Earnings Call
Ardmore Shipping Corp (ASC)
Earnings Call Transcript - ASC Q1 2022
Operator, Operator
Good morning, ladies and gentlemen. And welcome to the Ardmore Shipping's First Quarter 2022 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 at ardmoreshipping.com. We will conduct a question-and-answer session after the opening remarks. Instructions will follow at that time. A replay of the conference call will be accessible anytime during the next two weeks. At this time, I will turn the call over to Anthony Gurnee, Chief Executive Officer of Ardmore Shipping.
Anthony Gurnee, CEO
Thank you. Good morning and welcome everyone to Ardmore Shipping's first quarter of 2022 earnings call. Let me first ask our CFO, Paul Tivnan, to describe the format for the call and the forward-looking statements.
Paul Tivnan, CFO
Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you'll find a link to this morning's first quarter 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. Additional results may differ materially from the results projected from those forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements is contained in the first quarter earnings release, which is available on our website. And now I'll turn the call back over to Tony.
Anthony Gurnee, CEO
Thanks, Paul. So in terms of the format for today's call, to begin with, I'll discuss highlights and recent market developments after which Paul will provide an update on product and chemical tanker fundamentals and financial performance. And then we'll conclude the presentation and open up the call for questions. Turning first to Slide 4, over the past two months, the product and chemical tanker markets have changed completely. The first quarter was only partially impacted by these conditions. For the second quarter, we'll show the full effect. Ardmore's MRTCE for the first quarter averaged 15,600 per day, whereas for the second quarter with 50% fixed so far, the result is 25,500, and actually rising as evidenced by the last two weeks fixtures now averaging 34,400 per day. In anticipation of an improving market based on strong fundamentals, we had already gone to full spot exposure as of February, thus are well-positioned to capture the benefits of a strong market for our shareholders. The impact on our financial performance was significant. Using the second quarter of TCE to date, with 50% complete, our net income would be $22 million or at $0.63 per share for the quarter, an annualized 30% return on book equity, with every additional $1,000 per day generating another $0.28 per share, or 3.4% incremental ROE. Asset values are also rising with five-year-old MRs now valued at $32.5 million, representing a year-on-year increase of 18%. Taking advantage of rising values, Ardmore has sold its three 2008-built MRs with time charter back for two years plus options at attractive rates, which maintains our commercial scale and earnings power. Ardmore has not undertaken any voyages from Russia since the outbreak of the conflict. In the current market, our focus is on optimizing our commercial performance elsewhere while making every effort to support our seafarers and engaging in other measures to assist those in need. Moving next to Slide 5. On our last call, we discussed improving fundamentals offset by adverse oil market dynamics. Since then, the oil market has changed completely and it's in fact turbocharged the product tanker sector and MRs in particular, given their versatility. The oil market is now characterized by dislocation in fiscal supply and demand, record-high refining margins, wide price RPs, and a shift in sentiment regarding inventories. These factors are driving up both volume shift in distance traveled, thus resulting in a significant boost to product tanker ton mile demand. The chemical tanker market is being driven by similar factors, exacerbated by urgent buying of liquid fertilizer and various types of veg oils to substitute for volumes lost from Russia and Ukraine. As a result, the commodity end of the chemical tanker sector is also experiencing very high spot rates, which are clearly reflected in their own fleet performance. How high rates can go and for how long is unclear, but with MR transport costs still only running 5% of the value of the cargo onboard, we don't see rates alone capable of destroying demand and thus there's no practical upper limit. Similarly, with the dislocation of cargo flows and its steady stream of oil market events continuing to disrupt, there is a sense that these conditions could persist for quite some time even after the cessation of hostilities. Meanwhile, OBA fundamentals have taken a back seat to the oil market. We believe they're still improving and are providing underlying strength to our sectors, which Paul will discuss later in more detail.
Paul Tivnan, CFO
Thanks, Tony. I will take a look at the fundamentals and then move to a review of our financial performance. So starting with Slide 9 for demand fundamentals, all of the focus in recent weeks has been on the current market activity and volatility. At the same time, the fact remains the fundamentals are solid, despite pretty evident cross-currents in the global economy. On the demand side, the outlook for product and chemical tankers is very positive, driven by increased refinery throughput and market disruption in the near-term and continued demand growth and refinery dislocation over the medium-term. Oil demand growth has not gone away and based on the most recent estimates from rise set on the AI overall build, more demand is expected to increase by $1.9 million per day this year, crossing pre-Covid levels in the third quarter. Looking to the medium-term, as you can see on the graph on the upper right, the demand outlook remains firm. Global refinery activity continues to be a significant driver of product tanker ton mile demand. Global refining throughput in the third quarter is expected to be 5% higher year-on-year. Notably, there's significant increases in throughput in the U.S. Gulf and the Middle East, with corresponding reductions in Russian throughput. At the same time, the ongoing trend to refinery dislocation, which we've been talking about for some time, continues to have a positive impact on product tanker demand, providing an additional layer of growth. Over the next few years, there are significant increases in capacity in the Middle East and Asia, while at the same time closures of refineries in the U.S., Europe, China, and Australia, which is increasing seaborne volumes of refined products. Significantly, the Al-Zour refinery in Kuwait is expected to open in the next few weeks, approximately two years behind the original schedule. Overall, product tanker tonne-mile demand is expected to grow by 3% to 4% annually to 2026, which is well above supply growth. Based on recent market activity, tonne-mile demand for product tankers is potentially much higher this year. The chemical tanker demand outlook is also positive, driven by GDP growth, petrochemical outputs, and supported by an improving product tanker market, resulting in these vessels staying more on their core CPP trades. In April, global GDP was revised down by 0.8%, but from the IMF's January estimates, it is still expected to be 3.6% in 2022 and 2023. Chemical tanker demand is highly correlated to global GDP, with chemical tanker trade expected to grow by 3% this year and 5% year-on-year in 2023 and 2024. Moving to Slide 10, we'll take a closer look at supply fundamentals. The supply outlook for product and chemical tankers is very favorable, driven by lower bulk and increased scrapping levels. Net fleet growth, which is deliveries less scrapping, is expected to be well below demand growth for the coming years. In 2022, estimated net fleet growth for product tankers is 1.2% and for chemical tankers it is 1%. Scrapping has increased significantly in 2021 and we expect levels to remain elevated in the years ahead with an aging fleet and increasing pressure on efficiency and carbon reduction. Consistent with our comments on prior calls, the order book for product and chemical tankers remains low, and this is expected to remain the case for the foreseeable future for two reasons: Firstly, there continues to be a lack of clarity on future ship designs to meet the industry's emission targets; and secondly, there’s limited parts availability for MRs because of significant ordering in other sectors, particularly container ships. Turning to Slide 12 for financial highlights. We're reporting an adjusted loss of $900,003 per share, representing a significant improvement year-on-year. MRs averaged $15,600 a day for the first quarter versus $11,400 per day in the prior quarter, while chemical tankers' TC averaged $13,600 per day in the first quarter, compared to $11,300 per day in the fourth quarter of '21. As Tony announced, these rates have subsequently increased significantly. Charter rate improvements reflect the ongoing recovery in oil demand post the onset of the Ukraine-Russia conflicts towards the end of the first quarter. Next, I'll take a closer look at our cost line items and provide some guidance for the coming quarter. Wage costs increased significantly quarter-on-quarter due to higher bunker costs, and operating expenses were $16.4 million in the quarter, a slight increase mostly related to timing of crude charges. We expect OpEx for the second quarter to be approximately $15.6 million. Chartering expenses were $2.1 million for the quarter, and we expect it to be $9 million in the second quarter. Depreciation and amortization totaled $9 million for the first quarter, and we expect depreciation and amortization for the second quarter to be $8.5 million. Total overhead costs were $4.8 million for the first quarter in line with prior periods, and for the second quarter, we expect overhead, incorporating corporate and commercial, to be approximately $5 million. Interest expense was $4.1 million for the first quarter, and we expect it to be in line in the second quarter, currently benefiting from fixed interest rate swaps entered into in mid-2020. Currently, $250 million of our debts are fixed at a margin of plus 32 basis points through June 23, and overall, 88% of our debt is fixed. Our interest rate swaps entered into in 2020 are currently in the money by $5 million at the end of March. Overall, we believe our cost structure is among the lowest of our peer group, and in particular, internal commercial overhead costs are approximately 50% of prevailing market rate pool fees. Moving to Slide 13 for Fleet and Operational highlights. We're continuing to invest in the fleet to optimize performance. We expect to complete two dry dockings and two ballast water system installations in the fourth quarter of this year, with CapEx of $3.2 million. We have some flexibility in terms of the precise timing of these dry dockings depending on market conditions at the time. Our forecasted revenue days for 2022 are approximately 9,500, with chemical tankers representing 23% of total fleet days. For the second quarter, 96% of total days are stocked, or 105% on an ownership basis. Operationally, the fleet continues to perform very well. Finally, turning to Slide 14 for capital allocation and balance sheets. We're continuing to prioritize financial strength as well as good value as cash flows have really started to improve in the past few weeks. A sustained strong charter market at current levels will provide more options for capital allocation over time, and for now, our focus remains unchanged on the priorities we've been highlighting for some time. In the meantime, we're maintaining a strong balance sheet, healthy liquidity, and relatively low leverage. Looking at working capital, last year we had five ships employed on time charter routes at competitive rates, which supported earnings. We've since returned all of our one ship to spot trading and taken on two more ships under time charter in anticipation of strong charter market conditions. As a result, working capital increased in the first quarter, attributable partially to more ships trading spots and also higher bunker prices. Increasing and boosting net asset values are up 18% year-on-year on the back of rising new building costs, supportive demand, and a positive outlook. In light of the strong market, we agreed to terms for the sale of three ships, and in a separate transaction are more time chartering in these ships at market rates for two years plus options, maintaining our scale and earnings power. The sale was consistent with our capital allocation policy and generated net cash flows of $50 million after prepayment of debt. These factors were financed through a fixed-rate lease structure, and our overall cost of debt will reduce following the transaction. With that, I'd like to turn the call back over to Tony.
Anthony Gurnee, CEO
Thank you, Paul. So to sum up, then, the market environment has changed completely as a consequence of the war and its impact on the oil market, for which there is no clear end in sight. Even after the cessation of hostilities, we believe the resulting dislocations will persist until sanctions have been lifted and any repairs required are completed. While the disruptive oil market has taken center stage for now, fundamentals shouldn't be ignored. Overall, the world is continuing its post-COVID recovery despite some cross-currents at the moment. While it's unclear how far this market can go, it is clear that there's a renewed appreciation for the role that oil products play in energy security, and in providing a bridge to a full energy transition. So there is logic to the view that we've reached a turning point in product and chemical tanker sectors. The impact on Ardmore and its financial performance is clear. Assuming second-half performance continues, we would earn $22 million or $0.63 per share in the second quarter, and each incremental $1,000 per day is another $0.28 per share. As a final point, our capital allocation policy, as Paul just described, still prioritizes financial strength, but our targets could be met rapidly in this new market, which could allow us to pursue other means to build and deliver value to our shareholders, including well-timed growth opportunities and return of capital to shareholders. With that, we'll open the call for questions.
Operator, Operator
We will now begin the question-and-answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. At this time, we will pause momentarily to assemble our roster. Our first question will come from Jon Chapelle with Evercore. You may now go ahead.
Jon Chapelle, Analyst
Thank you. Good morning or good afternoon. Tony, my two questions are going to be on the two points you made in your summary: one company-specific, one industry-specific. I think we've been talking for a long time about this market hopefully recovering based on fundamentals, and it seemed like things got really tight, really fast. I think there's this misinformed view that this is strictly a war outcome. And you've talked about even after the cessation of hostilities using your term, you believe these dislocations could last a little bit. To that regard, can you talk a little bit about what has exactly transpired in your markets since the invasion that’s kind of been the catalyst to these tightening fundamentals? And I know this is really hard to answer, but even post a peace environment hopefully sooner rather than later, what are some of the long-lasting effects on trade flows, opportunities, or perhaps even the impact of commodity trading houses that you think can have a much longer tail to this cycle than just a war-related impact?
Anthony Gurnee, CEO
Good, we'll start with that. I think you had another question, which we can address. Those are very thoughtful questions, and we genuinely believe that the fundamentals are somewhat weakened due to the noticeable slowdown in global economic growth and the COVID situation in China. However, for those of us who have traveled, we're observing a strong recovery in air travel, especially long-haul international flights, which were previously a significant gap. This is important to understand in the context of current developments. Despite going through a disruptive period, we believe there’s ongoing strength beneath the surface. That's a pertinent question regarding what changes might be permanent once we emerge from this situation. I believe there is a consensus that inventory levels have reached a low point, and the re-stocking process may take considerably longer than expected. This is particularly true in the chemical sector, where we see disruptions in the supply of UAN or liquid fertilizers and vegetable oils, like sunflower oil, originating from the Black Sea region. The timeframe for restoring that production is uncertain, and substitutes from further away will be necessary. Regarding petroleum flows, I'm currently in the U.S., but I spend most of my time in Europe and am closely observing the situation. There’s significant concern about Europe’s current level of dependence on energy supplies, particularly from Russia, whether that be gas or oil. This will prompt a change. Clearly, adjustments will be necessary, and while it will take time for the EU to reach a consensus, I don't foresee a return to previous levels of dependency. As a result, there will likely be an influx of substitute products from farther sources.
Jon Chapelle, Analyst
Got it. Okay, that's really helpful, and I understand that was a challenging, somewhat hypothetical question to answer, so thank you for that. The next one should be a bit easier. It's remarkable that during your last conference call, we were still dealing with investor questions regarding liquidity and the actions you could take if this market persisted longer than anticipated, and now the nature of the questions has shifted to capital usage, which you've briefly addressed. As you navigate these early stages of recovery, is the focus solely on strengthening the balance sheet, suggesting that further sale and leasebacks might not be considered? Or does your dividend policy's formulaic nature imply that it essentially becomes a capital return story immediately, as soon as the second quarter, given the robust quarter-to-date rates you mentioned?
Anthony Gurnee, CEO
I think it’s remarkable how rapidly things transform in this industry. It’s also surprising how quickly people can overlook that last year was extremely challenging; we faced a loss of $38 million. We weren’t the only ones; other companies suffered even greater losses. For those businesses, the focus must remain on repairing their balance sheets for a while, and that’s also our priority. We have been transparent about our approach to capital allocation and our targets for financial strength. I'm happy to discuss this further. However, the reality is that with current interest rates, progress can be made swiftly. Then we will need to evaluate the opportunities that arise. We have not had a dividend policy over the last two or two-and-a-half years, but before that, we were strongly committed to maximizing shareholder value and maintaining high standards of corporate governance. We recognize that investors anticipate a return on their investments.
Operator, Operator
Our next question will come from Ben Nolan with Stifel. You may now go ahead.
Benjamin Nolan, Analyst
Thank you. I would like to follow up on what John mentioned. Paul or Tony, you mentioned your capital allocation policy includes specific targets. Tony, you also noted that you could provide more details on this. Could you elaborate on what you are aiming for regarding leverage?
Anthony Gurnee, CEO
I'll ask Paul to comment on that.
Paul Tivnan, CFO
Yeah, sure. Ben, our capital allocation policy has been fairly clear that we wanted to get to a target still below 40% debt-to-capital. We're currently around 50%, so we aim to get on that. But as Tony mentioned, given the current rate environment, we could get there very, very quickly at these levels.
Benjamin Nolan, Analyst
Okay. Helpful. And then, just for my second question, and you talked a little bit about this, that the low order book and how incremental fleet growth can be somewhat limited. One of the things that we've seen a little more on the larger ship classes, although not pervasive yet, is oil majors generally subsidizing shipping companies to go out and build typically LNG fuel, but other types of propulsion systems on new ships and that has sort of been seemingly where most of the incremental new buildings are coming. Two questions. First, is that happening at all in the MR market? It doesn't seem like it. And then is that something that you guys would consider if a big company came to you and said, hey, we want you to build some ships. Will you do it?
Anthony Gurnee, CEO
Yes, there have been past projects with oil majors for constructing MRs, but they usually end up on long-term time charters at very low rates, which hasn't excited us. However, as part of our Energy Transition Plan, we plan to engage in discussions and build collaborative relationships with customers to help them meet their energy transition needs, based on long-term charter business with acceptable returns on capital. I don't expect any significant increase in shipbuilding in our sectors anytime soon. The real transition is still quite a distance away, and we are also facing a situation where shipyards are extremely busy right now. We are worried about near-term oversupply, which is unlikely due to the long lead times for new ship orders and the current low order book. Primarily, containerships and gas carriers have occupied all the available slots.
Benjamin Nolan, Analyst
And you're not seeing oil majors pushing for their subsidizing it in a market in the way that there's been a little bit?
Anthony Gurnee, CEO
I take exception to the word subsidized because if you can ask any of the people who have done these deals, they probably don't feel like they're being subsidized at all; they are very attractive rates. And that's a prerogative of an oil major. But I don't think that it's something that is evident in our sectors at the moment.
Operator, Operator
Our next question will come from Magnus Fyhr with H.C. Wainwright. You may now go ahead.
Magnus Fyhr, Analyst
Yes. Hi, Tony, Paul. Thanks for the presentation. Just a question on your chartering strategy going forward. You went spots ahead of the recovery. Do you see that changing? I mean, you're painting a very positive forward picture. Would you see securing tonnage or staying spots for the remainder of the year or do you have ongoing discussions now? How are some of the trading houses looking to secure tonnage for the second half of the year?
Anthony Gurnee, CEO
Yes, I think there's probably a scramble at the moment. But I think rates for one-year MR Eco-Design MRs might be up to around 20,000 a day now. That's not appealing given the spot market performance. We always keep a close eye on what's happening in the time charter market, both chartering in and chartering out. We got lucky last year with our timing on both. At the moment, we have two ships time chartered in at a little under 12,000 a day. We have one remaining time chartered out at 15,500. So we like to spread there and we appreciate the incremental spot exposure, but we're not averse to putting more ships out on TC. Generally, they are one-year deals and it's really just a position you take against the view you have on the spot market, managing exposure and looking for relative value in chartering in and out. That’s a rambling answer to a good question, which is yes, we are keeping an eye on the time charter market, and it probably begins to look attractive into the mid-twenties.
Magnus Fyhr, Analyst
And that would be longer-term, like 24, 36 months or?
Anthony Gurnee, CEO
That gets pretty thin down in the market unless you're in a really hot market, so we haven't really seen that yet. I know there has been some discussion in other forums, but maybe we're not aware of what's happening, but it seems like it’s building in that direction. This is a very typical kind of cyclical trend that we're experiencing right now with spot rates exceeding time charter rates and asset values.
Magnus Fyhr, Analyst
Thank you. I have one more question. While we are quite familiar with the MR market, the chemical tanker market appears to be closely tied to global GDP. Looking at the current market, it seems that GDP forecasts may be adjusted downward. Could you elaborate on areas where chemical demand shows resilience compared to GDP?
Anthony Gurnee, CEO
Typically, there is a strong correlation under normal circumstances, and that's beneficial. Currently, the situation is greatly impacted by disruptions from the conflict, similar to the MR sector. There are some interesting trades occurring. For instance, we dispatched a ship on one of our 25s from Trinidad to the UK carrying UAN, which is liquid fertilizer, at a rate of $32,000 a day. This can be viewed as panic buying to meet spring fertilizer demands that were anticipated to be supplied from Russia. Another noteworthy example is a voyage carrying styrene monomer, used for polystyrene production, from China to Rotterdam at a very high rate, influenced by price RPs. The market is also experiencing significant disruption, leading to volatile rates. Once we move past this disruptive phase, it will be important to assess the nature of GDP growth to understand its impact on the chemical market. At present, while the chemical market doesn't exhibit as much volatility as product markets, we have observed average rates reaching up to $50,000 a day, though we haven't seen that level ourselves yet. We conducted one voyage with an MR at $95,000, but the averages have been as communicated in the call.
Magnus Fyhr, Analyst
Alright, very good. That's it from me. Thank you.
Operator, Operator
Our next question will come from Chris Robertson with Jefferies. You may now go ahead.
Christopher Robertson, Analyst
Hey, good morning, Tony and Paul. Thanks for taking my questions.
Anthony Gurnee, CEO
Good to hear from you.
Christopher Robertson, Analyst
Tony, I guess, given the low product inventory levels, how long do you think seaborne transport will simply meet immediate demand versus when inventories will actually begin to be restocked, given kind of the key theme here for energy and national security?
Anthony Gurnee, CEO
There has been outright panic buying of diesel, and that's had a knock-on effect. We wouldn't go into too much detail, but like South American countries, we've had to go very, very far afield to cover their requirements. We've done some very back of the envelope analysis and it seems like you could add at least a few percent MR demand over upwards of a year as people reset their stocks to a little bit higher, but not back to high levels. We think it's additive. We don't think it's transformative, but we think it's additive. I think another thing, if I can just throw in, it's important to mention that LR2s have begun to trade out of clean into dirty. So far, I think about 15 ships this year have made that transition, and that's taking supply out. So I just forgot to mention that earlier on, I just threw it in there for the record. We think that it's unclear today whether there's any meaningful restocking taking place, or if it's all just covering immediate requirements, but we think restocking will come.
Christopher Robertson, Analyst
Okay. Thank you. I guess the second question here. So you mentioned last year was pretty tough in terms of rates. I think that's reflected in the scrapping that took place in 2021. So how might rising rates during this year impact the scrapping thesis? Do you think it pushes at least a few of those ships at the tail end of the age spectrum out even further, or have they come to kind of the end of the road here?
Anthony Gurnee, CEO
So the average age of scrapping for MRs is typically around 25 years. We saw a big run of scrapping last year. If we go back to earlier strong markets, definitely those drop-offs. We would expect that to happen. So yes, I think it will probably negatively impact scrapping, but it's not like it'll disappear. And it's not the kind of dynamic that you find in the VLCCs at the moment.
Christopher Robertson, Analyst
Okay. And if I could sneak one last question, how are the current lockdowns in China impacting refined products demand? And do you think it'll be a tailwind into 3Q once the lockdowns end?
Anthony Gurnee, CEO
Yes, I hesitate to say because it sounds like we're just positive on everything. The fact is that slower consumption levels in China have resulted in more exports.
Operator, Operator
Our next question will come from Climent Molins with Value Investor's Edge. You may now go ahead.
Climent Molins, Analyst
Good morning, gentlemen. Thank you for taking my questions. Following up on the capital allocation question. You have a generally young fleet, and I was wondering, how do you currently think of fleet renewal? You provided some commentary regarding potential new ordering, but how do you think of middle-aged vessels on values, especially after the recent running rates?
Anthony Gurnee, CEO
I think I'll start, and then maybe if there's anything Paul wants to add. That's a good question. I believe that middle-aged ships are typically very good investments, especially before they reach a certain age. When ships are between 10 and 15 years old, they generally represent an ideal point in terms of current returns on investment. This is because there is a lower amount of capital invested while the earnings remain relatively consistent. We no longer have a hyper-modern fleet, but that's fine because our fleet has been depreciated, and it continues to yield good returns on investment. We were planning to sell our 2008 ships anyway, and we’re pleased to have found a high-quality partner to charter them back from, as this preserves our earnings power in our commercial scale. The charter back rate offers them a decent return on investment at an attractive level. Paul, do you want to add anything to that?
Paul Tivnan, CFO
No, I think that's pretty well covered.
Climent Molins, Analyst
That's helpful. Regarding the three ships agreed to sell and charter back for a minimum rate of two years, will you have a call option to purchase when the charters come to an end?
Anthony Gurnee, CEO
No, we have options to extend, but we do not have repurchase options.
Climent Molins, Analyst
That's helpful. And final question from me, an offer recently emerged as a simple shareholder in Ardmore, and I was wondering if you could provide any commentary regarding whether he has approached you over the past few months?
Anthony Gurnee, CEO
Good question. Look, the filing they made was a 13G passive filing. We're very pleased to have Quantum as an Ardmore investor, and I imagine they're pretty pleased with the returns they've gotten so far on the investment. We have a regular investor outreach program, and we talk to all of our shareholders, big and small, and they're no different I assume.
Operator, Operator
This concludes our question-and-answer session. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.