BW LPG Ltd (BWLP) 2016 Q3 法說會逐字稿

Welcome to the BW LPG's third quarter 2016 financial results presentation. We will begin shortly. You will be brought through the presentation by Martin Ackermann, CEO and Elaine Ong, CFO of BW LPG. They will be pleased to address any questions raised after the presentation. (Operator Instructions). We will now begin the presentation.

Thank you very much. Welcome everyone to the presentation of BW LPG's results for the third quarter of 2016, the financial period ending September 30. And I'm joined here by our CFO, Elaine Ong. We appreciate your interest in our results and encourage your queries at the end of the call.

The third quarter of 2016 was the softest year-to-date, with rates for the quarter averaging $11,500 a day on the benchmark Baltic route, while BW LPG's spot performance came in at $13,250 per day, or 15% higher. The LGC freight rates have remained low, owing to the delivery of 42 new buildings so far this year, as well as US Asia propane price spreads that average $72 per tonne throughout the quarter.

This effectively capped VLGC spot rates at [near] OpEx levels and led to a contraction in global LPG trade as a result of cargo cancellations. Overall, seaborne LPG trade fell by 0.5% in the third quarter of 2016, compared to third quarter of 2015.

Turning to slide 4, we review the highlights of third quarter of 2016. With the continued softness in the market, daily rates were $22,100 for the VLGC segment and $15,900 for our LGCs. In line with market sentiment, we have recognized impairment charges of $50 million on our vessels as well as $11 million on our stake in Aurora LPG, totaling $61 million overall.

Due to this we report a $60 million loss in our results. Excluding the impairments, we generated profit of $0.5 million in the third quarter, remaining above breakeven in the most challenging quarter of the last six years on our operations.

On our new building program, we took delivery of BW Magellan and BW Malacca in October, whilst our last two DSME new buildings will be delivered in January 2017.

Now let me provide you with a brief update on Aurora LPG. On October 31, we launched the voluntary unconditional tender offer for the remaining shares in Aurora LPG, for a consideration of each share to consist of either 0.3175 shares in BW LPG, and a cash consideration of NOK7.40 or a NOK consideration of NOK16 in cash.

The offer will expire on December 5, at 4:30 pm central European time. And the completion of the offer will not trigger any obligation for BW LPG to make any subsequent mandatory offers under the Norwegian Securities Trading Act. As of November 22, BW LPG, together with the shareholders who have undertaken to accept the offer, hold over 15 million shares, or 53%.

Given the current market outlook, we're confident that our offer remains the most attractive option for our loyal shareholders to remedy the Company's solvency situation, whilst also providing them the opportunity to participate in any future upside in the VLGC segment.

Turning now to slide 5. We provide financial highlights for the third quarter of 2016. Our net revenue was $81 million. Our EBITDA was $33 million and profit before impairment was $0.5 million and a loss of $60 million after the impairments. Earnings per share before impairment for third quarter was $0.004. This was all achieved on a leverage ratio on 48%.

Let me now turn to slide 6 for an overview of the global VLGC and BW LPG fleet. Here we see the global fleet of VLGC on the water, which today stands at 238 vessels, with 42 VLGC still on order. The global VLGC fleet grew by six vessels, or 3% in the third quarter of 2016, while no new orders were placed. 42 vessels were delivered so far this year, with another two set to enter the fleet in the fourth quarter of this year and 28 in 2017. Two vessels have been sold for scrap year-to-date, representing the first in relation of VLGC since 2011.

Our current fleet of 38 owned and operated VLGCs account for 16% of the total VLGC fleet. We will take delivery of our two remaining DSME new buildings in January of 2017.

On slide 7, we provide an overview of seaborne LPG trade in third quarter. Seaborne LPG trade contracted by 1% in the third quarter of 2016, compared to third quarter of 2015, led by declines in Indian imports. This was partially offset by import growth of 20% and 29% in China and Korea respectively.

US seaborne LPG export volumes contracted slightly year-on-year, totaling approximately 5.5 million tonnes in the third quarter of 2016. Middle Eastern LPG export volumes continued growing by 7%, on the back of increase Saudi Arabian and, to a lesser extent, Iranian volumes.

On slide 8 we provide an overview of seaborne LPG trade for year-to-date 2016. The US and Middle East have continued to drive export growth by roughly 5.5 million metric tonnes, relative to the same period of 2015, offset by lower exports out of Latin America and the Mediterranean. China and Korea have seen the strongest import growth, led by increases in PDH feedstock and retail demand, as well as LPG -- sorry -- as well as naphtha to LPG switching.

We now turn to slide 9. Here we see a snapshot of EIA's outlook for the LPG balances in the US. In its November 2016 short-term energy outlook, the EIA's 2017 forecast now calls for production growth of 3.3%, while domestic LPG consumption is forced to decrease by a further 1.7% next year. Export forecasts have been lowered over fears of continued cargo cancellations in 2017.

However, when looking closer at the composition of propane production growth for 2016, we see that most of the gains came from refining by-product production rather than field production. After growing by 5 million tonnes in both 2014 and 2015, propane produced from processing plants is only expected to grow by 0.6 million tonnes in 2016.

Fears over a slowdown in LPG production, coupled with still robust exports of roughly 2 million tonnes per month, have kept prices strong in the US in 2016. We do note that the EIA expects propane field production growth to rise by 1.8 million tonnes next year, which is three times as much as this year.

Turning to slide 10. TCE rates on our VLGC fleet averaged $22,950 per day in third quarter, with contract cover of 45%. Our LGC fleet generated TCE rates of $21,710 per day for the quarter.

Focusing on our VLGC chartering performance, we recorded 368 total CoA days, or 12% on the VLGC revenue days. Our CoA TCE rate of $38,970 was in line with our guidance released last quarter. Our year-to-date 2016 CoA performance of $41,580 per day is in line with the probable minimum guidance we released in our second quarter earnings.

We also make no adjustments to our CoA portfolio for full year 2017, and reiterate guidance for probable minimum levels in today's freight rate environment. So, let me just repeat that one more time. We also make no adjustments to our CoA portfolio for full year 2017, and we reiterate the guidance for probable minimum levels in today's freight rate environment.

Time charter days came in at 1063 days, or 33% of the LGC revenue days. With a blended time charter rate of $33,430 per day. This is lower than previous guidance, as we entered into short time charters throughout the quarter, at rates that were lower than those of our legacy TC contracts. Our spot fleet generated $13,250 per day, outperforming the Baltic index by 15% and accounted for 55% of the LGC revenue days.

Switching to our LGC fleet, we recorded 367 time charter days, and our entire LGC fleet is on time charter contracts.

All of our clients continue to perform within the contractual limits for both time charters and contractor freight mix. The performance affirms our strategy to contract our ships out only to blue-chip charterers.

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

Thanks, Martin. Looking at our income statement on slide 11, our net revenue for the quarter was $81 million, compared to $182 million in the same quarter last year. Charter hire expenses for the quarter decreased, as we operated one less chartering vessel.

Operating expenses was $1.5 million lower year-on-year, despite an enlarged fleet. This is mainly due to the cost-cutting program we initiated last year. We generated EBITDA of $33 million in the quarter, compared to $133 million in the same quarter last year. Finance expenses were higher by $2 million, due to the additional drawdown from our EC facility to finance the delivery of three new builds.

We recorded a net loss for the quarter of $60 million, due to the recognition of $61 million of impairments. $50 million of this amount was due to impairment charges on our vessels. We also recognized an $11 million impairment charge related to our stake in Aurora LPG. Excluding these impairments, we generated a profit of $0.5 million in the third quarter.

I'd like to also provide a snapshot of our balance sheet and cash flow position. We continued to maintain a strong balance sheet, with a leverage ratio of 48%, and an asset base of $2 billion. Cash and cash equivalents at the end of the quarter was $54 million.

On slide 13 you'll see our net debt position at $922 million at the end of the quarter. Available cash and undrawn facilities were $315 million. As of September 30, we have four debt facilities with the following outstanding at quarter end. The first is the $800 million facility, with $399 million outstanding and $260 million of undrawn revolving credit.

Secondly, we have the $400 million ECA facility, with $374 million outstanding. Third, we have the $221 million ECA facility with $49 million outstanding. Last, we have the $100 million unsecured revolving credit facility, which was fully drawn at quarter end. We are currently in discussions with our lender to upsize this facility, to $150 million at the same all-in cost of LIBOR plus 160 basis points.

As of today, our total liquidity is $380 million, after repaying $50 million in revolving facilities since quarter end.

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

Thanks Elaine. So, if you'll please turn to slide 14, I will summarize the presentation and then we can open for questions.

We generated earnings per share before impairments of $0.004 in the third quarter of 2016, based on a profit before impairment of $0.5 million. In the continued weak global ship asset value environment, we recognized impairment charges amounting to $61 million, $50 million of which was for our fleet.

We launched a voluntary unconditional tender offer, expiring December 5, for the remaining shares in Aurora LPG. We expect minimum total contract coverage of 38%, in fourth quarter of 2016, and 30% for the full year of 2017.

We remain encouraged by the small recovery in freight rates that has taken place in September, as the VLGC market immediately responded in a positive way to the reopening of the west-east arbitrage, whilst spot terminal fees increased by almost 50%. This affirms the sensitivity of the VLGC market and LPG trade in general, to commodity price movements.

Freight growth in fourth quarter to date is trending 6% higher, year-on-year, and seems to be back on track after the contraction in third quarter. We also note the uptake in utilization of the Panama Canal in fourth quarter, and spot Asian LPG prices rallied, thus incentivizing charterers to seek the shorter route and sell into the short end of the forward curve.

However, we remain cautious on the market over the short term, as we have now entered the seasonally strong period for US LPG prices, while upward price pressure on Asian LPG prices from stock building, ahead of the winter, has concluded. Sustainability of any recovery will depend on LPG prices, freight rates and terminal fees, finding an equilibrium where cargoes are still being shipped but not at a pace that Asian markets are unable to absorb.

This concludes our results update for the third quarter of 2016. And as always, we appreciate your interest in our market updates. Now let's open the line for questions. Thank you very much.

We will now begin our question and answer session. (Operator Instructions). Our first question is from Eirik Haavaldsen of Pareto Securities. Please go ahead, your line is open.

Yes, hi guys, just a question on your CoAs. If you look a year back, so Q3 2015, you had quite extensive coverage for 2017, and now you have nothing for 2018. Can you give an indication on the status there and how you are proceeding with discussions for CoA coverage a year ahead?

Good morning Eirik and thanks for joining. On CoA negotiations, I would say in general that there's a very healthy level of enquiry and the profile of clients range from end users to traders, to oil majors, while durations of these enquiries range from one to five years. And of course, it makes sense, given where we are at the low point in the cycle, that charterers look to secure trade coverage at below median levels.

We find this encouraging for our long-term LPG trade, but we must not rush into deals where pricing does not actually reflect the tightening supply/demand fundamentals of the VLGC market over the medium term. Or, put differently, we're not there to contract at very low levels.

There is a tendency by charterers and brokers in general to extrapolate current freight rates that are in the low teens into the future. And while the market may be challenged over the next year or so, we certainly do believe in a recovery in the medium term. As such, we'll keep a close eye on optionality and pricing, as we proceed with CoA negotiations, but we remain encouraged by the demand for VLGC coverage in general.

Okay, thank you. Very good answer. On your working capital, you had the quite huge reduction in receivables in the quarter. Anything special there, or is this the new level we should expect, given the overall market coming down?

I think this is part reflective of the market conditions.

Okay, thank you, guys.

Yes, thank you.

We will now take our next question from Peder Jarlsby of Fearnley Securities. Please go ahead. Your line is open.

Hi guys. Just a bit more of what Eirik was asking. I understand you cannot give specifics on this, but given where we are in the cycle and where rates are, when you finally firm up more CoA business, can you give some color on how much we should expect rates to drop on your CoA book?

Hi. Good morning. No, unfortunately I can't give you any guidance on this. I think it would be unwise of us to discuss our contract negotiations here, with the investor community. So, I think you have to wait and see for what we manage to conclude, going forward, but I think you have to be very confident that we are keeping a very strong eye on pricing and optionality.

Okay, thanks. And just one other quick question here. You've previously spoken about tightening up your CoA portfolio in terms of both call it flexibility and also have a, call it more strict lifting and discharge costs in your CoAs. How feasible do you think this is in the current market?

Well, I mean, it always takes two to contract, and of course we have contract partners and very long-standing relations with some of our clients, so we have to find mutual ground. But of course, for us to fix anything at the current levels is -- it's quite difficult, at least for a longer period of time.

And I think our charterers also understand that we can't give the same flexibility as maybe historically has been given in this market. So, from our perspective, things have had to change on that, and we are definitely implementing this, going forward.

Okay, perfect. Thank you.

Thank you.

We will now take our next question from Erik Stavseth of Arctic Securities. Please go ahead. Your line is open.

Good afternoon, guys. Two quick questions from me. The first one relates to the write-down. I mean, why another one? Didn't -- was this not (inaudible) were this low in Q2? And also, do you see the risk of additional write-downs?

Hi, Erik. I guess maybe just to put it very simply, our methodology for vessel impairments was the same as Q2 as previously. And this quarter's write-down was driven by the same drivers, mainly continued weakness in the spot market, the general downward trend in ship values across all sectors, and a shipbuilding overcapacity and very low forward order book at shipyards.

The impairment charge was done so selectively, only on vessels where the carrying amount was greater than broker valuations. So, we believe it's prudent and our conservative nature has positioned us forward.

In terms of forward-looking, I don't want to speculate, but if the market continues to running soft, I think there is still a possibility that vessel values will continue to correct. At this point we are hopeful that the material adjustments will have been behind us.

Yes, and I think to add to that, I think -- yes, I think that I will just say that our conservative nature in general is what you should read into our numbers also, when you forecast ahead.

Okay. And the second question relates to financing. I mean on the Aurora LPG fleet, have you started discussions with the banks there and is that on track? I don't know how much you can say.

Yes, I mean, you are right -- I can't say a whole lot at this point. A lot of what is going to -- how the financing is going to shape up is going to be dependent on what our final shareholding position will be at the close of December 5, when our offer expires. And that -- it will be only at that point that we have a bit more clarity on the path that we will take

But at the same time, I've already started discussions with Aurora's existing lenders, as well as BW's own lenders, to see what we can do in terms of their lending facilities. So, it is definitely -- discussions are definitely underway. And the outcome of it should be clearer come middle or late December.

Thanks.

Thank you.

We will now take our next question from Lukas Daul of ABG. Please go ahead. Your line is open.

Thank you, and good morning, guys. On the LGC side, I was wondering -- you had 100% fixed income or time charter in the third quarter and then for 2017 you are in the low 20s. Is that market -- is there more possibility in that market to do time charter, as opposed to the VLGCs?

I think we -- there is definitely options for us still in that market and these ships have historically different trades than the VLGC carriers. Of course, the Panama Canal has changed the nature of the trade in Central Americas. But we are continuously having options and interest for [business on these] ships, and so we will look at that going into the future. I can't, of course, be specific about the details of what we can contract or not.

Okay, fair enough. And, Elaine, can you just repeat what you said on the potential upsizing of one of the revolving credit facilities?

Sure. We have an existing $100 million unsecured facility with OCBC Bank. We are in the process of finalizing and upsizing of that facility, which is to -- from $100 million to $150 million. And that continues to be an unsecured facility. The margins on that will be at the all-in cost of 160 basis points plus LIBOR, which is identical to the initial facility.

And that's the one maturing in 2018, right?

That's correct.

Okay. Thank you. Thanks, guys.

And I think, just to -- just to hint a comment on the previous question, on impairment, I think what Elaine is just saying here on the new facilities, is this prudent and the conservative nature has basically positioned us to be the -- at least one of the -- or it's a preference among our lenders, and this is of course why we are able to have some sort of flexibility with these facilities.

Okay, thank you.

Thanks.

Thank you. There are no other questions. I would now like to hand the conference back to today's presenters. Please continue.

All right. Well, thank you all very much for your attention and for the ongoing support of BW LPG, and we look forward to speaking to you again when we release our fourth quarter results in February. So, merry Christmas to everyone. Thank you.

We have now come to the end of today's presentation. Thank you for attending BW LPG's third quarter 2016 financial results presentation. More information on BW LPG is available online, at www.bwlpg.com. Goodbye.