Earnings Call Transcript - BWLP Q2 2025

Aline Anliker, Head of Corporate Communications

Hello, everyone. A warm welcome to BW LPG's Q2 2025 Earnings Presentation. My name is Aline Anliker, and I'm the Head of Corporate Communications at BW LPG. Today's presentation will be given by our CEO, Kristian Sorensen; and our CFO, Samantha Xu. After the presentation, we will have a Q&A 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. And without further ado, I would now like to hand over to our CEO, Kristian.

Kristian Sorensen, CEO

Thank you, Aline, and hello, everyone, and thank you for taking the time to be with us today as we review our second quarter financial results and recent developments. So let's turn to Slide 4, please. The second quarter was marked by extraordinary geopolitical and market events, which substantially increased the market volatility, both for shipping and trading. For the quarter, we reported a TCE income of $38,800 per available day and $37,300 per calendar day, above our guidance of $35,000 per day. In a quarter with spot rates fluctuating between $10,000 and $70,000 per day, the time charter portfolio played a vital role in protecting our downside. After minority interests, the Q2 profit was $35 million, equivalent to an EPS of $0.23. And the Board of Directors has declared dividends of $0.22 per share, consisting of 75% of our shipping NPAT, topped up with retained dividends from Product Services 2024 results. Moving on to our trading operations. Product Services achieved a gross profit of $15 million and a profit after tax of $6 million. Samantha will take you through the details later in the presentation, and it's important to keep in mind that it is the realized result which generates Product Services dividend capacity. As of 30th June, the aggregated realized result for the first half of 2025 is $39 million. Further on our shipping activities, 2025 is a busy dry-docking year for us. And in the second quarter, we had 139 days related to vessels dry-docking. In the second half of the year, we expect 143 and 135 days, respectively, for Q3 and Q4. These numbers should be noted since the impact our revenue-generating potential on top of the dry-docking cost itself. For the third quarter, we're guiding on about $53,000 per day fixed for 90% of our available days. These are solid levels above our all-in cash breakeven of $24,800 per day. On the asset side, BW Yushi was added to our own fleet in June after we declared a very lucrative purchase option earlier this year. On financing, we finalized a $380 million term loan and revolving credit facility to finance the Avance Gas fleet and secured a $215 million term loan facility for BW LPG India fleet. Our $250 million shareholder loan from BW Group was terminated earlier due to ample liquidity. But now that Q2 is over, the focus is on the second half of 2025, which has started off on a strong note. So let's turn to the next slide, please. The current VLGC market is characterized by solid fundamentals with robust growth in export volumes from the U.S., supported by high domestic LPG production and ongoing terminal expansions. The Middle East volumes are also slightly up, backed by a reversal of the OPEC cuts. The extraordinary factor is how inefficiencies in the LPG trade pattern have absorbed substantial shipping capacity in recent months. The first such inefficiency emerged after China imposed retaliatory tariffs on U.S. sourced LPG, which led to a significant reshuffling of U.S. export volumes away from China and into other parts of Asia. The sudden shift of U.S. volumes toward India and Southeast Asia, combined with the redirection of Middle East volumes to China rather than India, absorbed considerable capacity from VLGC fleet and pushed rates up. The short but intense Israeli-Iran conflict also fueled spot rates for ships loading around that period in the Middle East. Now trade patterns are slowly returning to pre-trade war flows, but the Panama Canal has once again become a bottleneck as growing traffic from container ships, ethane carriers and other prioritized or high-paying segments strains capacity. The consequence has been more VLGCs routing around South Africa, which significantly impacts the ton mile for the global VLGC fleets, making fewer ships available, which in turn is pushing rates up. In addition, the global fleet growth is at a low level with 409 ships currently in service and only 7 more to be delivered in 2025. We keep an eye on the LPG FFA market, which is currently pricing the balance of 2025 at an equivalent of low $60,000 per day for the Middle East, Japan benchmark leg. Next slide, please. This slide shows how the LPG market dynamics played out after the Chinese retaliatory tariffs were implemented. The U.S. LPG export volumes shifted from Chinese destinations to India, but also Japan took a big chunk of the rerouted cargoes. U.S. LPG exports to India were above 1 million tonnes in the second quarter of 2025 compared to less than 100,000 tonnes for the entire 2024. Middle Eastern volumes also played a key role by replacing U.S. cargoes to China and thereby redirecting traditional cargo flows for India to longer-haul destinations in China and absorbing more shipping capacity. Furthermore, China substituted U.S. LPG with cargoes from Canada and Australia, a trend that we see continues. All in all, the massive reshuffling of cargoes that took place was creating substantial inefficiencies in the LPG supply chain, which required more shipping capacity and moved rates up. The trade pattern is now pivoting towards the pre-Liberation Day structure in anticipation for a trade deal between the U.S. and China. But the Panama Canal has created new inefficiencies for the fleets. In 2023 and 2024, we all spent significant time analyzing the Panama Canal dynamics. Now with the canal regaining relevance, it's worth revisiting its key aspects driving our markets. The new Panama Canal locks have a daily capacity of around 10 ships in total combined for both directions. VLGCs have over the last years taken up between 2 and 3 of these 10 transit slots. As previously explained, VLGCs are not prioritized through the canal during periods of increased traffic. So when waiting times become excessive or auction fees for available slots are prohibitively high, the alternative is to route vessels around the Cape of Good Hope. And this rerouting increases sailing distances by up to 50% compared with the Panama Canal route to Northeast Asia and has an immediate and material impact on the VLGC market by raising demand for tonnage to offset the longer voyages. Monitoring developments in the Panama Canal will therefore be important in assessing the direction of the VLGC freight rates going forward. The increased demand for shipping capacity is $70,000 per day for loading in the U.S. Gulf. As you can see from the graphs on this page, shipping is currently capturing almost all the profit in moving cargoes from the U.S. Gulf to the Far East, and there is very little room left for profit on the cargo price itself. Driven by increased export volumes and the aforementioned inefficiencies is growing faster than the capacity of the VLGC fleet. And the upcoming export terminal expansions will likely lend support to shipping share of the U.S.-Far East arbitrage. In the LPG value chain, there is a daily arm wrestling going on between terminals, cargo owners, and the shipping market on capturing as much as possible of the price difference between the U.S. and the landed price in Asia. For the time being, the supply-demand balance in the VLGC market is tight and the bargaining power is in the shipping market's favor. On that note, I'd like to remind you how this may impact the Q3 accounting result for Product Services since the change in the mark-to-market valuation of their shipping portfolio is not captured in the P&L, while forward cargo and paper positions are included. Looking ahead on this slide, the U.S. export volumes are forecasted to continue growing on the back of increased production of LPG. The crude oil wells in the Permian Basin are more gaseous than we expected some years ago, and the gas production is forecasted to grow at least twice as much annually as the crude oil production, where lower growth figures are expected in the next five-year period. The growth in U.S. LPG exports is supported by several terminal expansions from now into 2028, and Energy Transfer has already started their LPG exports from their Nederland terminal expansion. Moving over to the Middle East. The export growth is forecasted to accelerate next year with Qatar leading the way as well as Abu Dhabi. Neighboring Saudi Arabia’s Jafurah project is worth keeping an eye on. Although it's further out in time, the size of the LPG volumes made available for exports could potentially add another 5 million to 10 million tonnes of LPG to the growing volumes from the Middle East. On the fleet and new building front, there is little new to report, and the order book counts 111 additional vessels to the current fleet of 409 vessels, where about 15%, equal to 60 ships are older than 20 years. And then it's over to you, Samantha.

Samantha Xu, CFO

Thank you, Kristian, and hello, everyone. Let's dive into our shipping performance. The second quarter of 2025 completed with a TCE of USD 37,300 per calendar day or USD 38,800 per available day, over 94% fleet utilization after deducting technical off-hire and waiting time. The healthy result achieved in a volatile market was a strong testament to our commercial strategy, consistently taking on time charter and FFA for coverage in a strong market to provide support when spot market are under pressure. In Q2, the time charter portfolio was 44% of the total shipping exposure, among which 32% is fixed rate time charter. Looking ahead for Q3, we have fixed 90% of the available fleet days at an average rate of about USD 53,000 per day. For second half '25, we have secured 34% of our portfolio with fixed rate time charter and FFA hedged, respectively, at USD 45,200 and USD 51,700 per day. Our time charter out fleet is estimated to generate a profit of around USD 9 million over our time charter-in fleet. On top of that, the balance of our fixed time charter out portfolio is estimated to generate USD 74 million. On the Product Services side, the business posted a realized gain of USD 6 million for Q2. The positive result reflected a disciplined approach and effective risk management in a volatile quarter. On the unrealized open positions, we reported a $12 million increase in mark-to-market on our cargo position, which was offset by a negative movement in paper position of $3 million. After accounting for other expenses, which mainly comprise general and administrative expenses, Product Services reported a net profit after tax of $6 million for Q2. Net asset value of USD 58 million as at the quarter end. As we mentioned in the previous quarters, the large mark-to-market valuation movement is due to the gradual phase-in of our multiple-year term contract, which reflects value adjustments in times of volatile market. Value is significant. It reflects the delta between the balance sheet dates, and we continue to see fluctuations before the positions are realized. We also want to highlight that due to the nature of its gain and loss are realized in different financial periods and cannot be extrapolated and predicted using its historical performance. Its unrealized position will fluctuate depending on the valuation at the end of the financial period, driving the accounting results up and down drastically. It's important to remember that our trading model looks at creating value combining positions of cargoes, paper and shipping positions. As such, we would like to remind you that the reported net asset value does not include the unrealized physical shipping position of $10 million, which was based on our internal valuation. In light of the strong shipping market outlook, the open cargo contracts and hedging position may, in turn, experience negative mark-to-market valuation changes, and we'll continue to see fluctuations before the positions are realized. In Q2, our average VAR, value at risk was USD 6 million, reflecting a well-balanced trading book of cargoes, shipping, and derivatives after including the increased term contract volume, as mentioned. Going on to our financial highlights. We reported a net profit after tax of USD 43 million, including a profit of $16 million from BW LPG India, a $6 million profit from Product Services. Profit attributable to equity holders of the company was USD 35 million for this quarter, which translates into an earnings per share of $0.23 and an annualized earning yield of 8% when compared against our share price at the end of June. We reported a net leverage ratio of 31% in Q2, a slight decrease from 33% reported at the end of last year. The decrease was due to lease liability reduction of $123 million from the purchase option exercised for BW Kizoku and BW Yushi, partly offset by the net drawdown of some banking facilities. For Q2, the Board declared a dividend of $0.22 per share, which translates to a 110% payout of our quarterly shipping profit. These are also supported by some of the retained dividends from Product Services in 2024. For the period end, our balance sheet reported a shareholder's equity of USD 1.9 billion. The annualized return on equity and capital employed for Q2 were 9% and 8%, respectively. Our Q2 OpEx was $9,000 per day. For the full year '25, we estimate our own fleet operating cash breakeven per day to be $19,100 per day and total fleet operating cash breakeven, including time charter-in vessels to be $21,700 per day. Please note, this is a reduction compared with the cash breakeven of 2024 of $22,800 per day, primarily due to meticulously managed financing, reduced time charter-in vessels, and lower G&A per day. And this is also offset by increased OpEx. All-in cash breakeven, including dry-dock program for the year is estimated to be $24,800. On the liquidity side, at the end of Q2, we maintained a strong position of $708 million, including $287 million in cash and $421 million in undrawn revolving credit facilities. Due to our meticulously managed financing plan, we are able to support our fleet growth and remain a robust and resilient financial position to weather the future. Our repayment profile continues to be sustainable and healthy with major repayments only kicking in after 2029. On the Product Services side, trade finance utilization stood at a moderate level of USD 303 million or 38% of our available credit line, adding sufficient room for future trading needs. Okay. With that, I would like to conclude my update. Thank you for listening, and back to you, Aline.

Aline Anliker, Head of Corporate Communications

Thank you, Samantha, and thank you, Kristian. We would now like to open the call for Q&A for questions. We will start with verbal questions first before moving on to the chat. I see first up Thomas Christiansen.

Unidentified Analyst, Analyst

Can you hear me?

Aline Anliker, Head of Corporate Communications

Yes.

Unidentified Analyst, Analyst

That's really good. I have a question regarding the fleet growth. First of all, if you could put some figures regarding the capacity of the VLG fleet today and the expected 111 vessels going forward? And then my next question is if that is a concern to you, and if it is, how you will mitigate the impact? And if not, why is it not a concern?

Kristian Sorensen, CEO

Thank you, Thomas. To go into detail about every vessel size would take too long. However, these ships are quite standardized, with about 60 in the fleet being Panamaxes that can navigate both the old and new canal lanes and have a capacity of 88,000 cubic meters. The VLGCs are generally standard in design, with some built in '91, some in '93, and others in '88. Looking back to the years before 2010, these ships typically had capacities of about 82,000 to 84,000 cubic meters. This shows how vessel design has evolved over the last decade. Regarding fleet growth in 2027 and 2028, we are aware of the dynamics here. It's essential to consider the increasing LPG volumes from the U.S. and the Middle East. The fleet growth resembles what we experienced from 2022 to 2023, where the market effectively absorbed new vessels due to inefficiencies and volume growth from the U.S. We are definitely aware of this situation. Additionally, as mentioned earlier, we have a time charter portfolio that currently exceeds 30% of our capacity, and if the rates are attractive, we plan to increase that towards 40%. This strategy helps mitigate potential risks, as highlighted at the beginning of our presentation.

Aline Anliker, Head of Corporate Communications

Thomas, you had a follow-up question?

Unidentified Analyst, Analyst

Yes, I did. I mean, a little bit in the same context. I mean, recently, Panama announced that it wouldn't register ships above 15 years. I mean, can you say on a global level, how does that impact the fleet of big gas carriers? And also how would that impact BW business?

Kristian Sorensen, CEO

Sorry, I didn't get that. The Panama has...

Unidentified Analyst, Analyst

The Panama register announced that it will not register ships older than 15 years going forward. How does that impact the global market and your market?

Kristian Sorensen, CEO

Well, then there will be fewer ships going through the Panama Canal. And I guess, more ships have to sail around South Africa to and from Asia, if that is the case.

Unidentified Analyst, Analyst

I think it's more about to register to B2B, to flag the Panama flag going forward that the...

Kristian Sorensen, CEO

Thomas, you disappeared.

Aline Anliker, Head of Corporate Communications

Yes. It looks like we lost him.

Unidentified Analyst, Analyst

Can you hear me now?

Aline Anliker, Head of Corporate Communications

Yes.

Unidentified Analyst, Analyst

Sorry. Yes. I believe it relates to the Panama flag register, which will no longer permit vessels over 15 years old to be registered under the Panama flag. This change will likely exclude some vessels from the global fleet of gas carriers. Do you have any insights on how this will affect the global fleet and your business?

Kristian Sorensen, CEO

I am not certain about the restrictions on flagging ships in Panama. However, if that is the case, I assume there are registries where ships can be flagged. Therefore, it seems unlikely that this will have a significant commercial impact on our markets from my perspective.

Aline Anliker, Head of Corporate Communications

Next up was Clement.

Unidentified Analyst, Analyst

Over the years, you've generated significant shareholder value by assessing the purchase options that were below market prices on time chartered-in vessels with Yushi as the most recent example. Could you remind us whether you have purchase options on any of your remaining time chartered-in vessels?

Kristian Sorensen, CEO

We have one ship planned for later in the decade, but there are no immediate purchase options available. However, we do have some options towards the end of the decade.

Unidentified Analyst, Analyst

Okay. Makes sense. Q3 guidance was a bit, let's say, disappointing relative to recent market trends, especially on the spot market. A portion of that is attributable to your time charter book. But could you please delve a bit into the numbers where a significant portion of this fixed before rates went up?

Kristian Sorensen, CEO

We will need to follow up with you on that for the next quarter because it requires careful calculations to get the number right. However, you are correct that the time charter portfolio, which helped mitigate our losses in the second quarter, is also influencing the guidance for the third quarter. Additionally, we have dry-dockings happening throughout the year. It's also important to consider the timing aspect here, as these voyages typically last three months, and preparing ships to take advantage of rising rates takes time before they are ready to load and benefit from market strength. Therefore, we will provide more details on the split between spot and time charter, as is customary in our earnings presentation.

Unidentified Analyst, Analyst

Makes sense. And final question from me. You had 139 dry-docking days in Q2, followed by 143 and 135 in Q3 and Q4, respectively. How many vessels are expected to go through dry-docking each quarter? And secondly, have you seen any congestion going into dry docks?

Kristian Sorensen, CEO

No congestions, but it's another 6 or 7 ships for the remainder of this year.

Aline Anliker, Head of Corporate Communications

Thank you, Clement. We have John next.

Unidentified Analyst, Analyst

I just have a quick question for you related to the Panama Canal. Can you hear me?

Aline Anliker, Head of Corporate Communications

Yes. Can hear you well, John.

Unidentified Analyst, Analyst

Earlier this year, President Trump focused on working with Panama to reduce freight rates for U.S. flag vessels and naval vessels. Do you believe this is affecting the congestion in the Panama Canal, and do you anticipate this will continue in the future?

Kristian Sorensen, CEO

Not really. The capacity is mainly being absorbed by container ships. We see more ethane carriers on the back of the increased exports of ethane from the U.S., and this is going to accelerate in the coming years as well as other ship types. But we don't so far see any impact from the, let's say, naval ships or the U.S. flagships as you mentioned.

Aline Anliker, Head of Corporate Communications

Thank you, John. Do we have any more questions that you would like to ask verbally before we move on to the chat. If not right now, might just turn to the chat, maybe starting with Andreas first. SGA has come down from Q4 and also Q1. What is driving this? And is the current level a more realistic level going forward?

Kristian Sorensen, CEO

Samantha, I guess, this one is for you. On the G&A side, what typically drives this up, I presume this is the G&A we are referring to, right?

Samantha Xu, CFO

I assume the SGA refers to the G&A. Yes. I think, Andreas, so G&A is not something that we can have a say or can give you a good base for you to estimate because partly of that is that the shipping G&A and the other part is Product Services G&A, which is a reflection of the realized profit as part of the incentive scheme. So that's why you will see fluctuations of G&A as a true-up reflecting the Product Services realized profit as well.

Aline Anliker, Head of Corporate Communications

All right. Andreas had another question related to spot rates being lower. So the question was with the current market dynamics being favorable and comparing relative to peers reporting recently, what is the reason for the achieved spot rates for Q3 being relatively lower for BW LPG?

Kristian Sorensen, CEO

I think our peers need to explain their own numbers. For us, when we provide guidance on the Q3 figures, it includes both spot and time charter activities, so it’s not solely based on spot rates. As I mentioned to Clement earlier, the time charter portfolio is influencing this number in comparison to the pure spot rates in the market. Additionally, factors like positioning, timing, and a relatively busy dry-docking schedule this year will affect our guidance and results moving forward.

Aline Anliker, Head of Corporate Communications

Thank you. We move on to a question from Peter on VLACs. To what extent are the VLACs affecting the VLGC market? And when do you expect to start seeing some scrapping?

Kristian Sorensen, CEO

The VLACs are currently being phased in and are essentially trading like regular VLGCs. The ammonia trade for these vessels hasn't developed yet and likely won't before the 2030s. Therefore, we consider them part of the conventional VLGC fleet in our market outlooks. Regarding scrapping, this usually occurs when the markets are significantly low. Typically, ships exit the conventional trade around 25 years and often move to captive trade or floating storage operations. These ships can last up to 40 years with minimal wear and tear compared to dry cargo vessels. I do not expect any scrapping activity to increase until market conditions change significantly.

Aline Anliker, Head of Corporate Communications

Thank you, Kristian. We have another question in the chat from Olaf on contract extension. Do you have any plans to extend the contracts for the vessels you're currently chartering-in?

Kristian Sorensen, CEO

This is something we will decide on as we get closer to the expiry of these various contracts. So we will inform the market more on how we extend or choose not to extend these contracts as we move into the third and the fourth quarter.

Aline Anliker, Head of Corporate Communications

Thank you. Another question from Chandan on Panama Canal congestion. So he would like to know what is driving the containership congestion increase in Panama Canal, what do you think?

Kristian Sorensen, CEO

I'm not sitting close enough to the container market to give kind of a qualified reply on this. But I suspect that it has something to do with the ongoing trade war, trade negotiations between China and the U.S. But the container traffic in and around the canal is steadily growing simply because also there are more ships in general on the water, fighting for this very limited capacity, which the Panama Canal has to offer.

Aline Anliker, Head of Corporate Communications

And final question for now in the chat before we can open up again verbally as well is from John on the spot rate level. How do you look at the current freight market for VLGCs or spot rates of USD 70,000 a day a sustainable level? Or do you feel there are some downside risk in the near to medium term? All containers into the second half of '25?

Kristian Sorensen, CEO

Good questions. Spot rates are about $70,000 per day in the market. Today, for instance, ships are being booked around that level. So it seems like the market is able to absorb it and that the rates are sustainable. But I wouldn't say that there is any clear indication in driving these rates further up or down. The fundamentals are solid. So it's not like we have changed any views on the fundamentals of the market. But the wildcard is the Panama Canal. And as mentioned, we see the containers are taking up a substantial and increasing part of that capacity over the last couple of weeks. So it seems like this situation, even though it's rapidly changing from one week to the other, it seems like the Panama Canal congestion is going to be playing a role in our market going forward. I think that seems to be the case.

Unidentified Analyst, Analyst

Just real quick. Looking to the fourth quarter, Samantha said, and you showed that you've booked about 30% of your available days to the fourth quarter, I'm assuming that. What's your insight into that fourth quarter?

Kristian Sorensen, CEO

Yes. I think, John, the way to look at this is that regardless of how the market is performing, the spot market is performing, we have these 30-odd percent of all the fleet capacity locked in at $45,000 per day thereabout. And this will obviously have an impact on our time charter equivalent for an income for that quarter. But the remaining 70%, they are exposed to the spot market. So that's something we are happy to keep for the time being, at least, if that kind of answers your question. I think it's time to round it off and say thanks to everyone listening in and for asking good questions. We look forward to seeing you again in November. And in the meantime, we look forward to an exciting market development in the months to come. Thank you, everyone.

Aline Anliker, Head of Corporate Communications

Thank you, Kristian. Thank you, Samantha. This will conclude our call. The call transcript and recording will be available on our website shortly. So thanks a lot for dialing in, and we wish you a very good rest of your day.