StealthGas Inc (GASS) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the GASS Fourth Quarter and 12 Months 2019 Financial and Operating Results. (Operator Instructions) I must advise you that this conference is being recorded today.

I would now like to hand the conference over to your speaker today, Mr. Michael Jolliffe, the Chairman of the Board.

Good morning, everyone, and welcome to our fourth quarter and full year 2019 earnings conference call and webcast. This is Michael Jolliffe, the Board Chairman of StealthGas. And with me on the call is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris, who will later on discuss our financial performance.

Before we commence our presentation, I would like to remind you that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance.

At this stage, if you would all take a moment to read our disclaimer on Slide 2 of the presentation, I'd be grateful. Risks are further disclosed in StealthGas' filings with Securities and Exchange Commission.

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

Slide 3 summarizes the key highlights of our fourth quarter and full year 2019 that we released today. The weak spot market in Asia with very low petchem cargoes available persisted; however, we managed to achieve a strong operational utilization of 98%. Our results would have been stronger had it not been for various dry dockings, consequently an increase on our off-hire days of 1 owned and 1 chartered-in vessel. Furthermore, we did position ourselves defensively amidst the difficult spot Asian market, committing in the spot market, less than 16% of our voyage days compared to 18% for the same period of last year.

With our newly concluded period charters and charter extensions, we have now ensured 66% of period coverage for the remainder of 2020, with approximately $135 million in contracted revenues up to 2029. This conservative stance against market conditions has proven to be our strongest company tactic, especially this year with the recent coronavirus outbreak in China that has struck the shipping market globally during the past few weeks.

In terms of our strategic endeavors, we have been very active. We are pleased to announce that StealthGas further expanded into the MGC carrier segment through the agreement to acquire, under a new joint venture scheme, 3 second-hand 2010-built MGC vessels. We continue to grow our fleet while strengthening our presence across the LPG spectrum.

Looking briefly at our financial performance highlights. Our voyage revenues came in at $35.2 million, a decrease of $3.4 million compared to the same period of last year due to the net reduction of our average owned fleet by 7 vessels. In spite of our revenue contraction due to our fleet decline, our daily time charter equivalent is rising. Compared to the fourth quarter of 2018, our daily time charter equivalent increased by about $500. And looking at the whole of 2019, it is very positive for us that this was a profitable year, which generated an adjusted EBITDA of $62 million and an adjusted net income of $4.3 million, corresponding to earnings per share of $0.11.

Looking at our financial structure. We continue to deleverage at a strong pace. Our debt to assets now stands in the order of 38%, and we still maintain a strong cash position of almost $69 million of unrestricted cash.

Last but not least, based on our further stock repurchase program, despite the very low daily trading volume, we have purchased to date almost 732,000 of our company's shares since May 2019 for an aggregate consideration of $2.5 million. In Q4 2019, we purchased a total of 230,000 shares to date for an aggregate consideration of $791,000.

Slide #4 provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 42 operating vessels excluding our joint venture vessels, we have 12 of these on bareboat, 27 on time charters and only 3 in the spot market. Indeed, our low spot exposure assists in limiting risk, both against increased bunker costs as a result of the new IMO 2020 implementation, and against increased off-hire, especially this period when the market in Asia is quite shaky.

During the past 3 months, we concluded 10 new charters and charter extensions, all at improved rates, especially for our 22,000 semi-refs vessels. The period rates are significantly higher, thus adding to our bottom line. We now have 66% of our fleet days secured for the remainder of 2020. For the remainder of Q1 2020, our period coverage is as high as 92%.

Our contracted revenues are in the order of $135 million, with about $85 million secured up to the end of 2020, about $36 million for 2021 and 2022, and $13.5 million from 2023 up until the end of 2029. As evident, our secured employment, particularly in the short term, stands strong.

In Slide 5, I would like to provide a brief summary of our recent strategy concerning our joint venture engagements. Our current joint venture continues to operate smoothly, and 3 out of 5 of our existing joint venture scheme are under time charter contracts, and we are currently in the process of discussing new period charters for the 2 vessels that operate spot. As an opportunity to further expand into the medium gas carrier, what we call the MGC segment of the LPG shipping market, StealthGas has entered into a joint venture with an unaffiliated third party. Jointly, we agreed to the acquisition of 3 second-hand fully refrigerated 2010-built MGC vessels. These vessels have an aggregate capacity of 105,641 cubic meters and a total acquisition price of $80 million, with StealthGas holding a 51% equity interest. All 3 vessels are currently under time charter contracts at an average time charter equivalent rate of $545,000 per calendar month. The time charter contracts for the 3 vessels expire in July '20, August '20 and August 2021. As we will have joint control over these vessels, they will be accounted for in the StealthGas financial statements as an equity investment with only the related profit share reflected. These acquisitions enhance our fleet's diversification and broaden our presence across the LPG shipping market. We thought it was a good time to assert our position in the 35,000 cubic meter LPG market as rates for this segment have risen more than 40% since the end of 2019, while the current order book is less than 10 vessels in total.

In terms of our fleet geography, presented in Slide 6, our company focuses on regional trade and the local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels, excluding our joint venture vessels, as of February 5, 2020. Currently, 45% of our LPG fleet trades in Europe, about 37% in the Middle to the Far East, 8% in Africa and 10% in America, in the fourth quarter of 2019. And compared to our previous quarter, there were no significant changes in our trading profile.

I will now turn the call over to Fenia Sakellaris for our financial performance. Thank you.

Thank you, Mr. Jolliffe. And good morning to everyone. I will continue the presentation focusing on our financial performance for the fourth quarter of '19.

Indeed, we enjoyed a moderately profitable quarter assisted mostly by strong operational utilization, improved rates for most of our new period charters and a noticeable reduction in our finance costs. Unfortunately, the spot market in Asia became weaker, leading to our revenue stemming from our spot operations to be even lower than the third quarter of '19, thus negatively affecting our profitability.

Let us move on to Slide 7, where we see the income statement for the fourth quarter of '19 against the same period of the previous year.

Voyage revenues came in at $35.2 million, marking a $3.5 million decrease compared to the same period of last year. This contraction in revenues was expected due to the strategic reduction of our average owned fleet by 7 vessels, one less chartered-in vessel and relatively low revenue stemming from the spot market. It is noted that compared to the third quarter of '19, our daily spot revenue was lower by almost $2,000. Voyage costs amounted to $4 million, marking an 18% decrease compared to Q4 '18 because of spot days reduction by 32%. Based on all of the above, our net revenues for the period were $31 million, corresponding to a net revenue margin of 88%.

Running costs at $12.6 million marked about 14% decrease compared to Q4 '18. This decrease in costs was mostly due to our average owned fleet deduction by 7 vessels. It's noted that this quarter, we incurred the one-off insurance cost additionally in the order of $300,000, not expected to be incurred in the following quarters.

General and administrative costs decreased compared to the same period of last year by about $450,000, mainly as our stock compensation plan active in the same period of 2018 ended in August 2019. Based on all of these, our adjusted EBITDA is in the order of $15.1 million. Interest and finance costs marked close to $1.5 million decrease mainly attributed to the lowering of our debt, LIBOR decrease and several lower margin reductions we managed to agree during the past months.

Based on all the points analyzed above, we ended the fourth quarter of the year with an adjusted net income of about $1.5 million, corresponding to an adjusted EPS of $0.04. For the whole of 2019, our adjusted net income came in the order of $4.3 million, corresponding to an EPS of $0.11.

Slide 8 demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational fleet utilization for Q4 '19 was in the order of 98%. We marked a good performance. In terms of our adjusted time charter equivalent, we noticed a rise on a quarterly basis by about $1,000 daily, an outcome of improved time charter rates.

Looking at our balance sheet in Slide 9. Our strong liquidity continues as our unrestricted cash base is around $69 million; and including restricted cash, our liquidity is close to $82 million. Our gearing is in the order of 38.5%. In terms of net debt ratio, we stand at about 31%, a very healthy ratio.

Based on our scheduled principal repayments, we will reduce our leverage by around $40 million per year in the years ahead. We have no balloon refinancing due in 2020 with minimal balloon obligation of around $30 million in 2021, for which we have already entered into discussion for refinancing. We also expect a further reduction of loan interest costs in the quarters ahead. Assuming no change in LIBOR rates, we anticipate by the end of 2020, our loan interest cost to be reduced by another $1 million.

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

Let's proceed now with Slide 10. Rising global LPG production and consumption appears relatively assured in the years ahead and will continue to be backed primarily by U.S. exports on one hand and Asian imports on the other. The U.S.-Asia trade stands strong as America turns into the world's largest LPG exporter, producing about 2.2 million barrels per day in '18 to around 2.2 million (sic) [2.4 million] barrels per day in 2019, with 2020 forecasts at 2.6 million barrels per day.

Chinese LPG imports will remain the key driver of LPG demand, mainly due to the PDH plants. The country currently operates 8 PDH plants and this number is expected to nearly double by 2021. Other countries like India are gaining increasing importance for LPG trade as with their government's initiative. LPG is substituting biomass as household fuel. From the beginning of '19 until November of the same year, Indian imports were up 23%. Although PG trade fundamentals look promising, there are certain risks, such as the recent outbreak of the coronavirus that may potentially disrupt the market. Some of these effects range from slower port operations, discharge restrictions and lower contract rates to broader economic slowdown and overall trade disruption. Indeed during the past few weeks, all shipping segments from oil tankers to containers have been hit by the economic impact of factory shutdowns and travel restrictions implemented across China to control the spread of the virus. Should this situation be prolonged, it is estimated that Chinese LPG demand for 2020 will decrease by about 3%.

On Slide 11, we see that during Q4 '19 rates for the majority of small LPGs slightly weakened. The western spot market failed to show the expected strong Q4 market. In Q4 '18, the spot market in Northwestern Europe, in particular, showed significant strength with high activity and tight vessel supply and spot rates around all-time high. This last quarter of '19 though was significantly less active than expected due to some weather disruptions, along with strikes in France that led to soft spot rates.

On the period side, we have seen some activity and period rates were holding up reasonably well through the fourth quarter. Since the beginning of 2020, we have witnessed a bit of a negative turn in sentiment as there have been more supplies than demand after a few vessels came off charters, and we show additional tonnage positioning into Northern Europe. It's generally noted that indeed the period charter activity could be possibly affected by the IMO 2020 bunker regulations as some charters may return vessels in order to reduce exposure to high bunker prices. East of Suez, the last quarter of '19, gave some glimmer of hope for the owners as the new petchem JV between PETRONAS and Aramco in Malaysia started production and the new refinery in Muara in Brunei ramped up its exports. At times, the market got back to some good spot rates fixed, but it was never long-lasting. The (inaudible) petchem plant has unfortunately experienced some quality issues, and it's still far from its full potential export quantities.

On the period side, we showed quite a bit of time charter activity on the LPG side, especially for 5,000 cubic ships -- cubic meter ships. However, on the petchem side, things were very quiet, mainly due to the reluctance of charters to take forward positions.

The coronavirus has brought the early 2020 time charter market almost to a standstill with a wait-and-see attitude from charters. Our guess and hope is that it will take weeks rather than months for the sentiment to switch to positive again.

In relation to scrapping, the small LPG pressurized segment has an average age of 14 years. It has substantially old tonnage, whereas 26% of the fleet is currently above 20 years of age; and therefore, we expect an acceleration of recycling in the next couple of years. Particularly, now with the new IMO 2020 regulations and the water ballast that came -- that all came into effect.

Since the beginning of 2020, we have recorded the demolition of 1 small pressurized ship. As per published orders, there are 15 vessels, that is 4.2% of the total fleet, to be delivered until the end of 2021, a relatively small order book. The small gas carrier fleet has approximately 90 (sic) [95] ships above 20 years of age. Consequently, the current order book of 15 ships is not large enough to offset the older tonnage expected to be recycled in the period ahead.

The new IMO 2020 and water ballast regulations that came into effect will most probably accelerate scrapping as increased prices of low-sulfur fuels tend to make the operation of older and less-efficient vessels uneconomical.

On Slide 12, we discuss our company's outlook, commenting on our share performance for the past 14 months. The performance of our stock is presented along with selected gas carriers peer group and the price of oil. In terms of correlation with oil prices, which have remained relatively stable during the past couple of months, we see that all stocks in the group follow a broad correlation with oil prices.

With regards to events affecting energy-related stocks, we need to know that since the beginning of the year, most energy-related stocks have been under pressure, mostly due to the coronavirus outbreak and the market uncertainty that this creates.

On Slide 13, we're showing different scenarios in our company's performance for the year 2020. The different scenarios were created based on the existing fixed charters plus vessels open on the spot market, assuming no new charters upon the expiration of the fixed vessel. As all of our 4 semi-ref vessels are now fixed on time charters, fortunate good rates, we vary our forecast based on a potential fluctuation of our small LPG ships and our single Aframax tanker, which opens in the first quarter of 2020.

In light of the recent market situation in China, we created 3 scenarios. A base case; an upside scenario, assuming further market improvement; and a downside scenario, assuming that the market disruption, mostly due to the coronavirus outbreak, is prolonged. Based on the upside forecast, we see that $1,500 hike in our daily small LPG spot rates in combination with the spot rate for Aframax at $25,000 will boost our annual EBITDA by about $9 million. On the downside, we estimate a market deterioration to suppress our EBITDA by about $6 million. It's noted that our JV EBITDA is not accounted as earnings from our joint venture only affect the bottom line.

On Slide 14, we see some valuation multiples of StealthGas against comparable companies. As evident, our company trades at a greater discount than its peers in terms of NAV. Our market cap currently is close to $116 million creating a large discrepancy between the values of our assets, which are close to $1 billion. In essence, investors are valuing us at about $36 million above our cash balance or in other words, as much as one single Aframax tanker.

We are confident that the market will correct its view on our company and that will soon reach a stage that our market capitalization will be a realistic reflection of our assets, value and growth potential.

Concluding our presentation with Slide 15, we present a brief summary of the company's end market strong points. We placed emphasis on the fact that we operate in a market with solid fundamentals, and that we are well positioned from both a financial and market perspective to grasp all opportunities that may arise.

At this stage, our Board Chairman, Mr. Jolliffe will summarize our concluding remarks for the period examined.

Thank you, Harry. 2019 was a successful and profitable year for StealthGas. Indeed, in 2019, and in spite of the persistently difficult spot market in Asia, we achieved an operational utilization of 98%, increased our daily time charter equivalent earnings and managed to significantly reduce our finance costs. All these added towards our improved profitability, which excluding noncash items, amounted to $4.3 million, corresponding to an earnings per share of $0.11.

In terms of our new projects in an initiative to expand further across the LPG sector and accretively invest our cash in hand, while sharing the operational risk, we took the strategic decision to form a second joint venture arrangement with an unaffiliated third-party to jointly acquire 3 second-hand 2010-built MGC vessels of an aggregate capacity of 105,641 cubic meters for a total cost of $80 million.

Going forward, we feel confident for 2020. Our period coverage of 66% along with $135 million in contracted revenues, coupled with improved market rates, particularly, for our larger LPG vessels signifies good times ahead. We are trading close to our all-time low share price, and that might be an excellent entry point. In addition, the recent push into green investing might also benefit our company, operating modern Japanese-built ships with minimal carbon footprint. We do recognize, however, that the recent coronavirus outbreak may negatively affect seaborne trade. And should this situation deteriorate, then positive market fundamentals might be affected. We hope that this issue will soon be resolved, thus allowing the market to flourish.

We have now reached the end of our presentation, and we would like to open the floor for your questions. So operator, please open the floor. Thank you all very much.

(Operator Instructions) The first question is coming from the line of Randy Giveans from Jefferies.

All right. So a few questions. I guess, starting with the joint venture. What was the, maybe, the rationale for forming a second joint venture and acquiring the 3 medium gas carriers? Is this the most attractive vessel size? Or is that just the most attractive kind of asset price? And then also, are there opportunities to acquire ships below that 7,000 cubic meter size? Or are you now solely focused on the handy or maybe medium-sized vessels?

Thank you, Randy. As you know, we're trying to do anything that will boost our bottom line and the returns to our shareholders. We saw that the rates for the smaller ships over the last 2, 3 years have gone up, but not by big percentages, whereas the MGCs have gone up by quite significant percentages, whereas their price has not gone up by the same respective amount. So in other words, at the moment, based on the earning capacity, the value for money is better on a larger ship. Why we did the JV? It is quite simple because we're talking about a considerable amount of money, $80 million. Therefore, by doing a JV, let's say, conservatively, $40 million of debt. That means $40 million of equities. Therefore, with a partner you will only pay $20 million and have a 51% equity stake in 3 of those ships that potentially can earn up to $1 million a month each, which is a great boost to our profitability.

Now about the vessel sizes. As you know, our core business is the small ships. So I cannot say that we don't look at small ships. We always have our eyes and ears open for modern Japanese-built small ships. But in this particular case, that was the reasoning why we acquired 3 more MGCs and now have 4 MGCs in total.

Okay. You mentioned the debt proceeds, you're expecting about 50% kind of net debt to cap on these $40 million?

We want to be conservative. We would estimate between 50% and 60% debt. So let's say, $45 million or something like that as debt on the 3 ships.

Got it. Okay. And then you mentioned that the 10 recently completed time charters were at attractive rates. Can you quantify this maybe increase? Obviously, spot rates have been on the rise, so just curious if the time charter rates have increased as well.

We don't give the specific numbers, as you know. Plus, the differences are quite significant between the smaller ships and the larger ships. The spot market in the East was actually quite bad. We are happy that all of our time charters were done at higher levels. The big -- of course, the big differences were on the 22K similar ships. There, we saw some significant differences from the last done charters.

Okay. Perfect. And then 2 more questions, I guess. Focusing on the share repurchases, how did you decide on that maybe 230,000 shares during the fourth quarter, totaling almost $800,000. Was that the most you could buy due to the kind of SEC rules? And should we expect maybe a greater degree in 2020?

Very good question. Yes. The answer is there, yes. As you know, we are only allowed to buy a percentage of the daily share volume, and we are not allowed to buy in -- during our closed period and because of our very low daily share volume, this was what we were able to buy. We have asked the traders to buy as much as legally possible, and I think buying close to $800,000 shares is not that bad considering these parameters.

Sure. All right. And then, I guess, just putting a few different things together. I mean, you're spending maybe $15 million to $20 million in equity for the 3 medium-sized vessels. At the same time, on Slide 14, your price to NAV is 20%, an 80% discount may be according to that table there. And obviously, your cash on hand, and Michael was saying, it seems like a pretty attractive entry point with the shares near all-time low. So any thoughts on doing a tender offer for a larger block, so you don't have to comply with these kind of low-trading liquidity issues?

The answer is, yes. We had this in mind with the Board at the end of '19. We were not, obviously, expecting the coronavirus, nobody did. So that put a bit of a damper on our ideas. Obviously, we continue with the buyback program as it is. We want to see how far this virus will go and, obviously, if we see that it slowly, slowly slows down and the spot market slowly recovers, then it's another matter to be discussed in the next BOD.

Got it. And then lastly, for me, if you can touch on a little bit more of that extension of Chinese New Year, the coronavirus, how is that kind of impacting the small and even medium size LPG vessels? I'm looking at Slide 13 in your presentation, and it seems like downside, even still $59 million, $60 million in EBITDA. Is that inclusive of kind of a prolonged coronavirus impact?

Listen, as you know, this virus is a big unknown for everybody. We don't know if it will last 1 month or if it will last 6 months. We don't know the full effect it will have on shipping. We don't know how big the effect will be on LPG, specifically. We don't know how many Chinese charters and terminals will exercise a Force Majeure clause canceling their obligations. We know nothing. What we know is that being prudent, like we have been always since the inception of this company, is always having the vast majority of the fleet on period charters. And as you see right now, this conservativeness and this defensive policy has actually worked and shielded us from the virus because as you've heard, we only have 3 ships spot and therefore -- 3 ships spot now, more will come as the year is progressing. But anyway, having 52 ships and having only 3 ships spot, I would consider a great advantage in this quite unclear market, let's put it like that.

Understand. Okay. Hopefully, by this time in May, I guess, on your 1Q call, we should have some more answers than questions on the corona.

Yes. And don't forget that because the weather improves and the temperatures are going up in spring and summer, we hope that the transmissibility of the virus will drop and, therefore, it will slowly, slowly go away. I'm not a doctor. But, anyway, this is what we've been told.

Next question is coming from the line of Greg Weiss from Boston Partners.

So I am just kind of puzzled. I've been looking -- you always have this chart on the fleet age. And you highlighted 26% of your fleet -- of the fleet is above 20 years of age, but where are these ancient ships trading? Are there -- what's going to force them into scrapping? Are there special surveys or whatever? I mean, it's just puzzling, as we learned from the crude side, usually above 20 years of age or especially with increased environmental, people won't -- blue-chip customers won't trade these ships. So what's going on in your market?

Yes. Greg, as you know, that's a fair point, but you're forgetting one little difference that passing a special survey on a 20-year-old crude ship might cost you $2 million, whereas passing a special survey on 20-year-old LPG ship will cost you $300,000. So yes. So it all depends on the market and also the water ballast cost. This is what would push more ships out. Indeed, as you said, it's exactly the same policy as with the tankers. The majority of the oil majors and blue-chip charters don't take ships over 15 years of age. And the vast majority don't take ships over 20 years of age. But as with everything, there are small local charters in India, Pakistan, Africa, China, South America and so on that will take a 20-year-old ship or older if, of course, the money makes sense. So I think it's more a matter of market than a matter of oil major regulations or actual IMO regulations. If the market falls to levels where it doesn't make sense for these owners to keep these supposedly debt-free ships running and they can find a younger ship to replace them with, they will do it. Don't forget the water ballast is quite a significant investment. It's in excess of $250,000 to $300,000 additional cost. So suddenly, your special survey will not cost $300,000, it'll cost close to double that. So that's -- I'm sure that's something that these small owners with these very old ships will think about twice. Don't forget that we sold a lot of our older ships for further trading. So this secondary market actually helped us make quite a lot of cash last year. So we shouldn't be that critical, because if we didn't have that secondary market, our ships will be going for demolition at a much, much lower price than we fetched in the end.

But given -- is it your expect -- I mean, given your knowledge of your market and the order book being so minimal, is it your expectation we'll have negative fleet growth this year or next year?

We don't see many new building orders, so that's obviously a positive thing. The only thing is in shipping, as you know well, when you see suddenly a good market and if suddenly the virus ends and everybody rushes back to import and export LPG that might lead to a sudden boost in rates, and that might lead to a sudden rush of new building orders. Obviously, the good thing is that most of the big yards in China and Korea, don't build those ships. So we have a bottleneck protection here. But as we speak now and with the virus in full force, I would say, yes, but nobody can foresee the future.

(Operator Instructions)

No other questions.

No further questions at this time. Please continue.

We would like to thank you so much for joining us on our conference call today, and your interest and trust in our company. We look forward to having you with us again at our next call for our Q1 results in May. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may all disconnect.