StealthGas Inc (GASS) 2016 Q3 法說會逐字稿

Good day and welcome to the StealthGas Third Quarter 2016 Results Conference Call. Today's conference is being recorded, and at this time, I would like to turn the conference over to Mr. Harry Vafias. Please go ahead, sir.

Good morning, ladies and gentlemen, and thank you for dialing to our third quarter 2016 earnings presentation and webcast. This is Harry Vafias, the CEO of the company. And joining me on the call today is our finest officer, Ms. Sakellaris, who will discuss our company's financial performance. Before we commence our presentation, we would like for all of you to be reminded that we'll be discussing forward-looking statements which reflect current views with respective future events and financial performance. At this stage, if you could all take a moment to read disclaimer on slide 2 of this presentation. It's noted that risks are further disclosed in StealthGas' filing with the SEC. I would also like to note that all amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars.

Starting with slide 3, we're summarizing our Company key highlights for the third quarter of 2016. We faced quite a difficult environment this quarter as rates in these three months dropped by an average of 5%. Very low rates along with weak seasonal demand suppressed revenues and consequently profitability. In this environment, we managed to end the quarter with an operational utilization of 88.1%, a rather low figure given that in Q3 2015, our operational utilization was 94.4%. However, we managed to arrange several new charter arrangements and charter extensions, resulting in 87% of our fleet base secured on period charters for the remainder of the 2016 with a total of $175 million in precontracted revenues.

In spite of a difficult market, we strive to manage our relatively young fleet as efficiently as possible. Due to [strong] management at our Board in close cooperation with the yard has rescheduled the deliveries of our 22,000 new buildings, so that the first will be delivered in Q2 2017, the second in Q3 2017, the third in Q4 2017 and the last one in Q2 2018.

Proceeding to our financial highlights, in Q3 2016, we recorded the revenues of $34.4 million, a decrease of 4% compared to Q3 2015, while our EBITDA amounted to $11.2 million. In terms of our leverage and cash position, we still maintain a low gearing of about 40% with the net debt to assets ratio of as low as 34% as our cash is about $61 million. At this point, we are glad to announce that favor to the return of a guarantee issued for Aframax tanker, the SPIKE, our unrestricted cash base increased in November by a further USD10 million.

Slide 4 provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 56 operating vessels as of November 16, we had 14 of these on bareboat, 35 on time charters and 7 in the spot market. As customary to our conservative chartering strategy and in spite of very weak market conditions, we managed to increase our earnings visibility through new contracts and contract extensions for the remainder of 2016 to 87% and preserved our secured revenues balance to around the $175 million. One sign of our investment plan success and a reflection of our Company's capabilities is that 100% of our 12 new building LPG vessels delivered in 2015 and 2016 are all on period charters, while 13 out of 16 of our vessels are above 15 years of age are also fixed on a period contract basis. In terms of new employment contracts, since our Q2 2016 results announcement in August, we concluded nine new charter contracts and five charter extensions.

With regards to our fleet geography on Slide 5, 50% of the fleet trades in the Middle East and Far East, 30% in Europe, 11% in America, 4% in Australia and 5% in Africa.

In comparison to our fleet composition presented in the previous quarter, we had one vessel relocating from the Far East to Africa and three vessels engaging in voyages in the USA.

Moving to slide 6, I will provide you with an analysis of our remaining capital expenditure program scheduled to take place up until April 2018. As mentioned in the beginning of our call, our last four deliveries were pushed back, as per our Boards decision. The deferral of these deliveries is one quarter for each of the first three vessels initially scheduled to be delivered within the first half of 2017 and eight months for the final vessel initially scheduled to be delivered in August 2017.

All of these vessels are under construction in a top quality Korean yard and have additional upgrades, including an advanced cargo plant system, making it possible for them to carry higher ethane content, LPG, which is suitable for the US trade and therefore how the competitive advantage against the common semi ref fleet.

Looking at the table on the left hand side, the remaining CapEx, excluding any related advances paid to date is in the order of $156 million. At the bottom of the table, we provide you with a detailed breakdown of our remaining capital expenditure as to advances in final payments for our future deliveries. In relation to the financing of this capital expenditure, which is presented in the right graph from a total contract value of approximately $208 million, $52 million are advances paid to-date and $140 million are committed bank debts, a portion of which is still subject to definitive documentation, leaving us with an equity injection of close to $16 million.

I'll turn you over now to Mrs. Fenia Sakellaris for our financial performance discussion during the third quarter 2016 results. And later, we'll discuss the market and industry outlook.

Thank you, Harry. Good morning to everyone. The third quarter 2016, we faced a challenging market. Compared to the second quarter of 2016, rates declined even further by an average of 5% and full demand due to seasonal factors was quite evident.

Let us move on to slide 7 where we see the income statement for the third quarter of 2016 against the same period of the previous year. Our voyage revenues came at $34.4 million, marking a 4% decline compared to the same period of 2015. Revenues declined primarily due to the low seasonal demand, which led to another low fleet utilization of 88% compared to 94.4% utilization in the third quarter of 2015. In addition to these, halfway through the third quarter of 2016, we had one of our product tankers switching from time charter to bareboat, charter reducing the revenues from this vessel by approximately 50%. Voyage costs amounted to $4 million marking a 22% decrease compared to Q3 2015. The key driver of voyage cost reduction was the increase of time charter days by 19% and overall lower fleet utilization. Net revenues, that is revenue after deducting voyage costs, came at $30.4 million. Running costs at $14.6 million increased by 9% compared to the same period of last year given the net addition of one vessel plus two vessels coming on bareboat. At this stage, we need to know that compared to the previous quarter of the year, our operating cost base was stable. This is an outcome of the following that took place. Factors that reduce our operating cost base this quarter were the receipt of an insurance claim and one of our product tanker is going on bareboat.

On the other hand, we had the contribution on our operating cost base of our last new building vessel where we took delivery at the end of the second quarter and one vessel coming off bareboat, again, close to the end of the second quarter. Excluding the impact of these events, our OpEx in the third quarter remained at about the same levels as in Q2 2016. With regards to dry docking costs, these amounted to approximately $1 million given three scheduled dry dockings taking place during the same quarter, while only one dry docking had taken place during the same period of last year. Overall, for the remainder of 2016, we have scheduled an additional one dry docking that will take place at the end of the year. Our EBITDA for this quarter came at $11.2 million, quite a low figure, attributed to the reasons explained above. Interest and finance costs marked an increase of approximately $900,000 as a result of the increase in our leverage in order to finance our CapEx plan. With a net loss of $2.5 million, our earnings per share for the third quarter of 2016 was minus $0.06, while for the six months of 2016, our net loss was close to $3.4 million, which gives us an EPS of minus $0.09.

Slide 8 demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational utilization was low in the order of 88.1% as a result of weak seasonal demand and very soft spot market. Focusing on the average daily results, adjusted time charter equivalent is lowered by 7.5% period-on-period, indicating that the market has deteriorated. Looking at our adjusted operating expenses this quarter and compared to Q3 2015, we see a 2% reduction. This is mostly attributed to our product tanker going on bareboat. As per our daily G&A costs following a sensible cost management strategy, they were reduced by more than 30%.

Looking at our balance sheet in slide 9, in the first nine months of this year, we did not see any significant change in our asset base with our vessel net value increasing by $15 million following the delivery of two new Eco LPG vessels taking place in the first and second quarter of this year. In addition to this and compared to the end of year 2015, we marked the cost reduction mainly as a result of our capital expenditure program. Focusing on the equity and liability side, our gearing still remains low in the order of 40%, while net debt ratio lies in the order of 34%. Compared to 12 months 2015, our leverage actually decreased by $12 million as no drill done for vessel delivery was realized in the third quarter of 2016 and since the beginning of the year, our loan principal repayments amounted to $43.4 million. Moreover, our short-term debt outstanding decreased further due to the refinancing of a balloon payment of approximately $22 million.

Overall, we're pleased to follow a sensible and stable loan repayment schedule, which allows us to preserve our debt at moderate levels in spite of our capital expansion. After Q3 2017, we have scheduled fees for repayments in the order of 10% of our current outstanding debt.

Slide 10 presents on a daily basis the evolution of our breakeven against our average time charter equivalent. It is clear that our average TC is affected by the trend of the market that of declining rates. With regards to our daily breakeven, this follows a rather stable trend in the past quarters.

Looking briefly at the fleet contribution analysis at the bottom left, our Company's strongest revenue stream is our time charters when the weakness of the market is evident in the spot activity, which has a low contribution to our net revenues, only 11% while committing 23% of our fleet voyage days in spot activity.

I will now hand you over to our CEO, Harry Vafias, who will discuss market and company outlook.

Let's proceed with slide 11. The growth of the LPG market still stands strong despite of the oil price environment. In terms of export activity, even though US oil production has seen a decline, US LPG exports have actually increased. LPG exports from the USA reached 20.5 million metric tons in the first eight months of 2016 with a forecast of 26 million metric tons until the end of 2016 and just shy of 30 million metric tons in 2017.

In terms of imports, China continues to have the leading role, importing around 1.5 million metric tons in the first eight months of 2016, marking a 25% increase against 2015 volumes. It's important to note that smaller but important markets for LPG trade are emerging. The activity in Iran has intensified, while the country of Bangladesh has issued 38 new licenses entitling holders to build storage and bottling plants for LPG. The country's demand is expected to rise significantly in the years to come, although a small area of intensification of LPG trade will benefit greatly the segment of small pressurized vessels. In terms of the LPG price arbitrage that affects the LPG seaborne trade, we noticed in the third quarter a narrowing of price differentials. However, this widened in October due to the seasonal demand picking up and an increase in oil prices evident during this interval. Overall, should the price arbitrage widens even more broader, LPG trade is bound to intensify.

Focusing on our segment, during Q3 2016, the purchase market remained challenging, whereas (inaudible) the shipping line has been substantial for long periods with low freight rates. There is definitely a seasonal factor explanation to part of the softness during this period but still the element of oversupply of ships negatively affects our segment. The pressurized market has performed much better in Asia. Our signs of returning to a more balanced market are evident, particularly during the last month. Another important element is that there has been a significant increase in petchem gas cargos, and this helps to explain the tightness of the market, but also the vessel supply side has stabilized, giving us reasons to be more optimistic for the future trade in this area.

In slide 12, we see the evolution of small LPG charter rates. As evident by the table presented, the small LPG segment has experienced sharply declining rates during the past couple of years. In addition to rates compared to Q2 2016, the rates in the third quarter of the year marked further decline, driven mostly by low seasonal demand. In terms of scrapping activity, even though wage distribution of the small LPG fleet favors scrapping, since the beginning of the year, we only noted four vessels being scrapped. The strong point in our segment is the limited order book for the years to come. As per published orders, we have two vessels to be delivered until the end of 2016 and 2.5% of the total fleet to deliver in the period 2017 to 2018.

I'll now continue to discuss further our Company's outlook commencing with our share price performance for the last four months in slide 13. The performance of our stock is presenting along with selected gas carriers peer group. Again, we stress the fact that all stocks of our peer group exhibit strong correlation with oil price movement with the exception of the immediate post US election period where all shipping stocks increased rather sharply. Focusing on StealthGas during the interval examining, our stock value decreased by about 4%.

Proceeding to slide 14, we are showing different scenarios on the Company's performance for 2017. The different scenarios were created based on our existing fixed charters plus vessels open on the spot market. Revenues were calculated using an estimated spot rate based on current market and an individual utilization rate for each vessel. We estimate that the hypothetical $500 increase in spot daily rates will lead to an approximate $4.3 million contribution to our annual EBITDA. We find this quite interesting as it shows the sensitivity of our revenue stream to market rates fluctuation, but most importantly, our strong earnings improvement potential should rates increase even modestly. That is at an average percentage of 5% to 10%, which is a realistic scenario for the future.

Proceeding to slide 15, we can see some valuation multiples of StealthGas against comparable companies. All peer group companies trade at the discount to NAV, while asset values exceed current enterprise values. As evident, our Company trades at a greater discount than its peers in terms of NAV, but has a clear and safe capital structure with less gearing than its peers, in spite of having expansion plan that took place over the last couple of years.

Compared to our peer group, our debt-to-assets ratio is lower by 11%. We believe that low share price combined with solid company fundamentals, such as healthy capital structure, make a good investment opportunity for medium-term investors.

Concluding with slide 16, we summarize all the reasons why we feel StealthGas is a good investment and present the market factors, but any improvement would allow our company to express profitability to its fullest potential. We base this belief to our capital structure, our solid fleet management, (inaudible) chartering and operations and our consistency in maintaining top quality vessels, striving to provide top quality services to our customers.

The third quarter of 2016 was quite a difficult one. Although broader LPG demand was strong this quarter, we faced lower day rates and extended idle time due to seasonal factors, which suppressed our bottom line even further. In this poor market environment, particularly very weak spot market, our earnings potential was affected. Despite the bleak outlook, we succeeded to lock in nine new period contracts and extended existing ones. Our period coverage up until the end of the year increased to 87%, while our secured revenues are in the order of $175 million.

In terms of our operations, we continue to manage closely our costs, trying to contain our operating cost base and our G&A costs. Moreover, and following our Board's decision, we in collaboration with a yard pushed back the deliveries of our last four semi-ref newbuildings.

We have now reached the end of the presentation, and we will like to open the floor for questions. So please, operator, open up the floor.

(Operator Instructions) David Sachs, Hockey Capital.

On these four semi-refrigerated that you pushed out, was there any concessions that you had to make with the yards to accommodate them or to compensate them for that or...?

Not really, just to cover some costs, which is the warehousing of the ships and painting of the hall, because it would get, how you call it, dirty from grass by being let -- by being idle in the yard for a couple of months.

Okay. And then, if you could talk a little bit about narrowing down the third quarter into a couple of months in sort of October and most of November under our belt. Can you give us some sense of what was happening with rates as you went through the month or through the third quarter and as you're seeing now in October-November, and what makes you feel that in your term here at the bottom of the cycle?

We feel that we are near the bottom because we see charters keener to take ships on period. It's not that the rates are suddenly booming, but when you see older ships getting snapped up by charterers, that for us is a good signal that some really major charters are calling the bottom, and hopefully, we're expecting a cold winter, which means strengthening day rates and limited idle times between the cargos.

Last question, if you can comment a little bit about your MRs and your Aframax's in terms of your -- one, what you're seeing happening in those markets; two, your long-term intentions in staying in that asset class opposed to perhaps using those as a source of additional liquidity?

Yes. So, I think we've discussed that before. As I said before, these ships are still generating very good money for StealthGas. They are fixed. All of them are above current market levels. The values of tankers, I don't know if you follow, they have fallen dramatically since last year. So even if we sold the ships, if we deduct the debt, there won't be so much cash left anyway. So it wouldn't really help StealthGas in the end of the day. So the strategy is the same, keep fixing the ships on periods, so for the second source of income for as long as the LPG rates are soft.

Patrick Sheffield, Beach Point Capital.

Just a couple quick ones. One, I thought I heard you say something about $10 million of unrestricted cash getting released or something to that effect. Would you mind repeating the comment you made earlier in the call?

Yes. We had a legal claim in South Africa for one of our ships. It was totally unfair legal claim against us. We won the case and the money we had put down as a guarantee were returned back to us. It's a significant amount of money and that's why we thought it would be good to announce it.

Where was that cash balance sheet I guess prior...

It was in the balance sheet as restricted cash. Now, it's back as unrestricted cash.

And it was $10 million, you said?

Correct.

And just sort of following up on David's question about rates, has there been any change, I guess, in October or November relative to the Q3 rates?

As I said, Patrick, it is a bit early to judge. I mean, the winter is now starting and we actually see quite a rapid decline in temperatures. I don't know about the US, but at least in Europe, that's what we are seeing. We are hopefully going have a cold winter, which is good for the business. As I said, the only significant signal we have seen up to today are the increased period fixtures on our older vessels because obviously the brand new vessels are easy to be fixed. But when you see vessels that are 18, 19, 20, 22-year-old getting fixed on period, I think this is a good signal of what's coming, but I don't want to say too much because as you know, we are quite conservative.

And then looking at CapEx for 2017, aside from the new build that you laid on the presentation, are there meaningful dry docking costs or any maintenance capital expenditures that you anticipate?

No, not really. There's always dry dockings, but as you know, dry dockings for the ships are not significant amounts. The more significant amounts are obviously the new buildings, which are anyway pushed back and thus, our equity contribution will also be slightly pushed back anyways. So, dry dockings, of course, is such a big fleet. There are dry dockings every single year.

And then, as far as maturities of bank debt next year, you just have that $17.5 million facility that matures in December 2017. That's the only meaningful bullet?

Yes, yes. We have -- as you know, it's a bit forward. We cannot discuss with the bank 12 months or 13 months in advance, but the intention is to refinance it.

David Sachs, Hockey Capital.

In terms of environmental regulations that might be affecting fleets of your characters, are there anything that's projected or has been implemented that will happen over the next few years that will require fleet owners to invest significant money on environmental remediation for their assets and could that accelerate some scrappage of the older vessels and maybe tighten this market up a little bit more?

David, you are 100% correct. Very clever question. Indeed, there are two sets of regulations coming within the next two to five years, one is water ballast treatment systems and the other is emissions, both are quite expensive. And obviously, someone with a 20, 25-year-old ship will think twice before investing any money on such an old ship and I guess, depending of course on the market, would rather scrap, I guess.

And can you give us some sense of what the capital upgrade costs would be for an existing vessel to modify it or achieve both ballast and emissions?

For the ballast, there is no US systems approved yet. So the answer is we don't know. For European systems it is about $300,000 per ship. For US, as I told you, we don't know yet. We're waiting for the US Coast Guard to come out with approved systems. For the emissions, there is no real cost because you can opt to burn distillates and therefore make no amendments to your ship. Or if it's a brand new ship and you want to have an advantage over your competitors, you can install a scrubber, which means that you can burn much cheaper fuel in comparison to your competitors, but of course, the scrubber costs $2 million to $3 million.

Have you done an environmental assessment of your fleet and have a sense of where we would be looking either to put in scrubbers or your preference would be to burn more costly fuels?

Yes, we have done, but our advisors cannot yet reach a conclusion, as I told you, since the US Coast Guard has not yet approved the system. So without approved system, it's not very easy to reach a conclusion.

And what percentage of your fleet is compliant with what has been proposed as far as environmental (inaudible). I would assume some of your newer assets are all fully compliant at this point.

Some of the new buildings have already water ballast treatment systems fitted, not all of them.

And then, the order book, you mentioned only a few percent increase over the next 2.5 years. And if I look further out 1920, those would be zeros right now on the chart?

A 100% zero.

And what would happen, in your mind, if we took 10% of the world's fleet out based on the math exercise of investing $2.5 million, $3.5 million to upgrade a 20-plus-year-old vessel? Has there --?

The maths are not right, I told you. For a water ballast treatment, which is obligatory, is $300,000, not $2.5 million.

I know you're talking about adding a scrubber though would be $2.5 --.

We don't have to add a scrubber. To add a scrubber is only voluntary. If you want, you can burn distillates and you make no changes to your shape, as I mentioned.

In that case, you'd be passing that extra cost through. So it would just become an overall tax to the industry?

Yes. It depends what you want. I mean, if you want to put a scrubber, you put an initial investment in, but then you have a very attractive ship for the charters and you get your money back that way or you don't invest anything, you have a normal ship, let's say, but you have to burn more expensive fuel. It depends on what the strategy is and depends what your cash is and depends how you want to place yourself in comparison to your competitors, I guess.

And just from an industry perspective, we've had a series of deliveries of VLGCs. This was going to be -- 2016 and 2017 are big years for VLGC deliveries. Has that affected -- it doesn't appear to have yet affected demand for your smaller pressurized vessels. Why hasn't that happened and will we see that happening in 2017 or another reason that the market becomes tighter or more dynamic?

David, as you know well, this coincided with the collapse in oil price and the weakening of most of the economies, right? So yes, on one hand, we had a lot more bigger ships, but on the other hand, we had the problems we just discussed. So I think the one cancel the other, and the same time, we had a big --relatively always, a big fleet of small shapes and a big chunk of that fleet was overaged, but we have seen very few ships leaving the fleet. So that's why we have not seen no real benefit. But as we've discussed before, the ships cannot wait forever. At some point, they have to go.

And there is no clever alternative to moving these cargos outside of using your small pressurized vessels to these secondary markets?

No, not of what I know of.

(Operator Instructions) There are no further questions in the queue at this time. I will turn the call back to your host for any additional or closing remarks.

We'd like to thank all of you for joining us at our conference call today and for your interest and trust in our company, and we look forward to having you with us again at our next conference call for our fourth quarter 2016 results sometime in February. Thank you.

Thank you, ladies and gentlemen. That will conclude today's conference call, and you may now all disconnect.