Earnings Call Transcript - BWLP Q3 2024

Operator, Operator

Hi, everyone, a warm welcome to BW LPG's Third Quarter 2024 Results. The presentation today will be given by our CEO, Kristian; and our CFO, Samantha. Afterwards, we will open up for a question-and-answer session. Before we begin, I would like to highlight the legal disclaimers displayed on the current slide. Please also note that today's call is being recorded. I will now give the word to Kristian.

Kristian Sorensen, CEO

Hi, everyone, and thank you for taking the time to join us today as we present our financial results and recent events. It's been another eventful quarter for our company, so let's turn to Slide 4 for the highlights and our market outlook. Our Time Charter income per available day ended at $46,800, somewhat lower than the previous quarter, but above our guidance of $43,000 per day. The market went through a rollercoaster during the quarter with rates fluctuating in the range from low $20,000 per day and back into the $50,000 per day within a short period of time. In addition to a great job done by our chartering team in navigating through the ups and downs, we are pleased to see that our downside protection through our Time Charter portfolio and FFAs mitigated quite a lot of this volatility. We're also very happy with the new ships starting to enter our fleet, and as of today, we have 5 out of the 12 acquired Avance Gas ships safely delivered. As explained in this slide, another four ships are expected to be delivered, which share issued in time with the right to receive dividends for Q3. The Board has declared a dividend of $0.42 per share, which translates to 100% payout of the NPAT from our shipping activities. Moving on to Product Services, and as per our trading update in October, our trading activities benefited from a considerable uptick in the 12-month forward mark-to-market valuation of the trading portfolio, reflected in a net accounting profit of $58 million. Although we are glad to see that the forward trading portfolio is becoming more valuable, the volatility in the trading market may drive the portfolio valuation up or down before the positions are realized. And it's important to understand that it is the profitable realized trading positions that matter as we move forward when they are eventually converted to cash in the bank accounts. Two subsequent events since the end of September were the refinancing of our $400 million revolving credit facility, which is now replaced by a new seven-year and larger facility of $460 million. Samantha will comment more on this later. In addition, we recently announced two sale and purchase transactions where we sold the 2007 vintage vessel BW Cedar from our India subsidiary at around $65 million, while declaring a purchase option on the 2019-built BW Kizoku at just below $70 million, equivalent to a new building price in the mid-$80 million. This is a strong testament to our business model, which creates optionality, allowing us to harvest profits. Our market outlook for Q4 and next year is positive as export levels from the US Gulf have stabilized after a period of maintenance and slightly reduced exports. However, it is important to note that the small market like the VLGC market is quite sensitive to only a few cargoes being added or taken out. At the moment, freight rates in the US Gulf seem to have found an equilibrium level around $40,000 per day. There are currently little to no delays around the Panama Canal, which means that there is upside potential from today's rate level as we see it. Let's turn to Page 6 for a closer look at the market fundamentals. The market volatility we have been through lately is well illustrated in this slide. When you see the rate movements against the variation in US Gulf coast loadings on the right side of the slide, it shows how finely balanced the VLGC market is at the moment, with no delays in Panama. I used to say that our market is driven by three engines: exports from the US Gulf, exports from the Middle East, and the availability of Panama Canal slots for VLGCs. The next round of US export capacity increase starts in the second half of next year, as energy transfer increases their ethane and LPG export capacity at the Nederland terminal in the US Gulf. The Enterprise Terminal will follow up in 2026 with their planned expansion, and we estimate that North American exports will increase another 10 million tons from '24 to 2026 on the back of increased production of oil and natural gas in the US, combined with increased terminal capacity. Looking at the Middle East, the growth in export volumes is expected to ramp up from 2026, as Qatar commences the expansion of their new LNG trades. Abu Dhabi's LNG project is expected to commence a bit later in 2028. Looking at the Panama Canal, it remains a wildcard in our market, and unexpectedly we can see that the number of container vessels passing through the canal so far in Q4 has come down, leaving more slots available for VLGCs and consequently more VLGCs sailing the shortest route from the US Gulf to Asia. Whether we will see more congestion in Panama is hard to predict, but the number of daily slots in the Neo Panama Canal locks is fixed at 10 transits total in both directions combined. So it takes only a couple of additional container or LNG vessels to pass through to tilt the availability of slots in the opposite direction. Let's turn to Slide 8 for a look at the LPG demand side. The picture is pretty much unchanged since the last update, and directionally the Asian region continued to grow their appetite for LPG in the residential sector in the Indian subcontinent as well as Southeast Asia, while the petrochemical sector in China specifically continued to expand their consumption of propane as feedstock. The trade pattern that has developed over the last years on the back of increased LPG demand in India deserves attention. The country is absorbing close to 50% of the Middle East exports and all countries further east in Asia are increasingly dependent on sourcing LPG from the US, underpinning the growing need for long-haul shipping. If you look at the VLGC fleet and new buildings, there is good visibility on the new building deliveries over the next 18 months, and for 2025, we have 13 vessels on our list for new building deliveries. Worthwhile to note is that the number of ships going into dry docks in 2025 will more than double from this year as we count approximately 80 ships due for dry dock next year. And then I leave the floor to you, Samantha, for an update on the financials.

Samantha Xu, CFO

Thank you, Kristian, and hello, everyone. Coming to Slide 11, we're very pleased to share that we delivered a solid shipping performance in a volatile quarter. For Q3, we achieved a 98% fleet utilization and a TCE of $46,500 per calendar day or $46,800 per available day. Maintaining a healthy Time Charter and FFA portfolio has been key to our success. In this quarter, the portfolio represents about 45% of our shipping exposure. For the fourth quarter, we have fixed 90% of the available days at about $36,000 per day. Looking at 2024, our Time Charter out fleet generates a profit of around $31 million over our Time Charter in fleet. The remainder of our fixed Time Charter out portfolio is estimated to generate $69 million for the year 2024. Next slide, please. As shared in our earlier trading update, Product Services booked a strong quarter and yielded a net profit of $58 million. The result was contributed by gross profits of $71 million, after netting general and administrative expenses and tax provisions. The gross profit includes an unrealized mark-to-market gain of $86 million, which consists of open cargo positions and hedges. This is offset by $14 million of a realized trading loss. The unrealized gain is expected to be realized in future periods, although some volatilities are expected to impact the final realized result to be higher or lower. At the end of Q3 '24, Product Services' book equity position arrived at $128 million. We would also like to highlight that the reported book equity does not include the unrealized physical shipping position of $17 million, which was based on our internal valuation. You can recall, we announced a multi-year term contract with our Enterprise Products Partners back in Q2. The related fiscal volume has started to phase into our 12-month rolling mark-to-market valuation. As such, we expect greater volatility in our unrealized position in the future quarters. For Q3, our average VAR was $5 million on a well-balanced trading book, including cargoes, shipping, and derivatives. Coming to our financial highlights, on the back of a good performance from both shipping and product services, we reported a net profit after tax of $120 million in Q3, including a profit of $12 million from BW LPG India and $58 million from Product Services. Profit attributed to equity holders of the company was $105 million, which translates to an earnings per share of $0.79. This translates into an annualized earning yield of 23% when compared against our share price at the end of September. We reported a net leverage ratio of 21% in Q3, an increase from 12% reported at the end of June. The net leverage ratio change was driven mainly by an increase in short-term trade finance and margin requirements, deposit paid for the Avance Gas fleet acquisition, and an increase in lease liability from the exercise of purchase option for BW Kizoku. These factors impacting the net leverage ratio as outlined above are mostly temporary. The delivery of the Avance Gas fleets commenced in November and is expected to complete by the end of this month. When the fleet delivery finalizes, we expect that our net leverage ratio will gradually increase to approximately a range of 30% to 35% as we draw down on our financing facility. For Q3, our Board has declared a dividend of $0.42 per share, a 100% payout of shipping NPAT. This excludes the dividend to be paid to newly issued shares to Avance Gas shareholders and ensures that the existing shareholders are fully compensated. This also shows our confidence in delivering growth to our business and our continuous commitment to return value to our shareholders. The balance sheet ended in the quarter with a shareholder equity of $1.6 billion, and our annualized Q3 return on equity and return on capital employed were 30% and 26%, respectively. Looking at our year-to-date operating expenses, it arrived at $8,400, a slight reduction from the previous quarter reported. For 2024, we expect our own fleet operating cash breakeven to be about $18,800 and $22,800 for the whole fleet, including Time Charter vessels. As you can see, we continue to have a healthy repayment profile with outstanding shipping loans at $216 million, of which $120 million is a term loan for BW LPG India only due to be refinanced in 2026, a very manageable position. On the liquidity side, we ended the quarter with a strong position of $750 million, paving the way for the Avance Gas fleet delivery. The vessels' deliveries have been smoothly taking place since November and are scheduled to be completed by the end of this month, as mentioned earlier. Post-delivery, our liquidity is expected to remain healthy at a level of $552 million supported by our shareholder loan and the seven-year revolving facility of $460 million newly signed in November this year. We will also evaluate and start refinancing our vessels in early 2025 following the Avance Gas fleet delivery. We're very confident in maintaining a healthy leverage and financing structure as well as a sustainable repayment profile with a larger fleet. On the Product Services side, trade finance drawdown stood at a moderate level of $248 million or 30% of our available credit line, leaving a healthy headroom for growth. With that, I conclude my update, back to you, Kaia.

Operator, Operator

Thank you, Samantha. We would now like to open the call for your questions. Yes, Petter Haugen, you have raised your hand. The floor is yours.

Petter Haugen, Analyst

Thank you. Good afternoon. Quick question on the process of taking those vessels from Avance. To what extent should one expect costs to come in earlier than revenues? Is it more or less back-to-back or should we, for instance, use a month of sort of overlap here? Yeah, that's the first question.

Kristian Sorensen, CEO

Thanks, Petter. I can just start off by saying that, of course, we pay for the ships now and when you fix the ships for the next voyage, we will not be able to invoice before the vessel is about to discharge as per normal shipping practice. So there will be, like normal, a delay because we are not able to invoice our charters before the voyage that the ships have performed is finished.

Petter Haugen, Analyst

Okay. So, yeah, I understand there will obviously be cash flow effects here, but in terms of your P&L bookings, I suppose that.

Kristian Sorensen, CEO

Okay, Samantha, would you like to add anything about that?

Samantha Xu, CFO

Yeah, maybe just from a commercial side that Kristian has just explained, maybe a little bit from a financing perspective. As the vessel is being delivered, we will be drawing down our financial facilities to finance each of the vessels. I think the details, Petter, you can very well refer to the earlier deal structure to get a sense of how much each needs to be drawn down. I won't be able to give you absolute numbers. The delivery is spread across November to the end of December. Additionally, you would know that the depreciations will come in as we take ownership as well.

Petter Haugen, Analyst

Yes, naturally. Yeah. Okay. Thank you. Just one more from me then. Because from the asset market, it seems as if prices are still holding up to, well, more or less the same levels that we saw in the first half of the year as well. If you were to do something on the newer side now, how do you think that is going to compare to the Avance transaction? Is there sort of any data points that we could use to either mark the current resale price up or down from the Avance transaction?

Kristian Sorensen, CEO

I think the market for the assets and let's say the sale and purchase market is pretty much unchanged for the new ships since last quarter. So I think there is no real change from the last, I would say, six to eight months in terms of valuation for newer ships or new buildings. If that answers your questions.

Petter Haugen, Analyst

It does, Kristian. Thank you. That was all from me.

Kristian Sorensen, CEO

Okay.

Operator, Operator

Thank you, Petter. Jorgen Lian, you've raised your hand. Please go ahead.

Jorgen Lian, Analyst

Thank you. Hello, Kristian, Samantha. You are now taking on a bit more debt as part of the VLGC acquisition from Avance and you have a pretty rigid net leverage ratio dividend policy. So just any question or any more information about what we potentially need to account for to adjust the net leverage for the short-term effects that you mentioned, Samantha, or is that sort of set in stone and how to think about dividend payouts going forward?

Kristian Sorensen, CEO

I can start by saying that the dividend policy remains unchanged, but it is ultimately up to the Board to declare the dividend. Therefore, I can't provide further insights on future dividend payouts. The dividend policy is as it stands.

Jorgen Lian, Analyst

All right. And Samantha, I don't know if you have anything to add on or if that's then irrelevant in terms of the net leverage ratio where you talked about short-term events or short-term impacts from Product Services?

Samantha Xu, CFO

Yeah, I think, Jorgen, you are referring to my comments about Q3. The elements that are driving up the leverage ratio. I have to mention a couple of things that for example, that the Product Services are drawing on the trade finance and the margin finance, etc. As you know very well, that's a reflection of a slight, how to say, a slight timing of the number of cargoes they're carrying on our balance sheet that would change by days. So that's what I meant as a temporary effect, similarly for the purchase of a BW Kizoku as well. So that's due to the accounting rules that we have to gross it up, which drives up the leverage ratio. Once we take over the vessel, it would just be a normal asset.

Jorgen Lian, Analyst

All right. Thank you. And then finally for me on the Product Services part of the business and just to make sure that we understand correctly, but the way you book this is sort of on a 12-month forward-looking basis, right? So when we're talking about length in the unrealized positions, that would be sort of a fair working assumption.

Kristian Sorensen, CEO

Yes. So the positions are spread as we always have over a 12-month forward rolling period. That's right.

Operator, Operator

Thank you, Jorgen. Then we have raised hand from Climent Molins. The floor is yours.

Climent Molins, Analyst

Hi. Good afternoon. Thank you for taking my questions. I wanted to start by asking about the Q3 TCE. Considering the guidance you provided alongside Q2 earnings, it seems the low-to-discharge accounting has a positive impact on earnings. Could you talk a bit about that? And secondly, do you expect low-to-discharge accounting to once again have an impact on Q4 earnings relative to the guidance you provided?

Kristian Sorensen, CEO

Are you now referring to the IFRS adjustment?

Climent Molins, Analyst

Exactly. Yeah.

Kristian Sorensen, CEO

I can say generally that when the market is rising, there is a negative IFRS adjustment, and when the market is falling, there is a positive IFRS adjustment. This is how IFRS smooths out the fluctuations throughout the year. That's just a general explanation of the mechanism. Samantha, could you comment on the IFRS adjustment for this quarter specifically?

Samantha Xu, CFO

Yes, Kristian, you covered most of the factors affecting IFRS 15. It also relates to when the vessel is on its last voyage. In such cases, we often cannot provide a forward-looking estimate until after we close the quarter, at which point we can assess the exact impact. To answer your question, yes, there will be an impact. However, it's difficult to predict the extent and direction of that impact, Climent.

Climent Molins, Analyst

Makes sense. Thanks for the color. And given the sale of the Cedar, should we expect net proceeds to be distributed from the India JV to the parent or is there any appetite to buy another vessel in the JV level? And secondly, could you provide an update on the infrastructure investments in India?

Kristian Sorensen, CEO

The sale of the Cedar is scheduled for delivery in Q1, at which point we will determine how to allocate the net proceeds. We will provide an update on this in our next earnings release. As for the infrastructure investments, there haven't been any significant changes since our last update. We are on track with our plans and anticipate starting the first phase of terminal construction early in the new year, assuming everything goes smoothly.

Climent Molins, Analyst

That's helpful. Thank you. That's all for me. Thank you for taking my questions.

Operator, Operator

Thank you, Climent. Appreciate your questions. Next question comes from Auguste Klem. Please go ahead.

Unidentified Analyst, Analyst

Thank you. A question kind of following up on Jorgen's question about Product Services. Can you give some color on sort of, I mean, Q3 was a fantastic result in the P&L with a very large ARB and kind of more normalized rate, should we call it? Rates have been sort of flattish into Q4, while the ARB has come down. Can you talk a little bit about sort of in general, the environment this leaves for the Product Services division? Is it more difficult to extract value at this point? And secondly, seeing as it's unrealized, a large portion of the gain in Q3, which you will then realize in the following quarters, is there an argument to be made for paying out more than 100% of shipping NPAT because you will have a cash flow contribution from Product Services as well? Thank you.

Kristian Sorensen, CEO

Thanks, Auguste. I can start with the last one. If you look at how we distributed the profits from Product Services and the capital return to us as shareholders, I believe you'll find the answer to your last questions there. Regarding your first question, Auguste, could you please repeat it? I seem to have lost track of it.

Unidentified Analyst, Analyst

That was a bit long, sorry. No, it's more about the market environment for Product Services now that the ARB has come in quite a lot while shipping rates are more or less flattish from Q3?

Kristian Sorensen, CEO

Yeah, I would say it's hard to guide exactly on how Product Services is performing from week to week and month to month because they have many handles to pull. They have physical cargoes, FOB cargoes. They have outlet positions in Europe and Asia, where they have deliveries and commitments fixed on certain price mechanisms. They have derivative positions and shipping positions. So they have, I would say, a wide range of ways to create profit and value even though the market is, like you say, in a state where the ARB is coming down and the shipping is also kind of flattish. So I would say, on a general basis, it's hard for us to comment specifically on how they may perform in a market like this, except for the fact that they have many ways of positioning themselves depending on the prevailing market conditions. So I'm sorry, it's hard to be more specific, Auguste.

Unidentified Analyst, Analyst

No, no, that's great. Thank you very much. And then finally just kind of a housekeeping question. G&A was down quite a lot this quarter. Any guidance there for Q4 and maybe also for depreciation as you take over the Avance vessels?

Kristian Sorensen, CEO

I can just start off with the G&A because I think what we are doing is that we are accruing for bonus tax, etc., which is based on realized profits. And that will go a little bit up and down during the year because we do this on a quarterly basis, adjusting it. So I think you have to see the G&A over the year to get the full picture of how the G&A is playing out because there are certain elements of bonus tax, etc. which are being adjusted from quarter to quarter. And Samantha, would you like to add anything there?

Samantha Xu, CFO

Yeah, I think that's correctly said. I think if you're referring to contrast with the previous year, I would say that there are no drastic changes expected as we've seen last year.

Unidentified Analyst, Analyst

Okay. Thank you very much.

Operator, Operator

Thank you, Auguste. I don't see any more raised hands. But if there are more questions you would like to ask verbally, please raise your hands. We have, during the Q&A session, also answered a few incoming questions on the chat channel. Are there any more Q&As you would like to raise on the chat? If not, I will round off the Q&A session.

Kristian Sorensen, CEO

It seems like we have answered all the questions here now. So I'd like to thank everyone for joining us. And I think that concludes our third quarter 2024 result presentation. So thanks everyone for dialing in, and we wish you a good rest of your day wherever you are in the world. Thank you.