Dorian Lpg Ltd. Q3 FY2021 Earnings Call

Greetings and welcome to the Dorian LPG Third Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. Additionally, a live audio webcast of today's conference call is available on Dorian LPG's website. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young, please go ahead.

Thank you, Rob. Good morning, everyone, and thank you all for joining us for our third quarter 2021 results conference call. With me today are John Hadjipateras, Chairman, President, and CEO of Dorian LPG Limited; John Lycouris, Chief Executive Officer of Dorian LPG, USA; and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call and the replay will be available through February 9, 2021. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe, or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks, uncertainties, and other factors, as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended December 31, 2020, that were filed this morning. In addition, please refer to our previous filings where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. With that, I'll turn over the call to John Hadjipateras.

Thank you, Ted. Good morning from Connecticut where John, Ted, and I are speaking to you from different locations, and from Copenhagen where Tim Hansen has joined us. I appreciate all of you joining us this morning to discuss our third quarter results. Today we are happy to announce a $100 million self-tender offer. Having considered various options, our Board decided the tender offer presents a very compelling way to return cash to our shareholders. It accomplishes our main goal of making a meaningful distribution, while at the same time maximizing financial and optional value for all our shareholders. We believe that investors will value the optionality of our approach as those who wish to receive cash and sell as much of their holdings as fits their needs, and those who wish to increase their ownership have that flexibility as well. Through continued cooperation with our customers, various regulatory bodies, and local governments, we have been performing our work remotely when possible during the ongoing pandemic. Digitalization and remote monitoring have enhanced efficiency, offsetting some of the higher costs associated with COVID-19, while reducing potential exposure to the disease. Both through these efforts, our seafarers and shore staff remain safe and able to perform their duties as we continue to focus on providing our customers with safe, reliable, and trouble-free transportation. The financial results for the quarter are even better than we expected on last quarter's call regarding the potential effects of the combination of large amounts of U.S. supply coming online, a heavy drydocking schedule for the global fleet, and the potential impact of a cold Asian winter could have on the market. While rates have fallen dramatically from a busy peak, the market environment remains promising and we think that it is sustainable for some time. We expect the drydocking and maintenance on the global fleet will likely have a stronger impact this year than last year. A wave of U.S. infrastructure came online during 2020 that was weighted towards the end of the year, introducing a large amount of spare export capacity and product supply to the market. At the same time, continued production cuts from OPEC plus are decreasing supply out of the Middle East, leaving only U.S. product to meet global demand. U.S. propane exports have returned to China, where our new propane dehydrogenation plants continue to start up. NGL and other export markets continue to grow. We continue to be believers in the cargo within our fleet transports. LPG is a clean and flexible fuel amongst those that will bridge the potential transition to alternative energy. Next, Ted Young will provide an analysis of our quarterly financials, followed by Tim Hansen on the markets, and John Lycouris with an update on our environmental and operational activities. Ted, the mic is yours.

Thanks, John. My comments today will focus on our financial position, results, liquidity, and some commentary on the self-tender offer announced today. At December 31, 2020, we had $133.6 million of free cash. As of Friday, January 29, our cash balance stood at $149.3 million. The increase since year-end is reflected in the strong chartering results we are currently seeing. Turning briefly to the tender. At the tender price of $13.50 per share and based on the 49.9 million shares currently outstanding, we would be repurchasing 7.4 million shares or about 14.8% of the shares currently outstanding. Based on charters booked and our expected expenditures, we currently anticipate that we will generate roughly $50 million to $60 million of free cash flow this quarter, including the cash already generated in January. Thus, even after accounting for the $100 million buyback, we would maintain a cash balance that is consistent with our approach to balance sheet management without any borrowings. In addition, the buyback is accretive to shareholders' equity per share, a key valuation metric for the investment community. Overall, we view this transaction as an efficient and highly accretive way to return capital to our shareholders. Further details on the mechanics and logistics will be available later today via the SEC website. For the discussion of our third-quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. Turning to our third quarter chartering results, we achieved total utilization of 96.2% for the quarter, with the daily Time Charter Equivalent revenue over operating days defined in our filings of $42,298, yielding utilization adjusted TCE at about $40,690. This quarter saw steady month-over-month improvements in rates and utilization. Spot TCE per available day, which reflects our portion of the net profits of the Helios Pool for the quarter, was about $41,754. Overall, the Helios Pool reported a spot TCE, including COAs, of approximately $45,237 per available day. Our daily operational expenses for the quarter were $9,189, which, excluding amounts expensed for drydockings, were $9,487 including those costs. Sequentially, operational expenses were down, reflecting overall strong cost containment. Our time charter-in expense remained stable at $4.4 million. Total general and administrative expenses for the quarter were $5.5 million; in cash G&A, that is, excluding non-cash compensation expense, was about $5 million, which was down about 10% from the preceding quarter. We continue to look for efficiencies in our cost structure. Our reported adjusted EBITDA for the quarter was $60.1 million. Similar to our chartering results, we saw steady month-over-month increases in EBITDA this quarter. Our cash interest expense for the quarter was $6 million, representing a $900,000 reduction from the last quarter. We blended and extended our $200 million notional swap, which resulted in our extending its maturity by three years to 2025 and reducing the fixed interest rate from 1.933% to 1.091%. We also did a similar transaction on our $50 million swap, which decreased the rate from just over 2% to 1.145%. Overall, we continue to benefit from our hedging policy and the favorable pricing of our Japanese financing, leaving us with a current interest cost fixed hedged and a small floating piece of 3.71%. Our realized and unrealized gain loss on derivatives also includes the effect of our freight forward agreements portfolio. We believe it is useful to provide some additional insight to give a more complete picture of our financial condition. As of Monday, February 1, the pool had roughly $45.7 million of cash on hand. We feel that our liquidity and capital structure has positioned us well for any rate environment, and we believe that this allows our company to make capital allocations, such as the one announced this morning, from a position of strength. Our Board's decision to begin a $100 million self-tender underscores its commitment to shareholder value creation and aggressively returning cash to shareholders when appropriate. Assuming successful completion of this tender offer, we will have repurchased roughly 16.3 million shares, representing over 28% of the shares outstanding following our IPO in 2014. We will continue to remain interested in accretive growth opportunities that meet our risk-reward criteria as well. We will be prudent in deploying cash, but our financial position allows us to act quickly on meaningful opportunities as they arise. With that, I'll pass it over to Tim Hansen.

Thank you, John. For the calendar year 2020, the global seaborne LPG volumes fell by over 2% year-on-year to 106.8 million tons. Quarter volumes totaled 27 million tons, a less than 1% decrease versus the same quarter in 2019. U.S. export growth continues to counterbalance the Middle East volumes that sold about 4 million tons. Meanwhile, in 2020, American export volumes increased by 16% to 46 million tons compared to only 39.7 million tons last year. For the second quarter in a row, U.S. export volumes reached record levels. Year-on-year, export volumes in the fourth quarter grew by 18.8% to 12.9 million metric tons. American export volumes hit a monthly record of 4.4 million tons in October, surpassed again in December with 4.5 million metric tons. Due to the increase in demand from the Asian winter, new export capacity came online in December with ETP's expansions of the Nederland terminal being completed. The Baltic Market Index averaged $76 per metric ton in the last quarter. Rates increased as the quarter progressed, rising from $55 per ton at the beginning of the quarter to over $100 per ton for most of December. Several contributors, in fact, just lifted last quarter's raised rates. Delays in the Panama Canal caused waiting times to increase dramatically during the quarter due to heavy container traffic and an overall increase in transits. COVID-related inefficiencies in U.S. Gulf and Asian ports due to winter weather further increased the utilization of the fleet, in addition to an elevated number of ships undergoing drydock. At the same time, global LPG demand increased substantially, particularly from Asia, with unusually cold weather leading to a relative shortage of gas in the region for residential and commercial purposes. With high LNG prices and additional LNG coming from the U.S., we've seen a bloom in the LNG market, leading to the substitution of LNG with LPG in industrial applications. With resilient U.S. LPG production and low inventory levels until Christmas, the value price competition opened the West-East arbitrage in mid-November, which remained open for the remainder of the quarter. The opened arbitrage ports East make traditional investment-based players and cargoes more viable, while margins were more favorable than cracker economics in Europe against naphtha, creating additional ton miles. On the supply side, concerns over the U.S. NGL production volumes remain. Propane storage levels are tracking well below both last year's levels and the five-month average. However, we continue to believe the U.S. will supply global demand that has been left by lower Middle East production due to significant cuts. Saudi Arabia has agreed to absorb many of the new OPEC cuts in favor of Russia for February and March. This could remove approximately 200,000 tons of LPG from the market for two months. Although rates have come down over the past weeks due to increased U.S. prices, which have closed arbitrage and resulted in a few U.S. cargo cancellations, prices are adjusting and looking more positive, with market activity picking up again. High utilization of the Panama Canal should continue, resulting in sustained delays and more frequent routes around the Cape of Good Hope. We remain optimistic looking into 2021. With that, I'll pass it on to John for the environmental and fleet update.

Thank you, Tim. In the last calendar quarter of 2020, we completed drydocking and the third special survey on our vessel Captain John NP. In the past couple of weeks in January, we completed the drydocking and first pressure survey on our vessel Commodore. We plan to fit two ships with scrubbers during this quarter, which will complete our announced scrubber program and carry out those vessels' five-year drydocking cycles. We expect outlays of $6 million to $8 million over the next couple of quarters. During 2020, coal prices saw extreme volatility, as have bunker fuel prices. The high-sulfur fuel oil price spread, however, has steadily priced at a 20% to 25% premium above that of heavy fuel oil bunker fuel, even though, in absolute dollars, this spread ranged from a high of $300 per metric ton down to $50 per metric ton. It currently stands at about $100 per metric ton. As we look back to the IMO 2020 launch last year, we are now very confident that the decision to install hybrid scrubbers was justified, both economically and environmentally. Our fleet of hybrid scrubber vessels overall averaged 0.04% to 0.07% sulfur oxides emissions, or SOx emissions, against the blended and problematic fuel oils or 0.5% and 0.1% sulfur shipping for the year. As we have previously reported, scrubbers also reduce particulate matter and black carbon emissions by 80%, keeping in line with our environmental sustainability goals. We continue to invest in our vessels' performance and efficiency in achieving reduced emissions and lowering operating costs. An improved environmental footprint is very important to Dorian LPG, and we hope to continue with additional energy efficiency technologies for our vessels, including dual fuel batteries and fuel cells. Dorian has been at the forefront of LPG dual-fuel technology since 2013 and 2014 when the first new building vessels were ordered, and we have followed that development closely since. After the most recent LPG dual-fuel retrofits achieve regular service and when the first new building dual-fuel vessels deliver from the shipyards, we hope to revisit this opportunity and consider our options. Given the age profile of the LGC fleet, it would have been a significant number of vessels for drydocking that would have removed from trading in the last year, but this year we expect to see even stronger trends. According to some brokers, as many as 90 ships could opt for drydocking maintenance this year, which would be almost one-third of the current global fleet. With the strong freight rate environment in the second half of last year and increasing COVID-19 disruptions at the yards, many owners deferred maintenance, which is now pushed into 2021. Considering LPG dual-fuel engine retrofits, ballast water treatment installations, and some scrubber retrofits, more ships could be out of the global fleet this year for longer periods than last year. The current fleet order book remains at reasonable levels and supports the VLGC market for the medium term, currently standing at 39 vessels or about 13% of the fleet, with about 21 vessels expected in 2021, 13 vessels in 2022, and nine in 2023. There are currently 30 vessels in the fleet that are 25 years or older, which equates to about 10% of the current fleet. And with that, I will pass it over to John Hadjipateras.

There we are. Thank you, John. Rob, do we have any questions?

Thank you. With the prepared remarks completed, we'll now open the line for questions. And our first question comes from the line of Sean Morgan with Evercore ISI. Please proceed with your questions.

So in light of this large buyback and return of capital to shareholders, I think you said $50 million reauthorized on the buyback authorization for the rest of the year, at least through the rest of the calendar year. How do you think about how aggressive you will be in terms of timing of using that and to what extent you using will be just dependent on the path of the share price and sort of how do you think about that reauthorization of the buyback in light of the change in circumstances, with this big chunk of cash being used right up front for this tender offer?

Thanks for the question, Sean. It remains as an authorization, and it will be evaluated, as before, taking all factors into consideration including the price, the success of the tender, and the market conditions.

Okay. And then, I got one here for Tim, regarding the PEMEC now. You talked about this utilization spike between the LPG vessels, LNG vessels, and containerships, do we see this as kind of a seasonal uptick or a one-time event, or is this sort of a new normal where all three of these vessel categories are using the Panama Canal to an extent that it's going to become capacity-constrained on an ongoing basis?

I think there is some seasonality in it, but especially with container ships, we have seen an increase throughout the year. More container ships are being fitted for the Panama Canal and more lines are going in that direction. So I think that’s more on a continuous basis. Dry cargo has increased quite substantially, which we expect to be somewhat seasonal due to the cold winter in Asia and the lack of types of coal origins in South America. LNG also has some seasonality, but we have seen an increase in transit throughout the year, especially this cold spell in Asia has drawn in a lot more LNG in that direction. Overall, we believe that there will be more delays in the Panama Canal but there will also be some seasonal variations.

Okay. And so in light of that, as you're managing the Dorian fleet, has that resulted in Dorian just waiting at the Panama Canal longer along with a lot of other global players or are you actually having to send ships around the longer route around Africa from the U.S. Gulf to Asia?

We are sending ships around the longer route. As the delays in the Panama Canal have shown, we've had waiting times of 12 to 14 days. The economics of going around justify presenting some ships around the longer route from the north part of Asia. We can say, we have some Panama slots booked throughout the year. However, the regulations for pre-booking of Panama slots changed, and it is no longer possible for LPG carriers to pre-book slots from 2021 onwards. So that will change again the dynamics of the Panama Canal transits in the future.

Yes, Sean. That obviously has a positive effect on ton-mile.

The next question is from the line of Omar Nokta with Clarksons Platou. Please proceed with your questions.

Hi, hope you're able to handle the snow okay. I just wanted to ask about the $100 million self-tender offer. It's clearly the most aggressive shareholder reward program you guys have done since being public. Given the earnings momentum and clearly the valuation, it makes a lot of sense. How do you feel about reinvesting in the business, considering that the market has become tight over the past year or two? Do you feel that the market is short on vessels? Do you think it makes sense to grow or are you more content with return on capital?

Omar, we are not excluding growth, but we are focused first on returns. At this stage, it is much more compelling to return money to our shareholders than it is to acquire ships.

Yes, that’s fair. The spot market has been robust, although we haven’t really seen much time charter activity. How do you see the period market opening up? In the past, you've been more willing to put vessels on contract, but we haven't really seen that in the past several quarters. How would you describe the period market right now?

I think we have seen some activity in October and November for short-term time charters, so one to two years. However, for longer-term deals, activity has been very limited. People are looking ahead at what types of vessels will meet future regulations. However, in the past, we would see quite a lot of renewals in our ships which come into renewal at that time of year.

Thank you. Regarding U.S. exports, you touched on this a bit in the opening comments. I'm trying to think about the situation this past summer when the VLGC market came to life. Could you see a similar situation arising where a loss of Middle East cargoes might be replaced with U.S. exports?

Tim, do you want to address that?

Yes, I think we could see something similar where the demand in the East is strong and vessels are seeking cargoes. When we see export costs out of the Middle East, we expect them to be replaced by U.S. exports. We also saw this earlier in the year, where lacking tons led to tons that could go into naphtha cracking being redirected to other demand in Asia. We expect the trends from Qatar and Saudi to be replaced by U.S. tons, which should yield more ton-mile.

Yes, it would be interesting to see, thank you.

I think the dynamic of the increased ton-mile from that and from the canal has been very helpful. We've seen continued volatility; we are thankful for it because even though it went down to breakeven early last year, it bought us up to wonderful returns at the end of the year. Now the markets are rolling off again, but I think, on average, we are looking at better prospects than we anticipated last year.

Yes, I agree with that definitely. And maybe John, just one final question. How do you feel about investing in newbuildings today? Are there customers requesting that of you?

No, we haven't seen that yet. I do think the newbuilding market is reaching an inflection point. I believe prices have been either sliding or steady for a long time, and the next move will be up, but I don't see any rush to do anything, certainly not for us. We continue to prioritize returning capital to shareholders at the appropriate stock prices. We believe the best course of action is what we've announced today.

Thank you. At this time, we've reached the end of time for questions. And I will turn the call back to management for closing remarks.

Thank you very much. My closing remark is to thank you all for joining us. I hope you will join us again next quarter, and we have even better news for you then. Have a great day.

Thank you, everyone. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.