BW LPG Ltd (BWLP) 2017 Q2 法說會逐字稿

Welcome, everyone, to the presentation of BW LPG's results for the second quarter of 2017, the financial period ending 30 June. I am joined here by our CFO, Elaine Ong. As usual, we appreciate your interest in your results, and we encourage your queries at the end of the call, where we will open to Q&A.

Daily spot market earnings were stable quarter on quarter, averaging $16,700 per day. Recently, however, rates have nearly halved to $21 per ton on the benchmark Baltic route after starting the quarter at $36 per ton. The weakness in freight has been driven by unviable arbitrage economics, leading to substantial cargo cancellations in the US Gulf Coast, as well as continued above-average sweet growth.

Heading into the third quarter, we have seen an uptick of fixtures on the long-haul US to Asia route, going via Cape of Good Hope, the longer route, rather than via the Panama Canal. However, this positive development in the distance side of the shipping demand equation is continuing to be partly offset by the adverse impact of US cargo cancellations. Turning to slide four, we review the financial highlights of second quarter.

The Company recorded a loss due to deteriorating market conditions and lower fleet utilization. It generated net revenues of $91 million, based on daily rates of $20,300 for the VLGC segment and $11,300 for our LGCs, with total contract coverage of 28%.

EBITDA came in at $40 million, which was only 5% lower quarter on quarter. However, on the back of $40 million of EBITDA, we generated a net loss of $7 million, or $0.05 per share, after breaking even last quarter on an adjusted basis.

This is partly due to the implementation of an accelerated depreciation schedule for our two older LGCs, which Elaine will explain a little on later on. As a result of a $7 million loss this quarter that almost entirely offset our $8 million profit in the first quarter, the Board did not declare an interim dividend for the first half of 2017.

The book value leverage of 55%, approaching the higher end of our 40% to 60% target band, and market conditions remaining weak, we signed a contract to sell the 2001 build unencumbered VLGC BW Vision. Lastly, in July, we entered an agreement with Global United Shipping to establish a joint venture to be named BW Global United LPG India, for the purpose to own and operate a fleet of VLGCs for the transportation of LPG within Indian waters.

As part of this agreement, we decided to sell the 2001 and 2002 built VLGCs, BW Boss and BW Energy, to the joint venture. The primary yardstick for the sale price of these three VLGCs was new built parity value, and we're pleased to have secured prices that are above historical median VLGC new building values and well above our [stock supplied] VLGC new building price. We're also very excited to participate in the fast-growing Indian LPG market, with India expected to be second -- to be the second-biggest importer of LPG by the end of the year.

We believe our joint venture with Global United positions us very well to capitalize on this continued growth. I'll now turn to slide five for an overview of our commercial performance in the second quarter. Time charter rates on our VLGC fleet averaged roughly $20,300 in the second quarter, with a contract coverage of 28%. Our LGC fleet generated TCE rates of $11,300 per day for the quarter.

Focusing on our VLGC chartering performance, our COA portfolio accounted for 12% of VLGC revenue days and generated TCE rates of $33,770 per quarter -- or per day, sorry. We also make no adjustments to our COA portfolio for the remainder of the year, and we reiterate guidance for probable minimum uptake levels. Our time charter portfolio accounted for 16% of VLGC revenue days, with a blended time charter rate of $34,770 per day, and we expect similar rates from our time charter portfolio for the remainder of the year.

Our spot fleet generated $15,710 per day, based on a fleet-wide utilization rate of 84%, calculated as revenue days divided by calendar days. Switching to our LGCs, we operated roughly 46% of our fleet on time charter and the remainder of the fleet in the spot market.

On slide six, we see the global fleet of VLGCs on the water today stands at 253 vessels, with 29 VLGCs still to be delivered for an order book ratio of 11%. Fourteen vessels were delivered this year so far, while three have been scrapped or committed for scrapping. We also expect at least two more vessels to be sold for scrap within this year.

Recently, three separate orders took place for a total of five new buildings VLGCs delivering in the second half of 2019, the first VLGC new building order since May 2016. Given the large overhang of vessels BW LPG does not support new building orders that will further upset the supply-demand balance. However, we are of course encouraged by the show of confidence in the sector by two large LPG traders that this order exemplifies.

We also expect a further six deliveries in 2017, with 10 vessels set to enter the VLGC fleet in both 2018 and 2019. Our pro forma VLGC market share is at 18%, following the disposal of BW Vision and the redeliveries of BW Broker and Yuyo Spirits. Including LGCs and new builds, our total fleet comprises 52 vessels, with an average age of six and a half years.

On slide seven, we provide an overview of seaborne LPG trade in the second quarter. Seaborne LPG contracted as strong Chinese import growth of 23% was offset by double-digit declines in Indian and Korean imports. The pace of Indian imports decelerated after growing a strong 40% in the first quarter, with the Indian market needing some time to digest the massive influx of delivered butane during Q1.

We are firm believers in the long-term growth story of Indian LPG imports, and we expect to see import growth resume in the second half of the year. US seaborne LPG export volumes grew by 9% to 7 million tons in the second quarter, albeit at a slower pace, following a raft of cargo cancellations, while Middle Eastern LPG export volumes declined by 1% year on year to 9.6 million tones, due to continued cuts in oil production.

Turning now onto slide 8, US LPG production has risen by 4% year to date through second quarter of 2017, while domestic consumption has fallen by 2%. Propane production based on weekly data registered 5% growth through the third week of August, while pointing to a 4% decline in domestic propane demand. The EIA has revised upwards its export growth estimates by 1.5 million tones for the full year of 2017 and 1.1 million tones for 2018 since May.

For 2018, the EIA's forecasting LPG production growth at 6%, the same percentage growth as it estimates for crude oil, despite LPG production growth outpacing crude oil production growth for the past two years. Based on weekly data in the third quarter so far, propane production has grown by 8% year on year, while domestic demand has also grown by a surprisingly strong 5%.

While the 8% growth in production is in line with our expectations of an accelerated pace of LPG production growth in the second half of the year, due to the positive lag effect of strong shale oil production growth in the first half, we still believe the uptake in demand is mostly attributable to the commissioning of Enterprise's PDH plant, and it should phase through the end of the year. With that, let me turn you over to Elaine, who will walk you through the financial positions and our results.

Thanks, Martin. Starting with our income statement on slide nine, our net revenue for the quarter was $91 million, compared to $99 million in the same quarter last year, and this is despite a bigger fleet. This is also mostly due to lower spot rates and lower fleet utilization.

Charter high expenses for the quarter increased as we operated one more charter in VLGC. Chartering expenses will decrease in the second half of the year due to the redelivery of one VLGC in Q2 and another one in August.

Operating expenses were approximately $4 million higher year on year, reflecting 11 more vessels in our operating fleet. This was partially offset by significant savings from our ongoing cost-cutting initiatives. We generated EBITDA of $40 million in the quarter, compared to $52 million in the same quarter last year. Finance expenses were higher $5.5 million, due to the debt drawdowns to finance four new buildings and six modern [XOR] vessels.

We also implemented an accelerated depreciation schedule for our two older LGCs to better reflect their diminishing value in the context of today's weak spot market and their age. We recorded a loss for the quarter of $7 million, or $0.05 per share, in Q2. Despite this, we managed to remain profitable for the first half of the year, generating $1 million of after-tax profit. Turning to slide 10, we provide a snapshot of our balance sheet and cash flow position.

We continue to maintain a strong balance sheet with a book leverage ratio of 55%, the same as in Q1. After impairing our fleet by $144 million in 2016, we believe that the book value of our assets is in line with broker valuations.

We also have no remaining growth CapEx commitments. Cash and cash equivalents at the end of the quarter was $59 million.

On slide 11, you'll see our net debt position at $1.3 billion at the end of the quarter. Available cash and undrawn facilities were $294 million at the end of the quarter.

As of June 30, we have six debt facilities.

The first is the $800 million facility, with $418 million outstanding and $200 million of undrawn credit. Secondly, we have the $400 million ECA facility, with $357 million outstanding. Next, we have the $221 million ECA facility, with $198 million outstanding.

Our third ECA financing is the $290 million facility to finance the six modern XOR vessels, with $283 million outstanding. We then have the $150 million unsecured revolving credit facility, with $115 million outstanding and $35 million of undrawn credit.

This facility comes due in March 2018. We are engaged incremental constructive discussions with both new and existing lenders and are currently evaluating several financing options. We foresee no difficulty in concluding a refinancing well before this facility expires. Lastly, we had $1 million outstanding under the ex-Aurora bond that we have already repaid earlier this month.

As of today, our total liquidity is $273 million. Assuming a constant rate of $10,000 per day, we have sufficient liquidity runway until the first half of 2019. With that, I would like to hand it back to Martin to conclude our presentation.

Thanks, Elaine. If you'll please turn to slide 12, I will summaries the presentation, and then we'll open the line up for questions. We generated a loss per share of $0.05 in the second quarter on net revenues of $91 million and an EBITDA of $40 million.

As a result, our Board did not declare an interim dividend for the first half of 2017. We sold one of our 2001 build VLGCs and established a joint venture with an Indian partner, Global United, to capitalize on opportunities arising from the strong growth of the LPG imports into India.

As part of this agreement, we will sell one 2001 and one 2002 built VLGC into the joint venture. Looking ahead, we expect total contract coverage of between 27% to 35% for the remainder of the year.

The short-term outlook remains challenging, as US inventory levels will continue to prop up domestic LPG prices until confidence returns that propane stockpiles have built sufficiently, anywhere from 80 to 100 million barrels, ahead of winter heating demand season.

Going forward, US LPG production must meaningfully outpace both domestic demand and export growth to generate a surplus of exportable LPG, as well as for US LPG to maintain its competitiveness in the global market. The long-term outlook for continued growth in US LPG production and exports is very strong, evidenced by the resumption of US NGL infrastructure investment.

Targa Resources and Enterprise Products Partners both recently announced plans to invest in NGL pipeline capacity, while Enterprise will also expand their gas processing capacity. Concurrently, higher crude oil prices will be required to both stimulate LPG production and widen LPG price spreads between the US and key import markets.

This concludes our results update for the second quarter of 2017. We appreciate your interest in our market updates, and I'd like to open up the line for questions now. Thank you.

We will begin our Q&A session now. (Operator instructions). We will take questions from the conference call first. The first one comes from ABG's Lukas Daul. Your line is open. Please go ahead.

Thank you. Good morning, Martin and Elaine. My first question is, Martin, can you talk a little bit about the utilization in the global fleet and maybe in your own as well, for the second quarter, and where we are currently standing and how you see it?

Good morning. Yes, I can. We have -- as you probably saw, we introduced last quarter a fairly detailed overview in our commercial performance slide in the deck on slide five, where we have started to disclose our fleet utilization.

So, as you can see, the commercial utilization is 87% this quarter, so 13% basically is consumed by slow steaming and idle time on our fleet. And I think when we look across the global fleet, we see similar patterns with our competitors and we're basically expecting utilization in the mid-80%s on a global basis at the current time.

Okay, so yours is basically a proxy for the global fleet, and you think this is stabilizing going forward, or are we still heading downwards, given there are some more vessels to be delivered during the rest of the year?

Well, I think it's still under pressure. The market right now is quite low, currently, on the Baltic. So we probably still expect the utilization in the mid-low 80s for third quarter. Going forward, once the lag of the fleet supplies slows down a little bit, then we will expect to see fleet utilization coming upwards again.

How do you think it differs compared to last year, when we were observing relatively similar spot rate levels at this time of the year, yet utilization levels were reported to be higher? Do you see any sort of a major change, any delta that would explain the difference?

Well, I think a combination of several factors, but we've seen more cancellations over the past three months that have been a larger contributor to higher waiting times this year over last year, but mostly flat. So I think this is probably the best explanation I can give at this point.

Okay, okay, when you sold the BW Vision, did you sell it for scrap or did you sell it to a different industry player?

So I can't disclose who the buyer is, but it's definitely sold for continued trading. The ship is not that old, and as I said during our call, the vessel is unencumbered and will contribute a decent amount of cash to our liquidity once the vessel's delivers

Okay, and your JV in India, can you talk a little bit more about what to expect and also I was wondering, are you using VLGCs for moving LPG within India?

For the JV, I think the macro picture, which is -- which you can say is creating our interest for establishing the joint venture in India is the very strong imports of LPG, the government-supported programmes within India to encourage further switching from biomass to LPG, and we foresee, as I mentioned, India becoming the world's second-largest LPG importer by the end of this year.

So many -- from a macro perspective, India is an enormously important market to us. India has some flag requirements, which gives advantage to domestic flag vessels, and through our JV with Global United, we will be able to benefit from such business and to support our long-term clients within the Indian oil companies, such as ILC and HPCL and HPCL and so forth.

So commercially, we think this makes a lot of good sense, and we're very encouraged to basically have feet on the ground within India to help the country with further LPG imports.

Okay, and accounting wise, the three vessels that are leaving the fleet this year, I assume you have removed them from your 2018 available days, and how is the JV going to hit your P&L? Maybe it's a question for Elaine.

So for 2018, the days would have been removed, yes, and the JV would be a 50-50 JV, so we will have to consolidate.

Okay, so you'll keep consolidating it. And you touched upon the refinancing in 2018. I guess it's a manageable task.

Yes, I'm not foreseeing any difficulties with the refinancing. I'm already in discussions with several lenders, and I think we should be able to conclude that fairly quickly, hoping to accomplish the costs along the same lines as what we have been able to accomplish.

Okay. Okay, thank you guys, and have a good weekend.

Thanks, Lukas.

Yes, thanks, Lukas. Thank you very much.

Now, we will move to our next question. It comes from the line of [Mora, Alex Stronine]. Your line is open. Please go ahead.

Operator, I don't think anyone is there. Should we take the next one?

Yes, we do have a question. Just a reminder, we have a new one, new question comes from the line of Mora, Alex Stronine. Your line is open. Please go ahead with your questions.

And a reminder, we have a new coming on the line of Mora, Alex Stronine. Your line is open. Please go ahead with your question. We have difficulty to hear you. We will now take the questions from the webcast.

We have one question from the webcast from [Herbert Henson] from TDN. The question is, will Hurricane Harvey interrupt LPG exports out of Texas in any significant way?

Thank you for that question. Well, it's still difficult to say. I think the center of Harvey is located about 340 miles southeast of Corpus Christi, Texas, and it's moving northwest.

We expect that no vessel movements will be allowed into individual ports without written permission from the port captains, which of course with Harvey moving closer to land will be probably causing some delays.

Houston Pilots, which affects Targa and Enterprise, and Brazos Pilots, which affects the Freeport P66, they have ceased boarding inbound ships and outbound traffic is expected to continue until port captains will say otherwise. So we're not seeing any effect on [Sabine], which is Shell Netherlands.

They're not being affected yet, but we probably think that they will shut down at the end of the day. So delays are likely to be expected from US ports, and some congestion can occur here.

In the past, a hurricane may have had a substantial impact on the Gulf of Mexico production because of the reliance on production in the region. But what we see -- what we expect, however, is that with the shale revolution, most of the production is not happening specifically in the Gulf but on land and further away from the center of the hurricane.

So we would expect liquid production and, i.e., LPG, to be minimally impacted at this stage. Do we have any further questions from the webcast or from the audience?

Thank you. For the [other] participants, there are no other questions. I would now like to hand the conference back to today's presenters. Please continue.

Well, thank you very much. Thank you for your questions. I think Lukas, he had everyone's questions answered during the day, so I hope that handles everything.

Otherwise, feel free to reach out to us after the call. We're happy for your interest in our market updates, and we look forward to talking to you either in the market or next time on the call. Thank you very much.