Ardmore Shipping Corp Q4 FY2021 Earnings Call

And welcome to the Ardmore Shipping's Fourth Quarter 2021 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Anthony Gurnee, CEO.

Thank you. Good morning and welcome to Ardmore Shipping's Fourth Quarter Earnings Call. First, I'll 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, ardmoreshipping.com, where you'll find a link to this morning's fourth-quarter and full-year 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 our discussion today contains forward-looking statements. Actual results may differ materially from the results projected from those forward-looking statements. And additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the fourth-quarter and full-year 2021 earnings release, which is available on our website. With that, I'll turn the call back over to Tony.

Thanks, Paul. First on the outline of the format for today's call. To begin with, I'll offer some perspective on the current market and outlook and then discuss what Ardmore is doing in response to that outlook. After that, Paul will provide an update on product and chemical tanker fundamentals, along with a discussion of our financial performance. And then I'll conclude the presentation and open up the call for questions. In addition to Paul and me today, we also have our Chief Commercial Officer, Gernot Ruppelt, with us to provide additional insight into our markets of interest. So turning to Slide 4, our fourth quarter performance reflects market levels prior to the onset of winter, and what we expect was the last period of significant demand destruction from the pandemic. Our first quarter to date is much improved with our Eco-Design MRs earning $14,525 per day in spot trade, up 25% from last quarter and 60% from the low point in mid 2021. Reflecting improving fundamental oil demand as well as the winter market. Looking ahead, we expect continued recovery in 2022, which may be influenced by many competing factors. Most importantly, the evolution of the pandemic and the completion of what has so far been a strong but uneven global economic recovery. But also, geopolitics creating uncertainty and potential market volatility. Our continuation of crude tanker activity and product trades is temporarily increasing tons of supply, and high oil prices are impacting the cost of tankers and thereby reducing Time Charter Earnings (TCEs), as well as impeding trading activity. However, notwithstanding these factors, the big picture is very much one of an ongoing global economic recovery, increasing product and chemical tanker demand, and a tight supply outlook with high scrapping levels matched with constraints on tanker new building and ordering activity. On our last call, we expressed the view that the worst was behind us and that we should see a moderate but still meaningful market improvement this winter, which we think has occurred. We now believe that rates should continue to improve through 2022 on a trajectory very similar to that of the global economy, but also one that will be influenced in particular by oil market dynamics, which we will discuss later on in more detail. Moving to Slide 5, the question of what Ardmore is doing in response to this outlook. First, we're increasing our earnings upside by returning to full exposure to our freight markets. Second, we're at the same time maintaining a conservative financial stance and even strengthening our financial position most recently in the second half of 2021, issuing perpetual preferred shares. Third, we are continuing our clear focus on operating performance through both revenue enhancement and smart cost management in an inflationary environment. And fourth, we're working on our energy transition plan, which is progressive by design but also very much performance-driven in the sense that we're reducing carbon emissions in the near term through greater fuel efficiency, thereby boosting earnings. We're moving gradually into more non-Clean Petroleum Product (CPP) cargos, which offer more trading flexibility, thus enhancing TCE performance. We're increasing engagement and long-term time charter project discussions involving transition fuels and efficiency features with return expectations to ensure value accretion if we find the right deals. And we're making progress with our e1 Marine investment, including the recently announced first-ever methanol-to-hydrogen powered towboat shown on this page. Overall, when it comes to the market outlook, we believe there's good cause to be optimistic, but we remain financially cautious regarding the exact nature and timing of a full recovery. Meanwhile, there's plenty of opportunity for the Ardmore team to continue improving performance as described above, as well as engaging selectively on financial and asset transactions to protect and build value. And with that, I'll hand the call back to Paul.

Thanks, Tony. Turning to Slide 7 for demand fundamentals. Demand outlook is positive. Global GDP growth is solid while oil demand is recovering with continued growth expected through 2022 and beyond. As you can see from the graph on the upper right, global oil demand is expected to increase by 3.2 million barrels a day this year, surpassing pre-COVID levels on a global basis in the second quarter. It's worth noting that the recovery has been uneven. Road fuel and petrochemical demand is back up to pre-COVID levels while aviation fuel is the laggard. Looking forward, the medium-term outlook for oil demand remains firm and consumption is expected to reach 104 million barrels a day in 2026. Meanwhile, refinery dislocation will continue to have a positive impact on product tanker demand, providing an additional layer of growth. At a high level, closures of refineries in developed markets such as Europe and the U.S. mean the 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 products moved at sea is about 21 million barrels a day, and this context, the level of refinery dislocation is significant for product tanker demand. The pandemic accelerated the refinery dislocation trend with closures of older, more inefficient refineries. Between 2022 and 2026, refinery capacity in export-oriented locations, particularly the Middle East and Asia, is expected to increase by 8.5 million barrels a day compared to local market-oriented refinery closures of 5.5 million barrels a day in the U.S., Europe, Japan, and Australia. Overall, product tanker ton mile demand is expected to grow by three to four percent to 2026, which is above the current product tanker supply growth. Chemical tanker demand is also positive. It is highly coordinated with global GDP, which is expected to increase by 4.5% in 2022. Other factors such as petrochemical output have a multiplier effect on chemical tanker trade growth. Moving to Slide 8, we take a look at supply fundamentals. The supply outlook for product and chemical tankers is favorable, given the lower bulk and increase in scrapping levels. Fleet growth is expected to be below demand growth for the coming years while current market conditions persist. 2022 estimated fleet growth for product tankers is 1.4% and for chemical tankers is 0.8%. Scrapping levels have increased significantly, and we expect scrapping to continue given the age profile of the fleet. 68 product tankers were scrapped in 2021, compared to 20 ships in the prior year. Currently, 9% of the product tanker fleet and 14% of the chemical tanker fleet are over 20 years old. In addition, upcoming regulations, which will begin to take effect from January 2023, will increase pressure on ownership. Meanwhile, looking at future supply, the order book for product and chemical tankers is low relative to the demand outlook and ongoing scrapping. Our new ordering is constrained due to very limited resources available as a consequence of activity in other sectors driving up prices and pushing out deliveries. Ongoing lack of clarity on propulsion technology has dampened the willingness of tanker owners to order now. Turning to Slide 10 for financial highlights. We're reporting an adjusted loss of $8.6 million or $0.25 per share for the fourth quarter, compared to an adjusted loss of $12.8 million or $0.37 per share in the third quarter. MRs averaged $11,400 a day for Q4 '21, and $10,900 a day in the third quarter. While chemical tankers performed better with TCE of $11,300 per day in Q4 compared to $8,400 a day in the third quarter, charter rate improvements reflect the ongoing recovery in oil demand. Also, while freight rates have strengthened, some of the upward momentum in TCEs are being eroded by higher bunker prices. Next, we will take a closer look at our cost line items and provide some guidance for the coming quarter. Operating expenses were $16.1 million for the fourth quarter and $61 million for the full year, a slight decrease on the prior year, mostly related to one less shipping operation in 2021. Looking ahead, we expect operating expenses for the first quarter to be approximately $15.6 million. Chartering expense was $2.1 million in the fourth quarter, and we expect to be in line in the first quarter. Depreciation and amortization totaled $9.3 million in the fourth quarter and $37 million in the full-year, slightly down year-on-year. We expect depreciation and amortization for the first quarter to be $9.5 million. Total overhead costs were $4.3 million for the quarter and $19.2 million for the full year, representing a slight increase in 2020, mostly attributable to market-related increases in insurance and foreign exchange. For the first quarter of 2022, we expect overheads incorporating corporate and commercial to be approximately $5.1 million. Interest expense was $4.1 million for the fourth quarter and $16.7 million for the full year, down significantly from the prior year. We're currently benefiting from the floating to fixed interest rate swaps entered into in mid-2020, and currently, $255 million or 79% of our debt is fixed at a margin of plus 32 basis points through June 2023. In the first quarter of 2022, we expect interest expense to be approximately $4.1 million plus finance fees of $400,000. Overall, we believe our cost structure is among the lowest of our peer group, and in particular, our internal commercial overhead costs are approximately 50% of prevailing market pool fees. Moving to Slide 11 for Fleet and Operational highlights. We are continuing to invest in the fleet to optimize operating performance. Three dry dockings and one ballast water treatment system installation were completed in 2021 and we expect to complete two dry dockings and two ballast water treatment system installations this year with capex of $4.8 million. Our forecasted revenue days for 2022 are approximately 9,500, with chemical tankers representing 23% of total fleet days. And for the first quarter, we have about 10% of the days fixed on time charter. Operationally, the fleet continues to perform well, with on-hire fleet availability at 99.5% last year and 87% of our crew now fully vaccinated for COVID. The challenges continue for our industry and safety will remain a top priority. Turning to Slide 12, we take a look at charter rates. Reported a fleet average TCE of $11,390 per day in the fourth quarter, up from $10,300 per day in the third quarter. The chemical tankers are performing very well on a relative basis. As with previous quarters, we are presenting charter rates on the chemical tankers on an actual and capital adjusted basis. The purpose here is to present the rates for the various vessels on a comparable basis to MRs. Chemical tanker rates reported that $11,250 per day for the quarter, and on a capital adjusted basis, the chemical ships reported $12,200 per day. Looking ahead, as of today, for the first quarter of 2022, we have 60% of our days booked on the spot market at $13,725 per day, and 70% of the days booked on the chemicals are at $30,325 per day. Turning to Slide 13 for capital allocation and a look at our balance sheets. We completed the drawdown of the second tranche of the preferred shares, raising $50 million in December. Preferred shares are an important piece of capital, boosting liquidity and enabling asset reduction. Maintaining a strong balance sheet and liquidity position, we have $67 million in total liquidity comprising cash of $55 million plus another $12 million on-line at the end of December, which equates to $2.7 million per ship. Total net debt stood at $313 million at the end of December with leverage on a net debt basis of 49% down 3% from Q4 2020. Debt reduction remains a top priority in our capital allocation policy. We reduced overall debt by $34 million in 2021, and we have scheduled repayments of $37 million this year while maintaining the revolving credit facilities for financial flexibility. Meanwhile, ship values are increasing and boosting net asset value. Values are up approximately 6% since June 2021, on the back of rising new building costs, limited new supply, and a positive outlook.

Well, to sum up, then, our fourth quarter results reflect conditions prior to the onset of winter, along with the tail end of the pandemic-related demand destruction. And so far this quarter, conditions are much better. Where we go from here is a function of the global economic recovery and tanker fundamentals, all of which look positive through 2022 and beyond. But as mentioned at the beginning, the oil market itself should be considered as well. Given the currently negative impact it's having on the tanker market. These factors include a higher oil price and backwardated futures curve resulting in very high bunker costs and impeding trading activity, as well as driving ongoing inventory destocking. OPEC+ production discipline and some operational constraints on supply are resulting in further reduced crude shipments, with geopolitical factors seemingly creating inactivity at the moment. The point here is that any shift away from these negative conditions would not only raise overall tanker demand but also pull crude tankers out of clean trades, as well as attract LR2s back into crude, thus boosting the product and chemical tanker sectors as well. Overall, we're optimistic for the coming year, but given the cross currents that we've discussed, we're also maintaining a conservative financial stance. Long term, we feel that our focus on operating performance, our energy transition plan, and our selective approach to transactions are keeping us focused on the right things, above all, protecting and building value for shareholders. And with that, we'll open up the call for questions.

We will now begin the question-and-answer session. To ask a question, please signal by pressing *1 on your telephone keypad.

Howdy, gentlemen, how is it going? Excellent. Doing well. So I guess first question just on the overall market, kind of your fleet strategy, clearly constructive on the outlook, moving a lot of your vessels more to the spot exposure. I guess two questions: how bullish are you on the market? And will that lead to some chartering opportunities for additional exposure?

Yes, I think I'll just answer that simply that we do at the moment have two ships chartered in. It's something we've been doing for a while, but we're not really ever in a position to communicate our commercial intentions. But certainly, that's one option that we have.

Sure. That's fair. And then, looking at the e1 investment and the methanol-to-hydrogen towboat, I guess looking at your partners, how will they all fit into the development process? What's the estimated timeline of that development? And more importantly, maybe the financial impact or upside from this new project?

Hey, Randy. I'll take that one. Great question. First of all, we're not here to talk about maritime partners and their investments or their returns. But it is a very exciting announcement made in November for the first vessel. The anticipated delivery of that vessel is in 2023, and interest overall in the system, particularly on the back of that announcement, has been significant. So too early to say in terms of what it means overall, but it's a very positive development for the system and validation of it. So, yes, we're very excited about it.

Got it. Well, I'll turn it over to the next question. Thanks again.

Thank you. Good afternoon or good morning. Tony, starting with you in response to your outlook, one of the things you noted moving gradually into non-CPP cargos. Could you describe exactly what you mean by that? Does that mean the existing fleet or any upgrades or other alterations you need to make to the fleet as you get out of traditional trades or just any other things regarding strategy as you kind of de-emphasize the traditional CPP?

I'll just answer briefly and as you know, Gernot is here so I'll ask him to comment as well. But I think it's a mix of things. First of all, about 25% of our cargoes are already non-CPP. We do have the six chemical tankers, and most of our MRs are chemical tanker notations. So I think it's a combination of a little bit of technical aspect to it and operational know-how. But I'll ask Gernot to comment further.

Thank you, Tony. Maybe just to add to that on the chemical tankers, the six that we own and the four that we commercially manage. We're trading those predominantly in non-CPP cargos, but that has also created interesting cross-training opportunities for MRs, where we are engaging in non-CPP trades, both East and West, where we're even on occasion parceling up some of our larger ships. There's also a lot of demand coming from biofuel blending for anything that has to do with feedstock and blended feedstock for biofuels. So we see a lot of that happening at the moment and we're able to capitalize on that.

And for my second question, we've talked about this refinery dislocation for some time now, I think Paul said it's been accelerated through the pandemic. Why do you think it hasn't led to more material improvement in market conditions yet? And as a follow-up to that, how much of this pressure on product do you think is maiden voyages of newbuild crude carriers? And are we getting close to the end of that pressure?

Yes, I think it's important that we look at where inventories are at the moment, particularly in the Atlantic. In the U.S. and also in Europe, we see refined product inventory is quite low. And of course, in a market that has been pretty backwardated, you don't see that pop on long-haul trading demand as much as we would see in a contango market. But that ought to change at some point and you could certainly see great inventory restocking particularly in the Atlantic that would get sourced from some of the new refineries, and more excess inventories would help us. The trend that we've seen towards the start of the year around crude tankers taking CPP cargoes that certainly is happening. But as we see crude markets improve, that should also abate, and in a way, the eastern freight markets have already priced it in now.

Alright, thank you, Gernot. Thanks, Tony.

Hi, just a question on the market outlook. Excluding the pandemic and any potential wars, how do you see the seasonality playing out this year going forward?

Sure. I’ll let Gernot address that, but the winter is still ongoing. The winter market is currently showing some interesting developments, especially in the Atlantic. We've observed significant tightness in the market, and as of this morning, the TC2 route for gasoline from Europe to New York is earning about $19,500 per day on a load-to-load basis. The U.S. Gulf is lagging behind but is also strengthening and becoming quite tight. Currently, the triangulated TC is likely around $15,500, but for TC14, it could reach about $17,500 on an Atlantic average. These two markets are still behind as we've described, primarily due to activity related to new crude tanker builds. However, with increased CPP flows and inventory restocking, we should see more East-to-West arbitrage, which will support trade growth in the East.

With market recovery underway, do you think there will be much seasonal depth like we typically see in a year, or do you think there could be steady improvement throughout the year?

Yeah, it's a very dynamic environment. You get these pockets of market increases and pockets of weakness pretty much all the time, no matter what kind of market environment you are in. And so we obviously look at the global averages to get a sense of the direction, but at the moment the West is strengthening and the East is a bit weak. And it was the opposite a few weeks ago.

Thank you for the question about your fleet. I'm interested in your thoughts on the three ships built in 2008 and the four ships constructed in Japan at reputable shipyards. How do you envision their trading performance in the future, considering their high quality?

They are very fuel-efficient ships, they are of a very high quality with great following among the oil customers, the oil majors, and the oil traders. So they are very versatile ships even though they are more focused on the refined product trade. But of course, there's plenty of that to go around and looking at the particular dimension of those ships, they can also access certain trades and certain ports that would be uniquely suited for these ships. So there's a very meaningful market for these ships to continue trading in.

Alright, so then turning 15 next year shouldn't really have any implications for those ships despite stricter regulations?

I think it's really a preference for the customers, and obviously with market strength, they don't seem to mind as much. But if they have a choice, they'll obviously choose more modern ships. But they continue to trade quite well even beyond 15. Historically, we've tended to sell off ships when they reach around that age, but that's not a cast-iron rule.

Okay. Very good. Well, thank you.

Again, if you have a question, please signal by pressing *1 on your telephone keypad. The next question is from Ben Nolan of Stifel. Please go ahead.

Hey guys, I have a couple of questions. First, Paul, thank you for providing the guidance. Regarding the equity method and losses, can you share any insights on how we should expect those numbers to manifest or flow through in the future?

Thanks, Ben. I guess it's a case of we'll see. I mean, E1 Corp. and E1 Marine are in the early stages of development. So it's really at a commercialization stage now. The running costs are fairly modest, but obviously, if things really pick up on the revenue side, then there'd be a positive impact. It's a little bit too early to say, but I wouldn't expect major movements on it for the coming quarters.

Okay. And then just in line with that, assuming that things pick up and move forward, is there any capital call that you guys would be obligated or would want to make, should that be necessary?

No. I mean, as we set out when we made the investment almost coming up to a year ago now, it is a pretty asset-light model, so I don't expect any capital calls as such. It's intended to be primarily a licensing model. There may be small capital amounts for assisting with prototypes, etc., but no, I wouldn't expect any capex on.

Okay. Now, regarding the market commentary, I understand this may be a subjective question, but yesterday, one of your competitors expressed strong optimism. Tony, Gernot, do you share that sentiment, or are you perhaps a bit more reserved? How would you characterize your perspective?

I believe it's fair to say that we've been humbled by the past two years. The pandemic has presented various challenges, some positive and many negative. We're trying to be realistic and focus on the data regarding oil demand, global economic recovery, and what seems to be a very tight supply situation. However, we also recognize that there are many factors affecting the oil markets. Overall, we align with some of the optimistic views but are expressing our perspective in our own manner.

Got you. And then lastly, for me, the fuel spread has really widened out a bit. Now all of a sudden scrubber economics even for things like MRs seem to be wide open. Any thought at all about revisiting that idea for you guys?

Good question. When assessing our performance, we often exclude the benefits of the scrubbers because this does not accurately reflect their costs, which include operational expenses and initial capital outlay. Given the circumstances so far, we are satisfied with our choice. Each company has its own reasoning and perspective, which is entirely valid. However, we have opted to invest more significantly in fuel-saving technologies that directly enhance performance, with returns on investment exceeding 50%. Although these investments are not particularly large in total, they are integral to our energy transition strategy. So far, the returns on scrubber investments have been acceptable when accounting for both initial capital costs and operating expenses, but I wouldn't describe it as a complete success. New orders have shown strong returns, but it's essential to consider all aspects, not just revenue increase.

And so from where you say you're not necessarily imminently reevaluating or looking to make an investment in that direction today?

No, because our own view, and again, everybody has a different angle on it, is that the incremental return for the incremental investment is still pretty neutral. I just want to clarify that this is especially true for MRs and chemical tankers, as it is very different for the larger ships.

The next question is from Climent Molins of Value Investor's Edge. Please go ahead.

Good morning. Thank you for taking my questions. Looking at the order book, it's at very low levels. But I was wondering what you are seeing in other segments. What kind of delivery would a buyer be looking at approximately for an MR order?

Yeah, I think it depends on the yards you go to. If you look at the biggest yards that build MRs, it's Hyundai Mipo. Last year, they delivered 29 ships, and if you look at the delivery schedule from that yard over the next couple of years, it declines substantially. We're looking well into 2024 at this point. It may be possible to get orders in other yards to deliver sooner, but it's definitely pushed out quite substantially. I don't know if that answers the question.

Indeed it does. Thank you. And secondly, just a modeling question. When do you expect to conduct the two dry dockings forecasted for 2022?

The dry docking for 2022 will be mid-year, towards the second half.

Alright. That's helpful. That's all from me. Thank you very much.

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