BW LPG Ltd (BWLP) 2016 Q4 法說會逐字稿

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

We will begin the presentation now. Please go ahead.

Hello, good afternoon, thank you. Welcome everyone to the presentation of BW LPG's results for the fourth quarter of 2016, the financial period ending December 31. I'm joined by our CFO Elaine Ong.

We appreciate your interest in our results and encourage your queries at the end of the call. Freight rate improved slightly to $13,600 on the benchmark (inaudible) due to an expansion of geographical LPG price spreads. This recovery in Asian LPG prices was led by significant restocking demand ahead of the winter heating season, as well as rising fuel prices and delays in receiving US-sourced cargos.

After rebounding to about $20,000 per day in January, the market has since softened as extremely high US LPG prices and a heavily backdated Asian LPG forged price curve closed the arbitrage window and promoted cargo translations in the US Gulf coast.

However, we remain encouraged by the responsiveness of freight rates, to improvements in geographic LPG price spreads witnessed in January and we continue to believe that the resumption of US LPG production growth will be the key to a sustainable freight rate recovery.

Spot rates currently stand at around $15,000 today, and we have seen a pick up in the west-east trade in the past week. And (inaudible) has reopened. The market is awaiting the announcement of March Saudi CP prices, with expectations in the $475 to $480 per ton range for propane.

Turning to slide four, we review the highlights of 2016. 2016 was a difficult year, but the Company remained profitable and grew its fleet by nine VLGCs at attractive values. We generated net revenue of $407 million, based on daily rates of $27,100 for the VLGC segment, and $23,400 for our LGCs. With total contract coverage of 50%.

EBITDA came in at $210 million. While net profit was $24 million. Excluding non-cash, non-recurring items, we generated a new profit of $81 million in an extremely challenging market environment. The Board of Directors will not propose a final dividend for the second half 2016 due to adjusted NPAT of only $300,000 in the period. Keeping the full-year payout at $0.09, which must be cleared for the first half of 2016.

This is fully consistent with our policy of paying out 50% of NPAT. We will not payout a dividend if we have generated losses. In order to further fortify our balance sheet, we upsized our unsecured revolving credit facility with OCBC to $150 million. In November, we sold the 2001-build BW Borg, [$43] million and leased her back for two years.

In December, we completed the acquisition of Aurora LPG which allowed us to renew our fleet at below replacement cost. Since then, we have also completed the technical and commercial integration of the Aurora LPG fleet. And Elaine will provide you with a brief update on the refinancing a bit later on in the presentation.

Lastly, we recycled the 1991-built LGC BW Havfrost and we took delivery of VLGC newbuildings BW Mindoro and BW Messina in January, thus concluding our (inaudible) newbuilding program.

Now if you please turn to slide five, we'll provide you with the financial highlights for the fourth quarter of 2016. Our net revenues was $90 million, which was a decrease of 44% relative to fourth quarter 2015. This decline was driven by weaker spot rate and offset by a bigger operating fleet.

Our EBITDA was $35 million, 68% lower year on year. Net profit was $80 million for the quarter. But if we exclude one-time events, we generated a loss of $600,000 in the quarter. Our leverage remains at manageable 56% following a major acquisition.

I'll now turn to slide 6 for an overview of our commercial performance in the fourth quarter. TCE rates on our VLGC fleet averaged $21,720 per day fourth quarter, with a contract cover of 42%. Our LGC fleet generated TCE rates of $28,770 per day for the quarter.

Focusing on our VLGC chartering performance, we recorded 499 total CoA days, or 14% VLGC revenue days. Our CoA TCE rate of $37,300 was in line with our guidance which we released last quarter. Our CoA performance of $40,760 per day was also in line with the probably minimum guidance and almost double that of the spot market for the full year of 2016.

We also make no adjustments to our CoA portfolio for the full year of 2017 and we reiterate guidance for probably minimum levels in todays' freight rate environment. Time Charter days came in at 1003, or 28% of VLGC revenue days. With a blended time charter rate of $32,805 per day. This was slightly lower than previous guidance as we entered into short time charters throughout the quarter at rates that were lower than those of our legacy TCE contracts.

Our spot fee generated $12,700 per day and accounted for 58% of the VLGC revenue days. The underperformance relative to the Baltic was mainly due to the adverse effect of integrating the Aurora fleet in our December results.

Switching to our LGC fleet, we recorded 422 time charter days. With our entire LGC fleet on time charter coverage. All of our clients continue to perform within the contractual limit for both time charters and CoAs. Their performance affirms our strategy to contract our ships out only to blue chip charters.

On slide seven, we see the global fleet of VLGCs on the water today stands at 244 vessels. With 36 VLGCs still to be delivered for the order book ratio of 15%. Three vessels have delivered this year; two of ours and one has been scrapped. We expect a further 23 vessels in 2017, with 5 vessels set to enter the fleet in 2018 and another 6 vessels in 2019.

With the acquisition of Aurora, our fleet of VLGCs increased to 49 vessels and now accounts for 20% of the total VLGC fleet. Including LGCs and new builds, our total fleet comprises 55 vessels with an average age of slightly below six years.

On slides eight and nine, we provide an overview of seaborne LPG trade in fourth quarter and full-year 2016. Seaborne LPG trade grew by 3% in the final quarter of 2016 compared to the fourth quarter of 2015, led by import growth of 20% and 5% in India and China respectively. And slightly offset by declines in Japanese imports.

For full year 2016, seaborne trade increased by 6% to 90.7 million tons, with Asian import growth of 15% more than offsetting import declines in the Mediterranean and Latin America. Us seaborne LPG export volumes rebounded strongly to approximately 7 million tons in fourth quarter of 2016. Reaching 25.4 million tons for the full year, a growth of 23% year on year.

Middle Eastern LPG export volumes also registered healthy growth of 5% during the fourth quarter, on the back of increased Saudi Arabian production registering 39.3 million tons for the full year.

Now let's please turn to slide 10. Here we provide an updated snapshot of the EIA's outlook for LPG balances in the US, which now also includes a 2018 forecast. US LPG production grew by 2% in 2016, while the domestic US consumption declined by 2%.

For 2017, the EIA expect net US LPG exports of 24.9 million tons. While production is forecast to grow by 2.9% to 78.6 million tons and domestic consumption to remain flat at 54.2 million tons.

Looking ahead to 2018, EIA's forecast calls for stronger LPG production growth of 6.1% and minimal domestic consumption growth of 0.8%. Net exports are forecasted to grow by 12.3% in 2018, hitting 28 million tons.

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

Thanks, Martin. Starting with our income statement on slide 11. Our net revenue for the quarter was $89 million, compared to $160 million in the same quarter last year. Charter hire expenses for the quarter decreased as we operated one less chartering vessel.

Operating expenses were approximately $6.3 million higher year on year. Reflecting in a large BW LPG standalone fleet as well as the December expense contribution from the Aurora fleet. We generated EBITDA of $35 million in the quarter, compared to $111 million in the same quarter last year.

Finance expenses were higher by $4.5 million year on year due to the drawdown from the $221 million ECA facility as well as the consolidation of Aurora's December interest expense. Reported net profit for the quarter of $80 million due to the recognition of $111 million of negative goodwill arriving from the acquisition of Aurora LPG, $8 million of non-cash gains, offset by $38 million of impairment charges on vessels. Excluding non-cash, non-recurring items, we recorded a loss of $600,000 in Q4.

Turning to slide 12, we provide a snapshot of our balance sheet and cash flow position. We continue to maintain a strong balance sheet with a leverage ratio of 56%, following a nine-ship acquisition and an asset base of $2.6 billion.

In the first quarter of 2017, we paid the final installment on our two new builds of approximately $70 million. This concludes our new build program. And as of today, we have no remaining growth CapEx commitments. Cash and cash equivalents at the end of the quarter was $81 million.

On slide 13, you'll see our net debt position at $1.3 billion at the end of the quarter. Available cash in undrawn facilities was $326 million. As of December 31, we have seven debt facilities, four of which are pre-existing and three were assumed as part of the Aurora acquisition.

For BW LPG's pre-existing facilities, the first is the $800 million facility with $433 million outstanding and $215 million of undrawn revolving credit. Secondly, we have the $400 million ECA facility with $367 million outstanding.

Next, we have the $221 million ECA facility with $154 million outstanding. We then have the newly upsized $150 million unsecured revolving credit facility with $120 million outstanding at the same all-in cost of LIBOR it was [160] and now maturing in March 2018.

Switching to the three acquired Aurora facilities, we had $322 million outstanding on the nine vessels and $5 million outstanding from the NOK200 million bond which we did not own at quarter end.

Following the quarter end, we have bought back some more of the bond with only $2 million outstanding currently. We have also repaid the outstanding amount under the $150 million commercial facility in full, with proceeds from our $300 million revolver.

We have agreed on a term sheet with ABN AMRO and Kexim for the refinancing of the six 2016-built ships at very competitive pricing and are currently in the documentation phase. We will provide an update once everything is finalized. But as guidance, we are looking at a notional amount in the $280 million to $300 million range.

As of today, our total liquidity is $190 million. And this is before the refinancing. Assuming a constant rate of $12,000 per day, we have sufficient liquidity runway until the beginning of 2020.

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

Thank you very much, Elaine. So if you'll please all turn to slide 14, I will summarize the presentation. After which, we will open up for questions.

We generated earnings per share of $0.18 in 2016 and $0.58 in the fourth quarter. While the Board has proposed that no final dividend be paid for second half 2016 in line with our policy. We completed the acquisition and integration of Aurora LPG and are close to refinancing the Aurora vessels as described by Elaine earlier.

As a result of our enlarged fleet, we established commercial and technical operations in Oslo and Houston to better service our customer base in the west. Looking ahead, we expect total contract coverage of between 24% to 31% for the full year of 2017.

I'd like to conclude our presentation with some thoughts on our current financial position and outlook. In the last month, we have taken significant measures to strengthen our balance sheet and liquidity position. We sold the BW Borg, freeing up more than $40 million of liquidity, sold the BW Messina which freed up more than $20 million of equity and a further $6 million cash gain.

And finally, we upsized our OCBC facility by $50 million. These three initiatives alone raised $150 million of liquidity without resorting to any issues of issuing dilutive equity below NAV in an already-depressed asset valuation.

We still remain cautious on the market short term due to the back dated forward curve, substantial, new building deliveries in the first half of the year and the potential for further inventory draw downs in the US, keeping LPG prices elevated.

The medium-term fundamentals for VLGC trade, however, are positive. US production should track the recovery in oil prices following the OPEC production cost signaled by recent announcements of increased E&P spending by major producer and an increasing rig count.

The softening in the US domestic LPG pricing as a result of renewed LPG production growth and a sharp drop off in new building deliveries by late 2017 should allow for an improvement in freight rate in 2018 and beyond assuming no more ships are ordered.

But, we will be proactive in managing our balance sheet. We can make it through a $12,000 per day market until the beginning of 2020 assuming no additional debt capital from our unencumbered fleet. We hope for the best but always plan for the worst. And we're very well prepared to ride out the current down turn.

So this concludes our results update for the fourth quarter of 2016. We appreciate your interest in our market updates and now I'd like to open up the line for questions. Thank you.

Thank you sir. We'll now begin the question and answer session. (Operator Instructions). Peder Jarlsby, Fearnley Securities.

Morning guys. Just a quick one on your contract portfolio. So given that rates remain below cash cost breakeven level throughout the year, is it just fair to assume that you would rather have the optionality of having the vessels in the spot market than call it firming up further contracts going forward?

Good morning, Peder, and thanks for asking. We were expecting questions on our CoA. And to your points, that is a yes, exactly. And maybe I can elaborate a little further on that question.

So as I said during the call, in 2016, our CoAs generated rates that were almost double those of the spot market. And CoAs are and will remain a core part of our charter portfolio strategy.

So we're keen to contract with payers across the LPG value chain, but only at the right rate levels. And we're seeing a healthy demand for CoAs, but we'll hold off on entering into contracts that are based on an extrapolation of today's weak markets into the future.

So our currency rate books expires at the end of the year and we have already started talking about renewals. Even though they do not expire for another 10 months. So it's still very early days.

Okay, thank you.

This is a good sign that those are -- sorry.

And just a question on your fleet. You've done quite a lot in terms of renewing the fleet with the Aurora acquisition. And just looking at your fleet now, I think you have -- you've one 1990-built, which I think is on a long-term contract. And then you have three or four early-2000-built VLs.

I'm just curious what are your thoughts on these vessels going forward? Is there room for further sale lease backs or what are your thoughts on these vessels going forward?

Well there's always plenty for room for sale lease backs. And we have no shortage of those being pushed to us. I would say, as a general note, we are a little bit careful with sale leasebacks. And typically we see them being priced at levels which are slightly above what Elaine is able to do on our financing.

So we only do a very moderate amount of these. But of course, it's always something we can resort to to free up additional liquidity. Right now, I don't think we need to.

Okay, yes, that makes sense. And just a final one from me. I think last year, or in the fall, we saw two VLGCs scrapped and then we saw another one this year. And I think the first ones were 1987 or 1990 built and then the last one this year was, I think it was north of 40 years.

I'm just curious to hear what your view on scrapping potential of the fleet going forward is? And you probably know more of the private fleet and what kind of contracts they have. So just curious to hear your views and at what age you think we will see uncontracted vessels be scraped through 2017.

You saw we did one LGC ourselves. I think the ones that we have seen being scrapped so far have been rather old and much older than the normal average. I think it's natural when we've come from a market which was very high in 2014, 2015 that there was very little scrapping. I think now a year of challenging market's probably changing that.

And I think owners that are operating vessels, say in the last 20s or anything above 25 years old is probably considering their options, particularly when they reach the next dry dock. So I think we'll see more of that.

Okay, (multiple speakers).

Another -- I'd say another key element to that is that the Ballast Water Maritime (sic - Management) Convention will come into effect in September 2017. So the estimated cost for a retrofit of VLGC with US Coast Guard approval for ballast water treatment plants is about $0.8 million to $1 million.

So effectively, it's a large CapEx increase if you're operating an older ship. And of course, this also incentivizes earlier scrapping of vessels. But again, we will probably see some of these ships being able to operate elsewhere. So it will certainly be a net effect of a positive.

Okay, perfect. That's all from me. Thank you very much.

Thanks Peder.

Next question from Lukas Daul, ABG Sundal Collier.

Thank you and good morning. Martin, I was wondering if you could shed some light on the current situation in the market in terms of very strong January US exports. How is that panning out right now?

And obviously we see the increase in exports in 2018. My question is, what do you think happens if OPEC ramps up production again later this year? Is this going to be a competition against US LPG, just like we saw it last year?

Good morning, Lukas, and thanks for calling in.

Well on the short-term market outlook, we saw the ARP window opened in Q4. But very large [London] inventory drawdowns in the US grow the domestic LPG price to a three-year high and closed the ARPs again from very late January through to last week, where it opened again slightly.

And as we've seen also the Middle East prices have turned on tighter supply of cargos, following the production [cut] as you mentioned. So ARPs have reopened as US price eased with the end of this winter heating demand. And I think they're moving forward on the backdated curve here.

So Asian buyers should also return to the market for inventory restocking. Since they've been absent since late January due to the backwardation of the price curve. And I think before they do, we expect weaker demand in the short term as the domestic prices in Asia are roughly equal to [debond] delivered prices.

And I think as a consequence of that, we've seen a lot of owners ballasting west in the recent weeks. In addition to that, we have 23 more ships to deliver this year. It's for these reasons freight to remain at low levels for the short term.

So as of right now, the Middle Eastern LPG prices are not very competitive. And as I mentioned earlier on, all eyes are on the SBP March pricing.

Okay, thank you. And the second question regarding the CoA renewal. Obviously you have stated before that you want to price the optionality in the CoAs in the right way. And we are not there as of now.

So my simple question really is, if you don't succeed with that, how is the spot market going to look like if you move your vessels into the spot market?

Well I mentioned the uptake we have on our contracts as of now. And I think we have a sizeable portion of our fleet already operating in the spot market. And we're of course willing to do that.

I think we're -- to be very, very clear, we're not going to be pushed into taking any CoAs based clearly on an extrapolation of today's weak freight rates into the future. And I think also our clients realize that that's not going to happen.

Everyone knows that for us to remain here on the longer term, as VLGC owners, we have to have a sustainable freight market. So I think it's a good sign that both are existing as well with new customer wants CoAs. But for us, it's good not to have full exposure to the spot market in order to cover the freight needs.

And to that extent, we also understand the role that BW LPG must play in order to facilitate the continued growth of LPG trade. And this aligns with the long-term view we take on the market.

But again, we must balance clearly the need to generate a good return on our assets and our capital and contract at a rate that recognizes the utility CoAs offer our customers. And I do think our customers see great benefits in the flexibility and the service that they're getting under these contracts. And of course, we have to price that in.

So going forward, we're happy to look at contracts with other parties, wherever optionality is priced appropriately and wherever rates are at least at parity with our internal spot forecast.

So I hope that answers your question?

Okay, thanks. Thanks for your color.

Thanks you very much.

(Operator Instructions). We'll now take our next questions from Eirik Haavaldsen, Pareto Securities.

Yes, hi. Just you say there's a lot of interest from charters to secure CoAs. Is it possible to give any indication on what levels you're seeing there? Or is that something you want to keep for yourself?

Good morning, Eirik, and thanks for asking. And you're absolutely right, that is exactly something we'd like to keep for ourselves. This would be probably my shortest reply on the day.

Very well. And secondly, if we look at this in the broader scheme of things, BW today has a different leverage, it has more operational leverage and financial leverage than what BW LPG has had historically at least. So is this just a way of managing the cycle? Or should we also interpret this as the way BW LPG will go into the next upcycle, in a way?

Will you be more opportunistic when rates eventually recover now? Or go back to the 40%, 50% coverage once rates reach a satisfactory level?

I think this is of course -- what we're seeing right now with 56% leverage is a result of investing counter-cyclically. So I think we will see our leverage respond to that. And our ambition, which we have also been very clear about, is to grow during downturns in the market.

And of course, then we deleverage when the market is high. So I think we're in a very comfortable position right now, both on bank debt and liquidity. And so this is right now, especially for a fairly big investment.

Sure, I understand that. But also in terms of your operational coverage then, so your CoAs and TCEs again, as rates go back to a healthier level, will you seek to increase coverage again to the same levels you had two, three years ago?

Or will the new BW LPG be more of a spot company than what it has been before your time, essentially?

No. No, there's no change in our strategy on this. As I said before, CoAs are and will remain a core part of our charter portfolio strategy. But of course, we are also slightly optimistic on the other opportunities that are out there. And of course, in this situation that we just had here in 2016, we managed to invest countercyclically and grow the Company. And with that, comes slight increase on the leverage for a shorter period of time.

Thank you. And finally, one for Elaine. Will the G&A impact -- or G&A, is that increasing from January on the back of Aurora? Or will you maintain the same overhead cost as you've had previously?

It'll likely be pretty much the same as what we've -- at the levels that we're currently seeing.

Perfect, thank you.

Thanks, Eirik.

(Operator Instructions). Thank you, there are no more questions. I would like now to hand the conference back to today's presenters. Please continue.

Arathi does that mean that there are no questions on the webcast?

Yes, that's correct. There are no more questions on the webcast and wire phone.

Okay, well thank you very much for that. So thank you everyone for your attention and for the ongoing support of BW LPG. I hope we answered your questions appropriately.

I'd like to take this opportunity to alert you to the availability of our 2016 annual report which we have also released this morning. You'll find further insights on the LPG market, including a few stories and further insight.

And as well, there's a microsite to go further into the outlook and our numbers. So everything is available on our web page and we hope that the annual report becomes your go-to source for the world of LPG. And we welcome your feedback.

So thanks again everyone and we'll speak again soon.

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