Dorian LPG Ltd (LPG) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Dorian LPG Third Quarter 2021 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, Rob. Good morning, everyone, and thank you all for joining us for our third quarter 2021 results conference call. With me today 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 February 9, 2021. 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 December 31, 2020, 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.

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

Thank you, Ted. Good morning from Connecticut, where John, Ted and I are speaking to you from different locations. And from Copenhagen, where Tim Hansen has joined. I appreciate all of you joining us this morning to discuss our third quarter results. Today, we're happy to announce a $100 million self-tender offer. Having considered various options, our Board decided the tender offer presents a very compelling way to return cash to our shareholders. It accomplishes our main goal of making a meaningful distribution, while at the same time, maximizing financial and option value for all our shareholders.

We believe that investors will value the optionality of our approach as those who wish to receive cash can sell as much of their holdings as fits their needs, and those who wish to increase their ownership have that flexibility as well. Through continued cooperation with our customers, various regulatory bodies and local governments, we've been performing our work remotely when possible during the ongoing pandemic.

Digitalization and remote monitoring have enhanced efficiency, offsetting some of the higher costs associated from COVID, while reducing potential exposure to the disease. And through these efforts, our seafarers and shore staff remained safe and able to perform their duties, as we continue to focus on providing our customers safe, reliable and clean and trouble-free transportation. The financial results for the quarter are even better than we expected on last quarter's call on the potential effect that the combination of large amounts of U.S. supply coming online, a heavy drydocking schedule for the global fleet and the potential impact of a cold Asian winter could have on the market.

While rates have fallen dramatically from the busy peak, the market environment remains promising, and we think that it is sustainable for some time. We expect the drydocking and maintenance on the global fleet will likely have a stronger impact this year than last year. The wave of U.S. infrastructure came online during 2020 that was weighted towards the end of the year, introducing a large amount of spare export capacity and product supply to the market.

At the same time, continued production cuts from OPEC+ are decreasing supply out of the Middle East, leaving only U.S. product to meet global demand. U.S. LPG exports have returned to China where new PDH plants continue to start up. Indian and other export markets continue to grow. We continue to be a believer in the cargo that our fleet transports. LPG is a clean and flexible fuel, amongst those that will bridge the potential transition to alternative energy.

Next Ted Young will provide an analysis of our quarterly financials, followed by Tim Hansen on the markets, and John Lycouris with an update for our environmental and operational activity.

Ted, mic is yours.

Thanks, John. My comments today will focus on our financial position and results and our liquidity as well as some commentary on the self-tender offer announced today. At December 31, 2020, we had $133.6 million of free cash. As of Friday, January 29, our cash balance stood at $149.3 million. The increase since year-end is reflective of the strong chartering results that we're currently seeing.

Turning briefly to the tender. At the tender price of $13.50 per share and based on the 49.9 million shares outstanding -- currently outstanding, we would be repurchasing 7.4 million shares or about 14.8% of the shares currently outstanding. Based on charters booked and our expected expenditures, we currently anticipate that we will generate roughly $50 million to $60 million of free cash flow this quarter, including the cash already generated in January.

Thus, even after accounting for the $100 million buyback, we would maintain a cash balance that is consistent with our approach to balance sheet management without any borrowings. In addition, the buyback is accretive to shareholders' equity per share, a key valuation metric for the investment community. Overall, we view this transaction as an efficient and highly accretive way to return capital to our shareholders. Further details on the mechanics and logistics will be available later today via the SEC website.

For the discussion of our third quarter results, you may also find it useful to refer to the Investor Highlights slides posted this morning on our website. Turning to our third quarter chartering results, we achieved total utilization of 96.2% for the quarter, with a daily TCE, that's time charter equivalent revenue over operating days as both those terms are defined in our filings, of $42,298, yielding utilization adjusted TCE, that's TCE revenue per available day, of about $40,690. This quarter saw steady month-over-month improvements in rates and utilization.

Spot TCE per available day, which reflects our portion of the net profits of the Helios Pool for the quarter, was about $41,754. Overall, the Helios Pool reported a spot TCE, including a -- including COAs of approximately $45,237 per available day. Our daily OpEx for the quarter was $9,189, excluding amounts expensed for drydockings. It was $9,487, including those costs.

Sequentially, OpEx was down, reflecting overall strong cost containment. Our time chartering expense remained relatively stable at $4.4 million. As a reminder, we do not include time chartering costs in our vessel operating expenses. Total G&A for the quarter was $5.5 million; and cash G&A, i.e., G&A excluding noncash comp expense, was about $5 million, which was down about 10% from the preceding quarter. We continue to look for efficiencies in our cost structure. Our reported adjusted EBITDA for the quarter was $60.1 million.

Similar to our chartering results, we saw steady month-over-month increases in EBITDA this quarter. As a reminder, we look at cash interest expense on our debt as the sum of the line items, interest expense, excluding deferred financing fees and other loan expenses, and realized gain/loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $6 million, representing a $900,000 reduction from last quarter.

As I mentioned last quarter, we did blend and extend our $200 million notional swap, which resulted in our extending its maturity by 3 years to 2025 and reducing the fixed interest rate from 1.933% to 1.091%. We also did a similar transaction on our $50 million swap, which resulted in a decrease in rate from just over 2% to 1.145%. This swap remains at $50 million notional until March 2022, at which point it will begin to amortize. So a big part of the reduction that we witnessed was due to those favorable blend and extend transactions in the swaps.

Overall, we continue to benefit from our hedging policy and the favorable pricing of our Japanese financing, leaving with us -- leaving us with a current interest cost -- fixed, hedged, and a small floating piece -- of 3.71%. As a reporting matter, our realized and unrealized gain/loss on derivatives also include the effect of our FFA portfolio. The calculation of EBITDA in our filings, however, only adds back the interest on the realized gain/loss, not the FFA piece. John will touch on our drydocking program, but our remaining drydocking commitments are quite manageable from a financial perspective.

Although we currently hold a roughly 70% economic interest in Helios, we do not consolidate its P&L or balance sheet accounts, which has the effect of understating our cash and working capital. Thus, we believe it is useful to provide some additional insight in order to give a more complete picture of our financial condition. As of Monday, February 1, the Pool had roughly $45.7 million of cash on hand. We feel that our liquidity and capital structure positioned us well for any rate environment and we believe that this allows our company to make capital allocation, such as the one announced this morning, from a position of strength.

Our Board's decision to begin a $100 million self-tender underscores its commitment to shareholder value creation and aggressively returning cash to shareholders when appropriate. Assuming successful completion of this tender offer, we will have repurchased roughly 16.3 million shares, representing over 28% of the shares outstanding following our IPO in 2014. We continue to remain interested in accretive growth opportunities that meet our risk/reward criteria as well. We will continue to be prudent in deploying cash, but our financial position allows us to act quickly on meaningful opportunities as they may arise.

With that, I'll pass it over to Tim Hansen.

Thank you, Ted. For the calendar year 2020, the global seaborne LPG volumes fell by over 2% year-on-year to 106.8 million tons. Fourth calendar quarter volumes totaled 27 million tons, a less than 1% decrease versus the same quarter in 2019. U.S. export growth continues to counterbalance the Middle East volumes that held about 4 million tons. Meanwhile, in 2020, American export volumes increased by 16% to 46 million tons compared to only 39.7 million tons last year.

And for the second quarter in a row, U.S. export volumes hit the record levels. Year-on-year export volumes in the fourth quarter grew by 18.8% to 12.9 million metric tons. The American export volumes hit a monthly record of 4.4 million tons in October and a record again beaten in December with 4.5 million metric tons. The cold Asian winter increased demand, while new export capacity came online in December with [each of these] expansions of the Netherlands terminal being completed.

The Baltic Market Index for the Ras Tanura-Chiba route averaged $76 per metric tons in the last quarter. Rates increased as the quarter progressed, increasing from $55 a ton at the beginning of the quarter to over $100 per ton for the most of December. Several contributing factors drove last quarter's rate strengths. Delays in the Panama Canal caused waiting time to increase domestically during the quarter. This was caused by heavy container traffic and an overall increase in transits. Also COVID-related inefficiencies, and U.S. Gulf and Asian port delays caused by winter weather further increased the utilization of the fleet, in addition to the elevated number of ships out of trading due to drydock and all the surveys.

At the same time, global LPG demand increased substantially, particularly from Asia with an unusual cold weather, leading to a relative shortage of gas in the region for residential and commercial purposes. Also high LNG prices, in addition to drawing LNG gas from the U.S. and creating a boom in the LNG market, incentivized substitution of LNG with LPG in industrial applications. With a resilient LPG -- U.S. LPG production and low inventory draws until December -- until Christmas and value priced competitively and opened the West-East arbitrage in mid-November, which remained open for the remainder of the quarter.

The opened arbitrage towards East made traditionally Western-based players send cargoes to the East, as well, as margins was better versus the cracker economics in Europe against naphtha, which created additional ton miles. On the supply side, concerns over the U.S. NGL production volumes remains. Propane storage levels are tracking well below both last year's levels and the trading 5 months' average. However, we continue to believe that U.S. supply will supply the global demand gap left from the lower Middle East production due to Saudi cuts.

Saudi Arabia had agreed to take brunt of the new OPEC cuts in favor of Russia for February and March, which could remove 4- to 5-year [seized] cargoes or about 200,000 tons of LPG to the market for the 2 months. Although rates have come off over the past weeks on the back of increased U.S. prices, which have closed arbitrage and resulting in a few U.S. cargo cancellations, prices are now adjusting and look more positive. And we have seen market activity picking up again, high utilization of the Panama Canal to continue resulting in sustained delays and more regular VLGC routing around the Cape of Good Hope. We remain optimistic looking into 2020.

With that, I'll pass it on to John for environmental and fleet update.

Thank you, Tim. In the last calendar quarter of 2020, we completed drydocking and third special survey on our vessel Captain John NP and in the past couple of weeks of January, we completed drydocking and first -- and first special survey on our vessel Commodore. We plan to fit 2 ships with scrubbers during this quarter, which will complete our announced scrubber program and carry out those vessels' 5-year drydocking cycles. We expect outlays of $6 million to $8 million over the next couple of months -- quarters, sorry.

During 2020, crude oil prices saw an extreme volatility as have bunker fuel prices. The very low-sulfur fuel oil price spread, however, has steadily priced at 20% to 25% premium above that of heavy fuel oil, bunker fuel. Even though in absolute dollars, this spread ranged from a high of $300 per metric ton down to $50 per metric ton. It currently stands at about $100 per metric ton.

As we look back to IMO 2020 launch last year, we are now very confident that the decision to install hybrid scrubbers was justified, not only economically but also environmental. Our fleet of hybrid scrubber vessels overall averaged 0.04% to 0.07% sulfur oxide emissions, SOx emissions against the blended and problematic fuel oils of 0.5% and 0.1% so to shipping for the year.

As we have previously reported, scrubbers also reduced particulate matter in black carbon emissions by 80%, keeping in line with environmental sustainability. We continue to invest in our vessels' performance and efficiency in achieving reduced emissions and lowering operating costs. An improved environmental footprint is very important to Dorian LPG, and we hope to continue with additional energy efficiency technologies to our vessels, including dual-fuel batteries and fuel cells.

Dorian has been at the forefront of LPG dual-fuel technology since 2013 and 2014 when first newbuilding vessels were ordered, and we followed that development closely since then. After the most recent LPG dual-fuel retrofits get into regular service and when the first newbuilding dual-fuel vessels deliver from the shipyards, we hope to revisit this opportunity and consider our options.

Given the VLGC fleet age profile last year, it would have been a significant number of vessels for drydocking, which would have removed from trading. But this year, we expect to see even stronger trends. According to some brokers, as many as 90 ships could opt for drydocking maintenance this year, which would almost be 1/3 of the current global fleet. With a strong freight rate environment in the second half of last year and increasing COVID-19 disruptions at the yards, many owners deferred maintenance, which is pushed now into 2021.

Considering LPG dual-fuel engine retrofits, ballast water treatment installation and some scrubber retrofits, more ships could be out of the global fleet this year for longer periods than last year. The current fleet order book remains at reasonable levels and supports the VLGC market for the medium term. It currently stands at 39 vessels or about 13% of the fleet, with about 21 vessels expanded in 2021, 13 vessels in 2022 and 9 in 2023.

There are currently 30 vessels in the fleet that are aged 25 years or older, which equals to about 10% of the current fleet.

And with that, I will pass it over to John Hadjipateras.

Thank you, John. Rob, do we have any questions?

(Operator Instructions) And our first question comes from the line of Sean Morgan with Evercore ISI.

So in light of this large buyback and return of capital to shareholders, I think you still have $50 million reauthorized on the buyback authorization for the rest of the year, at least through the rest of the calendar year. How do you think about how aggressive you'll be in terms of timing of using that, and to what extent you use it? Will it be just dependent on the path of the share price? And sort of how do you think about that reauthorization of the buyback in light of the change in circumstances with this big chunk of cash being used right upfront for this tender offer?

Thanks for the question, Sean. No, it's there. It will remain as an authorization. And it will be, as before, evaluated on taking all the factors into consideration, the -- including the price, including the success, hopefully, of the tender, and the market, the freight...

Okay. And then I got -- I have one here for Tim regarding the pandemic now. You talked about this utilization spike between LPG vessels, LNG vessels and container ships. Do we see this as kind of a seasonal uptick or a onetime event? Or is this sort of a new normal where all 3 of these vessel categories are using the Panama Canal to an extent that it's going to become sort of capacity constrained on an ongoing basis?

Tim?

I think for -- yes, I'm sorry. Can you hear me?

Yes, I can hear you. Yes, go ahead.

Okay. Yes, I think there are some seasonality in it there naturally, but containerships especially have increased throughout the year by, I think, 90-plus more passages than the year before, and we see more containerships being fitted for the Panama and more lines going in that direction. So I think that's more on a continuous basis. We have seen dry cargo, for example, increase quite substantially, which has been -- which we expect to be somewhat seasonal due to the cold winter in Asia and lack of (inaudible) of cold oceans in South America.

And LNG also is somewhat seasonal, but we have seen an increase in transit throughout the year, but especially this cold spell that we have in Asia and which still is in Asia has drawn a lot more LNG in that direction. But totally, we're seeing like the increase of passages in the canal by more than 200 transits since 2019 and 2020. So overall, we believe that there will be more, let's say, delays in the Panama Canal, but it will also have some seasonal swings.

Okay. And so in light of that, as you're managing the Dorian fleet, has that resulted in Dorian just waiting at the Panama Canal longer, along with a lot of other global players? Or are you actually having to send ships around -- the long way around Africa, from like the U.S. Gulf to Asia?

We are sending ships around the Cape, I think at -- especially as the delays in the Panama Canal surge up to 12 to 14 days, the economics actually from going on both through the canal and waiting for that long justify sending ships along the Cape, even from the north part of Asia. And still we are seeing 8 to 10 days delays. So maybe the inflection point moved a little bit southerly. But yes, we will send ships in that direction more because these delays also surged quite a lot and makes it hard to plan the next cargoes.

You can say also, we have some Panama slots booked throughout the years, so we can schedule around those. But as you saw on New Year's Eve, the Panama Canal has changed the regulations for prebooking of Panama slots. So that is no longer possible for LPG carriers to prebook slots, so -- from 2021 -- 2022 onwards. So that will also change again the dynamics of the Panama Canal transits in the future. This year, there is a number of players who have (inaudible)

Yes, Sean, you've been -- that obviously has a positive effect on the ton mile surge.

(Operator Instructions) The next question is from the line of Omar Nokta with Clarksons Platou.

I hope you're able to handle the snow okay. The -- obviously, just wanted to -- clearly, the $100 million self-tender offer is clearly the most aggressive shareholder reward program you guys have done since being public. And with the firepower you have, the earnings momentum and clearly, the valuation, it makes a lot of sense. But I wanted to ask with that, how do you feel about reinvesting in the business? Clearly, the market has become -- or at least it appears to be very tight over the past, call it, a year, 2 years aside from the COVID window there that lasted a couple of months.

Do you feel that the market is short on vessels? Clearly, there is some of that. But how do you feel about your positioning? Do you think it makes sense to grow? Or are you more content with returning capital?

Omar, we're not -- we're not excluding growth, but we are focused first on return. At this stage, the -- it's much more compelling to return money to our shareholders than it is to acquire ships. That's the very precise and concise answer to your question, I think.

Yes. No, that's fair. And the -- maybe just thinking about the spot market, it's been fairly robust. And we haven't really seen much time charter activity, I think, maybe from my perspective. Is that the case how you see it? Do you see the period market opening up? Or -- because I know in the past, you've been more willing to put vessels on contract, but we haven't really seen that the past several quarters. How could you describe the period market right now?

I'll let Tim answer that.

Okay. Yes, I think we have seen some activity in October, November for shorter-term time charters, so 1 to 2 years. I think still for the longer-term deals, that has been very limited. I think people are also looking ahead at what types of ships and what will the regulations and so on encompass, but long term because all of the spike or the beginning of the spike, we did see quite a lot of renewal of ships which -- for 1 to 2 years, which is normal for that time of year. So all the contracts would come into renewal.

I think, also, we saw a very difficult product market just leading up to fourth quarter -- calendar quarter. So at that time, most freighters was very, very cautious of committing to anything. So that might have been the reason for you seeing a little bit less activity in that front than previous years.

And then just maybe -- just on maybe the topic of U.S. exports. You touched on this a bit in the opening comments. This -- try to think about it from, say, what happened this past summer when the VLGC market came to life after the spring shutdown. And things started to come to life despite the OPEC cost cuts or the Middle East cut and the U.S. made for a lot of those lost volumes and really grabbed some market share and that kind of sprung VLGC to higher levels. With the Saudis now talking about taking off 1 million barrels of crude here in February and again in March, could you see a similar situation arising, that being a loss of Middle East cargoes being replaced with the U.S.?

Tim, do you want to have a jab at it?

Yes, I knew that. Yes, I think we could see something similar where the demand in the East is really -- is still there. So it's definitely not -- no (inaudible) of the tons there, they're definitely there. So when tons are -- when we are seeing export cuts out of the Middle East, we expect them to be replaced by U.S. and also on the back of, we should see improved oil price and thereby making cracking more attractive in the U.S. as well. And we see -- you also saw this earlier the year that when tons are lacking, then basically the tons that could go into naphtha cracking will then go into the other demand in Asia.

So we think -- we see the cut of Saudis that these tons will be replaced and will be replaced in the East by U.S. tons, which should give more ton miles as well -- obviously more ton miles as well.

Yes, yes. It'd be interesting to see. Yes, go ahead.

I think the dynamic of the increased ton mile from that -- and from the canal has been very helpful. So we're seeing continued volatility. And this year, we've got to be thankful for it because even though the volatility took us down to breakeven early last year, it brought us up to wonderful returns at the end of the year, now markets rolled off again. But on average, I think probably we would be looking at prospects that are better even than we had anticipated last year for -- going forward.

Yes, I agree with that, definitely. And maybe, John, just one final question, and I've asked you this before on calls, and you've been pretty firm with the response, but how do you feel about investing in newbuildings today? Are there customers requesting that of you?

John?

No, we haven't seen that yet. And I do think the newbuilding market is getting to an inflection point, where I think that the prices have been either sliding or steady for a long time. And the next move will be up, but I thought that before. So I don't think there's a rush to do anything, certainly not for us and certainly not for the rest of the market. We can handle -- the fleet can handle the demand that's there. And it's a challenge going forward for, not just our sector, but all sectors to know what kind of fuel mix to put into future when you're designing and building ships for the future.

In our case, in the LPG business, it's a bit easier because the obvious answer would be LPG as a dual fuel. But we do look at it. We continue to look at it, but we're not there yet. We have -- and as I said before, we are prioritizing return to shareholders at the prices -- at a price of our stock, we continue to think the best way to do it is by what we've done -- we've announced today.

At this time, we've reached the end of allotted time for questions, and I will turn the call back to management for closing remarks.

Thank you very much. I think my closing remarks is thank you all for joining us, and I hope that you join us again next quarter, and we have even better news for you then. Have a great day.

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.