BW LPG Ltd Q1 FY2024 Earnings Call

Welcome to BW LPG's First Quarter 2024 Financial Results Presentation. Leading the presentation today are CEO Kristian Sorensen and CFO Samantha Xu. We will be happy to answer questions at the end. Before we start, we want to emphasize the legal disclaimers displayed on the current slide. This presentation, which is being held on Zoom, is also being recorded. I will now hand the call over to Kristian.

Hi, everyone, and welcome to our 2024 Q1 presentation. Thank you for taking time to join us today as we present our financial results and recent events. It's been a busy period for our company. So let's turn to Slide 4, please. We delivered another strong quarter with a result of $150 million net profit after tax on the back of a strong time charter equivalent of $61,500 per available day, which includes a positive IFRS adjustment of $26 million. We booked a net gain of $20 million from the sale of the BW Princess, and it was another good quarter by our trading unit BW Product Services showing a profit of $21 million, where we subsequently returned $30 million to its shareholders in April through the preannounced capital return. The quarterly end results translates into an earnings per share of $1.07, and the Board has declared a $1 per share in dividends, which is equivalent to 106% of the earnings from our shipping activities, which calculates to an annualized dividend yield on a 22% basis Tuesday's closing price in New York. On the shipping side, we have mutually agreed with Vitol to terminate their pool and charter back arrangements. There is some financial impact anticipated from the termination of the agreement and we look forward to continuing business together in the day-to-day chartering markets. For our trading activity, we are happy to announce that product services have concluded a multiyear extension of the cargo contract with Enterprise Product Partners, which will significantly improve our optionality and ability to capture profits in the LPG value chain. In addition, the transaction is enabling us to grow our business at a time when growing in shipping is more expensive than ever, and it bolsters our business model for the future markets. The expansion of our trading volumes will be financed by trading facilities already in place, and the valid risk is anticipated to only increase from $6 million to $8 million reflecting the balanced trading portfolio that Product Services is running. And finally, we are very proud about our milestone dual listing on the New York Stock Exchange. The reception in the U.S. investor market has been very satisfactory, reflected in a 27% increase in our U.S. dollar-denominated share price since the listing, and the share trading volume in the U.S. is picking up. Turning over to our market outlook. We remain positive on the sector with several indicators pointing in the right direction, both in the underlying LPG commodity market as well as the supply-demand balance in the VLGC market. And this is even without disruptions in the Panama Canal. So let's turn to Page 6 for a closer look at the market fundamentals. The U.S. production and export volumes are still the locomotives in the LPG growth story and continue to deliver on the upside of expectations. According to recent EIA figures, the production and export volumes are up 8% and 14%, respectively, year-to-date compared to the same period last year. We maintain our positive view on the U.S. export volumes for 2024 and '25. With regard to the CapEx plans by the U.S. terminal companies as a positive sign for the future U.S. LPG export volumes and believe they will remove any potential bottlenecks for the medium term. The Middle East exports are expected to be stable for this year, unless OPEC decides on any cutback reversals. While we anticipate more volumes to come on stream from next year onwards from Abu Dhabi and Qatar. The increasing LPG exports from the U.S. and the Middle East are meeting a growing demand side in Asia, both for industrial purposes, well represented by rapidly increasing demand by the Chinese PDH plants and from the residential sector, especially in the Indian subcontinent and Southeast Asian countries. The Indian demand for LPG is now consuming about half of the Middle East exports, making the rest of the Asian market increasingly dependent on the U.S. LPG exports to meet the underlying and high demand, which follows growing population and prosperity. Also worthwhile to note is that LPG by being a byproduct from oil and natural gas production has a history of always being price clear and eventually finding a home since no producers want to store LPG for a prolonged period of time. And this market dynamics makes it a competitively priced energy source which easily penetrates new markets since it's relatively easy to handle compared with other energy sources, which require much higher infrastructure investments. Let's turn to Slide 7. Looking at the global VLGC fleet balance for the next 18 to 24 months, it is a sharply abating curve of newbuilding deliveries when we move into the second half of this year. We only have a handful of VLGCs set for delivery from the yards, while the global fleet is approaching 400 units. And for 2025, only a dozen vessels are scheduled for delivery. Yards are still talking deliveries for new orders more than three years forward, and this gives us good visibility of the market the next 18 to 24 months. So to summarize, the market fundamentals for both the LPG commodity markets and the VLGC markets are strong and reflected in the current rate level, which is fluctuating between $60,000 to $70,000 per day. The FFA market is priced for the remainder of this year at levels in the low to mid $60,000 per day. And this is without any serious delays in the Panama Canal, which continue to be a wildcard also in the future. And with this, I'm pleased to let Samantha take you through the commercial performance and our financials.

Thank you, Kristian, and hello, everyone, on the call. Good to speak to you. For the first quarter of 2024, we delivered a TCE of USD 59,400 per calendar day and USD 61,500 per available day, a continued solid performance. We have a healthy coverage through our time charter and FFA portfolio, which represents about 37% of our shipping exposure. For the second quarter, we have fixed 84% of the available days, about USD 49,000 per day. For 2024, our time charter-out fleet generates a profit of around USD 25 million over our time charter in fleet. Additionally, more shipping capacity that is fixed on time charter during the quarter is estimated to generate about USD 39 million for the year 2024, up from USD 19 million as reported in Q1. Moving to Slide 11. Product Services delivered a solid performance in the beginning of the year. In Q1, the yield and net profit of USD 20 million increased its net asset value to $82 million as of end March. The net profit was contributed by gross profit of USD 33 million after netting off G&A and tax provisions. The gross profit includes realized gains of USD 18.7 million and unrealized cargo and derivative gains of USD 40 million. The reported net profit does not include unrealized fiscal shipping valuation, which is $31 million at the end of March, based on our internal valuation. This shipping valuation dropped from the previous quarter, reflecting a decline of a 12-month freight forward market at the end of March compared with the substantially higher market in Q4. For Q1, we reported an average value at risk of USD 5 million on a well-balanced trading book, including cargoes, shipping, and derivatives. As announced earlier, we concluded a multiyear contract with the Enterprise Product Partners in Texas. The contract has the potential to double our volume up from the U.S. Gulf providing product services with a strong cargo position. Next slide, please. Moving to the financial highlights. In Q1, we continued our good business performance and reported a net profit after tax of USD 150 million on a consolidated basis. This includes $10 million in profit from BW LPG India and $21 million from Product Services. The net profit also includes a positive adjustment of $26 million related to the effect of IFRS 15 for the quarter, as the TCE for the strangling voyages over the quarter end is recognized on the low to discharge base. We reported an earnings per share of $1.07, mainly contributed by our core shipping business. This translates into an annualized earnings yield of 38% when compared against our share price at the end of March. We reported a net leverage ratio of 7% in Q1, a decrease from 21% at the end of December. This substantial decrease was due to repayment of a shipping loan, decrease in restricted cash held for the derivative margin requirement, and a reduction in product services, a short-term trade finance drawn at the end of Q1. On the basis of a low leverage ratio and considering the business performance as well as the capital requirement ahead, the Board has declared a dividend of $1 per share in Q1. This represents a 93% payout ratio of Q1 total profit or 106% of shipping NPAT. The dividend payout reflects our commitment to return value to our shareholders as we continue to deliver a high dividend yield of 22% when calculated on yesterday's share price. Our balance sheet ended the quarter with shareholders' equity of USD 1.7 billion, and our annualized Q1 return on equity and capital employed was 37% and 30%, respectively. In Q1, our daily OpEx came in at $8,700 per day due to higher-than-expected maintenance and repair expenses. For 2024, we expect our own fleet operating cash breakeven to be about $17,300 per day. As you can see, our liquidity continues to remain healthy. On a consolidated basis, we ended Q1 with $661 million in liquidity including $340 million in cash and $347 million in undrawn revolving facilities, which will support us for upcoming CapEx expenditures. Ship financing debt stood at EUR 244 million at the end of March, comprised of the balanced ship finance term loan was spread out with no major repayment until 2026. Trade finance drawn stood at a moderate level of $167 million or 21% of our $796 million trading line, leaving a healthy headroom for growth. With that, I would like to conclude my update. And back to you, Lisa.

Thank you, Samantha. We will open the floor for questions now.

Kristian, you mentioned that growth in shipping is currently challenging or costly, depending on how it's perceived. What alternatives do we have? Excluding the debt related to BW India, you are essentially debt-free now. With your cash earnings significantly outpacing your net profits, we seem to be at a juncture where you could either accumulate substantial cash reserves or increase payouts. Are you contemplating some type of extraordinary distribution, and how should we view your balance sheet in a year or two considering the current market outlook?

Thanks, Erik. As you mentioned, we don’t aim to be completely debt-free. However, it is currently challenging for us to identify profitable investment opportunities that would justify increasing our debt. When it comes to dividends and the structure of our balance sheet, those are topics we regularly discuss with the Board. I don’t want to dismiss any possibilities. Ultimately, these decisions rest with the Board, and we will see how things develop in the future. You are correct that our balance sheet feels a bit too strong at the moment. Nonetheless, we are not looking to eliminate debt entirely. If we do take on debt, it should be tied to projects that we believe will generate value for both the company and our shareholders.

Okay. That's fair. And just on the market now. I mean, we're seeing some time charter activity and think we're seeing 2-, 3-year deals now being done at $50,000 a day, which is approximately where it should be also based on share prices at least. What are you seeing? And if I also may ask, are you surprised about the strength you've seen over the past few months compared to where we were? I mean, it's been quite a turnaround in sentiment at least in a few months' time.

Yes. If you focus on U.S. exports specifically, they have exceeded our expectations. The robustness in U.S. production and export volumes is greater than we had anticipated. Additionally, we recognize that there are active discussions among market players who require shipping services moving forward. Nowadays, if you need a ship, you will need to pay a premium. I believe you mentioned a 3-year deal at around $50,000, which isn’t surprising to us. Other participants in the market are also seeking ways to meet their shipping needs in the future, so I wouldn't be surprised to see more time charters completed at similar rates.

Okay. And one final one. I mean, we're sitting some distance away from this. But obviously, you are seeing quite decent investment activity into both fractionating capacity, export capacity, et cetera, out of the U.S. So given your relationship with Enterprise. I mean, on the production side, is that potentially becoming a bottleneck as you see it? I mean, it doesn't look like infrastructure is going to be a bottleneck. But given the drilling activity we're now seeing and expectations ahead, is that at all becoming anyone's fare? Or is it just business as usual?

I believe we would not have witnessed the recent investments made by terminal operators and other players in the U.S. shale gas market if they did not have confidence in the future of shale gas. For example, the involvement of energy transfer and WTG Midstream indicates that these large operators and terminal operators are consolidating because they recognize the continued potential for growth in the U.S.

Thank you. Erik Peter, please go ahead.

Yes. Just firstly, a quick question on the Vitol ships. You're right that there is no financial impact from it. But can you share some of the background behind those ships being pulled from the pool?

Yes. Well, this was a charter pool participation with shipping capacity, charter back kind of CoA, which was tested for a year, and it didn't work out as intended, and then we have amicably agreed with all that let's rather meet in the spot market. So it's very undramatic in all ways.

Okay. Good to hear. You also write that the Panama passages are now normalized. But I suppose then you refer, of course, to your market, in the overall market, it's still a substantial reduction in the number of transits. And to the best of my knowledge, there is still a substantial auction premium to be paid. So question, part 1 is, what are the auction premiums these days? And two, very good, if you can elaborate on what the consequence of still hefty payments to use the Canal is impacting the VLGC markets?

There have been significant fluctuations in the auction price for the Panama Canal. We observed rates ranging from $600,000 and $700,000 per day to as high as $1.8 million a few weeks ago, before dropping back to $500,000. Currently, I believe the price is around $700,000. This is a daily auction that is difficult to predict, but there are definitely considerable changes from week to week. Generally speaking, both charterers and shipowners have shown a willingness to pay to get their vessels through the canal. However, the capacity of the Panama Canal remains constant. As more ships enter the market, we expect ongoing congestion near the canal, especially during peak season, which will likely be worse than what we are seeing now. That's our expectation.

Okay. But I read you asked, if you now pay the auction fees on the used Canal predominantly and not to do the long-kept good hope around.

It depends on where we are discharging in Asia. If we are in Northeast Asia, we will consider the possibility of returning via the Panama Canal. If that’s not feasible, we would route our return around South Africa to get back to the U.S. Ultimately, the decision depends on our location after discharge and the current situation with the Panama Canal.

And that applies also to the laden leg, the front haul?

The front haul is negotiated individually with each charter. Generally, there is a rate for going around the Cape or a rate for going via Panama. This is discussed on a case-by-case basis, considering the circumstances at any given time in the Panama Canal.

A final question from me. As has been mentioned, it's expensive, but just how expensive is it really? You sold some older ships last year, which I think is fair to say surprised most people regarding the higher prices. If you were to sell some of the 15, 16 tonnage, what would that price be?

Well, I think the last reference point is a deal done by Petrodex where they sold it in the low $80 million, wasn't it? So I think that is the last reference point, but I can double check that, in case I'm not misguiding you.

Would you sell on those prices, Kristian?

We currently have no plans to sell any more ships, as doing so would reduce our capacity to generate revenue. It is crucial for us to maintain a certain size to ensure we can continue generating revenue in the future.

The next question comes from Axel.

Axel Styrman from Kepler Cheuvreux. I have a question related to the PDH plants in China, if you can comment related to recent market intelligence regarding the margins there, which has been weak lately. Do you think this is a consequence of increased capacity? Or do you think it's a consequence of softer demand?

I think when you look at the PDH plants run rate, they have been weak to relatively weak for quite a long period of time, but we still see that they continue to run and new PDH plants are opening. And there are many of them also linked to other petrochemical projects in China. So we don't really see any big change in this since the last half-year or so or even longer. So for us, there is no change in the way we regard the Chinese demand from the PDH side.

Over to you, Kaia, for questions from the Q&A channel.

Sure. Thank you, Lisa. We have one question here from Nino Rodrigues asking about the TCE guiding for the second quarter, which is lower than the actual Q1 TCE. And does this mean that the net profit for Q2 is expected to decrease?

Kaia, I'm glad to answer your question. It's important to note that the timing of when we fixed four TCE to secure our earnings was earlier than the quarter. Additionally, let's not forget that last quarter came from an extremely strong historically high freight market, which makes our current figures appear somewhat lower in comparison. However, I want to emphasize that with an operating cash breakeven of $17,300, a rate of $49,000 is very healthy. This doesn’t necessarily indicate that our net profit will decrease compared to this quarter. The reality is that we won't know until the books are closed, as there are other factors, including product services performance and accounting-related issues, that could affect the net results.

We have a question from Blaise Francis about the guidance for TCE revenue per available day for the second quarter, which is $49,000. This is a decrease compared to last year's figure of $52,500. Can you provide more details on the reasons behind this? What is your guidance regarding its impact on earnings? Will the reduction in net finance expenses, which positively influenced earnings in the first quarter, help offset the decline in TCE revenue per available day in the second quarter?

Thank you for the question. I believe that was addressed earlier. Regarding net finance expenses, I want to emphasize that this is a natural result of being nearly debt-free at the moment. Additionally, we maintain a robust cash management program, which indicates that net finance expenses will likely remain low.

And if I can also make a comment on the reasons why it's coming off compared to TCE revenue of $52,500, it's because of the events in the first quarter. And there is a backlog on the earnings and revenues. So since we had this sharp rate drop in January, we are not immune to it, and it affects some of the positions also into the second quarter.

Finally, a question from the chat channel, Kaia?

Yes. Another question from Blaise Francis. Thank you for your answer, highly appreciated. No question, sorry.

Given the events in the first quarter, there is a backlog of earnings and revenues totaling $52,500. The sharp rate drop in January has impacted us, affecting some positions into the second quarter.

I think we are coming to the end of the presentation here. So thanks, everyone, for the questions and for your participation. And I think we can round it off here. Thanks, everyone.

Thank you for attending BW LPG's First Quarter 2024 Financial Results Presentation. More information on BW LPG and BW Product Services are available at www.bwlpg.com and www.bwproductservices.com, respectively. Have a good day and a good night.