StealthGas Inc (GASS) 2018 Q1 法說會逐字稿

Good day, and welcome to the StealthGas First Quarter 2018 Conference Call. This conference is being recorded. At this time, I'd like to turn the call over to your host today, Mr. Harry Vafias, Chief Executive Officer. Please go ahead, sir.

Good morning, everybody, and welcome to our First Quarter 2018 Earnings Conference Call. This is Harry Vafias, the CEO of StealthGas. Joining me on the call today is our Finance Officer, Mrs. Fenia Sakellaris, who will provide commentary on our financial performance for the period.

Before we commence, I would like all of you to be reminded that we'll be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, if you could all take a moment to read our disclaimer on Slide 2 of this presentation. Risks are further disclosed in StealthGas' filing with the SEC.

I would also like to point out that all amounts quoted unless otherwise clarified are implicitly stated as U.S. dollars.

Slide 3 summarizes our key highlights for the first quarter of this year. This quarter's performance, both in terms of operational utilization and profitability did not reflect our company's full potential and was an outcome of specific events combined with the change in the market's economic variables, all of which will be explained in detail during the course of this call.

In the quarter -- in the first quarter of 2018, we achieved an operational utilization of 93.3%, 3% lower than our utilization in Q1 '17, mostly due to the ballasting of 3 newbuild vessels and operational days lost due to the positioning of spot trading vessels.

Despite this, we continue our chartering strategy to the extent the market permits us to do. We have 73% of fleet days secured for the remainder of 2018 with a total of about $171 million in contracted revenues.

One of the most interesting aspect of this past quarter was in essence our sale and purchase activity. In May 2018, we took delivery of our last 22K semi-ref newbuilding LPG ship, the Eco Freeze, with which StealthGas successfully concluded its newbuilding program, counting the delivery of 26 new vessels since 2011.

In spite of the soft semi-ref LPG market, we succeeded to place all 4 of our semi-ref newbuilding vessels on period charters. Moreover, we are proceeding with the sale of vessels. A fairly modern vessel, the Gas Enchanted was sold and delivered at the beginning of May, and we have concluded with the sale of another 2 vessels, the Gas Legacy, 1998 built, 20 years old; and the Gas Evoluzione, '96 built, 22 years old, with expected deliveries in August '18.

All these sales generated an aggregate of $17.5 million. The asset values are improving even for older vessels as we sold the Gas Legacy at about 5.6x scrap value and the Gas Evoluzione at about 4.2x its demolition value.

In terms of our financial performance, we ended the first quarter of '18 with $39.7 million in revenue. Although the market for the small LPG ships continues to be strong, this period will face a very weak tanker market, which affected the total revenue.

In terms of the broader economic environment, the constant rise in oil prices noticeable in the past months, although positive for the trade of LPG, has increased our voyage cost and affected our operating cost base. This led to an adjusted EBITDA figure of $13.6 million, and cap the rise of LIBOR rates led also to an income loss excluding the impairments for the period of $2 million.

As per our leverage and cash position, our gearing remains at low levels, around 43%, while we're still maintaining healthy unrestricted cash balance of approximately $53 million.

In Slide 4, we provide an analysis of our fleet employment. In terms of charter types, out of a fleet of 55 operating ships, we have 13 of them on bareboat, 34 on band charters and 8 in the spot market, 4 of which are employed in a series of consecutive spot voyages.

During the past 3 months, we successfully concluded 10 new time charter contracts and contract extensions. We also chartered in an LPG vessels from a third-party to take advantage of this positive market momentum.

What I would like to note is that we have 19 vessels finishing their period contracts in the period from this month until December '18 and they will most likely be chartered at improved rates, leveraging our company's revenue.

With regards to our fleet geography on Slide 5, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels as of May 14. Currently, 49% of our LPG fleet trades in the Middle and Far East, about 29% in Europe, 12% in Africa, 6% in America and 4% in Australia. In the first quarter of '18, we had one vessel of our fleet repositioning from South America to Europe and another vessel positioning from Australia to the Far East.

I'm now turning you over to Mrs. Fenia Sakellaris for our financial performance discussion for the first quarter of '18, and later I will discuss the market and industry outlook.

Thank you, Harry, and good morning to everyone. As explained at the beginning of our call for the first quarter of '18, although we were still operating in a favorable market for the small LPGs, we faced several setbacks that led to lower net revenues unanticipated.

Let us move on to Slide 6, where we see the income statement for the first quarter of '18 against the same period of the previous year. Voyage revenues came at about $39.7 million, an increase of 4.2% compared to the first quarter of '17. This increase is attributed to improved rates for the small LPGs, which partially covered their revenue reduction stemming from the operation of oil tankers.

One of our product tankers was operating for the majority of the first quarter in the spot market, whereas known rates for these vessels are quite weak.

Overall this quarter compared to the fourth quarter of '17, the revenue from our tanker operation were about $700,000 lower. We need to stress that we achieved higher revenue despite of a low utilization figure compared to the first quarter for '17 and the sale of LPG vessels in 2017 and understanding that the market for the small LPGs is indeed improving.

Voyage costs amounted to $5.6 million, marking a 58% increase compared to Q1 '17 due to the higher number of vessels operating in the spot market, a quarter-on-quarter increase of average bunker prices by 20%, but most importantly, the ballasting of 3 newbuild vessels in this quarter added to our voyage costs about $600,000.

Net revenues, that is revenues after deducting voyage costs, came at $34.1 million.

Running costs at $15.4 million marked about $460,000 increase compared to Q1 '17. This increase was an outcome of the operation of 3 22,000 semi-ref vessels, which is more expensive than the small LPGs, a rise in store costs to address the initial supply needs of the newly delivered vessels and higher oil price, which affected and will continue to affect the price of lubricants. The rise in operating costs was partially offset by receipt of a claim from one of our oldest vessels.

With regards to drydocking cost, this amounted to approximately $1.5 million, resulting from the drydocking of 2 LPG vessels and 1 product tanker, which was more expensive.

Based on all of this, our adjusted EBITDA for the first quarter of the year was $13.6 million, marking a $1.7 million reduction compared to Q1 '17.

Interest and finance costs likewise had substantial increase of about 42% mostly because of the continuous increasing LIBOR rate and the increase of our leverage by $70 million due to the newbuild deliveries.

With regards to LIBOR rates, we would like to mention that the 3-month LIBOR was around 120 basis points in the first quarter of '17 and gradually declined to 230 basis points as of the end of the first quarter '18.

In light of this event and as mentioned in our previous call, we have increased our swap coverage to 25% of our current outstanding debt. With an adjusted net loss of about $2 million, our adjusted earnings per share for the first quarter of 2018 was minus $0.05.

Slide 7 demonstrates our performance indicator for the period examined. As mentioned earlier, our operational utilization for Q1 '18 was in the order of 93.3% and 97.3% for the first quarter of '17, mostly as a result of days lost due to the ballasting and positioning of several vessels.

Our adjusted time charter equivalent marked a slight increase of approximately $100 per day, but we need to know that mostly due to the higher cost faced this quarter for the initial operation of 2 newly delivered semi-ref vessels, our adjusted operational expense increased at a higher rate than that of our revenues.

Looking at our balance sheet in Slide 8. We managed to preserve very good liquidity of $53 million in free cash and maintain our gearing at low levels in the order of 43%.

In terms of net debt ratio, we stand at about 38%. As mentioned in our previous call, we concluded with the refinancing of all balloon payments due in 2018.

In light of the rising LIBOR, we have hedged almost 40% of the total loans we took for our 4 semi-ref new LPG vessels. We have no balloon payments due for refinancing in 2019.

Slide 9 presents on a daily basis the evolution of our breakeven against our average time charter equivalent. What we noticed is that our average time charter equivalent has stabilized at higher levels compared to previous quarters, while the rise of our daily breakeven comes mostly from the rise in our finance cost due to the increase of LIBOR rates.

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

Let's continue on Slide 10. Global trade of LPG has grown by an average of 6% over the last decade, driven largely by growth in U.S. exports to Asian destinations. Indeed, LPG exports from the U.S. have shown a positive trend, increasing by an average of 35% per annum over the past 10 years. Leading LPG importers are China, Japan, India and South Korea, with Asia accounting for half of the overall trade. China has 8 PDH units currently in operation and will commence the operation of 2 more in 2019. This PDH plants use about 40% of the propane imported by China.

As per other major importers in the first quarter of 2018, LPG imports in South Korea rebounded due to strong demand from the country's petrochemical sector. In March '17, we saw the opening of the third PDH plant in South Korea. In fact, that is a major contributor to the country's increasing demand for LPG. Other countries like, for instance, Indonesia have exerted strong LPG import growth, which for 2017 was 17%. This is the outcome of the country's program to substitute kerosene with LPG.

On Slide 11, we see that during Q1 '18, rates for all small LPG segments continued to be on the rise, exerting in most cases an annual increase of about 20%. Our market fundamental still stands strong and it's believed that the market will continue to strengthen for at least the next 2 years. This positive long-term market forecast is due to the very small order book and the aging fleet of our segment.

According to Gibson Shipbrokers, it's [envisioned] that rates for the 3,500 cubic meters ships will move towards $300,000 per month, while for the 5,000 cubic meters ships rates will climb to the mid-$300,000.

Focusing on our segment's trade. (inaudible) became evident through the past quarter, though the balance on the 3,500 to 5,000 cubic meters ship have tipped in the owner's favor and we have seen healthy spot rates achieved for substantial time. Several vessels have left the region, which have left significant less spot candidates to choose from for the charters.

The spot market in Asia was relatively active throughout Q1 2018, save for the Chinese New Year period. However, although it has been active, it has not been as robust freight-wise as the spot market in Europe. We have also seen cargo cancelations as charters have not been able to find vessels or the vessels were simply pricing themselves higher than what the charters could afford. Although we expect some slower period during the summer, we don't foresee a gradual further tightening of the Asian market. We see vessels leaving international trading for domestic markets, and with few newbuilding deliveries, this means improved bargaining power in the owner's favor.

In terms of scrapping, the small LPG pressure segment has substantial old tonnage as 23% of the fleet is above 20 years of age. Going forward, 2 factors may influence scrap policies. Firstly, the required investment in ballast water treatment system will for some older ships prove costly given their remaining trading time. Secondly, following the implementation of the sulfur oxide cap on January 1, 2020, prices of compliant low sulfur fuel is expected to surge, making older ships without a scrubber less attractive.

For these reasons and taking into consideration the oil tonnage of our segment, scrapping is anticipated to intensify over the next 2 years. It can be argued that scrapping has begun to intensify already. Since the beginning of the year, we have witnessed 4 pressurized LPG vessels sold for demolition, while in 2017, the number of vessel scrapped throughout the year was 5. As per published newbuilding orders, there are 10 vessels that is 2.9% of the total fleet to be delivered in the period 2018 to 2020.

On Slide 12, we discuss our company's outlook, commencing with our share performance for the past 5 months. The performance of our stock is presented along with selected gas carriers peer group. It's evident that all stocks presented follow a broad correlation with oil price movement. However, oil price has shown a continuous rise particularly in the past couple of months, leading to a weaker correlation with energy-related stocks. During this interval, our company stock has remained relatively flat.

On Slide 13, we're showing different scenarios on the company's performance for '18. The different scenarios were created based on the existing fixed charters plus vessels open on the spot market and assuming no new charters upon the expiration of the fixed contract. Revenues were calculated using an estimated spot rate based on current market and an individual utilization rate for each vessel.

Compared to the previous forecast presented, we used already agreed charter rates for the tanker vessels and lowered their net revenue margin in order to account for the higher bunker costs. In addition, we increased our OpEx base by 2% in order to account for the higher lubricant costs, again, and outcome of the increased oil prices.

We can see throughout the quarters examined that the hypothetical $500 increase in spot daily rates will leverage our earnings, while a $2,000 hike in daily rates lead to an average boost of approximately $11 million to our annual EBITDA.

This table shows our company's potential if there is a further rate strengthening, a realistic scenario given current market conditions and the fact that rates climbed by almost 4% in the past quarter.

Proceeding to Slide 14. We can see some valuation multiples of StealthGas against comparable companies. As evident, our company trades at a greater discount than its peers in terms of net asset value despite its safe capital structure, less gearing than its peers and market-leading share of the pressurized market. We would like to point out that this selected peer group is comparable in terms of broader seaborne LPG trade, as no other company in the small LPG segment that we operate in is listed on any U.S. stock exchange. The lack of a true comparable company and also low share volume are some of the reasons why we think our stock is undervalued.

Concluding our presentation with Slide 15. We summarize all the reasons why we feel StealthGas is a good investment as a market-leading company in a niche market with promising fundamentals. At this stage, I will summarize our concluding remarks for the period examined. The first quarter of '18 was a very busy period for our company in terms of sale and purchase activity. We agreed to the sale of 3 additional vessels, 2 older ones and 1 fairly modern one, all at an aggregated price of $17.5 million. More evidence that values are firming even on older vessels was provided by these sales as we sold the Gas Legacy, which was 20 years old, at 5.6x demolition value, and the Gas Evoluzione, which was 22 years old at 4.2x for demolition value.

In addition to this and as announced a month ago, we took delivery of the last 22,000 semi-ref newbuild vessel, thus concluding our newbuilding program, which counts the delivery of 26 new vessels since 2011, most of them built in Japan.

Both our net revenue and profitability were affected this quarter by the rising oil prices, which increased our voyage costs and the increase in LIBOR rates, which affected our finance costs. In addition, we saw a slower spot market for our LPG carriers in February in the weeks around the Chinese New Year. These factors, coupled with the weak earnings from our tankers, led to lower-than-anticipated margins.

This quarter, company-specific factors deemed as one-off events had an impact on our revenue and profitability as well. In particular, costs related to the delivery and commencement of trading for vessels for the new vessels Eco Arctic and Eco Ice, the second and third vessels in our series of 4 Handy Size semi-ref ships. And in addition, significant ballasting costs on a number of vessel, which changed trading region burdened our voyage cost by about $0.6 million.

We continue to observe that our core market fundamentals have improved as rates for small LPG ships are still on the rise, and the forecast is that they will continue to do so at least for the next couple of years. Taking this into account, our main focus is to take advantage of this positive market momentum to the fullest and calibrate our fleet management strategy as to increase our profitability. We have so far in the second quarter of 2018 reduced our commercial idle days by about 90% compared to the first quarter of this year. With an asset base in excess of a $1 billion, low leverage and ideal demand of supply conditions, combined with improving freight rates, gives us reason for optimism for the future.

We have now reached the end of our presentation. We'd like to open the floor for your questions. So operator, please open the floor.

(Operator Instructions) We now move to our first question today, which comes from Randy Giveans of Jefferies.

So I've got a couple of questions, starting with the sale of the vessels. So as I asked in the last quarter, you had 7 vessels or so over 20 years of age. You sold 3 vessels, 2 of them older, one of them kind of more modern, as you mentioned. So how did you kind of choose these 3? Were these 3 that you have earmarked for sale or there are a buyer that specifically wanted these vessels?

As discussed, all of our over-aged vessels are sales candidates. Obviously, the older the ship, the more difficult it is to trade it. The more -- the older the ship, the more difficult it is to get all major approvals. The older the ship, the higher OpEx you have. So all our old ships might be sales candidates, and obviously, when you see this kind of premium over demolition value, I guess there's no question you have to take the money. On the slightly modern ship, again, it was a matter of price. We were not actively seeking a buyer, but we got a very good price for a small 12-year-old ship. And we decided that, with the permission of the board, to sell her.

Okay. And then for use of proceeds for these. Obviously, you're paying on some debt on them. What about the incremental kind of net cash? And as a follow-up to that, what is kind of your ideal --your needed cash balance going forward? Is $50 million kind of your base level or do you only want to hold $30 million on balance sheet?

Good question, Randy. First of all, the total debt on these 3 ships was 4 point something million, so the debt was very minimal. Use of proceeds, there is no use of proceeds at the moment. We're following the market. If, of course, there's a very good opportunity to buy something younger, it will be discussed at board level. We just finished our huge CapEx program, so obviously, we are no short of modern ships. And having a cash balance of about $50 million, as you said when you have a fleet of 50 to 60 ships, I think, is safe enough. So again, with the board's permission, we think we should always have between $40 million and $60 million as cash for rainy day or if something goes wrong.

Got it. Okay. Now looking at the supply side. It appears that the small LPG sector actually shrink year-to-date with 0 deliveries, I think, or maybe 6 scraps. So do you expect this trend to continue throughout 2018? Like a net supply shrinkage in the small LPG segment?

This is what the numbers show, Randy. I mean, forecasting scrapping is not an easy thing because if, let's say, by September the rates are up by another $1,000, then some people might prefer to pass a special survey and buy and pay $400,000 on scrapping the ship. But with 23% of the fleet over 20 years of age, sooner or later, you'll see more scrapping going on, especially with the 2 new obligatory regulations coming in force from now until 2020, as you know well. So I think it looks good, and comparing with other shipping segments in LPG or other completely different segments, dry and tankers, I don't think you'll see such attractive demand and supply fundamentals, especially from a fleet point of view.

Got it. And then the order book only has maybe 7 vessels at most. So speaking of the order book, if you or any owner per se, were to make an order today for a 3,500 cbm vessel, when do you think that could get delivered? Is it 12 months, 18 months, 24 months?

These ships, as you know well, cannot be ordered in your typical huge Chinese yard that can build 20, 30 ships per annum. These are mainly built by small Japanese yards with an annual output of 2 to 3 ships. If you order a ship now, I guess, the earliest you can take delivery is 18 months from the signing date. But I hope we don't see many new contracts. And up to now, despite the market strengthening, we have not seen a big newbuilding surge, which actually is very good news for the owners of such vessels.

Okay. Two more quick questions. Sorry to -- not trying to hog the call here. But speaking of charters, you've locked in a bunch of 1-year charters, booked time charter, bareboats in recent months. Now were these at relatively comparable or higher rates than previous charters? And if higher, are we talking $100 a day, $1,000 a day? What is kind of the rate of change there?

Good question. As you can understand, Randy, I cannot really -- I cannot give you a number because all the ships are different in ages and sizes. So obviously, they're depending on location, there is a difference on the premium. What I can tell you is that on the LPG side, excluding of course, the very old ships, all charters were agreed at better rates. Better rates might mean from $500 up to $1, 000 a day. On the tankers, it's the opposite. All new charters, obviously, on the tanker side, because the tanker side -- the tanker segment at the moment is at a very, very low point in the cycle. All new charters on the tankers are down by between $2,000 and $5,000 a day. Thank God we don't have too many tankers opening from now on. But we have as you show in the presentation, another 19 LPG ships coming open from this month until December. So hopefully, this will be -- most of these, excluding the old ships, will be renewed at better rates, thus improving a lot the bottom line.

Got it. All right, last question, I promise. A quick question. So do you expect the voyage expenses to decrease sequentially in 2Q, mainly as that $600,000 in ballast costs for those 3 22,000 semi-refs were onetime items or are these ballast costs going to continue into 2Q '18 and beyond?

Again, it's not very easy to say. But I would suspect that it will be down because these were one-off positioning voyages for these newbuild vessels to start their actual trading. And so I would say that for Q2, when we announce the Q2 results, this will be found at lower levels, yes.

(Operator Instructions) We move now to our next question from [Arash Safari]

Harry, just a quick question for me. It's [Arash] from (inaudible). Sorry if I missed it. You mentioned the product tankers. Could you just update us on the crude oil tanker, on the Aframax, and what your strategy is for that as well?

Yes. I think it's in our announcement. We just, in Q1, we fixed the ship on a 1-year bareboat at a lower rate, obviously, from what she was on. And obviously, we chose to fix for 1 year because we are at the bottom of the market, so obviously, you don't want to lock the ship into a low rate for a long time. So we hope by the time she comes open again in Q1 '19 that the market will be better.

(Operator Instructions) We have a question from George Berman from Raymond James.

It looks like we're finally going in the right direction.

George, thank you. I'm not as happy as you are, but the market is going towards the right direction. That's true.

Yes, the improvement is there. Just one quick question concerning the -- I think you still have an open stock buyback program going on. How much sense would it make with your company trading basically at 1/3 of net asset value to forcefully engage in further stock buybacks since your newbuild is complete?

Good question, George. We discussed that in the previous quarter. The board have said that they want to see the actual improvement of the market being crystallized in our quarterly results, which has not really yet happened. And at the end of the year, depending on what the market has done and what our cash position is and what our debt position is, to decide either to continue buybacks, as you know, we have spent $21 million to buy stock already, or instead of buying back more stock, start a small dividend. These are the 2 options we have, but the board will discuss that in 7 months from today, around Christmas time. So we have to show them that from now until Christmas, the results will improve, the bottom line will improve, the profitability will be up, and obviously, thereafter without any CapEx, it will be a good idea to discuss 1 of the 2 options and hopefully get the board's greenlight.

Okay, that's something to look forward to. One last quick question. The increases in fuel prices is generally passed through or taken on by the charter. Is that correct? Or do you have exposure to actual fuel price rises?

Very good question. When the ships are fixed on time charter or bareboat, then the fuel price is paid by the charter. When the price -- when the ship is fixed in the spot market or in consecutive voyages, then the price is paid by the owner. So it depends on what kind of charter it is.

Okay, and then maybe one quick last question. What do you contribute the recent strong rise in LIBOR rates to? Compared to the U.S., it seems like especially the short-term LIBOR rates have been rising at unprecedented levels.

Trump is doing a very good job with the economy, and that is reflected in the LIBOR rates. But I'm not an American, so you'd better not rely on my opinion.

Even though LIBOR is the London interbank rate versus U.S. rates?

Sorry, I missed that.

LIBOR is the London interbank borrowing rate, which entail primarily the European markets versus here our U.S. markets. And it seems like...

No. LIBOR is the U.S. one. It's based on the U.S. so...

As we have no further questions, I'd like to turn the call back over to you, Mr. Vafias, for any additional or closing remarks. Thank you.

We would 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 again with us at our next conference call for our Q2 results in August 2018. Thank you.

Thank you, sir. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.