StealthGas Inc. Q3 FY2021 Earnings Call

This is Michael Jolliffe, the Board Chairman of StealthGas. Joining me on our call today is our CEO, Harry Vafias; and our Finance Officer, Fenia Sakellaris. Before we commence our presentation, I would like to remind you that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, you could all take a moment to read our disclaimer on Slide 2 of this presentation. Risks are further disclosed in StealthGas filings with the Securities and Exchange Commission. I would also like to point out that all amounts quoted, unless otherwise clarified, are implicitly stated in U.S. dollars. Slide 3 summarizes the highlights of our third quarter 2021 results that we released today. Our key strategic highlight is the successful spin-off completion of our 4 tankers now trading in a separate listed entity called Imperial Petroleum Inc. Indeed, we are excited to have completed this transaction as we strongly believe that the timing was right for the creation of two businesses in distinct sectors of the shipping industry. And that is, of course, LPG carriers and tankers. Focusing on StealthGas performance in the third quarter of this year, this was mainly governed by poor spot activity, increased bunker costs and a high number of commercial idle days. Even though the COVID-19 pandemic is still persisting, we managed to limit our spot exposure compared to the second quarter of this year. However, due to seasonal factors, we did face increased commercial idle time for open vessels seeking new period employment. As a result, our spot revenues were weak, while due to the rise in oil prices, our voyage costs were disproportionately high. Given the completion of two drydocking and the partial completing of another two drydocking within the third quarter, we incurred technical off-hire days. This, in combination with the soft spot performance already discussed, resulted in a lower operational utilization in quarter 3 '21 of 94.1%. However, despite the commercial obstacles faced in this quarter, we managed to take advantage of the improved market noticeable from September onwards and fix several vessels on period charters. We now have only three vessels operating in the spot market. We have 93% of fleet days on period employment up until the end of this year, with total fleet employment days for all subsequent periods generating approximately $66 million, excluding, of course, our JV vessels in contracted revenues. Period coverage for the first quarter of 2022 is as high as 77%, while for the whole of 2022, our employment coverage is 39%. Focusing on our financial performance, and compared to the third quarter of 2020, our revenues came in at $37.5 million, an increase of $400,000 mainly due to a 45% reduction of bareboat chartering activity where revenues are by default, lower than time charter and spot earnings. Revenue potential was offset by the poor earnings generated from spot activity. Our daily time charter equivalent in the third quarter of 2021 dropped by about $100. We had about 60% increase in commercial idle and technical off hire days. As a result of all of the above, we generated in the third quarter of this year, an EBITDA, excluding noncash items of $14.6 million. In terms of net income, StealthGas produced breakeven results. The profitability stemming from both of our joint venture arrangements stood strong and we ended the quarter with an aggregate adjusted net profit of about $1.8 million corresponding to an adjusted EPS of $0.05. Moving on to slide number 4. We wish to explain in simple terms the impact of the tanker spin-off on StealthGas. As said at the beginning of our call, strategically we felt the timing was right for this separation of asset classes to occur as future prospects for both markets look promising. From a financial perspective, the spin-off of our tankers to Imperial Petroleum will lead to a reduction of StealthGas OpEx by about $2.5 million per quarter or $10 million annually, a drop in quarterly depreciation charges by about $2.2 million per quarter or $8.8 million annually and an almost $30 million reduction and that is about 9% of total debt in StealthGas total leverage. However, these tankers depending on their employment type and market cycle, were generating on average 10% to 15% of our total time charter equivalent revenue. Hence, this asset separation will, for the time being, lead to a decline in revenue potential. Placing our focus now on StealthGas third quarter and nine months performance, Slide 5 provides an analysis of our fleet employment. In terms of charter types, and as of December 2021, out of a fleet of 37 LPG operating ships, excluding our seven joint venture vessels, we have four of these on bareboat, 30 on time charters and only three in the swap market. Regardless of the uncertain market, mostly due to COVID-19 pandemic, we have managed to significantly reduce our spot exposure. Since our previous announcements, we successfully concluded nine new charters and charter extensions. We have three vessels concluding their period charters up until the end of 2021, two of which have charter extension options. Our period coverage for the remainder of 2021 is in the order of 93%, while for the first quarter of 2022, the average period coverage is 77%. We have close to $66 million of secured revenues and including our joint venture vessels, total secured revenues increase to about $87 million. In Slide 6 I would like to provide an update as to our two joint venture performances. Our first joint venture, which comprises in its majority of small LPG ships currently has all vessels on time charter. Since our last announcement, we managed to fix the Gas Shuriken on a 14-month time charter, extend the time charter for the Eco Nebula for an additional six months and fix the Eco Lucidity on a time charter with a six-month minimum duration. Our second joint venture, comprising of two medium gas carrier vessels is both under time charter contracts, thus yielding steady cash flows. Our joint venture arrangements combined have a cash base of about $40 million. In terms of our fleet geography presented in Slide 7, our company focuses on regional trade and local distribution of gas. This graph is a snapshot of the positioning of our LPG vessels excluding our joint venture vessels as of November 30, 2021. Currently, 18 vessels of the LPG fleet trade in Europe, 12 vessels in the Middle and the Far East, and two vessels are now currently trading in South America and five in Africa. I will now turn the call over to Fenia Sakellaris, our Financial Director for our financial performance. Thank you.

Thank you, Mr. Jolliffe. And good morning to everyone. I will discuss our financial performance for the third quarter and nine months of 2021. Indeed, as we mentioned at the beginning of our call, our biggest obstacle in this third quarter was commercial off-hire days, coupled with a sharp rise in bunker costs. These factors led to low spot revenues, thus undermining overall profitability. Market improvements notable from September onwards allowed us to lock almost all of our fleet on time charters, hence significantly minimizing spot exposure and on higher potential. Let us move on to Slide 8, where we see the income statement for the third quarter of 2021 against the same period of the previous year. Voyage revenues came in at $37.5 million, marking a $400,000 increase compared to the same period of last year. This increase is attributed to four fewer vessels on bareboat, now operating either spot or on a time charter contract offset by the fact that 25% of quarterly spot days were in essence commercial off-hire. In terms of off-hire this quarter, we faced waiting time of vessels seeking new period deployment. But most importantly, we had one of our product tankers and one similar vessel being idle for the majority of the quarter. As discussed earlier in our call, almost all of the vessels that met an idle time within the third quarter of 2021 are now operating under time charter contracts. In terms of voyage costs, this amounted to $4.5 million, marking a $700,000 increase compared to Q3 '20 despite the decline in number of spot days by about 30%. Key driver for this rise in the daily bunker cost is the sharp rise in daily bunker costs by 55%. Based on all of the above, our net revenues for the period went in the order of $33 million. Running costs at $15.5 million marked about a 12% increase compared to Q3 '20, mostly attributed to four fewer vessels on bareboat for which we now incur operating costs along with a $250 rise in our daily crew cost, mainly crew medical and crew flight expenses attributed to the COVID-19 pandemic. Drydocking charges amounted to $1.7 million and corresponded to the drydocking of four small LPG vessels, two of which faced prolonged time in the docking yards as they also underwent ballast water system installation. Based on the above factors, our EBITDA, excluding noncash items, such as impairment came in at $14.6 million. Interest and finance costs marked close to a $400,000 increase as $1 million of this quarter financial cost corresponded to swap interest as well as arrangement and refinancing costs. With regards to income from our joint ventures, both of our JVs ended the quarter with an operating profit as the majority of the vessels were under the time charter employment at improved rates. As a result of all the points analyzed above, we ended the third quarter of 2021 with a net income of excluding noncash items of $1.8 million corresponding to an EPS of $0.05. Proceeding to Slide 9, we will briefly comment on our performance indicator for the period examined. Our operational utilization for Q3 '21 was quite low in the order of 94.1%, with technical off-hire due to heavy diagnostic scheduling and commercial off-hire marked a 50% increase compared to the same period of last year. With regards to our daily time charter equivalent in Q3 '21, daily TCE marked a gradual decline over the quarters. In Q2 '21, we noticed an obvious increase, which despite seasonal factors and poor spot performance faced in this quarter, we managed to preserve to a great extent. Looking at our balance sheet in Slide 10. Our free cash balance increased and is now in the order of $43 million, while to date, we have no further direct capital expenditure. Our gearing ratio has further declined to 36.6%, while taking into account our free cash and net debt-to-asset ratios as low as 32%. This year, we have been very active in investment refinancing, as within the first 9 months of 2021 we've completed the refinancing of 14 vessels, thus reducing our average annual finance cost that is LIBOR plus margin by 100 basis points. We will further refinance another 7 vessels within the first quarter of 2022. And therefore, we will have no value obligation for the next 2 years. I will now hand you over to our CEO, Mr. Harry Vafias, who will discuss market and company outlook.

Proceeding on Slide 11. During Q3 '21, and in spite of the customary seasonal softness, rents improved mostly towards the end of the quarter. Looking at the small LPG trade West of Suez, the spot market experienced the usual seasonal downturn during the summer months, forcing owners to experience idle time between voyages. We've also seen a few vessels leaving the area heading east in the last couple of months, which has further aided the balance due to the limited availability of spot owners noticeable since September and reasonable freight rates, charters have been increasing their time charter exposure, which has been positive for the owners. With the expected winter seasonal increase in cargoes, owners might witness further rate improvement and enjoy an even more balanced market. In the East of Suez, the spot market in Asia since September is tight and lacking available tonnage. So there are cargoes in the market that are finally not shipped due to the lack of tonnage. Naturally, this has had a positive effect on the freight rates over this period. The increasingly tighter spot market has resulted in an active time charter market that charters have been actively looking for forward shipping covers to move their contract cargoes and get an advantage in the tight spot market. We have seen numerous both new time charters fixed and extensions on existing time charters for periods from three months up to one year. Focusing on our market fundamentals, the small LPG pressure segment has substantial old tonnage. 31% of the fleet is currently above 20 years of age, which is a driving force behind the increased scrapping activity. Since the beginning of this year, we have witnessed the demolition of 7 small pressurized vessels. And indeed, we are witnessing a heightened demolition activity. Aspiration orders, there are 16 vessels on order, 7 to be built in Japan and Korea and 9 to be built in China and to be delivered until the end of 2023. It's important, however, to point out that 7 older LPG vessels equivalent to 45% of the current order book were sold for demolition within the first 9 months of 2021. Slide 12 presents our company's share performance since the beginning of the year. During this period, we see that StealthGas share price has increased by almost 6% and has been trending upwards in periods of result announcements. It's also interesting to note that following our tanker spin-off, the average trading volume has risen by about 85%. Our stock still trades at a discount to our NAV. In Slide 13, we are outlining the key variables that will affect our performance in the quarters ahead. Given the market turmoil, especially due to the COVID-19 pandemic, it's quite difficult to make any firm predictions. We have visualized a few key points that may assist our financial performance in the upcoming quarters. First point is that we have a total period coverage of about $87 million, a total cash base of about $50 million, sufficient liquidity in both our JV arrangement, and solid period coverage with minimum spot exposure. Moreover, we remain under a low LIBOR rate environment. Hence, our interest costs will remain low for the short term. On the downside, we have seven scheduled drydockings for 2022 for which we face increased costs due to related restrictions mentioned earlier. And while the enduring pandemic might push the global economy into another downturn, concluding our presentation in spite of the global challenges we're all facing, we believe that StealthGas will perform well provided we do not witness another global economic slowdown due to the new COVID-19 variants like the Omicron. At this stage, our Board Chairman will summarize our concluding remarks for the period examined.

Thank you, Harry. We are pleased with the successful completion of our tanker spin-off to a newly listed entity called Imperial Petroleum. With regards to StealthGas, the separation of the 4 tankers will give the opportunity to focus exclusively on the broader LPG market, which has always been our core business. The company owns predominantly small LPGs for which rates are less volatile along with large LPG vessels facing more volatile freight rates, thus giving us the capability to increase revenue dynamics. Given the different nature of risk that tankers and gas carriers bear, the strategic move of separating these two asset classes will give shareholders the flexibility to adjust their holdings according to the sector in which they want to invest and the timing in the cycle. Focusing on gas results in the third quarter of 2021, these were primarily underpinned by the weak spot market and particularly the increased commercial off-hire days. As the market improved from September onwards, we took the opportunity to fix all of our fleet on period charters and soundly positioned ourselves for the upcoming quarters. Regardless of the LPG market improvement, evident these last couple of months, the biggest global concern is still the COVID-19 pandemic. New variants might potentially heavily impact the market in the short term. And that's why we have chosen to be defensive with low leverage and having only a few ships operating in the swap market. We have now reached the end of our presentation, and we would like to open the floor for your questions. So operator, please open the floor. Thank you.

Ladies and gentlemen, we will now begin the question-and-answer session. Okay, we will now take our first question from Randy Giveans from Jefferies. Your line is now open.

How is it going?

Hi, Randy.

I guess first question being the biggest news here is just the spin-off. Can you discuss that decision to spin-off those tanker assets over simply selling the assets, putting the cash to work by repaying debt and then more importantly, repurchasing shares.

Yes, Randy. I mean, we've discussed this matter before. A lot of shareholders were asking why do we have tankers and it's not your core business. And we are better off focusing on all the different sub-segments of the LPG market. So we thought spinning this company out into a different company is a nice way of having StealthGas as a pure LPG company focusing on small handy and medium-sized gas carriers at least for now. And at the same time, giving a nice dividend to our shareholders. Selling the ships was not the best idea because selling the ships would have meant that we are selling the ships at the bottom of the market, which doesn't make any sense. On top of that, because you mentioned that, as you know, StealthGas has very low debt levels. So it wouldn't make a big difference if we reduce the debt a bit further. Our debt levels are very, very low, despite our rapid expansion in the last few years. Buying back stock, you know we've done it before. We've done a tender offer before in the beginning of COVID. And obviously, we will do more, but the Board will not allow us for as long as we have COVID affecting our results. So we need to see some more clarity on the COVID matters. And hopefully, disappearance of this pandemic before we sit down and ask for a further allowance on share buybacks.

The tankers are currently seeing very low rates and selling at the bottom, but asset values have not decreased significantly since the start of the year. We prefer not to sell at this low capacity. However, the share price in relation to your net asset value appears heavily discounted, especially with a strong balance sheet. It's uncertain when COVID will come to an end—perhaps in five years or longer. Separately, after the spin-off, are you planning to seek additional growth in the LPG sector, or are you satisfied with your current fleet? For instance, you still have some larger semi-ref vessels that could be considered noncore compared to the rest of your fleet; might those be candidates for spin-off or sale?

No, the opposite. These are core assets, and we will focus more on these handy, medium-sized gas ships.

Got it. Okay. In terms of the market, it's clearly tightening. Can you provide some insight on the increase in your new charters compared to previous ones? Have those rates improved? Specifically, what is the average rate for those seven charters that last 5 to 12 months?

Yeah. I mean if we give you a number, it will make it more difficult because as we are talking about different sizes of ships is not easily distinguishable. I would say that for 3,500 cubic meter vessels, you would be safe assuming a 0% increase on 5,000 vessels out, you would be safe to assume a 5% increase on 7,500 and the bigger you go, you would be safe to assume a 10% increase.

Okay. Can you give me the nominal numbers instead of just the increase? Like what does that 10% equate to, the 10% increase?

On the 7,500?

Yeah.

It would mean around $320,000 a month.

Okay. Great. And then on the 5,000?

It would mean $295.

295. And then lastly, on 3,500.

There is no increase.

And what would that be, though, on a monthly basis?

That would mean $225.

225. Great. That helps with the model.

Just to clarify the problem Randy, is not the income. The market is tightening, and obviously, this pushes the rates up. The problem is the increased cost due to COVID because of extra quarantines, increased crew costs, increased crew traveling, these kinds of things. This is the problem right now, not so much the income side.

No. I think that's fair. But I think the cost should come under control here in the next few months. The income, especially with all the charters, you have a lot more visibility there. And again, if you wait for COVID to end, your stock price will reach $6. I don't know if waiting till the end to repurchase shares is the best strategy, but I'll leave that for you and the Board.

Thank you.

Okay. We will now take our next question, and it comes from the line of Lance Gad from Gad family LLP. Your line is now open.

Yes. Good morning. The prospectus for Imperial Petroleum has a statement that the book value is substantially higher than market value. I was wondering if you could clarify substantially, if you could give us an idea as to what the market value of the 4 tankers are?

Yes. As you know, we can't provide numbers unless they are included in the F1. However, as mentioned in the previous question, selling the ships would result in a book value loss, and the debt reduction would be minimal. This is why we believe spinning them off is a better option, which will still lead to a book loss but allows us to maintain control of the ships. Current shareholders will receive shares as a dividend, which they can either hold or sell based on their views on the tanker market. In Q4, StealthGas will record this loss, and while the exact numbers will be revealed later, it is certainly not insignificant.

It's well known that the market values of ships can be a topic of discussion for a professional operator. It's not like we can't talk about what's publicly available information. You've mentioned significantly lower values in the prospectus. Since this is a public conference call, I don't see any reason we can't discuss these values. We've mentioned NAV in previous calls and how our stock was trading at considerable discounts, and you've even provided figures. So I don't understand why we can't clarify what the substantial differences are or what substantial means.

Yeah. I cannot answer that question as I'm not a lawyer, I'll have to check with our U.S. legal team and this type of information can be given or not.

Okay. I've been a lawyer for 50 years. I don't see any problem with it, but check with your counsel. I mean...

Yes, if it allowed, it's allowed.

One other question. Generally, with spin-offs, my background is in tax law. Typically, spin-offs occur in preparation for a sale or a merger acquisition. Was that a motivation for this spin-off at all?

Again, I think you're asking things which are not in the public domain. And if we tell you, you're going to be considered an insider. So I guess we cannot answer that question.

Right. But I'm not sure I agree with that, as anyone can access this conference call in the public domain. Anyway, okay.

Nothing to be said then, sorry, my good friend.

I understand. Please check with your counsel.

Yes, please send an email so that we don't forget it. Please send us an email and we'll come back to you.

Yes, what is the address to use for an email?

It's on our announcement. It's all in all our announcements, you can find it there.

I previously encountered an issue because the common stock of Imperial Petroleum has fluctuated between $3 and $7, representing a range of 100%. One reason for this is the assertion that the assets are worth significantly less than their book value, and there is no guidance on their actual worth. As a result, shareholders have received dividends, but we lack clarity on the value of this distribution. Therefore, the market...

Exactly. But, you are asking the same thing twice.

Right. I understand.

Please send us an email so that we can check if we can disclose information. And if we can, we'll be delighted to give it to you.

Good.

I think there are no other questions. So we would like to thank you for joining us at our conference call today and for your interest and trust in our company. We look forward to having you with us again for our fourth quarter 2021 results in February 2022. Thank you.