BW LPG Ltd (BWLP) 2016 Q1 法說會逐字稿

Welcome to BW LPG's First Quarter 2016 Financial Results Presentation.

We will begin shortly.

You will be brought through the presentation by Martin Ackerman, CEO, and Elaine Ong, CFO of BW LPG.

They will be pleased to address any questions raised after the presentation.

Should you have any questions, please press star, one on your telephone keypad or type your questions into the chat box on the website.

You will receive further instructions as required.

We will now begin the presentation.

Mr. Ackerman, please go ahead, sir.

Thank you, and good morning.

Welcome, everyone, to the presentation of BW LPG's Results for the First Quarter of 2016 and Financial Period Ending 31st of March.

I am joined by our CFO, Elaine Ong.

We appreciate your interest in our results and encourage your queries at the end of the call.

The first quarter of 2016 was soft, in line with seasonal patterns and a weaker VLGC market in 2016.

With the delivery of 19 newbuildings in Q1, narrowing US-Asia propane price spread and reduced congestion at Indian ports, TCE rates have been pressured significantly downwards from fourth quarter of 2015.

Global LPG prices are converging as more US product is linked to international markets, with shipping and terminal capacity no longer constraining trade.

Turning to Slide 4, we will review the highlights of our first quarter of 2016.

In a softer market environment and seasonally low quarter, daily rates were $38,600 for VLGC and $31,400 for LGC.

Despite a weaker market, we have managed to secure a $221 million facility for the 12-year financing of four VLGC newbuildings, with favorable terms of LIBOR plus 1.6% with an 18-year amortization profile.

With the recent share price weakness across the LPG shipping sector, we have acquired an additional 4.53% stake in Aurora LPG.

In total, BW LPG now holds a 19.53% stake in Aurora.

We have also concluded a sale and lease-back arrangement for our last DSME newbuildings.

In addition, we have time chartered in two VLGC newbuildings.

The delivery is expected in 2020.

On the newbuilding program, we have taken delivery of BW Tucana and BW Volans on April 20th and May 11th, respectively.

Three DSME newbuilds are expected to be delivered in the fourth quarter of 2016, and a fourth vessel in January 2017.

Turning now to Slide 5. We provide financial highlights for the first quarter of 2016.

Net revenue was $137 million, an increase of 5% above first quarter of 2015.

Our EBITDA was $89 million, 11% higher year-on-year.

Net profit was $60 million, which constitutes a 5% increase year-on-year.

BW LPG continues to deliver value to its shareholders through our earnings-per-share for first quarter of $0.44 and the company keeps a leverage ratio of 40%.

I'll now turn to Slide 6 for an overview of the LPG market.

On Slide 6, we provide an overview of the seaborne LPG trade in the first quarter of 2016.

Seaborne LPG trade grew by 13% year-on-year in the first quarter of 2016, led by a 65% increase in Chinese LPG imports and a 25% increase in Korean import volumes.

Growth in Chinese and Korean import demand was slightly offset by moderate declines in Japanese and Thai LPG imports.

US seaborne LPG export volumes rose by 48% to approximately 6.5 million tons in the first quarter of 2016 and accounted for roughly 30% of global LPG trade as propane inventories were drawn down and placed in international markets.

Middle Eastern LPG export volumes surpassed the 9 million ton mark during the first quarter and are thus on pace to experience an annualized growth of 4% year-on-year.

Turning to Slide 7. You will see a snapshot of the EIA's outlook for LPG balances in the US.

In its April 2016 Short Term Energy Outlook, the EIA left its 2016 US LPG production and consumption growth forecasts largely unchanged at 2.3% and negative 1.3%, respectively, leaving net export expectations this year at 25 million tons.

The EIA's 2017 forecast now calls for production growth of 3.7%, while domestic LPG consumption is poised to decrease by a further 2.9% next year.

In a special hydrocarbon gas liquids supplement released on March 16th, the EIA stated that the main driver of its downward revision to domestic LPG consumption growth was the ability of PDH plants to produce more propylene per barrel of propane feedstock than an ethylene plant, and that it also expects ethylene plants to become more reliant on ethane feedstocks.

Two of the PDH plants are online, with one entering service in 2017.

Less domestic petrochemical consumption of LPG would be positive for VLGC shipping, as it would result in a greater surplus of LPG available for export.

However, it is still unclear whether this dedicated-feedstock ethylene and propylene production capacity expansion will displace a portion of the olefin production currently coming from flexible-feedstock ethylene crackers, which will be positive for VLGC freight, or whether it will supplement it and the excess olefin production will then be exported, which will be a negative for VLGC freight.

This development, along with energy prices, will be the key driver of LPG balances in the US going forward.

Turning to Slide 8. On Slide 8, we see the fleet of VLGCs on water, currently standing at 221 vessels, with 19 VLGCs having been delivered in the first quarter, and a further 28 vessels expected for the remainder of this year.

Our current fleet of 36 owned and operated VLGCs account for 16% of the total VLGC fleet.

We expect to receive deliveries of three DSME newbuilds in the fourth quarter, and one in the first quarter of 2017.

With 29% of the fleet still on order, rates will continue to be pressured downwards when small vessels hit the water, and the current order book should result in net fleet growth of 13% for the remainder of 2016 and 10% in 2017.

On Slide 9, TCE rates on all VLGC fleet averaged $40,340 per day in the first quarter, with contract coverage of 65%.

Our LGC fleet TCE rates averaged $31,450 per day for the quarter.

Focusing on our VLGC chartering performance, we recorded 1,140 total CoA days or 37% of VLGC revenue days.

Our CoA TCE rate of $43,090 was in line with our guidance released last quarter.

CoA achieved rates are expected to soften as the floating element of some of our CoAs will be negatively impacted by the current market environment.

Time charter days came in at 844 days, or 28% of VLGC revenue days, with a blended time charter rate of $35,899 per day.

Our spot rate generated $40,921 per day, and accounted for 35% of our VLGC revenue days.

Our spot performance benefited from fewer waiting days and our decision to [lock] into longer voyages at the beginning of the quarter.

Switching to our LGC fleet, we recorded 251 time charter days, or 55% of the LGC revenue days.

Our spot LGC accounted for 45% of the revenue days with an average rate of $25,833 per day.

I'd like to comment a little on our updated charter guidance.

We expected the fall in Q1 rates in our previously announced CoA guidance, made in the fourth quarter 2015.

As a result, our achieved CoA rate aligns with the midpoint of our previous guidance.

Since late March, the magnitude and severity of the rate drop has been greater than anticipated.

One direct consequence is that the floating element of our CoAs has been negatively impacted.

Additionally, given that all our CoAs are now (inaudible) the money, charters are pulling on two main levers to minimize CoA uptake, namely, minimizing liftings and liftings have been nominated to the shortest routes available.

We also had a lucrative CoA expire in the first quarter, so CoA rates for the rest of the year are naturally lower.

This was also clear in our 2015 guidance.

As such, we have lowered our CoA rate guidance to reflect this weaker market environment.

Put another way, our (inaudible) probable minimum guidance is now more in line with our absolute minimum expectations at the end of 2015.

And the three main drivers of the guidance revisions are low floating rate element and the minimization of liftings and [barge distances].

With that, let me turn you over to our CFO, Elaine Ong, who will walk you through the financial position and our results.

Thanks, Martin.

Looking at our income statement on Slide 10, our net revenue for the quarter was $137 million, compared to $131 million in the same quarter last year.

Charter hire expenses for the quarter decreased as we operated one less charter-in vessel.

Operating expenses increased to $30 million, consistent with the four-ship increase in our own fleet since Q1 2015.

We generated EBITDA of $89 million in the quarter which is 11% higher than the $80 million achieved in the same quarter last year.

Finance expenses were higher by $1 million due to the drawdown from the ECA facility to finance the delivery of newbuilds.

Net profit for the quarter was $60 million, 5% more than the $57 million in the comparable quarter last year.

Slide 11 provides a snapshot of our balance sheet and cash flow position.

We continue to have a strong balance sheet with a leverage ratio of 40% and our asset base exceeds $2 billion.

Cash and cash equivalents at the end of the quarter was $73 million.

On Slide 12, you'll see our net debt position at $804 million at the end of the quarter.

Available cash in undrawn facilities were at $383 million.

At the end of March, we had three debt facilities.

The first is the $800 million facility, under which $416 million was outstanding at quarter end.

Secondly, we have the $400 million ECA facility under which $328 million was outstanding.

Lastly, we have the $100 million facility which is a one-year revolving unsecure credit facility under which $60 million was outstanding at quarter end.

Subsequent to the first quarter, we added a fourth facility of $221 million.

This is a 12-year ECA facility for the financing of four VLGC newbuilds at LIBOR plus 1.6% with an 18-year amortization profile.

We have also concluded a sale lease-back arrangement for our last DSME VLGC.

With that, I'd like to hand it back to Martin to conclude our presentation.

Thank you, Elaine.

So, if you please turn to Slide 13, I will summarize the presentation, and also, basically will open for questions.

We generated earnings-per-share of $0.44 in the first quarter of 2016 based on a profit of $60 million.

We expect total contract coverage of between 43% and 53% in 2016, depending on our CoA uptake.

A sustainable oil price recovery will pave the clearest path to a rebound in VLGC rates to median levels.

Energy prices must reach a level that will allow US producers to bring hydrocarbons back online without immediately capping prices.

This can only happen when global oil demand and supply shifts from surplus to balance.

The correspondent increase in LPG production should then start to re-exert downward pressure on domestic US LPG prices, while naphtha, Far Eastern LPG and olefin prices should trade up alongside oil.

Geographic LPG price spreads, the price-setting mechanism for VLGC freight in the short term, can then expand and remain sustainably open to support the flow of trade for long enough periods of time to absorb excess shipping capacity and tighten the VLGC market.

Concurrently, BW LPG expects continued strong retail demand growth for cooking and heating applications in developing markets.

This concludes our results update for the first quarter of 2016, and we appreciate your continued interest in our market updates and on our company.

I'd like to open the line for questions now.

Thank you very much.

Thank you, Mr. Ackerman.

Ladies and gentlemen, we will begin our question-and-answer session now.

(Operator Instructions)

Our first question comes from Peder Jarlsby from Fearnley Securities.

Please go ahead.

Hi, guys.

I know it's been a topic before and I know you can't really speak in details on your specific contracts, but could you provide a bit more general information on the flexibility within the CoAs?

I'm just trying to understand if, let's say, for instance, rates run up to $50,000 a day, how would your guidance change on the back of that?

Thank you, Peder.

I don't think, specifically, I will comment on a situation where rates go up to $50,000, but what we are saying is that, of course, in an environment where rates have been under pressure as we have experienced in this period, as I just mentioned, we are seeing the charters are nominating, of course, as a few voyages that they are contractually obliged to, and they are seeking to put these cargoes into shorter distances.

So, this is affecting our downward range and, as I just guided, we are now closer to the 2015 absolute minimum than the maximum.

But, of course, as soon as rates move upwards in the market again, there will come a time where the tipping balance of the contract is being more in the money than the spot market, and of course, then we will see charters starting to neutralize these contracts more and more.

So, I think it's quite elastic with the spot market in that sense.

But of course, within the confines of the strict terms of the contracts -- and just to be very clear, nothing has been canceled and all our counterparts are performing perfectly well under all contracts.

All right.

Thank you.

(Operator Instructions).

We will now take the next question from Nicolay Dyvik from DNB Markets.

Please go ahead.

Yes, hello.

This is Petter Haugen speaking.

I have a few market-related questions.

In terms of the share going to Asia now, you report some 45% on the full year, but on an incremental basis, if I remember correctly, you guided for some 80% back when you met with analysts in January.

Has this changed lately, or what is your most recent estimate for the incremental share going to Asia from the US?

Thank you, Petter.

Frankly speaking, I cannot recall that we have said that 80% of LPG volumes would go to Asia.

So, I think that's --

Of the incremental --

That's not correct.

(Multiple speakers)

-- the growth?

I think we need to take the details of the specific trade balances offline.

I know John sits with our model here on all this, so we can go into the details of this in more specifics.

Okay, fine.

Another question about the Panama Canal.

Now we know that some importers already have the slots to Panama.

To what extent do you expect the opening of the canal to change the sort of the price structure, the arbitrage in the market?

Yes.

It's correct.

The startup date of the canal is now June 26, as far as we have seen lately, and the first review this year had been booked.

And it did not come as any surprise to us that this was a Japanese ship, as that is the market where we believe the utilization of the Panama Canal will be most frequent.

So far, in 2016, approximately 35% of Japanese imports have come from the US and of that 35%, 85% was via the Cape of Good Hope, and the remaining 15% through STS operations at Balboa.

And our assumption, as we have said previously, remains at 50% of laden US East voyages will go via the canal in 2017.

And that is how we see the market also today.

Okay, thank you.

You're most welcome.

Thanks, Petter.

We will take the next question from [Anders Wennberg], who is a private investor.

Please go ahead.

Hello.

I wonder if you can give a little bit more color on the short-term outlook, what you see for June and July.

How is utilization compared to what has been previous in the year or compared to last years, utilization okay or is it a lot of excess ships?

And, also, has the number of available ships in the Arabic Gulf for the next few weeks versus number of [callers], et cetera, if you can kind of give a little bit more color.

But we're all wondering, of course, if you're going to get any season upturn this summer or not.

Thank you for that, Anders, and thanks for the interest in the call.

Yes, market looks more balanced right now and we've definitely seen that the Baltic has come up and you've seen the latest numbers, that 32-1/2, so we've definitely come up from the [draw] but lately, we have seen trader relapse having been creeping into the market again, into the spot market here, and that is, of course, putting some downward pressure on spot rates.

For your specific questions of June, July, of course, we are already quite late in May and that means that quite a lot of the tonnage have already been booked well into June.

Fundamentals are generally playing out positively and we're seeing that both drivers have ton-mile and demand side are up.

The year-on-year propane production is up 7% and the percentage share of US exports heading East in 2016 is up 45%, up from the 38% in 2015, which we have mentioned previously.

And in March alone, it was 50%.

So, we are seeing a trend here towards the [upward].

If you then look at EIA forecast, LPG production growth of 2% this year and 4% in 2017, and already for the first quarter, we're slightly above that number.

You would say that another element playing in here is that EMPs are now 30% hedged for 2016 and 10% hedged for oil production for 2017 and we think this also has positive impacts on the market.

The most crucial element is, and remains to be, the oil price, and Wood Mackenzie recently estimated that an average price of $53 per barrel means that the world's 50 biggest publicly traded companies in the industry can stop the cash burn.

So, I think that's a good indicator of where it's going, but it's just -- it's not enough just to hit the 50% trading, it's also about ensuring producers that future prices will remain above the 50% before, of course, they start approving further drilling projects and so forth that are economic at just $50.

So, it's about reaching $50 and sticking to that number for a while.

We will take the next question from Lukas Daul from ABG.

Please go ahead.

Thank you, good morning.

Hi, guys.

I was wondering, given where the market is -- and I guess it's a surprise on the downside.

What are your thoughts on your dividend strategy given that Q2 so far has been below cash breakeven?

Good morning, Lukas.

Thanks for calling in.

Our dividend strategy remains unchanged.

So, we remain firm to our policy of 50% and as you probably saw, our AGM yesterday approved the dividend as recommended by the board and we're trading today ex-dividend.

So, this is what you can expect going forward as well.

Okay, so no change there.

And then you mentioned one of your CoA expired in the first quarter.

And I guess that's going to be the case going forward as well.

And I was just wondering, what is the environment out there for entering into new CoAs and potentially into more longer-term contracts?

There is definitely still a demand and we'd like to think that our close partners and customers in the industry are still keen to work with us and this is also what we see on a daily basis.

And we do have contract requirements on an ongoing basis.

Of course, it's a commercial discussion which I can't go into details on, but of course, from our side, we are interested in making sure that optionality is relatively limited and our downside is, of course, protected.

So, in short, there is definitely still options to obtain more contracts.

And it's about agreeing on the terms of the flexibility and optionality which we are discussing.

And I know there is a lot of focus on Q3, and the rest of 2016, but given how the market has developed so far this year, what are your sort of preliminary thoughts on 2017?

There's still -- will be new vessels being delivered to the market, et cetera.

Can you sort of share some of your thoughts on that with us?

Yes, I think we've -- I mentioned the -- both the outlook and the supply side.

Here's -- of course, from a production and export standpoint, fundamentals are playing out mostly positive.

And the drivers of ton-mile demand are up, and as I mentioned, propane production is up 7% and we see more and more US exports heading East.

So, generally, that side of the equation is quite good.

When we look at the supply side, there is still quite a lot of ships heading the water for the remainder of this year.

And also into 2017.

So, we definitely don't expect the markets to roll back to the 2014, 2015 levels.

And generally, we are encouraged by the downward revisions to domestic US LPG consumption, which we think plays out quite positively for our market outlook.

All right.

Thank you.

Thank you very much, Lukas.

(Operator Instructions).

As there are no further questions at this time, I would now like to hand the call back to today's presenters.

Please continue.

Thank you very much.

Well, as a final comment to the question Lukas just raised, I can also say that we also expect the Mariner East expansion to help when we look into 2017 onwards, and of course, the P66 expansion that we have are seeing towards the end of the year is also going to [add for more property] demand.

But I would say inventories have all slowed down rapidly in 2016 and exports have been a big driver of that drawdown, but so has the domestic pet-chem consumption as we talked about earlier on in the call.

And in this first 18 weeks of 2016, propane has been the most profitable feedstock to perhaps half the time and the second-most profitable feedstock for the other half.

So, cheap VLGC freight has been a big enabler of US exports and it put upward pressure on Mont Belvieu propane as have higher crude prices.

So, energy prices going forward is definitely interesting.

Anyway, that ends our call today.

Thank you all for your attention, and thank you for the ongoing support of BW LPG, and thank you all for listening in.

Thank you all for your attention today.

We have come to the end of today's presentation.

Thank you for attending BW LPG's First Quarter 2016 Financial Report Presentation.

More information on BW LPG is available online at www.bwlpg.com.

Goodbye.