Dorian LPG Ltd (LPG) 2023 Q2 法說會逐字稿

Greetings, and welcome to the Dorian LPG Second Quarter 2023 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. Additionally, a live audio webcast for 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, Vikram. Good morning, everyone, and thank you all for joining us for our second quarter 2023 results conference call today. On the line today with me are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; John Lycouris, Chief Executive Officer of Dorian LPG USA; and Tim Hansen, Chief Commercial Officer.

As a reminder, this conference call webcast and a replay of this call will be available through November 9, 2022. 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, 2022, that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. Finally, you may like to refer to the investor highlight slide posted this morning on our website as we go through our remarks this morning.

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

Thanks, Ted. Thank you for joining us. Ted and John are in Hamburg. Tim and I are in Houston. I will give a brief introduction and then open immediately for questions when you can get -- you can access my colleagues directly.

Including our recent dollar dividend declared on October 27, we will have returned nearly $500 million to shareholders since our IPO. Our Board is focused on returns to shareholders while retaining commercial flexibility and ensuring a strong balance sheet. We've often been asked why we call our dividend irregular? To distinguish it from extraordinary and a regular dividend. That term is not our invention, it was more often used in the past, and Ted can elaborate on its history. We use it because we consider it a more accurate way for a shipping company to describe the prospects for future dividends.

Our Board prioritizes return to shareholders, consistent with a strong balance sheet and value creation. We are confident in our sector's relevance in the energy mix and in our part in the supply chain and returns over the lifetime of our assets. But we acknowledge that even in the best of times, volatility makes it impossible to make reliable medium-term predictions of the freight margins.

The TCE achieved per calendar quarter was $36,858 and our OpEx $9,541. Cash G&A was $5.8 million and cash interest expense of $6.4 million, down from $6.5 million, reflecting favorable hedges and fixed rate debt. Ted will answer more questions on -- any questions on our financials.

Our shoreside teams have continued their hard work to ensure the safety and well-being of our seagoing staff, including our Ukraine and Russian seafarers and their families, many of whom face extraordinary challenges. Difficulties in handling crude changes continue. China remains unavailable as a location to perform crude changes. Overall, however, the number of ports that allow crude changes has increased in comparison to the previous year.

LPG export and import demand increased in the third quarter of '22. Global exports are up 5.4% year-over-year with support from Canada and the Middle East. North American production continued to increase. A relatively quiet market over the summer and into [full] put some pressure on freight rates. Despite the summer doldrums often seen across tanker segments, the VLGC market kept a steady floor above cash breakeven level and the recovery was swift. This indicates a well-balanced market, supported by strong underlying fundamentals.

The heavy fuel oil, low sulfur oil spread is currently about $260 per ton in Houston, down from $320 at the close of last quarter. We have managed the volatility in bunker price as well, and this has contributed to our strong earnings this quarter. Tim and John will answer any questions regarding our view of the freight and product markets going forward. In the meantime, here are some highlights.

Despite lower-than-expected propane demand in China for olefin production, 2022 is forecasted to have about 4.7 million tons more of incremental LPG consumption compared to 2021. This was achieved in spite of only 6 out of 10 expected new PDH plants coming online this year.

LNG spiking in Japan and South Korea is expected to increase LPG production over the winter. South Korea is expected to import about 800,000 metric tons of LPG additionally to counter the high LNG prices. Meanwhile, Japan has imported 43% more year-on-year during the first half of '22 for city gas consumption.

Similarly, in Europe, there is -- we have seen some substitution of LNG -- LPG for LNG. North European substitution with seaborne volumes in the U.S. continues to add about 4 VLGCs a month. Despite the fact that more LNG ships are going to Europe rather than through the canal to Asia, the Panama Canal has remained congested adding on average more than 10 days to avoid both south and north bound, up from 5 end of last quarter. And while the VLGC order book next year is significant, increased export volumes, coupled with canal congestions and the fleet slowdown will likely help absorb most of the new tonnage.

Our outlook for the calendar year -- for the final quarter is positive. Estimates for U.S. exports point to further growth in '23 and '24. In its October short-term energy outlook, the EIA estimated that U.S. LPG exports will grow 8% in '22 and 11.3% in '23, up 1% and 1.3% from July's estimate. U.S. LPG production now is estimated to grow by 6.1% in '22 and 4.8% in '23.

The 2023 IMO Emission regulations, EEXI and CII, will come into effect in January '23 and will establish strict power limitation and carbon intensity limits to be complied with annually from then on. Our performance and new technology team have been diligently preparing our fleet and shoreside operations for these regulations, including retrofitting energy saving devices and developing and harnessing new software to manage fuel consumptions.

As Ted said, you can see more on our investor highlights and also ask -- we're here for any questions that you may want to ask and thank you again.

Vikram, I give it back to you.

(Operator Instructions) We have our first question from the line of Omar Nokta with Jefferies.

Just another solid quarter and another irregular $1 dividend. I wanted to just ask a bit, obviously, the market's really strengthened here over the past several weeks and just wanted to get a sense from you. As you think about how things have developed here and when we think about the $1 dividend that you just announced, do you base that off of the financials from this past quarter and how that ended? Or was it a bit of looking forward as well? And I'm just simply asking so that maybe we get a sense of perhaps what you're thinking in terms of the next quarter considering it seems likely that you're going to have a record results in the fourth quarter or calendar fourth quarter.

And so I just wanted to get a sense from you as how you approach that $1 irregular dividend for this quarter, given that earnings were lower than that, and there weren't any sort of capital gains that came in for you to pay out. So just kind of a bunch of words out of my mouth, but I just wanted to get a sense from you of how you came out with that dollar? And then what can we expect going forward?

Fair question, Omar. I'll let somebody else answer our -- the question as it relates to what we see in the market in the next quarter. Obviously, the current quarter will be very good. And we did have that visibility when our Board made the decision for the dividend. So generally -- well, not generally, invariably, we do not count our chickens before they hatch. But you cannot -- we take everything into consideration each time. This is why we don't call it regular. It's not formulaic, it's based on the judgment of our Board each quarter to decide what we can -- how best to deploy our capital and our cash reserves.

I think that's pretty clear. Sorry. Sorry, John, I put you off.

No, no. I just -- I was going to invite Tim to give you a sense of where the market is now and how we see it in the next few weeks.

Yes. Of course, we -- from when we had the Board meeting and decided on the dividend, the market has just gone one way, which is open and very fast. And we see this for the coming period to maintain the firmness and also into the first quarter of -- well into the first quarter of '23, is not all '23 first quarter as we see the demand in Europe and due to the unfortunate war in Ukraine, is helping our markets. And also now we are seeing the Panama delays, as John was mentioning earlier, going up to 20 days now at the moment. And so this creates a lot of distraction in the market and a lot of inefficiencies in the market and also a better trading environment for the traders. So we believe that, that the market should stay firm at least for the short period.

Okay. Yes. And I guess maybe just a bit more, I guess, bigger picture, how do you think about the fleet deployment at the moment? As we go into these, next several months look to be very strong, but there are a good amount of deliveries coming in next year, how do you think about that? And then also, I noticed you exercised an option to charter in a vessel for an additional 2 years, but then also extended an existing contract for 2 years that you have out. Was that done on a like-for-like basis? Or are they completely sort of separate from each other?

Yes. I will say they are separate from each other. The extension of the charter in was rate that was done in 2018 when we did the charter party. So that rate is very different from today's market. And you can say the extension of the time charter out is with one of our key customers, which we enjoy a good relationship with and at a rate that was in line with today's term market. So we do take some coverage in the market, but in general, we believe that in '23, even with the higher amount of new billings coming in, with the increase of production in the U.S. and with the delays we are seeing and with that production mainly going to the East, this is a lot of long haul. And then on additional slowdown of the -- age of the fleet at least with the EEXI regulations and the CII compliance that we will have to take into account order from 1st of January. This will have a significant impact on the fleet and the demand for our vessels.

So in our mind, the market looks okay for '23, and we are there to take more, you can say, assets in on time charter, if we see the right opportunities. But of course, also, we do try to keep a little bit of ships out on term as well to have a little bit of a balance on our book, yes. But for '23, we have -- in our opinion, the production and the slowdowns we'll be able to absorb the -- for [rare] ships coming into the market. So we do see the '23 sort of positive.

(Operator Instructions) We have next question from the line of Brian Reynolds with UBS.

Maybe to start off, just want to talk a little bit more about the spiking opportunities for LPG. Maybe on the upside demand of the equation, you talked about demand that you're seeing potentially from Korea and Japan in terms of spiking. Curious if you could just put it maybe in perspective of like a percentage uplift relative year-over-year all things equal, like what is the potential uplift in terms of overall like seaborne LPG cargoes being lifted to summer or this winter from potential LPG spiking?

Thanks, Tim (sic) [Brian]. We addressed that a little bit in the written remarks in the prepared remarks, but I don't know we calculated that in ships per...

Yes, it would be [integrated] into Europe, I'd say. It's about 4 VLs liftings a month and a round trip U.S. to Europe is about a month. So you can say -- so that's about 4 ships equivalent. And for Japan and Korea, it's, of course, a seasonal thing, especially for Japan filling up for the winter. So that will tail off later in the -- when we get into the spring at some point, once we get through the winter and the stockpiling. But we can also say that a lot of these, of course, as was also mentioned by John, that PDH demand and it has not been -- or is not at its full capacity. So some of it is replacing these demands.

But it is additional seaborne requirement for this and also what we see as the consumption from Ukraine and Poland and all the countries that were supplied overland from Russia. This is also replaced by VLs going into the storages in (inaudible) and other places and then ship on smaller ships into Poland. So that is also a new demand that is created. And that's about, I think, 2 VLs months that we see going in to cover that at the moment. So there are definitely new users and new demands happening.

Great. Really appreciate that color. So you maybe talked about 4 cargoes for the spiking uplift and then 2 cargoes going to Europe. I want to touch on the chemical demand aspect of it. what are you seeing? You've highlighted previously a lot of new PDH capacity coming online over the next few years. may take a while for that capacity to fill in? How many cargoes are you -- how do you see that demand filling up over the next few years? Do you really need to see an economic recovery? And are you seeing any early green shoots given the potential for China reopening potentially over the next couple of months?

Yes, I think as you say yourself, China is a difficult one to -- when they go away from the policies of the zero tolerance on the COVID on -- but these plants are coming and they are running even at reduced rates. So we are still seeing the consumption growth, but not as rapidly as we had hoped. But there is definitely a big potential upside once China gets either a control over the COVID or ease the regulations on that.

And I think LPG doesn't seem to be as hard hit on -- even though you have a bit of an economic slowdown and so on as some other products as there is a general demand for these plastics produced. So we see this as a intermediate problem that will go away in the near future, and we will see more production and more demand from the PDH plant. But it can take -- it's hard to say what the Chinese [will] take before they come back.

Great. Totally I understand, and I appreciate the color. Maybe just as a quick last follow-up. You talked about some congestion in the Panama Canal like we've seen in the past few years. Curious if you have any updated comments around or views around the potential LPG pipeline that could span the Panama Canal. Any updated views there on whether you're seeing some traction now on if that's happening? And then I guess just beyond that, do you see that as a potential solution towards the congestion? Or do you think it's really not -- maybe not worth the time to spend?

Yes, I think there's nothing really new on the pipeline, but when we looked at it in the past, the volume that it could handle and the implications was not a game changer, I would say. So we would be able to maybe solve the problem for a few VLGCs. But again, you would have the short haul on the one side and the storage issues and the meeting of the [lake hands] on the other side. So the total capacity was not something that we saw as a game changer, but I don't have any recent update on the progress of the pipeline.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. And I'd like to turn the call back over to John Hadjipateras, Chairman and CEO, for closing remarks. Over to you, sir.

Thank you very much, Vikram. So thank you all for joining us. I'm wishing you a good holiday season coming up, and we look forward to speaking to you again next quarter. Thanks. 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.