Tony, and welcome everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com where you will find a link to this morning's first quarter earnings releasing presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions.

Turning to Slide 2, please allow me to remind you that our discussion today contains forward-looking statements. Addition results may differ materially from the results projected from those forward-looking statements. And additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the first quarter earnings release, which is available on our website.

And now, I'll turn the call back over to Tony.

Thanks, Paul. So in terms of the format for today's call, to begin with I'll discuss highlights and recent market developments, after which Paul will provide an update on product and chemical tanker fundamentals and financial performance. And then we'll conclude the presentation up and open up the call for questions.

So turning first to Slide 4. Over the past 2 months, the product and chemical tanker markets have changed completely. The first quarter was only partially impacted by these conditions, but the second quarter will show the full effect.

Ardmore's MR TCE for the first quarter averaged $15,600 per day, whereas for the second quarter with 50% fixed so far, the result is $25,500 and actually rising as evidenced by the last 2 weeks fixtures, now averaging $34,400 per day. In anticipation of an improving market based on strong fundamentals, we had already gone to full spot exposure as of February, thus are well positioned to capture the benefits of a strong market for our shareholders.

The impact on our financial performance is significant. Using the second quarter TCE to-date with 50% complete, our net income would be $22 million or $0.63 per share for the quarter, an annualized 30% return on book equity, with every additional $1,000 per day generating another $0.28 per share or 3.4% incremental ROE.

Asset values are also rising, with 5-year-old MRs now valued at $32.5 million representing a year-on-year increase of 18%. Taking advantage of rising values, Ardmore has sold its 3 2008-built MRs with time-charter back for 2 years plus options at attractive rates, which maintains our commercial scale and earnings power.

Ardmore has not undertaken any voyages from Russia since the outbreak of the conflict. In the current market, our focus is on optimizing our commercial performance elsewhere while making every effort to support our seafarers, and engaging in other measures to assist those in need.

Moving next to Slide 5. On our last call, we discussed improving fundamentals offset by adverse oil market dynamics. Since then, the oil market has changed completely and has, in fact, turbo-charged the product tanker sector and MRs in particular given their versatility.

The oil market is now characterized by dislocation of physical supply and demand, record high refining margins, wide price arbs, and a shift in sentiment regarding inventories. These factors are driving up both volumes shipped, and distance travelled, thus resulting in a significant boost to product tanker ton-mile demand.

The chemical tanker market is being driven by similar factors, exacerbated by urgent buying of liquid fertilizer and various types of veg oils to substitute for volumes lost out of Russia and Ukraine. As a result, the commodity end of the chemical tanker sector is also experiencing very high spot rates, which are clearly reflected on our own fleet performance.

How high rates can go and for how long is unclear, but with MR transport costs still around 5% of the value of the cargo on board, we don't see rates alone capable of destroying demand. And thus, there is no practical upper limit. Similarly, with the dislocation of cargo flows and a steady stream of oil market events continuing to disrupt, there is a sense that these conditions could persist for quite some time, even after a cessation of hostilities.

Meanwhile, although fundamentals have taken a back seat to oil market, we believe they are still improving and are providing underlying strength or sectors which Paul will discuss later in more detail.

Next on to Slide 6. The next 2 slides are normally further back in the deck. However, we thought it would be useful to discuss it now as they highlight what's currently happening in the market and the impact on Ardmore's earnings.

On this slide, Slide 6, you can see the progression of rates over the past 6 quarters which covers the depth of the pandemic last year to this new market environment that we're in. We had a slight uptick in rates in the first quarter. However, as you can see, clearly with the green bars, there's a dramatic impact the market is having on our charter rate performance for the second quarter to date.

Moving next to Slide 7. On this slide, we show the resulting annualized earnings and EPS for the full range of market conditions we've seen over the past 6 quarters, and where at least some people think rates could go toward the upper end. Looking at the red dotted box, you can see that at current levels, our annualized earnings would be $88 million, or $2.52 per share.

On that note, I'll hand the call over to Paul.

Thanks, Tony. I would take a look at the fundamentals and then move to review of our financial performance. So starting with Slide 9 for demand fundamentals. All of the focus in recent weeks has been on the current market activity and volatility. At the same time, the fact remains that fundamentals are solid despite pretty evident crosscurrents in the global economy.

On the demand side, the outlook for product and chemical tankers is very positive driven by increased refinery throughput and oil market disruption in the near-term and continued on demand growth and refinery dislocation over the medium term. Oil demand growth is not gone away. And based on the most recent estimates from Rystad and the IEA, overall global oil demand is expected increased by 1.9 million barrels a day this year, surpassing pre-COVID levels in the third quarter. Looking to the medium term, as you can see in the graph on the upper right, demand outlook remains firm.

Global refinery activity continues to be a significant driver of product tanker ton-mile demand. Global refinery throughput in third quarter is expected to be 5% higher year on year. Notably, there's significant increases in throughput in the U.S. Gulf and the Middle East, with corresponding reductions in Russian throughput.

At the same time, the ongoing trend of refinery dislocation which we've been talking about for some time will continue to have a positive impact on product tanker demand, providing an additional layer of growth. Over the next few years, there are significant increases in capacity in the Middle East and Asia, while at the same time closures of refineries in the U.S. Europe, China, Australia, which is increasing seaborne volumes of refined products. And significantly, the Al-Zour refinery in Kuwait is expected to open in the next few weeks approximately 2 years behind the original schedule.

Overall, product ton-mile demand is expected to be 3% to 4% annually to 2026, which is well above supply growth. And based on recent market activity, ton-mile demand for product tankers is potentially much higher this year.

Chemical tanker demand outlook is also positive, driven by GDP growth, petrochemical output, and supported by an improving product tanker market resulting in these vessels staying more on their core CPP trades. In April, Global GDP was revised down by point 0.8%, but from by the IMF from January's estimates. But is still expected to be 3.6% in 2022 and 2023. Chemical tanker demand is highly correlated to global GDP with chemical tanker trade expected to grow by 3% this year, and 5% year on year in 2023 and 2024.

Going to slide 10. We'll take a closer look at the supply fundamentals. Supply outlook for product and chemical tankers is very favorable, driven by a low orderbook and increased scrapping levels. Net fleet growth, which is deliveries less scrapping, is expected to be well below demand growth for the coming years. In 2022, estimated net fleet growth for product tankers is 1.2% and for chemical tankers, it is 1%.

Scrapping levels increased significantly in 2021 and we expect scrapping to be at similarly elevated levels in the years ahead, with an ageing fleet and increasing pressure on efficiency and carbon reduction.

And finally, consistent with our comments on prior calls, the orderbook for product and chemical tankers remains low, and this is expected to remain the case for the foreseeable future for 2 reasons. Firstly, there continues to be a lack of clarity on future ship designs to meet the industry's emission targets. And secondly, there's very limited product availability for MRs because of significant ordering in other sectors, particularly containerships.

Turning to Slide 12 for financial highlights. We're reporting adjusted loss of $900,000 or $0.03 per share, representing a significant improvement year-on-year. MRs averaged $15,600 a day for the first quarter versus $11,400 per day in the prior quarter, while chemical tankers earned TCE of $13,600 per day in the first quarter compared to $11,300 per day in the fourth quarter of '21. As Tony noted, these rates have subsequently increased a great deal. Charter rate improvements reflect the ongoing recovery in oil demand post-COVID and the onset of the Ukraine-Russia conflict towards the end of the first quarter.

Next we will take a closer look at our cost line items and provide some guidance for the coming quarter. Voyage costs increased significantly quarter-on-quarter due to higher bunker costs and operating expenses were $16.4 million in the quarter, a slight increase mostly related to timing of crude changes. And looking ahead OpEx for the second quarter, we expect it to be approximately $15.6 million.

Chartering expense was $2.1 million for the quarter, and we expect it to be in line with the second quarter. Depreciation and amortization totaled $9 million for the first quarter, and we expect depreciation and amortization for the second quarter to be $8.5 million.

Total overhead costs were $4.8 million for the first quarter, in line with prior periods. And for the second quarter, we expect overhead incorporating corporate and commercial to be approximately $5 million. Interest expense was $4.1 million for the first quarter, and we expect it to be in line in the second quarter. And we're currently benefiting from float to fixed interest rate swaps entered into in mid-2020. Currently, $250 million of our debt is fixed at a margin of plus 32 basis points through June '23 and overall 88% of our debt is fixed.

Our interest rate swaps entered into in 2020 are currently in-the-money by $5 million at the end of March. And overall, we believe our cost structure is amongst the lowest of our peer group. And in particular, our internal commercial overhead costs are approximately 50% of prevailing market rate pool fees.

Moving to Slide 13 for fleet and operational highlights. We're continuing to invest in the fleet to optimize performance. We expect to complete 2 dry dockings and 2 ballast water system installations in the fourth quarter of this year with CapEx of $3.2 million. We have some flexibility and will determine the precise timing of these dry dockings depending on market conditions at the time.

Our forecasted revenue days for 2022 are approximately $9,500, with chemical tankers representing 23% of total fleet days. And for the second quarter, 96% of total days are spot or 105% on an owned ship basis. And overall, operationally, the fleet continues to perform very well.

And finally for me, we will turn to Slide 14 for Capital Allocation and Balance Sheet. We're continuing to prioritize financial strength as a means to build value and cash flow has really started to improve in the past few weeks. A sustained strong charter market at current levels will provide more options for capital allocation over time. And for now, our focus remains unchanged on the priorities that we've been highlighting for some time.

In the meantime, we're retaining a strong balance sheet and healthy liquidity levels and relatively low leverage. Looking at working capital last year, we had 5 ships employed on time charter routes at competitive rates, which supported earnings. And we've since returned all of our one ship to spot trading and taken 2 more ships in on time charter in anticipation of strong charter market conditions. As a result, working capital increased in the first quarter partially related to more ships trading spot and also higher bunker prices.

Ship values are increasing and boosting net asset value. Values are up 18% year-on-year on the back of rising new build costs, limited new supply and a positive outlook. And on the back of a stronger S&P market, we agreed terms for the sale of 3 ships and in a separate transaction are more time chartered in the ships at market rates for 2 years plus options, maintaining our scale and earnings power.

The sale is consistent with our policy on capital allocation and fleet renewal and will generate net cash proceeds of $150 million after prepayment of debt. These vessels were financed through a fixed rate lease structure and our overall cost of debt will reduce following the transaction.

And with that, I'd like to turn the call over to Tony.

Thank you, Paul. So to sum up then, the market environment has changed completely as a consequence of the war and its impact on the oil market, for which there is no clear end in sight. Even after the cessation of hostilities, we believe the resulting dislocations will persist until sanctions have been lifted and any repairs required are completed.

While the disrupted oil market has taken center stage for now, fundamentals shouldn't be ignored. Overall, the world is continuing its post-COVID recovery despite some cross currents at the moment. While it's unclear how far this market can go, it is clear that there is a renewed appreciation for the role that oil products play in energy security and are providing a bridge to a full energy transition. So there is logic to the view that we have reached a turning point in the product and chemical tanker sectors.

The impact on Ardmore's financial performance is clear. Assuming the second half performance continues, we would earn $22 million or $0.63 per share in the second quarter and each incremental $1,000 per day is another $0.28 per share.

As a final point, our Capital Allocation Policy, as Paul just described, still prioritize its financial strength, but our targets could be met rapidly in this new market, which could allow us to pursue other means to build value -- build and deliver value to our shareholders, including well-timed growth opportunities and return of capital to shareholders.

And with that, we'll open up the call for questions.

(Operator Instructions) Our first question will come from Jon Chappell with Evercore.

Tony, my 2 questions are going to be on 2 of the points you made in your summary: one company-specific, one industry specific. I think we've been talking for a long time about this market hopefully recovering based on fundamentals. And it seemed like things got really tight, and really fast. I think there's this misinformed view that this is strictly a war outcome. And you've talked about even after the cessation of hostilities using your term, you believe these dislocations could last a little bit.

To that regard, can you talk a little bit about what has exactly transpired in your markets since the invasion that's kind of been the catalyst to these tightening fundamentals? And I know this is really hard to answer, but even post a peace environment, hopefully, sooner rather than later, what are some of the long-lasting effects on trade flows on arb opportunities, on maybe even the impact of commodity trading houses that you think can have a much longer tail to the cycle than just a war-related impact?

Good. We'll start with that. I think you had another question, we can answer that. So those are very thoughtful questions. And we do really believe that the fundamentals are slightly diminished because of the evident slowdown in global economic growth and also the COVID situation in China. But overall, I mean as I said the travel, we're seeing a lot -- it seems like air travel is coming back strong and in particular, long-haul international. And that was really the big chunk that was missing.

So I think that's just an important kind of underlay, if you will, to what's happening. And so while we're going through this kind of very disruptive period, we think that's continuing to build underneath. That's a really good question in terms of what will it change permanently once we get out of this.

I do think that -- I think there's a view that inventories got to very low levels. And I think that a restocking process could actually take a very long time. And so I think that's something that would persist. I think the -- especially in the chemical sector, you have a lot of UAN or liquid fertilizer and veg oils, sunflower oil that moves out of the Black Sea. And those crops and that production has certainly been disrupted and how long it takes for that to come back on is unclear. But then that has to be replaced by other substitute products farther away.

In terms of petroleum flows, I think it's interesting. I'm in the U.S. right now, but I spent most of my time in Europe, and we're very close to what's happening. And there's a real sense of alarm around the dependence that Europe has allowed itself to find itself in today vis-a-vis Russia for energy supply, whether it's gas or oil. And I think that's going to change. There's no doubt that the EU is not going to -- it's going to take a while. It will be a messy process to get consensus within the EU. But I don't think there's any going back to that level of dependence. And of course, that directly gained substitute product coming in from further away.

Got it. Okay. That's very helpful. And I understand that was a difficult somewhat hypothetical question to answer. The other one will be a bit easier. It's amazing during your last conference call, we were still facing investor questions about liquidity and measures you can take at this market, stay par for even longer than anyone expected. And now the tone of questions has shifted to uses of capital, which you've touched on a little bit there. But are you in the -- at this maybe early stage of the recovery, is it strictly a focus on getting the balance sheet to a position of strength, so maybe further sale and leasebacks are off the table? Or because of the formulaic nature of your dividend policy, does it kind of become a capital return story immediately, like as soon as the second quarter, just given the strength in the quarter-to-date rates that you pointed out?

Yes, I think it's amazing how quickly things can change in this business. It's also amazing how quickly people can forget the fact that last year was a really, really tough year. We lost $38 million. We weren't alone, others lost a lot more. So I think for most companies, I think the priority has to remain, and it is for us in essentially balance sheet repair for a period of time. We've been very clear with our capital allocation policy, what our financial strength targets are. Happy to talk about that more.

But the fact is that with rates where they are today, that could happen very quickly. And then we have to see what's -- what the opportunities are at the time. And we've always -- we've had -- granted we haven't had a dividend policy in place for the past 2, 2.5 years, but prior to that, we're very, very focused on shareholder value and high-quality corporate governance, and we understand that investors expect a return on capital from their investees.

Our next question will come from Ben Nolan with Stifel.

Actually, just if I could follow on where John was there, maybe Paul or Tony. You did mention sort of your -- as part of that capital allocation policy that you do have targets. And then, Tony, you just mentioned that you could elaborate on this. Could you elaborate on those? What do you think you're shooting for with respect to leverage?

Yes, I'll ask Paul to comment on that.

Yes, sure. I mean, Ben, our capital allocation policy has been fairly clear that we wanted to get to a target still below 40% debt to capital. We're currently around 50%. So we have ways to go on that. But as Tony mentioned, given the current rate environment, we could get there very, very quickly at these levels.

Helpful. And then just for my second question, and you talked a little bit about this a bit: the low orderbook and how incremental fleet growth is going to be somewhat limited. One of the things that we've seen a little bit more on the larger ship classes, although not pervasive yet is oil majors generally subsidizing shipping companies to go out and build typically LNG fuel but other types of propulsion systems on new ships, and that has sort of been seemingly where most of the incremental new buildings are coming.

Sort of 2 questions. First is that happening at all in the MR market? It doesn't seem like it. And then is that something that you guys would consider if XYZ big company came to you and said, "Hey, we want you to build some ships"? Will you do it?

Yes. I think that it is -- there have been projects in the past involving oil majors for construction of MRs. They usually go add on long-term time charter at very low rates. So that's not something that we've ever been very excited about. But we do, as part of our energy transition plan, intend to engage in conversations and really develop a collaborative dialogue and relationship with customers where they -- we can help them meet their own energy transition needs on the back of long-term charter business, but with acceptable returns on capital.

I don't think -- I don't imagine that anything like that is going to result in a meaningful boost in shipbuilding in our sectors anytime soon. I think the real transition is still quite far ahead. And we're also dealing with the reality that yards are very full at the moment. So I think if we worry about oversupply in the near term, I think that's kind of off the table because of the long lead through ordering new ships and the low order book and the fact that mainly container ships, but also gas carriers, et cetera, have taken up all the slots.

And you're not seeing oil majors pushing for -- they're subsidizing it in the MR market the way that there's been a little bit in V's or LR2's order?

Yes, I take an exception to the word it subsidized because if you can ask any the people who have done those deals, they probably don't feel like they're being subsidized. It's not very attractive rates. And that's a prerogative of an oil major. But I don't -- it's not something that's evident in our sectors at the moment.

Our next question will come from Magnus Fyhr with H.C. Wainwright.

Just a question on your chartering strategy going forward. You went spot ahead of the recovery. Do you see that changing? I mean you're paying a very positive forward picture. Would you see secure tonnage or staying spot for the remainder of the year? Or do you have ongoing discussions now? I mean, how the -- some of the trading houses look in to secure tonnage for the second half of the year?

Yes. I think there's probably a scramble at the moment. But I think like a one-year MR eco design rate might be up to around $20,000 a day now. That's unappealing given the spot market performance. But I think it's -- we always keep a close eye on what's happening in the time charter market, both chartering in and chartering out. And we kind of -- we got lucky or smart last year with our timing on both. At the moment, we have 2 ships time chartered in at a little under $12,000 a day, and we have one remaining time chartered out at 15.5%. So we like the spread there, and we like the incremental spot exposure.

But we're not adverse to putting more ships out on TC. Generally, they're one-year deals, and it's really just a position you take against the view you have on the spot market and kind of just managing exposure and looking for relative value chartering in and out. So that's kind of a rambling answer to a good question, which is, yes, we are keeping an eye on the time charter market, and it probably begins to look attractive into the kind of the mid-20s.

And that would be longer term 24, 36 months or?

Yes, that gets pretty thin at that end of the market unless you're in a really hot market. So we haven't really seen that yet. I know that's been some discussion in other forums, but and maybe we're not aware of it that's happening. But it does feel like it's building in that direction. This is a very typical kind of cyclical trend that we're experiencing right now with spot rates leading then time charter rates and asset values.

Just one more question. The chemical tanker market, we're very familiar with the MR market. But maybe the chemical tanker market very levered to global GDP. I mean, from looking at the market now, it looks like GDP is going to be revised further down. Can you kind of talk a little bit about some points where there's the resilience on the chemical demand versus GDP?

Yes, I think typically, under normal circumstances, there's a very tight correlation and that's good. At the moment, it's been heavily affected by disruption from the conflict just like the MR sector is. So you see really interesting trades going on. For example, we put a ship on one of our 25 on a voyage from Trinidad to the U.K. with UAN, which is liquid fertilizer at $32,000 a day. And that's essentially -- you almost call that panic buying to cover springtime fertilizer needs that were expected to be covered out of Russia.

Another interesting one is a voyage with styrene monomer, which is used to make polystyrene from China all the way to Rotterdam at a very, very high rate. And obviously, that's based on price arbs. So I think there's -- I think that market is also very disruptive at the moment, and rates are very, very spiky there as well.

So I think that when we get completely past the disruptive phase of what we're dealing with here, we'll have to see what the nature of GDP growth is at that time to kind of have any view on how -- what the effect will be on the chemical market. But at the moment, it feels -- the chemical market is never quite as spiky as products, but we've heard of voyages up to $50,000 a day. We haven't seen that yet in ours. We did one voyage with an MR at $95,000. So -- but the averages are what we described on the call.

Our next question will come from Chris Robertson with Jefferies.

Tony, I guess given the low product inventory levels, how long do you think seaborne transport will simply meet immediate demand versus when inventories will actually begin to be restocked given kind of the key theme here for energy and national security.

So there has been outright panic buying of diesel, and that's had a knock-on effect. So we wouldn't do that too much detail, but like South American countries had to go very, very far field to cover their requirements. We've done some very back-of-the-envelope analysis. And it seems like you could add at least a few percent to MR demand over upwards of a year as people kind of like reset their stocks to a little bit higher, not back to high levels. So we think it's additive. We don't think it's transformative, but we think it's additive.

I think another thing if I could just try and it's important to just mention that LR2 have begun to trade out of clean into dirty. And so far, I think about 15 ships this year have done that transition and that's taking supply out. So I just forgot to mention that earlier on, I just throw it in there for the record.

But we think that it's unclear today whether there's any meaningful restocking taking place or if it's all just covering immediate requirements. But we think restocking will come.

I guess the second question here. So you mentioned last year is pretty tough in terms of rates. I think that's reflected in the scrapping that took place in 2021. So how might rising rates during this year impact the scrapping thesis? Do you think it pushes at least a few of those ships at the tail end of the age spectrum out even further? Or have they come to kind of the end of the road here?

So the average age of scrapping for MR is typically around 25 years. And that -- we saw a big run in scrapping last year. If you go back to earlier strong markets, it definitely does drop off. We would expect that to happen, to be honest with you. But because there's not a big swing in age. And so the ships are -- they're going to have to go pretty immediately anyway. So yes, I think it will probably negatively impact scrapping, but it's not like it will disappear. And it's not the kind of dynamic that you find in the VLCCs at the moment.

Okay. And if I could sneak one last question in. How are the current lockdowns in China impacting refined product tanker demand? And do you think it will be a tailwind into 3Q once the lockdowns end?

Yes, I hesitate to say because it always sounds like we're just positive on everything. But the fact is that slower lower consumption levels in China and that area has resulted in more exports, so.

(Operator Instructions) Our next question will come from Climent Molins with Value Investor's.

Following up on the capital allocation question, you have a generally young fleet. And I was wondering how do you currently think of fleet renewal? You provided some commentary regarding potential new weld ordering. But how do you think of middle-aged vessel values, especially after the recent running rates?

Well, I think I'll start and then maybe anything that Paul wants to add to that. It's a good question. Look into inherently, middle-age ships are usually very good investments. They especially before they get through certain age there, sounds like I'm talking about people, but I'm not talking about ships. But -- so when chips are kind of between 10 and 15 years of age, in many respects, it's there -- in terms of current returns on investment, that's their best point because there's a lower amount of capital invested, but the earnings are about the same.

So we're not -- I don't think we have a hyper modern fleet anymore. That's also okay because it's a written down fleet and provides us good returns on investment. We were going to sell our OA anyway. I'm really pleased we can find a high-quality partner to charter them back from because that keeps our earnings power intact in our commercial scale. And the charter back rate, I think, gives them a decent return on investment, but it's an attractive level.

So I don't know if there's anything, Paul, you want to add to that?

No, I think that's pretty well covered.

Regarding the 4 vessels, you agreed to sell and charter back for meaning a period of 2 years, will you hold the purchase option when each other come to an end?

No, we have options to extend but not repurchase options.

That's helpful. And final question from me is an offer recently emerged as a significant shareholder in Ardmore. And I was wondering if you could provide any commentary regarding whether he has approached you over the past few months?

Good question. Look, the filing they made was a 13-G passive filing. We're very pleased to have Quantum as an Ardmore investor. And I imagine they're pretty pleased with the returns they've gotten so far on the investment. We have a regular investor outreach program, and we talked to all of our shareholders, big and small, and they're no different, so.

This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.