Dorian LPG Ltd (LPG) 2019 Q2 法說會逐字稿

Greetings, and welcome to the Dorian LPG Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website, which is www.dorianlpg.com.

I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead.

Thank you, operator, and good morning, everyone. Thank you all for joining us for our second quarter 2019 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Ltd.; and John Lycouris, Chief Executive Officer of Dorian LPG, USA.

As a reminder, this conference call webcast and a replay of this call will be available through November 6, 2018.

Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today.

Additionally, let me refer you to our unaudited results for the period ended September 30, 2015, filed on Form 10-Q this morning, where you will find risk factors that could cause actual results to differ materially from those forward-looking statements.

With that, I'll turn over the call to John Hadjipateras.

Thank you, Ted, and welcome all to our Q2 financial year 2019 earnings call.

Our financial results improved from last quarter and from the corresponding quarter of last year. Both our utilization and time charter equivalents reflect the better market. Ted will discuss the numbers. The whole quarter can be characterized as one of continuing recovery. The Baltic Index was never below $35 and shot up into the upper 40s at its high point. It averaged $40 during the quarter, representing a big improvement from the second quarter of 2018 and a high point since the second quarter of 2016.

Like the investment community does, we too compare our results to the Baltic Index. It is worth pointing out that our voyages are generally 40 to 60 days in duration and are fixed 2 to 4 weeks in advance. Consequently, our results would normally outperform the index in a falling market and, conversely, underperform in a rising market.

So far this year, as the largest NGL exporting nation, the U.S. has increased its global market share to 34% compared with 33% in 2017 and 29% in 2016. Through October, U.S. LPG exports totaled 26.8 million metric tons, 11% higher than last year's 24.1 million metric tons measured over the same period. U.S. propane production is up 12% year-on-year, and we think U.S. LPG and NGL exports are set for a significant growth.

In July, we saw the last Chinese-bound U.S. LPG export cargo. The China U.S. trade war resulted in a shift of destinations for U.S. tons, with more going to Southeast Asia around the Cape and Middle East tons going to China, which has had a positive effect on ton miles. The U.S. exports are also increasingly headed to Europe, where LPG remains the best feedstock for flexible steam crackers.

Iran sanctions have significantly reduced Uranian exports and helped absorb U.S. tons in the East and keep the arbitrage open. Sanctions if sustained could have a positive impact on scrapping as the older tonnage, which traded from Iran, may not be fully flexible to trade in the international market. John L will give you more information on the demand side.

Finally, I would like to give a bit of perspective on our thoughts on M&A, on consolidation and on BW LPG's proposal. We believe that there are potential commercial as well as capital market benefits from size. In terms of market presence, a bigger fleet can provide more flexibility. For this reason, we cofounded and operate the Helios LPG Pool which now includes 29 ships. We have and will continue to explore growth opportunities.

Addressing the advantages in the Capital Markets which may accrue to a larger-cap company with greater trading and liquidity, whether accomplished through organic or M&A, we take the view that a strong balance sheet is far more important for sustained value creation, especially in a cyclical industry like ours. Scale does not in and of itself create an investable security.

Our board, our management team and our financial and legal advisers spent a great deal of time analyzing the proposal and had multiple meetings with BW before their proposal was withdrawn. In the course of our meetings, we explained that the financial advantages of our ECO fleet, would be diluted by combining with a less fuel-efficient and more highly leverage fleet and that we did not believe that stock market trading liquidity would be enhanced by dual listing.

Ted will discuss our Q2 earnings. Thank you, Ted.

Thanks. Total utilization of 95.8% for the quarter with time charter equivalent, TCE, revenue over operating days as those terms are defined in our filings of $20,973 per day yielded utilization adjusted TCE, which is TCE revenue per available day of $20,086. Our spot TEC (sic) [TCE] for the quarter, again stripping out our time chartered vessels that are outside the pool, was $19,481 a day, with a utilization of 95.1%.

OpEx for the quarter was $8,585 per day, which compared to last quarter's $8,334. OpEx per day was affected principally by higher spares and stores cost of $787 per day which largely related to our preventive maintenance program and $313 per day related to the Captain Nicholas dry dock in Singapore, and that amount included both noncapitalized dry dock expenses and the purchasing of coolant after we exit the dry dock. Thus, after stripping out costs related solely to the dry docking, we were flat to slightly down quarter-over-quarter on our OpEx, reflecting our ability to drive efficiencies in other areas.

I'd note that our preventive maintenance programs are designed to improve the overall life of the equipment on our ships and thereby shorten our time and cost in dry dock. In order to get a complete picture of daily OpEx, we feel that it is most appropriate to add a daily dry docking reserve, which is a non-GAAP measure I would add, to stated OpEx per day. We've done that math for you in a presentation that you can find on our website.

Total G&A for the quarter was $7.5 million. And cash G&A , i.e., G&A excluding noncash comp expense, was $6.1 million. We booked expenses of $1.7 million in the quarter related to BW's unsolicited takeover proposal. Those expenses were predominantly legal and investment banking fees. That's why our reported EBITDA was $17.9 million. If we strip out those transaction-related costs, which we don't consider to be ordinary course, our actual EBITDA for the quarter was $19.6 million.

We look at cash interest expense as the sum of the line items, interest expense and realized gain loss on derivatives. On that basis, total cash interest expense for the quarter was $8.3 million, which compared to $8.6 million last quarter. We continue to benefit from our aggressive hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost fixed hedge in a small floating piece of roughly 4.4%.

In the last quarter, we had announced commitments for up to 7 scrubbers, and we have now committed to all 7 scrubbers. We expect to receive debt financing for most, if not all of the remaining payments, including installation costs due under the contract. We are still working on the detailed terms which we will share when finalized. Excluding costs related to the BW proposal, we continue to maintain cash cost per day of approximately $23,000.

With that, I'll pass it over to John Lycouris.

Thank you, Ted. Global seaborne LPG exports through October stand at 78.9 million tons with U.S. LPG exports at 26.8 million tons and Middle East exports at 32.8 million tons.

U.S. LPG stock levels have increased steadily in October, and we have seen propane and butane prices weaken. The significant increase in natural gas liquids fractionation and Mont Belvieu has produced additional supply of butane volumes, setting butane pricing at a discount to propane and resulting in record butane exports from the U.S. These trends are likely to continue as the Targa terminal and the Mariner East are preparing for new export capacity. It is anticipated that the long-awaited Mariner East will commence service in November, initially with a reduced capacity of 150,000 barrels per day of natural gas liquids, and that translates into about 4 to 6 VLGC cargoes of LPG per month. And it is anticipated also that they might reach the planned capacity of 250,000 barrels per day of natural gas liquids or about 8 to 10 shiploads by the second half of 2019.

China efforts to improve their air conditions in major cities by reducing automotive emissions has seen early adoption of the new gasoline spec, which has driven increased butane blending demand and the start-up of new gasoline and petchem refineries in early 2019. Another Chinese PDH plant is expected to start in the coming quarter, along with new weighable plants announced to come online sometime between the second half of 2019 and 2021.

The new building order book still stands at about 13% of the VLGC fleet, and the number of VLGCs over 20 years of age or older are currently at 12% of the fleet. There are 2 vessels remaining to be delivered this year, another 18 in 2019 and 16 in 2020.

Bunker suppliers will become the focus of the industry in the next few months, and with compliant fuel launches and the increased focus by the maritime industry on the reliability, quality and stability of those new compliant fuels. The maritime industry's compliant fuel conundrum is likely mitigated with a retrofitting of vessels either with scrubber system or alternative fuels. At Dorian LPG, we have designed and diligently prepared the fleet with a view to retrofitting either a scrubber or alternative fuel to the vessels. We have been operating scrubbers in our fleet since 2015, gaining experience and a knowledge base related to scrubber equipment, which combined with the scrubber readiness of our vessels, is expected to result in the smooth retrofitting in 2019 of the additional 7 systems that we have recently contracted.

We consider that the additional investment for the retrofitting of scrubbers, given a conservatively projected $150 to $200 per metric ton price differential between the high sulfur fuel oil and the ultra-low sulfur fuel oil of 0.5%, breaks even within 15 to 20 months.

We also consider that the LPG has fuel upgrade to some of our vessels and now possibly in 2020 when the first LPG engines will be built and retrofit becomes available then. However, the investment required for this option is significant, and the breakevens are dependent on future LPG pricing when compared with future compliant fuel pricing.

As the full implementation of the IMO 2020 regulations comes into focus, especially after the recent MEPC meeting on noncompliant carriage of fuel by vessels and disposing of the experienced building phase in proposals, we are confident that LPG is a very attractive solution, given its low emissions and the upcoming environmental regulations. Thus, it is likely -- justifies the investment in upgrading vessels to LPG as Marine fuel.

With that, I will pass it back to John Hadjipateras.

Thank you, John. Operator, do we -- we pass it to you for questions, please.

(Operator Instructions) Our first question comes from the line of Peder Jarlsby with Fearnley Securities.

Just a first question on the potential of 4Q. We're seeing rates slide a bit in recent weeks. But I think, overall, the quarter should be better than the third quarter. So using a 3- to 4-week lag, I think we have the bulk to get 25,000 a day -- but I was wondering if you could add some color on how the market has been in the West so far and also potentially your geographical exposure so far this quarter.

Thanks. Well, it's -- as you know, we're biased towards the West most of the time. We have -- but we do have an exposure in both markets. The last quarter, the one -- we saw margins all compressed and even an elimination of the West premium. But the -- but I think our view is that there will continue to be a West premium. And that we have enough of fleet diversity to be able to have ships in both -- be exposed to the spot market in both sides of East and West.

Okay. And so -- you've been outperforming peers and also the Baltic for quite a few quarters now. Is that -- I guess, that's partly due to the Western premium you have achieved. But could you also potentially quantify how much is due to your vessels, the ECO benefits compared to the Baltic benchmark vessel?

Well, it's difficult to say that, because the Baltic, don't forget is, if you calculate off of the Baltic, you're using 100% utilization, which is rarely the case, obviously, in the real world. So you would discount the Baltic to some extent to project the earnings of different fleets. On the other hand, for the benefit of ECO, it varies depending on the price of fuel, obviously. So I think, that wouldn't be far off, and Ted will correct me if I use that kind of average number of $2,500 a day.

Again, obviously, Peder, as you know that, John is basing that on roughly current bunker prices. If bunker prices increase, which they may well post IMO 2020, that savings benefit increases quite significantly.

Okay. And just a final question for me. Looking at the order book next year, this year, we got the extremely low fleet growth. Next year, there's a few more vessels delivering. But a big bulk of those vessels coming to the market next year are going to be trade or controlled tonnage. Do you have any view on how that will impact the market? Are you concerned that it's traders sitting on those vessels? Or do you think it doesn't really matter?

We are cautiously optimistic that the increase in the volume and demand will absorb the ships delivering next year and the following year.

Okay. So but you're not worried that it's traders sitting on the majority of that tonnage coming to the -- hitting the water next year?

You say that but a lot of these traders are -- have captive business. I mean...

Offtake contracts.

They're like end users, in a way. It's not -- they're not ordered totally speculatively.

(Operator Instructions)

Operator, while you see -- if you get any more questions, in the meantime, we want to address -- answer an email question that we received about the report and the trade about -- a picture of our -- one of our ships to Equinor. And so we can comment on that, not specifically on the ship or the charter, but we can confirm that we did enter into a 3-year time charter with a major oil company for one of our scrubber ships at roughly the rates that were reported, which is 30,000 -- just under 30,000 a day. Any more questions?

Yes. We have a question from the line of Michael Webber with Wells Fargo.

This is Greg on for Mike. So just starting with scrubbers. Just wanted to get your strategy and your way of thinking behind choosing which vessels to install on? And then are you happy with the 7? Or could you see doing more in the future as you get closer and get more clarity around fuel spreads?

Greg, yes. The ships that were selected are the ones that are scrubber-ready, as we mentioned on the just -- write-up just a few minutes ago. And we plan to install those because these are the ready ones, and we feel that we can have a quicker turnaround on these vessels. We do not preclude the ability to do more ships in the next few months and years as things develop. But we keep an eye that LPG as fuel is another alternative. As I mentioned in the write-up again, we wait to see where the compliance fuel price will land and where the LPG price will develop in 2019 to make a decision about LPG as fuel and/or the scrubber. So that's the answer.

Okay. Helpful. As a follow-up, just kind of jump over to BW. To the extent that you are able to comment, where does that relationship stand? This is very much a public event and arguably it's starting to get a little chippy towards the end. So the public division is limited. Are things amicable there? Or is it fair to say that these conversations have ended for good?

I think we can say that we're, hopefully, mutually respectful competitors. That's the current status of our relationship.

And I think it would be only fair to say that the conversations have ended for now. And I'm saying that purely from a legal perspective. I can't possibly speculate on what they might do in the future and certainly wouldn't be drawn on what our board might decide to do in the future.

It's helpful. This is actually Mike on for Mike. Wanted to -- yes, I've been ghosting the call. So 2 valid questions. But John, I wanted to dig in for a second on your LPG as fuel feed works. And forgive me if you put this out and I've missed it. But in terms of the costs associated with fitting an LPG carrier to effectively and efficiently run on LPG, like to convert one of your existing carriers, do you have a vague cost point there in terms of just on a dollar basis? And then when you say you're looking at the spreads for the applicable fuels, what's the number you're looking for at which point you think it makes sense?

The first part of your question, Mike, $6 million to $9 million is a number that I could give you, and this is on initial pricing by the engine manufacturers and by the cooling plants and a number of other items that one would consider in this conversion of LPG as fuel. The second part is we have a moving target. If LPG comes to be priced the same as fuel oil, high sulfur fuel oil, then I expect that the breakeven that you are asking would be somewhere between 2 and 4 years.

Okay. So you need parity with HSFO basically to make that math work?

Well, I have to stab, I mean to take a price and give you something. And that's the best I could do right now because...

No, that's fair, yes.

We run it and it could be somewhere between 2 and 3 and 4 years. I think rather sooner than later, it might be around 3 years. And that's the number basis -- the numbers that I just mentioned to you, $6 million to $9 million. Does that answer what you wanted?

Okay. No, it's helpful. And just given some of the political concerns around scrubber tech, in general, the -- I would imagine that there's some kind of party perspective, there might be some ancillary factors as to why they might want to push forward for alternative fueling rather than simply just relying on scrubbers and HSFO. So no, that's helpful. And I can just dig in on that off-line, but...

It is absolutely exactly what we also feel that we would like to take a balanced approach to this. And would not jump all the way into scrubbers, but consider both alternatives and be able to have a balanced strategy going forward.

Michael, just one thing about that. I mean, the -- one of the arguments in favor of scrubbers is that it's actually actionable, and that is -- and you can see there is a visibility on the cost we capture. So that is one argument that I can -- we torture the whole subject like everybody else is doing. And our conclusion is, it's a short-term conclusion, maybe, maybe not, but it is actionable. And it's something -- and we have preferred to do -- to step in front of it rather than just say we'll wait and see.

Okay. No, it certainly seems like you're looking to move the ball forward at least a little bit with the LPG's fuel feed works and on the whole. Certainly, but there's probably more diligent sector-wide on scrubbers than there are actually on a lot of the asset decisions that get made. So -- which is telling. So no, I appreciate the thoroughness and what you guys are doing and we'll turn it over.

This ends our question-and-answer session. I'd like to turn the floor back for any closing comments.

Well, thank you all very much. Have a good afternoon, and Happy Halloween.

This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.