Dorian Lpg Ltd. Q1 FY2022 Earnings Call

Greetings, and welcome to the Dorian LPG First Quarter 2022 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, which is www.dorianlpg.com.

Thanks, John. Good morning, everyone, and thank you all for joining us for our first quarter 2022 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Ltd; John Lycouris, Chief Executive Officer of Dorian LPG USA; Tim Hansen, Chief Commercial Officer. As a reminder, this conference call, webcast and a replay of this call will be available through August 11, 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 and 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 June 30, 2021, that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. With that, I'll turn it over to John Hadjipateras.

Thanks, Ted. Good morning, everybody. Thank you for joining us this morning to discuss our first quarter financial year 2022 results. Ted, John and I are speaking from Stanford, Tim Hansen from Copenhagen. We had a healthy market this past quarter. North American exports rebounded swiftly going into April and May as winter storms abated in the Gulf, and U.S. LPG production and export capacity once again proved resilient. This swift increase resulted in temporary ship shortages in the West and pushed rates up. The Baltic began the quarter on an upward trend reaching a peak rate of $64.57 in mid-May before the increase in bunker prices started to put some pressure on earnings. Rates remained healthy for the rest of the quarter, and we are optimistic about market strength going into fall and winter. On the operational side, our shoreside staff have worked very hard to continue to facilitate safe crew changes around the world despite the continuous and new logistical challenges due to the COVID pandemic. Our drydocking and scrubber upgrade program is now complete. The last two ships left the shipyards in late May and early June. In total, we have installed 10 scrubber systems since the summer of 2019. Twelve of our 22 owned ships are now capable of operating with hybrid scrubbers, enhancing their earning potential and commercial flexibility. In June, after the MEPC 76 meeting, the IMO announced their near-term carbon and greenhouse gas emissions reduction measures. We have been planning for these measures and are now in the late stages of our analyses of various emissions-reducing technologies. We plan to compare these add-on technologies to the environmental and financial considerations around converting some of our vessels to burn LPG as fuel. In calendar year 2020, efforts to reduce emissions also achieved about $1.5 million in fuel savings, and we continue to enhance those efforts with new software and technologies. We have classified the Captain Markos NL, which is debt-free, as available for sale, and we will be reporting future developments in due course. The past quarter saw commodity market fundamentals stabilize as crude prices rose to double their averages in the second quarter of 2020. LPG demand is consequently also rising, especially in the East. Global exports were up by about 1.5 million tons this quarter, with the largest increases coming from Houston and the rest of the U.S. As we come out of summer, we expect exports from both the U.S. and the Middle East to increase as OPEC implements production cut reversals in August and winter demand returns. Our outlook for the second half of 2021 remains optimistic. Production forecasts continue to be revised higher, and demand continues to ramp up driven by the petrochemical sector. The Panama Canal has seen increasing congestion from container and LNG ships, and this may push more VLGCs around to keep increasing ton mile demand. We expect this trend to continue and be amplified when new emission regulations come into force. Continuing our commitment to returning shareholder capital, the Board of Directors has declared a cash dividend of $1 per share of the company's common stock, returning over $40 million of capital to shareholders. We have now returned over $260 million since our IPO in 2014. This announcement does not reflect the commencement of a regular dividend, but we have responded to clear feedback from our investors that they wish to see dividends alongside stock buybacks, and we will continue to evaluate both. I'd like to point out that the declaration of a dividend in no way changes our view that our stock is still trading at a meaningful discount to our intrinsic value. I will now pass the line over to Tim to further brief you. Thank you.

Thank you, John. Good day, everyone. To begin with some macro factors, crude oil prices rose throughout the quarter with Brent averaging around $69 per barrel compared to just $32 barrels in Q2 of 2020. The prices of propane and butane consequently rose. However, the price relative to crude oil dropped from the previous quarter across all major regions. LPG, therefore, remained a desirable commodity. As a result, global seaborne LPG supply rose an estimated 1.5 million tons in Q2 '21 from the previous quarter and a 6% increase from the same period of 2020. The majority of the rise was from the U.S., where exports reached an average of 4.4 million tons per month, rebounding swiftly after the polar storm in February, which demonstrated the robustness of LPG production and export capacity in North America. Middle East LPG seaborne supply remained relatively constant with production cuts and Iranian sanctions remaining in place through the quarter. Imports into major consumption regions rose, particularly into China, where LPG imports increased from around 5.7 million tons in Q1 '21 to 6.5 million tons in Q2 '21. This is after two new PDH plants began operating in Q1 and a new steam cracker utilizing propane as a feedstock started production in April-May of '21. The imports for feedstock utilized illustrate the consumption of LPG as a feedstock for petrochemicals, which increased in Q2 '21 compared to Q1 '21, where propane was favored as a feedstock for the production of ethylene and other. The propane-naphtha spread in Northwest Europe widened to $90 on average in Q2 compared to an average of $23 in Q1 '21. The demand for LPG transport translated to a shipping market characterized by monthly volatility, comparable quarterly freight markets to the first quarter. The Baltic VLGC index averaged $53 in the second calendar quarter of '21, only $2 below the performance of the Baltic Index during the first quarter of '21. The BLPG1, the Ras Tanura-Chiba route made gains in April and the first half of May because of the relatively lack of available tonnage in the Middle East. This was when the West market fell dramatically on the back of the polar storm in February. Real owners tended to stay East and avoid the weaker rates in the West. The knock-on effect was that by April, it was becoming evident there was not enough vessels on route to the U.S. via the Pacific or trading in the Atlantic Basin to cover all shipments. Thus the deficit of VLGCs for May loading in the U.S. meant that about 20 VLGCs departed from the east of Suez market during April and May, which again caused a lack of ship supply in the East and allowed the Baltic index to rise. The second half of the quarter saw a decline in Baltic. This was largely due to the dearth of export volumes from the Middle East. Furthermore, stricter restrictions imposed by the Chinese authorities on vessels having called India as a response to the increase in COVID cases in India at the time forced VLGC owners to reassess an already complicated situation, wanting to avoid a situation of vessels not being allowed to discharge in China. Many owners opted to avoid cargo inquiries into India, which made the list of tonnage marketed for the Middle East to the Far East trade longer and contributed to a fall in Baltic. Through April and May, the Houston cheaper rates traded between high 80s and low 90s per metric ton, a premium to the Baltic index. By June, there was an oversupply of tonnage in the West that had ballasted in from the East market, and the West premium so the Baltic index narrowed. Although the freight market measured in U.S. dollar per ton was comparable to the first quarter, the increase in crude oil also made shipping more expensive as bunker costs rose. For the last earnings call, we had forecasted LPG production in the United States to quickly recover from the polar vortex storm in February, and this has indeed materialized. Inventory levels trailed the levels of previous years, while production and exports have rebounded. It was also forecasted that the OPEC+ countries would agree to reverse production cuts during this quarter. While this did not materialize on schedule, the reversals have now been agreed from August onwards, and Middle East exports are expected to increase as the year progresses.

Thank you, Tim. During this quarter, we have completed the scrubber retrofit program of 10 hybrid scrubbers to our own fleet, which started in the third quarter of 2019, and Dorian now operates 12 scrubber vessels. The last two vessels retrofitted with hybrid scrubbers were completed and commissioned in early June, including drydocking and the completion of their first 5-year special survey requirements. With the completion of these two vessels, a total of 20 vessels of the Dorian LPG fleet have now successfully passed their 5-year special service cycle. Since the beginning of the calendar year, the actual price spread of the high sulfur fuel oil to low sulfur fuel oil supplied to our scrubber vessel fleet has averaged over $105 a ton of fuel. As we envisioned, this spread has produced an earnings advantage for our scrubber-fitted vessels and validates our original expectations on the payback period by having returned about one-third of the CapEx as of June 30, 2021, notwithstanding the oil market's collapse during most of the calendar year 2020. Dorian continues to evaluate LPG dual fuel technology in those few dual fuel LPG new buildings and retrofitted vessels entering service, and we will continue to consider an upgrade for some of our vessels. We are continuing to invest in our vessels' performance and efficiency to reduce emissions and lower operating costs. An improved environmental footprint is very important to Dorian LPG, and we continue to explore other incremental energy efficiency technologies. Greenhouse gas emissions from shipping came sharply into focus over the last two months, both on the IMO and the EU with several environmental proposals made for future implementation. The IMO MEPC 76 adopted several amendments on multiple annexes, which become effective later this year and finalized the technical measure for energy efficiency of existing ship index and the EEXI in short, and the operational measure of carbon intensity indicator, CII in short. With implementation anticipated towards the end of 2022, they have now provided guidelines on how to calculate, implement, survey, and certify and offered compliance alternatives on engine power limitation for vessels. The CII factor annual reductions have been agreed until 2026, which are Phases 1 and 2, and further discussion is to follow on Phase 3 for the years 2027 to 2030. The CII operational measure will impact the expected performance of existing vessels and reinforce the importance of an annual SIP implementation plan which prioritizes improvement options for each vessel. The EU Green Deal is now driving EU policy initiatives towards a climate-neutral Europe by 2050. These initiatives proposed effective January 1, 2023, to include maritime transport into the European Union Emissions Trading Scheme, ETS, giving a phase-in period from 2023 to 2026 and requiring all vessels inbound and outbound to be responsible for 50% of their emissions under an updated MRV Regulation program, which is monitoring, reporting, and verification. The EU Maritime framework policy focuses on new measures to drive a shift to low carbon fuel. From 2025, all vessels inbound and outbound of the EU will be responsible for 50% of the yearly average well to wake energy intensity used on board, including electricity they receive from the shore, with a phase-in of 2% reduction in 2025 and aiming to reduce energy intensity by 75% in 2050. In view of all these regulations, the options available to the VLGC fleet are limited to engine power limitation, energy efficiency technologies, dual fuel engine upgrades through LPG fuel, carbon capture, and biofuels. Most of these options will have a significant impact on the VLGC fleet over the next two years, encouraging scrapping for older vessels and necessitating further capital expenditure and upgrades of the fleet towards improved efficiencies to reduce carbon intensity and emissions. The outlook from a regulatory perspective is that there will be an urgent need to consider energy efficiency for all existing vessels, and we conclude that a significant portion of the younger VLGC fleet trading capacity utilization could be reduced to address those upcoming compliance considerations. And with that, I will pass it over to Ted Young.

Thanks, John. I'd like to focus today on our financial position and liquidity and also discuss our unaudited first quarter results. At June 30, 2021, we had $78.3 million of free cash. As of August 2, Monday, our free cash balance stood at $82.6 million. Please note that since we repurchased $14.2 million of stock during the quarter and an additional $2.7 million following the quarter-end, we really have generated quite strong cash flow through the quarter and beyond. With a debt balance of $589.1 million at quarter-end, our debt to total book capitalization stood at 38.6%. We have no refinancings until 2025, ample free cash, and an undrawn revolver. Also, since the Captain Markos has now been classified as a vessel held for sale, we expect to generate additional cash upon completion of the transaction. We continue to expect our operating cash cost per day for the coming year to be approximately $21,000 to $22,000 a day, excluding an $8 million progress payment that is due for our new building in our fourth fiscal quarter, the quarter ending March 31, 2022. Further to John's comments, this dividend is an irregular dividend. The payment of this irregular dividend is responsible to our shareholders who've communicated very clearly to us that they wanted dividends to be part of our capital allocation strategy, and we've heard them loud and clear. For the discussion of our first quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. Turning to our first quarter chartering results, we achieved a total utilization of 96.1% for the quarter with a daily TCE, that's TCE revenue over operating days as we define operating days in our filings, of $31,571, yielding utilization adjusted TCE, which is TCE revenue per available day, of about $30,342. We also show you a spot TCE per available day, which reflects our portion of the net profits of the Helios Pool for the quarter of about $30,470. Overall, the Helios Pool itself reported a spot TCE, including COAs, of approximately $30,256 per available day for the quarter. Daily OpEx for the quarter was $9,689, excluding amounts expensed for drydockings. It was $10,131, including those costs, a modest improvement over the last quarter. Within OpEx, not related to drydockings, we have seen increases in crew costs, most notably those associated with crude travel. Higher average airfares, additional hotel nights to comply with local COVID-19 restrictions, and the like have been the main culprits. During the quarter, we saw our daily OpEx, again, excluding drydocking costs decreasing sequentially, which is consistent with our expectation of improved OpEx as conditions slowly normalize. Our time charter-in expense was $3.5 million, reflecting a full quarter of 1 vessel and the redelivery of another during the quarter. As a reminder, we do not include time charter-in costs in our vessel operating expenses. Going forward, our TC-in costs should be $2.4 million per quarter starting July 1. Total G&A for the quarter was $8 million in cash G&A, which is G&A excluding non-cash compensation expense, was about $7.4 million. Roughly $1.5 million of the quarterly G&A reflected bonuses to non-named executive officers. For members of senior management, as outlined in our recent filing, we will recognize those bonuses in an amount of approximately $2.41 million during the quarter ending September 30, 2021. We continue to be vigilant about all of our G&A costs. Our reported adjusted EBITDA for the quarter was $29.8 million. To give you some indication of the quarterly activity, we generated close to 45% of our quarterly EBITDA in the month of June, reflecting the uptick in chartering markets. As you know, we look at cash interest expense on debt as the sum of the line items on our P&L interest expense, excluding deferred financing fees and other loan expenses and realized gain/loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $5.6 million, roughly flat with last quarter. We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with the current interest cost all-in fixed hedge and a small floating piece of 3.67%. We repaid just shy of $13 million of principal during the quarter, which is consistent with our scheduled amortization payments. In addition to the 9 special surveys completed during the fiscal year just ended, we finished 2 more with scrubber installations in the quarter ended June 30, 2021, bringing our scrubber-equipped fleet to 12 vessels. With the completion of those vessels, the first special survey cycle for our ECO VLGCs is now complete. Although we currently hold a roughly 70% economic interest in Helios, we do not consolidate its P&L or balance sheet accounts, which has the effect of understating our cash and working capital. Thus, we believe it is useful to provide some additional insight in order to give a more complete picture. As of Monday, August 2, 2021, the pool held roughly $22.3 million of cash on hand. Including the dividend just announced, Dorian will have returned over $265 million of cash to shareholders, including $170.6 million during calendar 2021 alone. Note that following the repurchases through to mid-July of $16.9 million, equating to 1,189,000 shares, we now have $31 million remaining under our current repurchase authorization. We, of course, remain interested in accretive growth opportunities that meet our risk-reward criteria, and we will always be prudent in deploying our cash, but our financial position allows us to act quickly on meaningful opportunities as they arise, including further opportunities to return cash to shareholders.

Thanks, Ted. Mr. John, Operator, we can open for questions.

Our first question comes from Sean Morgan with Evercore ISI.

I appreciate this is maybe somewhat new news in terms of what's happening with the pipeline potential for, I guess, LPG pipeline across the Panama Isthmus. How do you sort of gauge what that would do to utilization for kind of the global VLGC fleet? And if Panama does proceed with this project? Is that an indication from the government of Panama that they think that we're going to be having high sustained overutilization of the canal kind of as a new normal going forward?

We take it as having that optimistic tone to it. But, of course, we don't know if it's going to happen and when it will happen, if it does. But it is a letter of intent. And I think we all have an answer with this. But I think I'll let John Lycouris give you the numbers that we've calculated that would be displaced and what it would do to overall demand. I think he has it encapsulated. John?

Yes. John, thank you very much. I'm sure Tim also might want to chime in. But we figured that, Sean, even if we build a pipeline and even if it was 250,000 barrels a day, it would still take 2 days and a change just for 1 cargo VLGC to go through. So it's a kind of top GAG measure to help alleviate the pressures on the canal. And as we know, container ships have priority, LNG ships have priority. So it's probably an additional measure to help a little bit on being able to throughput enough cargoes through. On the other hand, it kind of sets up the country as a 2-tier because some fleet is going to be on the West side and some fleet is going to be on the East side. And so that's also going to cause increased ton miles and other activities and utilization of the fleet. So in general, the fact that it's being considered is positive for LPG for sure. And secondly, it's just a way to try to help the delays and the increased amounts of LPG that we have to go through. I don't know if Tim wants to add something to that.

Yes, Tim, go ahead.

I agree with John. It's a positive development that a problem has emerged in Panama and that measures are being considered, as it shows that the delays we've been discussing are likely to persist and possibly increase. The project's capacity is limited to about 5 VLGCs per month, so it won't significantly impact ton mile demand. If there is a problem, delays would need to exceed 10 days for this to be a practical solution. Therefore, if we experience 10-day delays in Panama moving forward, that's a good indication. We will likely see more vessels navigating around the Cape, and as John Lycouris mentioned, this will lead to a more fragmented market and greater demand for efficiency. The consideration of these measures is encouraging for the market overall. Additionally, the project's size shouldn't be a major concern in this context.

So if I'm understanding you guys correctly, then there'll still be a need for VLGCs to transit the Panama Canal. This pipeline wouldn't fully supplant those canal transits that kind of exist today in a normal market?

Yes, that's correct. It will be a fraction of the total capacity needed or export needed from the U.S. to lease that this pipeline will be able to handle.

I don't think it would fully built. I don't think it would displace more than the demand for 5 ships, fully built. Is that correct, Tim?

Yes, that's correct. Yes. We estimate the capacity of 90,000 barrels per day to be around 5-year VLGCs capacity per month. And that is then given that they build sufficient storage so that it's not just a throughput, but actually storage that doesn't cause any delay so that you can load the deals fully in a normal 2-day cycle and discharge level 2-day cycle. If it's only a pipeline, then the complications around the logistics will be worse, and it will be less than 4 ships.

And then with the sale of the Captain Markos, does that portend potential exit on your ownership of the John and the Nicholas that are kind of the same older vintage? Or is this just kind of a one-off?

We're examining sales and I believe they connect to what I mentioned earlier about intrinsic value. Even though we're significantly discounted, it makes sense to consider the sales of the older ships. You shouldn't be surprised if we pursue more of these.

Our next question comes from Omar Nokta with Clarksons Securities.

Obviously, you guys have become much more aggressive, I'd say, returning capital to shareholders. We've done the share buybacks in the past. You did the big tender offer this past March, and now you have the special dividend. John and Ted, you guys made it pretty clear in your opening remarks that the special dividend or it's an irregular dividend. What are your thoughts about going forward with a regular dividend? How did you come up with the idea of just doing a special versus instituting a regular dividend policy?

I'll let Ted clarify the difference between a special dividend and an irregular dividend. Although it's somewhat of an outdated distinction, we specifically referred to it as irregular to indicate it's not special. This does not mean we won't have future dividends; instead, we want to retain flexibility. As long as we are generating sufficient revenue, and given the current discount to our intrinsic value, we want to prioritize that flexibility. If Ted wants to share a more textbook explanation, he can do that here.

Yes, I think John captured it well. We refer to it as irregular rather than special because it's unique and may not happen again. Regular suggests adherence to a policy, whereas irregular represents a middle ground for us. We assessed our cash balance, considered the short-term outlook, and concluded that we could return capital. A significant number of shareholders expressed a desire for a dividend as part of this capital allocation plan, and our Board and management responded accordingly. However, this decision doesn't strictly align with traditional corporate finance principles, especially given our current trading discount to intrinsic value. As John mentioned, we want to keep our options open. We aim to reward shareholders, including ourselves since we own stock, but are cautious about selling at different times in the cycle. We're also keeping in mind the discount to our intrinsic value. Clearly, a dividend could help narrow that gap, but buybacks to directly address the discount for shareholders also look appealing. In summary, we're still focused on the significant discount and aim to address it, with dividends playing a role in our capital allocation strategy moving forward.

I appreciate that. Yes. I was going to ask, it makes sense considering the intrinsic value. There seems to be a significant difference between what you'll be selling the Markos for and the share price. When we think about this irregular dividend, should we consider it as you taking the proceeds from the vessel sale and distributing it to shareholders? Is that an accurate way to view it?

No. No.

There will be another capital allocation decision.

Got it. Okay. And then I guess one more, and I know, John, you had mentioned this, that you are looking at the older vessels. When it came to this one, in particular, obviously, it's the oldest in the fleet. The decision to sell that vessel, did it come to the decision to see the vessel?

Holistic. I think we're looking at it as a market. We're optimistic on the market. We're not there to reduce our exposure, but I think it's natural in the cycle to kind of renew, and this is partly renewal and partly what you said before, again, intrinsic value. It's when you see you can sell an asset at such a premium to what the market is evaluating it at, it makes sense in that respect. So it's all those considerations that our Board took into account.

Okay. We have now concluded the question-and-answer session, and I will hand the call over to John Hadjipateras for his closing remarks.

Many thanks for all of you who dialed in and for the questions. And I wish you a happy rest of the summer. Please stay safe and talk to you in a quarter. Bye-bye.

This concludes today's conference. You are now free to disconnect at this time. Have a great day.