Dorian LPG Ltd (LPG) 2019 Q4 法說會逐字稿

Greetings, and welcome to the Dorian LPG Fourth 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, Melissa, and good morning, everyone. Thank you all for joining us for our fourth quarter 2019 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; 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 May 30, 2019.

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 March 31, 2019, that were filed this morning on Form 8-K. In addition, please refer to our previous filings on Form 10-K and Form 10-Q where you'll 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.

Thanks, Ted. Good morning from Stanford, Connecticut, and welcome to our financial year 2019 fourth quarter earnings call. As we have done in the past, I will give you a brief report and introduce Ted to go over the numbers for the quarter, followed by John who will talk about the developments in the market and our fleet, then we'll take questions.

On this day in 2014, the Baltic rate was $80. In 2015 on this day, it was $111. They then followed 3 long miserable years. It was $30 12 months ago, and it has been trending up since, but not wholly without volatility. From the $30 in May 2018, we went to $48 in October and dropped to a low of $24 in February of this year before making the recent high of $65 in April. Yesterday, we closed at $59.5, a sturdy time charter equivalent of $45,500 per day. This volatility negatively impacted the financial results of the quarter we are reporting. And we expect it will positively reflect in the current quarter's results when we report them.

Seaborne LPG exports year-to-date have increased 17%, totaling 34.5 million tons. Export capacity is forecast to grow considerably in each of the next 2 years. New fractionation is planned in the U.S. through 2020, amounting to 1.6 million barrels a day, and export capacity through 2020 is expected to increase by 11 to 12 VLGC cargoes per month. Demand forecast remained strong as well driven by new PDH plants scheduled to start in Asia and planned expansions of Korea's cracking capacity. The Indian government has also forecast demand for LPG to grow 11% to 12% per annum over the next 5 years.

LPG is a clean and portable fuel. It produces 5x less NOx than diesel. It is nontoxic and noncorrosive. Up to 3.7 million deaths annually, according to the WPGA, are attributed to ambient air pollution. LPG can and should be making inroads in transport, residential and electricity generation.

The world VLGC fleet now comprises 277 ships, 35 of which or 12% are over 20 years old. The order book remained stable at just over 13% of the fleet. 5 vessels have been delivered this year. Our ECO fleet and readiness to fit exhaust gas cleaning systems are experienced with operating 2 ships already fitted with these systems. Our customer focus and full operation should keep us at a competitive advantage.

We continue to consider potential conversion to dual fuel capability. And while the economic viability is yet to be proven, we are nevertheless convinced by the promise of LPG over alternative fuels, including LNG. LPG has excellent clean handling properties, low emissions, no methane slip and lower installation and life cycle costs.

Finally, before putting Ted and John on, I would like to reiterate what I also said on our last call that our balance sheet remains strong. We have the lowest debt to new building parity value and debt to total cap amongst our quoted VLGC peers. Our debt is 90% interest rate-hedged, and our current interest rate cost is less than 4.3% per annum.

Ted?

Thanks. My comments today will focus on our unaudited fourth quarter results. Also, please note that we expect to file our Form 10-K next week.

Beginning with our chartering results, we achieved total utilization of 90.2% for the quarter with a time charter equivalent per day, time charter equivalent, again, is our time charter equivalent revenue over operating days as further defined in our filings, of $18,883 a day, which yielded utilization adjusted TCE or TCE per available day of $17,032. Our spot TCE per operating day for the quarter was $16,550 with utilization of 88.5%. I'd also point out that our spot results were net of the administrative costs of the pool, and as a result, our actual time charter equivalent is higher than this level.

Daily OpEx for the quarter was $8,104 which compared to last quarter's $8,287 per day. The quarter-over-quarter trend is, of course, favorable, and our technical management team continues to keep a sharp eye on cost.

Total G&A for the quarter was $5.7 million, and cash G&A, i.e., G&A excluding noncash compensation expense, was about $4.4 million. This level is broadly consistent with last quarter's. Note, by the way, that our G&A excludes the professional and legal fees related to BW LPG's unsolicited proposal, which we have separately reported.

Our reported adjusted EBITDA for the quarter was $14.1 million, which is a decline from the third quarter and reflects the more challenging rate environment that we faced in the quarter just ended.

We look at cash interest expense as the sum of the line items interest expense, excluding deferred financing fees and other loan expenses, and realized gain loss on derivatives. On that basis, total cash interest expense for the quarter was $7.8 million, which was down about $200,000 from the prior quarter largely due to continued debt pay-down. As John points out, in excess of 90% of our debt is either fixed or hedged, and we currently enjoy a financing rate of around 4.3%, which we believe is quite competitive. Excluding costs related to the BW proposal, we continued to maintain cash cost per day of approximately $23,000, including lower time charter.

Turning briefly to the full year. We reported a full year TCE per operating day of $21,746, which was fairly flat with the prior year. OpEx per day was $8,329, an increase over last year due to the dry docking this financial year and some other cost increases in various categories. EBITDA, again, excluding the BW proposal cost for the year just ended, was $74.4 million, which was flat with the $74.5 million recorded for fiscal year 2018.

For the coming fiscal year, we expect scrubber and dry docking-related capital expenditures of roughly $15.5 million. We break that down as follows by quarter: $2.8 million expected in Q1, which is the -- will be the quarter ending June 30; $6.5 million in the quarter ending September 30; $5.1 million in the December-ending quarter; and $3.5 million in our fiscal fourth quarter.

We currently plan to dry-dock 5 vessels and install scrubbers on 2 of those 5 during calendar '20 -- sorry, we're going to dry-dock 5 vessels. We will install scrubbers on all of them, and we're also going to install ballast water treatment systems on 2 of those 5.

In terms of timing, we expect to dry-dock 2 vessels in July this year, 2019, 2 in August and 1 in September. In addition to the $15.5 million capital cost, we will incur some noncapitalized expenses as well. While we normally complete special surveys in 10 to 14 days, the installation of the scrubbers can add up to approximately 2 weeks to the process, meaning that we could be up higher for up to 25 to 30 days for each vessel. However, our technical team continues to evaluate ways to reduce time in dry dock such as by completing certain work well at sea. Given the strong rate outlook, we currently anticipate funding these investments from cash flow, but we are continuing to evaluate several financing possibilities. This make economic sense for shareholders. We will look to execute on them.

We remain comfortable with our current and forecast liquidity levels given our current or constructive market yield. On May 31, 2019, the restrictions on payment of dividends and stock buybacks from our May 2017 bank amendment will lapse. While we have made no plans to repurchase stock or pay a dividend, capital allocation is a top priority for our management and our Board. We are pleased to have this additional flexibility available for our shareholders again.

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

Thank you, Ted. The U.S. LPG exports April year-to-date have grown 21% year-on-year to 11.9 million tons, while Middle East exports have grown 6% year-to-year to 13 million tons. U.S. exports exceeded historical highs this April, increasing 39% year-on-year to 68 VLGC cargoes versus 49 VLGC cargoes at the same time last year.

Propane inventories in the U.S. continue at the higher end of their 5-year range. The 2019 U.S. supply forecast have been revised higher with the completion of the Shin Oak pipeline and the schedule of third quarter '19 completion of the Grand Prix pipeline, both will be carrying Permian Y-grade volumes to Mont Belvieu.

With so much feedstock flowing to the Gulf Coast, Enterprise has now moved forward its estimated completion of their frac 10 unit to the fourth quarter of 2019 from first quarter '20 previously. In total, for PADD 3, we estimate that an additional 270,000 barrels per day of fractionation capacity will be added in 2019 and another 1.35 million barrels per day planned for 2020. Given this increased supply, significant export volumes of LPG appear to be materializing.

AltaGas Ridley Island in British Columbia is an LPG export terminal, which has just recently completed its outfitting and building, and is currently loading their first VLGC bond for the Far East. We expect to see 2 VLGC cargoes per month out of Ridley this year and likely to go to 3 or 4 cargoes next year per month.

In 2017, 24% of all the U.S. exports were delivered to China. With the imposition of the U.S. China tariffs, all export to China effectively stopped, and equivalent volumes were instead lifted from the Middle East, thus, bolstering the Saudi CP-posted prices in the process versus the Mont Belvieu LPG prices. A significant arbitrage developed between the 2 primary supply regions, resulting in U.S. LPG becoming very price-competitive.

For countries like India and Indonesia, this meant substantial reduction of liftings from the Middle East, and U.S.-sourced cargoes were in high demand. [2 out of] 7 U.S.-sourced VLGCs booked for Indian discharge most likely exacerbated by the U.S. nonrenewal of the Iranian sanction waivers and highlighting the desire of importing countries to the diversify their source of LPG supply. In view of the general elections, the Indian government accelerated their massive subsidy program by adding LPG connections to 10 million users within the first quarter of 2019, resulting in a 10.2% year-on-year demand increase.

Indonesia followed a similar trajectory in LPG demand during the first quarter of 2019 from new cylinder -- LPG cylinder subsidies on account of their upcoming elections in their country. The reduction of lifting from Middle East was again taken up by U.S.-sourced LPG cargoes.

Shipping delays in the Houston ship channel have also boosted Mariner East pipeline volumes out of Marcus Hook terminal to around 8 VLGC vessels per month during March and April. When we visited 1 of our vessels loading at the Marcus Hook terminal last week, we witnessed firsthand a 36-hour turnaround in loading a full VLGC cargo in our vessel; when in the past, it would have taken 4 days. And we're highly impressed by the terminal's efficiency of operations and a significant refrigerated propane storage tank form, likely to be the largest in the East Coast of the United States.

Finally, to recap, Dorian LPG designed and diligently prepared its fleet with a view to capitalize on the IMO 2020 regulations. We have been operating scrubbers in our fleet since 2015, gaining experience and knowledge in real-time scrubber equipment operations. Many of our vessels were built scrubber-ready. Retrofitting commences during calendar 2019. Our hybrid scrubbers enable our vessels to operate in all portion of the world either in open or closed loop, in fresh or salt waters and will uniquely position our fleet to operate with maximum flexibility.

Thank you. And with that, I'll pass it over to John Hadjipateras.

Thanks, John. Melissa, you want to turn it over to questions, please.

(Operator Instructions) Our first question comes from the line of Noah Parquette with JPMorgan.

I want to ask maybe Ted, as you guys, obviously, rates have improved quite a bit, so more cash flow hopefully coming. You mentioned you're okay kind of with the capital structure. But are there things that you want to do in terms of repaying debt or kind of reversing the capital leases? Are you comfortable with just natural deleveraging where you're at now and then focus on other?

I think that we're not focusing yet on what to do with the excess capital, with the excess. But as always, Noah, I think we'd look at the -- what would be creating the best shareholder value. I think we don't look at our leases as being burdensome at all. And perhaps, I don't want to signal something that we haven't decided yet. But if we were to deleverage, it might be more, firstly, bank obligations then the leases. And otherwise it's a problem we look forward to having to think about.

Okay. That makes sense. And I want to ask, you guys gave great color on the market and the reason for the hours with the tariffs. What -- I mean, what would you think would happen assuming an agreement is reached where the tariffs do go away? It might be a little far-fetched. But I just would love to hear your thoughts on how that would affect the market on any reversals you've seen.

I can give you a 3-letter word, wow. That's what I say.

I would say business as usual.

Yes. Yes. I think -- as you know, it hasn't really impacted the ton mile equation, but the dark cloud over, the kind of -- the uncertainty, et cetera, is something that we fear for the future of the world economy and its potential impact on everything, including our trade. So if that was removed, I think it would be a very big positive all around for everyone.

Our next question comes from the line of Michael Webber with Wells Fargo.

The first question is actually just really high level and pretty straightforward, we can all kind of map out how different U.S. export facilities are coming online and being debottlenecks. And it's a bit of a crystal ball question. But when you look at that and you look at the dynamics that we've got in play now from a ton mile perspective, is there a particular inflection point that you see coming with any particular phasing in of a facility and/or patch of time? Or you think, okay, this seems like this is where we're going to hit a critical point from a utilization perspective and you can start to see rates really gap?

Really gap upwards, you mean, right?

Yes.

Since you defined your question as high level, I'll let Lycouris answer it.

Oh, you can get as granular as you want. I just -- I figured it could be high level. But by all means, you can do it through the day. Go ahead.

Well, Mike, the issue is the Houston ship channel. But if -- as you see, the facilities are being expanded not only the Houston ship channel and improve, but also in other places like Nederland and Freeport, Texas and Marcus Hook and the West Coast of the United States. I think we will be able to have a better utilization of the vessels, which is good news for all of us because that means that we will be able to move more product out. So in general terms, I think that the way we've done it for the last 5 years with increased capacity coming online and being able to deal with it, I think we will continue to do it. I do not see a jump-up or some kind of unusual movement in the market.

Right. But Mike, I think it's obvious that we do -- we are having -- we are closer to equilibrium, right? I mean these spikes tell you that there is a kind of -- that the demand-supply balance is closer to equilibrium. Now the fact that it can drop as much as it does, it shows -- it tells you that we're not there yet. But I think we're definitely moving in the right direction.

Yes, would agree, and that makes sense. That kind of leads me to the follow-up to that question. If I think about the top half of the cycle and finding an inflection point where you do see rates kind of gap up and you go back to a period like 2014, 2015, it would seem like we probably still need to see a couple of new export facilities built in the U.S., kind of new construction, which seems like we're kind of getting closer to that point, getting a nameplate and then starting to tack a little bit on to that. I guess the question is do you think that's probably valid? And then to the extent that you're having conversations with your customers, do you think that's something we would look likely see in the next couple of years?

Hard to tell. I was down in Houston last week, and I met with 1 of the terminal operators there. And they have a pretty solid expansion plan, but I don't think they want to get ahead of themselves. So they're not really sort of leapfrogging. They're going 1 step at a time. That's my sense.

Okay, that's helpful. It's a tough question to answer, so I appreciate you swaying at it. And just, Ted, 1 modeling question for you, just -- and you might have mentioned this in your prepared remarks that I missed in terms of the legal expenses from BW. Should we expect any of that to bleed into Q2? Or is that done?

No, it should be done. We've -- look, we booked the vast, vast, vast majority of it in Q3. And we booked like $2,200-something this past quarter, and that should be the end of it.

Okay. I apologize by doing this a bit out of sequence, but if I just jump back to the market and maybe just thinking about supply disruptions from a tonnage perspective. You guys laid out your plan for dry docking, scrubber installations and ballast water treatment. As you look at the rest of the LPG space to the extent that you can get a sense of what your competitors are planning, how do you think that scrubber adoption throughout the rest of the space -- which -- how should we think about the cadence of vessels kind of going out of the market over the next 12 to 18 months going into dry dock that you think...

We're all looking at each other here.

So I mean, look, obviously, all the 2015 builds are going to be coming up pretty fast. I mean 2014 was not a huge year of deliveries. But beginning in 2015, all of those 15 builds are going to, by and large, we're going to have to want to dock, so big number.

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

Just on the time charter, I noticed that you had roughly $0.25 million slightly less on chartering cost and roughly 10 days charter in. Is it fair to assume that the, call it, all-in cost for that is $23,000, $24,000 a day? Or whatever I missed something? It seems like a good rate.

Not far off.

Yes.

Yes, not far off. Not far off.

And I guess, this deal was concluded slightly ahead of the market kind of taking off. But what do you think you would have to pay for a similar deal now?

I don't know. I mean because of this volatility, it sort of -- it goes up week-to-week. But I don't think we could repeat that deal today.

No, that's fair. And just 1 question -- sorry, 1 market-related question for John. We've spoken a lot about, call it, the oil price link to Asian propane prices in the past. And as we kind of move forward, do you think that Asian propane will continue to be priced off oil? Or do you see other pricing dynamics emerges as more of the, call it, incremental demand are coming from nonflexible feedstock or petchems?

I think it's probably more related to the products other than PDH plants, and it is related to -- more to the petrochemical rather than the oil -- the price -- the oil price. I think we have disengaged from that. But we are certainly tied with Middle East pricing, and that affects the business just like NAFTA does. But NAFTA is pretty far away. Now if it becomes more competitive, there's always the opportunity for NAFTA to get the bigger market share. But it's very difficult to make changes in the mix of feedstock to these petrochemical facilities unless there is a long-term trend. And I do not see a long-term trend here for -- I see long-term trend for the LPG to be significant in volume to be able to command a good, attractive price versus NAFTA.

Yes. I guess what a lot of investors are kind of looking at is IMO 2020 and what's going to happen with potentially a lot of NAFTA coming into the market next year. And I don't know if you have any views on how that could potentially impact the market.

Peder, this is a crystal ball question, and I really -- everybody has their own opinion about things. It's not -- we're not even speculating about it. Whatever I say is just my opinion versus yours or somebody else's. So I'd rather leave that alone and try to prepare ourselves for eventuality. And that's the way we see it.

(Operator Instructions) Mr. Hadjipateras, there are no further questions at this time. I'll turn the floor back to you for any final comment.

Thank you, Melissa, and thank you, all. And we look forward to -- we wish you a happy summer. And we look forward to the next call and hopefully, continuing improvements in the market. Thank you, and bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.