Ardmore Shipping Corp Q3 FY2021 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Ardmore Shipping Third Quarter 2021 Earnings Conference Call. Today's call is being recorded, and an audio webcast and presentation are available in the Investor Relations section of the company's website. A replay of the conference call will be accessible anytime during the next 2 weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 10161121. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.

Thank you. Good morning, and welcome to Ardmore Shipping's Third Quarter 2021 Earnings Call. Let me first ask our CFO, Paul Tivnan, to describe the format for the call and discuss forward-looking statements.

Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website, where you will find a link to this morning's third quarter 2021 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions. Turning to Slide 2, please allow me to remind you that the discussion today contains forward-looking statements. Additional results may differ materially from the results projected based on those forward-looking statements. Additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2021 earnings release, which is available on our website. And now I'd like to turn the call back over to Tony.

Thank you, Paul. So let me first outline the format for today's call. To begin with, I'll discuss financial highlights, recent market activity and the near-term outlook, after which Paul will provide an update on product and chemical tanker fundamentals and financial performance, and then I'll conclude the presentation and open up the call for questions. So turning first to Slide 4. We're reporting an adjusted loss of $12.8 million or $0.37 per share for the third quarter as compared to an adjusted loss of $7.6 million or $0.23 per share for the second quarter. Our MRs averaged $10,280 per day for the third quarter versus $11,300 for the second quarter, reflecting extremely tough market conditions impacted by oil demand still at that time low compared to pre-COVID levels, oil inventory destocking and reduced refinery throughput. Our chemical tankers were similarly challenged despite a stronger chemical tanker market as they traded in CPP for a greater percentage of time than usual, earning $10,400 per day in chemical trades with only $6,700 in CPP trades. Performance through the fourth quarter is expected to be much better, reflecting an improving market month-by-month, with October already done at similar levels to the third quarter, November a turning point and December expected to be stronger still. To provide some data and context around this, our MRs quarter-to-date have earned $10,450 per day with 50% of the quarter fixed and the chemicals at $11,400. However, our MR voyages fixed over the last 2 weeks are showing much better levels at $15,300 per day with chemicals at $17,400. In addition, as an indicator of the forward market, the MR Eco-Design 1-year TC rate is now at $15,400 per day, and the FFA or Futures Atlantic Triangulation that would be TC214 for December through March is now at $16,200 per day, indicating expectations of higher rates this winter and into 2022. And most recently, we fixed an MR at voyage U.S. Gulf to Caribs earning $20,500 per day around market, which has been the worst hit in the recent months. As an aside, one thing to keep in mind is that the Ardmore fleet is not scrubber-equipped, and that there is currently a $1,500 a day TCE differential based on current fuel prices, boosting scrubber-equipped TCEs without taking into account the offset in capital and operating costs of scrubbers. But back to the market from what we can see, the product and chemical tanker trades are turning on how far this goes, we will discuss further in the presentation. Meanwhile, we've made good progress in terms of our energy transition plan, which we'll also discuss later, but to highlight some of the recent developments, our e1 Marine has secured its first order for a hydrogen generator from a leading global engine manufacturer. And there's now an agreement in place with Aramco Americas for a joint research project to apply its carbon capture system to e1 Marine's hydrogen generator. And as a final point, as of quarter end, we're maintaining a strong liquidity proposition of $61 million of cash and undrawn lines plus an additional $15 million cash pending funding of the preferred equity tranche 2.

Thanks, Tony. Turning to Slide 8. Tony has taken us through the near-term market outlook, so I'll focus on the medium-term outlook for product tanker demand, which is also very favorable. Global oil demand is expected to fully recover and exceed pre-COVID levels in early 2022 and then continue our growth trajectory. Looking to the chart on the upper right, we can see the medium-term outlook for oil demand remains firm. Oil consumption is expected to reach 104.8 million barrels a day in 2025, representing a 1.5% growth rate per annum for the next 4 years. Meanwhile, refinery dislocation will continue to have a significant positive impact on product tanker demand, providing an additional layer of growth. At a high level, closures of refineries in developed countries such as Europe and the U.S. means that oil products supplied by these refineries are replaced by seaborne imports from new refineries in the Middle East and Asia. The current volume of refined product moved at sea is approximately 21 million barrels a day, and in this context, the level of refinery dislocation is significant for product tanker demand. Between 2021 and 2025, refinery capacity in export-oriented locations such as the Middle East and Asia is expected to increase by 9.7 million barrels a day as compared to refinery closures of 5.1 million barrels a day in the U.S., Europe, Japan, and Australia. In terms of live examples, a number of large refinery expansion projects are expected online in the next 12 months after many years of construction. The 400,000 barrel a day Jizan refinery in Saudi Arabia is expected to be fully operational by the end of this year. The 615,000 barrel a day Al-Zour refinery in Kuwait is scheduled to come online in the middle of 2022. And in Oman, the 200,000 barrel Duqm refinery is expected to come online later next year. Overall, product tanker ton-mile demand is expected to grow by 3% to 4% to 2025, which is above current product tanker supply growth. Moving to Slide 9, we highlight the very positive outlook for chemical tanker demand. Chemical tanker trade is highly correlated to global GDP, with the correlation coefficient of 95% from 2010 to 2021. The global economy has recovered strongly in 2021 with growth of approximately 5.5% and chemical tanker demand is now approaching the same pace. As a consequence, chemical tanker freight rates are well ahead of CPP rates. Ardmore's chemical tankers are currently outperforming MR product tanker TCE by $2,000 to $3,000 a day. Demand outlook is very strong. Seaborne chemical tanker trade is expected to increase by 5.5% in 2022, driven by an ongoing global economic recovery, expansion of petrochemical production capacity to meet demand, and particularly strong export growth of edible oils with an increase of 4% expected in 2022. Edible oils represent approximately 35% of chemical tanker demand. Therefore, we expect chemical tanker charter rates to continue running ahead of product tankers. And overall, we expect chemical tanker demand to grow by approximately 4% per annum to 2025, well above current chemical tanker supply growth. Turning to Slide 10, supply growth for products and chemical tankers is increasingly constrained. There has been a significant increase in scrapping with both products and chemical tanker scrapping levels well above prior periods. We're estimating approximately 70 product tankers or 2.3% of the fleet and 35 chemical tankers or 2% of the fleet to be scrapped this year. Elevated levels of scrapping are expected to continue as the energy transition accelerates the deletion of older, less fuel-efficient ships. EEXI, Carbon Intensity Index, and other IMO legislation are expected to accelerate scrapping. The application of the new rules is set to come into effect on January 1, 2023. In addition, the availability of product tankers older than 15 years—which is the core fleet for mainstream trading available for oil traders and oil majors—is set to shrink over the next few years. For example, an expected contraction of 3.5% in 2022. This is simply a function of vessels aging out at 15 years old, which is a high number versus a relatively low number of new vessel deliveries. Meanwhile, the current order book is very low at 6.3% or 195 ships for products and 4.4% or 78 ships for chemical tankers. Product and chemical tanker new deliveries are expected to remain relatively low for the coming years. Firstly, there is limited berth availability as yards are filling up following a surge in orders from other sectors, particularly container ships and dry bulk. Secondly, continued uncertainty on future propulsion and regulatory requirements is leading to ordering hesitation among shipowners. Overall, we expect net supply growth for products and chemicals to be low for the foreseeable future absent a very strong market. Moving to Slide 12, we take a look at our financial performance. Starting with TCE rates, it's important to reflect on the impact that COVID had on product tanker charter rates. As you can see on the left-hand side of the chart, in late 2019 and into 2020, the market was steadily gaining momentum driven by improving fundamentals and increased demand for clean products. At the time, the oil market was also preparing for the IMO 2020 fuel switch. Product tanker rates were very strong in the second quarter of last year due to unprecedented volatility in the oil markets driven by COVID and the oil price forward. As can be seen under the yellow banner in the middle of the chart, from the third quarter of 2020 to date, the oil market experienced unprecedented levels of disruption associated with global lockdowns and restrictions. Over the past 5 quarters, lagging oil demand, lower refinery throughput, and inventory destocking have contributed to record low product tanker charter rates. We now believe the recovery phase is coming to a conclusion and rates are starting to trend up, as you can see on the bars on the right-hand side of the chart. We expect charter rates to continue to strengthen in the coming quarters as the market returns to more normalized conditions. Moving to Slide 13 for a summary of our quarterly performance and financials. We're reporting EBITDA of $1.3 million and an adjusted loss of $12.8 million or $0.37 per share for the quarter. Earnings were impacted by the challenging charter market and dry docking completed in the third quarter. We adjusted our docking schedule this year to take advantage of weaker charter rates and completed 3 dry dockings last quarter, resulting in 80 off-hire days. Meanwhile, we remain focused on cost control and operating efficiency. Operating expenses came in at $15.5 million for the third quarter compared to $16.1 million for the same period last year. Looking ahead, we expect operating expenses for the fourth quarter to be approximately $15.9 million. Chartering expense was $2.3 million for the third quarter and is expected to be $2.1 million for the fourth quarter. Interest and finance costs came in at $4.4 million for the third quarter compared to $4 million for the same period last year, with the increased interest cost related to refinancings of 2 ships completed earlier this year. We expect interest and finance costs for the fourth quarter to be approximately $4.4 million, including amortized deferred finance fees of $400,000. Total overhead costs were $5 million for the quarter, and for the fourth quarter, we expect total overhead incorporating corporate and commercial to be $4.8 million, which includes both cash and non-cash items. Depreciation and amortization totaled $9.1 million for the third quarter and we expect it for the fourth quarter to come in at $9.2 million. As you can see from the graph on the lower right, we're maintaining a strong liquidity position of $61.4 million, comprising $54.5 million of cash at the end of September, with an additional $6.9 million available in undrawn lines. Turning to Slide 14 for fleet and operational highlights. We're continuing to invest in the fleet to optimize operating performance. As mentioned, we completed 3 dry dockings and one ballast water treatment system installation in the third quarter with no further dry docking schedule until the second half of 2022. Fleet on-hire availability was 99.2% in the third quarter, and we're forecasting CapEx of $2.1 million in the fourth quarter mainly comprised of payments for dry dockings completed in the third quarter and minor upgrading expenses. Revenue days for 2021 are forecasted at 9,500. In October, we time chartered out an Eco-Design MR for 1 year at an attractive rate. Currently, we have 5 vessels fixed on time charter with an average remaining duration of 4 months. In total, for the fourth quarter, we have 19% of fleet days fixed on time charter. The fleet continues to perform well, and we're pleased to report that as of today, 83% of the crew are now fully vaccinated and all COVID-related challenges are being managed carefully. Turning to Slide 15. We take a look at our capital allocation policy with financial strength remaining our top priority. We are continuing to focus on maintaining a strong balance sheet. We have $61.4 million in liquidity available, plus an additional $15 million in cash pending funding of the preferred equity tranche 2. Total net debt at the end of September was $326 million, and corporate leverage on a net debt basis was 48.5%, which is down 1.7% from fourth quarter 2020. Debt reduction remains a top priority. We have scheduled repayments of $9.2 million for the fourth quarter and we're maintaining revolving credit facilities for financial flexibility. We've renewed the ABN revolving credit facility in September, extending maturity to 2023 with a reduced margin for outperformance on sustainability targets. At the end of September, we have total liquidity of $2.6 million for own ship, which we believe is the highest of our peer group.

Thank you, Paul. To sum up then, the third quarter was impacted by an extremely tough tanker market. We believe that the worst is now well behind us and that we reached a turning point in the market. We anticipate that the fourth quarter will develop month by month, with October already concluded at some levels as the third quarter, November a turning point, and December expected to be much stronger. The market outlook is positive in view of the now close to complete global oil demand recovery and anticipated end of destocking, low inventories creating supply dislocations, and potential spillover from the oil prices into higher gas oil demand this winter. The chemical tanker market is similarly bullish but for different reasons: rapid GDP recovery, congestion, pricing differentials driving trade, and recognition of the strong market coming into 2022, which already feels like it's building momentum. The medium-term outlook for both products and chemicals is also positive in view of good demand growth, coupled with a low order book and constraints on further supply. Meantime, we're pressing ahead with our energy transition plan and are making good progress with Element 1 and other initiatives. We're maintaining our financial strength matched with significant spot exposure in order to benefit from what now very much appears to be a rising product and chemical tanker market.

Our first question comes from Jon Chappell with Evercore.

Tony and Paul, this is Sean Morgan filling in for Jon this morning. I have a couple of questions regarding the e1 Marine joint venture and your activities there. Is this a prototype that has been moved to a manufacturing facility, where an existing manufacturer would then be involved in mass producing the prototype for the joint venture?

Thanks, Sean. It's Paul here. So this is actually a sale, not right sale to a global engine manufacturer for a pilot basis. The plan there is to match the generator up to a fuel cell prototype that, if successful, is expected to lead to a commercial licensing arrangement for e1.

Okay. So would you be getting paid like a royalty or some sort of a commission on their sales of individual units? Or how would the economics work here?

Exactly. The commercial licensing model, the current business model for e1 Marine and indeed Element 1 Corp is a royalty fee, a license fee based on the number of units sold. So it will be an asset-light model, but potentially very lucrative depending on the number of models that get sold.

And then I know it's the bill sort of in flux, but they released the preliminary language for the Build Back Better Act. And there was some stuff in terms of carbon capture credits and either carbon offsets or other incentives. Is there anything that you think is applicable to this marine hydrogen JV that you have working?

I guess it's too early to say on this, Sean. I think the carbon capture research project, which Element 1 has entered into with Aramco is a research project. Their mobile carbon capture system has been made quite some time ago for mobility applied to trucks, and now they're looking to apply it to the e1 system, and it sounds like it's a very complementary system. In terms of kind of partial commercialization of this kind of system down the line in terms of offset credits, it's too early to say. But what we can say with green methanol, this would be the first and potentially only carbon-negative system, you're recycling capture from green methanol. Tony, any further to add?

Yes. No, it would be carbon negative if it's run on green methanol. And just look, we don't want to go into a lot of technical detail, and we don't want to give the impression that we're no longer a shipping company; that's our main business. But the exhaust that comes out of the e1 hydrogen generator is already 50% CO2, so it's an ideal exhaust stream for carbon capture.

Is there any limitation to how large you can scale this technology? On Slide 6, there’s an image of a smaller tug-type vessel. Is it possible to scale this up to a Cape or VLCC, or will it be restricted to smaller vessels?

Yes, it's really ideally applied to smaller vessels, either river or coastal, but importantly, it's a very good generator replacement on board any ship. And a surprising amount of fuel is burned in generators on ships.

So looking first at your fleet, it seems like the chemical tankers continue to maybe outperform the MRs here even in recent weeks. Can you provide some additional commentary on that? And when do you expect MRs to kind of inflect above chemical?

Well, I'll take a stab at it, Randy. Yes, it's really interesting. I think it's largely due to the fact that when you get into periods of rapid GDP growth, that really helps the chemical tankers, whereas MRs are obviously impacted by that as well, but they're more subject to the forces of the oil market itself. What's really happening is global GDP growth, with some port congestion; rates are very, very strong in North Asia, for example. In the chemical sector, that's kind of spreading worldwide, we think. So I think as long as we think that chemicals will continue to run ahead of MRs for a while. But having said that, we're really pleased with what we're seeing now in the MR space.

Sure. All right. And then I guess, second question on kind of the balance sheet. Any updates on the $15 million preferred option? I know you might not need it for cash reserves or fleet updates currently, but maybe thoughts on using those proceeds for share repurchases at this discount to NAV?

Yes. Thanks, Randy. So I'll update on the press. We do expect to draw that, and that will be subject to customary closing conditions, and we would expect that to complete within November. In terms of use of proceeds, I think, look, I'll direct back to early '20 when we put in place our capital allocation policy and the priorities there in terms of debt reduction, financial strength, etc. So I think in terms of share repurchases, I think the priority is and will continue to be on debt reduction until we reach our target set out in the policy.

H.C. Wainwright. Just a question on your capital allocation. You mentioned that debt reduction remains a key priority. Maybe it's a little bit early with the rates picking up here. But as you go from playing defense to offense, what are the priorities besides debt reduction going forward: product tankers versus investing in your e1 Marine venture?

Thanks, Magnus. I'll address that. When we eliminated the capital allocation policy early last year, we definitely considered the cyclicality in our business. Financial strength in its true sense enables a company to be counter-cyclical and to grow during advantageous times in the market. This approach continues to be our long-term focus: building financial strength and leveraging that as a competitive advantage to grow counter-cyclically. This remains our top priority both now and in the future.

This is Tony. Those ships are under commercial management; we don't own them. They operate alongside our modern and fuel-efficient units built in 2015, which are similar in size. The difference in earnings is significant due to fuel efficiency and greater capabilities. I'm glad you mentioned the 15 years of age or less. It's a concern in the chemical sector and in products that oil majors and traders involved in chemicals deal with. Chemical tanker companies prefer modern ships. It's interesting because while the focus is often on scrapping, the reality is that the fleet available to mainstream traders, including oil majors, is primarily up to 15 years old. It will be fascinating to see how that number decreases, as deliveries are not keeping up with the number of ships aging out at 15 years.

I wanted to explore further your comments about chemicals. Not all chemical tankers are the same, and clearly, you've recently seen benefits from improvements. Looking ahead at the market, do you identify any specific types of tankers that align well with the anticipated demand?

We just see broadly chemicals are attractive. It's something that there's an interesting article in trade wins written by Clarksons based on some comments out of Oldfield that they're excited about the fact that MRs that have been trading aggressively into the chemical space are going to be pulling back in a stronger MR market. So that crossover business is very real. That's currently where we live. And we also have our the coded chemical tankers that go more deeply into the chemical sector. But broadly, we just view the chemical sector in the very near term as being quite attractive. And then longer term, we think that's where the growth is going to be. Yes. We would love to, to be honest, but the challenge is that can actually end up being very distracting if you develop a kind of a third-party management pooling kind of model which is not our intention. Before, under commercial management, are very high-quality German-based company that granted the ships are older, but they're in great shape, and they're very good to trade. We would be looking for strategic type of relationships like that as opposed to just opening the door to people with 1 or 2 ships at a time.

This concludes our question-and-answer session as well as our call for today. Thank you for attending today's presentation. You may now disconnect.