Earnings Call Transcript - LPG Q2 2021

Operator, Operator

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

Theodore Young, CFO

Thank you, Doug. Good morning, everyone, and thank you all for joining us for our second 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, webcast, and a replay of this call will be available through November 9, 2020. 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 September 30, 2020, that were filed this morning on Form 10-Q. Also, 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 over the call to John Hadjipateras.

John Hadjipateras, Chairman, President, and CEO

Thank you. Good morning from John Lycouris in Athens; Tim Hansen in Copenhagen; Ted Young, Clint Webb, and myself in Stamford, Connecticut. And thank you for joining us today for our financial Year 2021 Q2 earnings call. Following our AGM on Wednesday last week, when two of our directors, Christina Tan and Tom Coleman, were reelected, and our regular quarterly board meeting on the same day, we expect to continue our focus on capital allocation and to pursue opportunistic share repurchases as well as consider dividends, deleveraging, and other opportunities. I'm happy to report that our seafarers and shore staff are safe and continue to ably perform their duties. With the cooperation of our customers, local and flag authorities and classification societies, we've been performing many statutory surveys remotely. In addition to the health benefit of reduced exposure, digitalization and remote monitoring enhance efficiency and reduce costs. During the quarter, our crew rotation has been successfully restored to normal levels. The industry-wide crisis caused by the disruption to the free movement of seafarers during the shutdowns has somewhat abated, though restrictions continue in many ports and they result in logistical challenges and increased costs. Our last quarter's results largely reflect the poor market of the previous April to June quarter. Many analysts understandably base their forecasts on the Baltic published rate, and I would like to share a word of caution about that. The Baltic Index for LPG is a daily forecast by a panel of brokers, reflecting their assessment, guess of the rates fixed on the spot fixture within 10 to 40 days on the route from the Middle East to Japan. As well as the obvious and the lag effect of time elapsed between fixture and voyage completion, there are other inherent distortions that make extrapolating from the single route published Baltic rate an unreliable forecasting pool for time charter equivalent earnings. These include sailing speed, actual costs of bunkers, Panama and other port delays, routing changes for weather, deviations for extraordinary crew changes and/or for guards, and, of course, idle time. We have communicated our opinion to the Baltic and hope that they will open a dialogue with stakeholders with a view to making their index more useful. U.S. production is 10% below the all-time high in January, but nearly 14% above the year's low in May, and exports are up 15% year-on-year through September 30. India's imports are up 14% year-to-date. U.S. storage is 10% above the 5-year average. These are some of the factors which, together with fractionation capacity being added in the U.S. and PDH plants being commissioned in China, give me cause for optimism. As usual, on our call, you will hear an analysis of our quarterly financial from Ted and industry and market updates from John Lycouris and Tim Hansen. Tim, over to you.

Tim Hansen, Chief Commercial Officer

Thank you, John. U.S. exports continued to offset declining Middle East volume last quarter, but it was not enough to generate global growth for the quarter. Global volumes decreased by 8% compared to 19% year-to-date. The global volumes totaled 80 million tons. There was a 2.6% year-on-year decrease. American export volumes, however, have increased by 15% to 33.3 million tons year-to-date, which compares to only 28.8 million tons during the same period last year. In the third calendar quarter, U.S. export volumes hit record levels, growing 11% year-on-year to nearly 11.5 million tons, the highest level ever recorded. Over the same period of time, our Middle East volume decreased by roughly 11.5% to 9.5 million tons. Despite the initial weakness, the freight market improved during this quarter. The Baltic market index for the Middle East to Japan route began the quarter at around $30 per metric tons, rising steadily in early August to the low 60s per metric tons range before moderating in the middle 50s from mid-August until the end of the quarter. U.S. exports appeared to set the trade rate recovery into motion. American export volumes hit record levels in July at 4.3 million tons, the strongest level ever recorded by a margin of 360,000 tons. Accordingly, U.S. VLGC liftings also peaked in July with 73 cargoes before stabilizing to an average of 65 cargoes in August and September. Record selling of U.S. export cargoes as well as weather conditions added to port congestions in Asia and India. Towards the end of the quarter, there were significant delays around the world. South Korea, for instance, saw significant delays, adding about 6 days or about 10% to a normal round trip voyage from Busan to Ulsan. Currently, many of the vessels caught with extended discharges in the Far East now also face delays in the Panama Canal. In ballast, there are up to 8 days delays, and laden is about four days delays at the moment. It adds to the ton base in the market and takes out capacity. Although regional Middle East liftings were down, regular cargo flows from Qatar and the United Arab Emirates to India maintained a good lifting momentum. Indian demand continues to grow. Indian imports grew by 4% year-over-year to about 4 million tons. Meantime, vessel availabilities for cargoes into India diminished after the 23rd of July, where Chinese flagged and Hong Kong flagged vessels in addition to national affiliated companies were prohibited from doing business into India by the Indian government due to military tensions between the two countries. The COVID-19 pandemic negatively impacted LPG demand in parts of Asia during this quarter. Japan and South Korea demand registered steep declines due to subdued industrial demand, and Chinese LPG imports also fell by 8.8% year-on-year, despite record imports in July that totaled 2.2 to 2.3 million tons, an all-time record. Propane had the price advantage over naphtha in the Far East for most of the quarter before shrinking towards the end of September. Delayed winter stocking and the prospect of a colder winter paints a positive demand outlook heading into the fourth quarter. On LPG supply, U.S. NGL production forecasts continue to be revised upwards, and actual volumes have outperformed expectations. Propane storage levels remain elevated compared to last year. Given the continued wave of infrastructure additions completed year-to-date, U.S. production and exports may continue to surprise to the upside due to the increased throughput capacity. Year-to-date, 1.6 million barrels per day of new Y-grade pipeline has been constructed to supply the 1.2 million barrels per day of new capacity. On export capacity targets, terminal expansion completed in August added another 3 to 4 cargoes of capacity, and the Lone Star NGL expansion at Galena is on schedule for completion this quarter, adding another 12 cargoes. There is no shortage of spare capacity from the U.S. Gulf, and preliminary lifting numbers for the month of October stand at 94 cargoes.

Operator, Operator

One moment, everybody. We lost Tim Hansen's line.

John Hadjipateras, Chairman, President, and CEO

Operator, we can go to John Lycouris, and we'll bring Tim back on when he's available. Hello?

Operator, Operator

Rejoining John Lycouris?

John Hadjipateras, Chairman, President, and CEO

Yes. We've lost Tim on the phone, so we'll go to John Lycouris now. When Tim returns, we'll allow him to finish his comments, as he was almost done. John Lycouris, the floor is yours.

John Lycouris, CEO of Dorian LPG USA

Thank you, John. During this quarter, we completed drydocking and the first vessel survey on the vessels, Cougar and COBRA, and expect to complete another two vessels during this quarter. Dorian remains committed to improving environmental emissions. With the use of scrubbers, we achieved a 98% reduction in sulfur oxide emissions and an 80% reduction in particulate matter emissions as well as black carbon emissions normally released when burning very low sulfur fuel oil. We currently operate 10 scrubber-equipped vessels, including two fitted and trading since their 2015 deliveries. Old scrubbers are hybrid systems, except for one vessel, so they can operate in open or closed loop, depending on local ECA conditions, regulations, and port requirements. We are programming to retrofit two more vessels with scrubbers in the coming months to coincide with the vessels' 5-year special survey and drydocking cycle. Bunker fuel price spreads have been volatile since March 2020. Low-sulfur fuel oil has traded from as low as 12% to more than 30% over the high-sulfur fuel oil price, which in dollar terms amounts to $30 to $85 per metric ton. Such volatility has largely been the result of crude oil pricing in the world markets, refinery utilization, and product surpluses in the markets, all impacted by COVID-19. Once COVID-19 conditions improve and market sectors recover, we expect that fuel spreads will widen again to pre-COVID-19 levels. Even though vessel scrubber retrofits were rushed to meet the IMO 2020 commencement on January 1, the installations are designed to perform for the remaining life of the vessels and cannot be judged on the very short term during which they have been operational under extremely volatile economic and market conditions. We are keenly following the results of LPG's fuel on the vessels currently being retrofitted and on the new building vessels as they commence commercial operations next year. Dorian has been at the forefront of this technology since 2013-14, when many of our vessels were being constructed. We built most of our vessels to accommodate future retrofit. In addition, we have carried out feasibility studies and tail retrofit plans. However, the associated capital expenditures for a dual-fuel retrofit amount to more than three times that of a scrubber, making commitment difficult. Once a number of these LPG fuel projects are completed and pricing becomes competitive on the equipment and outfitting requirements, we hope to consider LPG as fuel, especially when favorable economic conditions and LPG markets enable us to. According to DNV GL Energy Transition Outlook, the world's energy emissions peaked in 2020 due to the COVID-19 pandemic, avoiding 75 gigatons of CO2 emissions to 2050. The maritime fuel mix is likely to see a reduction in the use of oils; increases in the usage of low-carbon fuels and natural gas; as well as electricity through batteries, improving energy efficiency, increasing renewables and electrification, decarbonization, carbon capture and storage are some of the solutions being considered. Less than 10% of the current fleet on order is committed to alternative fuels like LNG, batteries, LPG, etc. Most decisions will be formulated in the next few years as fuels and engines transition and the availability of alternative green and blue fuels becomes available as fuel for existing vessels, with fuel costs being the main consideration against greenhouse gas reduction. The close collaboration of the regulators, owners, charters, and financial institutions in formulating future policy for all the stakeholders will be necessary to move the industry towards carbon-neutral fuels and zero emissions. The current VLGC fleet according to Clarksons comprises 301 vessels and the order book currently stands at 32 vessels, or about 11% of the fleet—a rather manageable number, we think. Two vessels are due to be delivered this year, with 21 vessels expected in 2021 and 9 vessels in 2022. There are currently 27 vessels in the fleet that are 25 years or older, and that number will increase to 30 vessels next year, assuming that there's no scrapping. The current fleet dynamic provides a highly encouraging backdrop for the VLGC freight markets. And with that, my comments are over, and I will pass it over to Ted Young.

Theodore Young, CFO

Thank you, John. My comments today will focus on our financial position and liquidity as well as our unaudited second quarter results. For the discussion of our second-quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. At September 30, 2020, we had $145 million of free cash. Since the quarter end, as we previously reported, we completed the repurchase of the Captain John, which is now 100% debt-free. Pro forma for that principal repayment of $18.3 million, our cash balance would have been $126.7 million and our debt at $628 million. As of Friday, October 30, our cash balance stood at $135 million. Following the repayment of the Captain John lease arrangement, we've reduced our debt service cost by about $2.6 million per year. As we have previously discussed, we've made significant and favorable changes to our debt capital structure in the last 6 months. We refinanced the commercial tranche of our main bank facility with a lower interest margin and more flexible financial covenants, entered into a 12-year floating rate sale leaseback on the Cresques, and now have repaid some of our higher cost debt. We currently amortize less than $52 million per year, which is a significant reduction from the $64 million that was required until recently. Following the new bank deal and the favorable interest rate environment, we took the opportunity after quarter-end to blend and extend our largest swap position with a $200 million notional value. I'll get into the economics of that a little later, but it did result in a reduction of our fixed rate by nearly 85 basis points. Turning to our second-quarter chartering results, we achieved total utilization of 97.4% for the quarter, with a daily TCE, that's TCE revenue over operating days as defined in our filings of $26,015, yielding a utilization-adjusted TCE, TCE revenue per available day of about $25,330. In contrast to last quarter, 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 $25,800. Overall, the Helios Pool reported a spot TCE, including COAs of approximately $24,560 per available day for the quarter. Daily OpEx for the quarter was $9,613, excluding amounts expensed for drydockings. It was $10,591, including those costs. Excluding drydocking, the increase was largely a function of higher crewing costs driven by crew change costs and certain incentive and retention payments to our seafarers. Our time charter-in expense remained stable at $4.5 million. As a reminder, we do not include time charter-in costs in our vessel operating expenses. Total G&A for the quarter was $5.9 million, and cash G&A, i.e., G&A excluding noncash comp expenses, was about $5.5 million, roughly flat with the preceding quarter. We continue to look for efficiencies in our cost structure in this challenging environment. Our reported adjusted EBITDA for the quarter was $22.3 million. Again, in contrast to the quarter ended June 30, 2020, where we made over 80% of the quarterly EBITDA in the first 2 months, we earned over half of our EBITDA during September, reflecting the fact that the financial impact of the stronger chartering market had its first noticeable impact at the end of the quarter. We view cash interest expense on debt as the sum of the line items, interest expensed excluding deferred financing fees and other loan expenses and realized gain/loss on interest rate swap derivatives. On that basis, our total cash interest expense for the quarter was flat versus last quarter at $6.9 million, representing a full quarter of interest savings from the 2015 AR facility refinancing and the Cresques sale leaseback, offset by a larger realized loss on our swaps. As I touched on, we did blend and extend our $200 million notional swap, which resulted in extending its maturity by 3 years to 2025 and reducing the fixed interest rate from 1.933% to 1.091%, or about 84 basis points. We continue to benefit from our hedging policy and the favorable pricing of our Japanese financings, leaving us with a current interest cost of fixed, hedged in a small floating piece of 3.78%. Please remember that as a reporting matter, our realized and unrealized gain/loss on derivatives also includes the effect of our FFA portfolio. That said, the calculation of EBITDA in our filings adds back only the interest on the realized gain/loss, not the FFA piece. John has already touched on our drydocking program, but we believe that our current financial position will allow us to finance whatever future drydocking schedule best supports our charterers. Although we currently hold a 60-plus percent 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 Friday, October 30, the pool had roughly $12.5 million of cash on hand, reflecting the fact that the pool just paid a distribution a week prior. We feel that our liquidity and capital structure have positioned us well for whatever rate environment we face in the coming months, and we believe that allows our company to make capital allocation decisions from a position of strength. Though significant rate volatility caused us to curb our buyback activity, we remain committed to returning cash to shareholders and note that we still have approximately $50 million remaining under our share buyback authorization. We also remain interested in accretive growth opportunities that meet our risk-reward criteria. We will continue to be prudent in deploying cash, but our financial position allows us to act quickly on meaningful opportunities as they may arise. With that, I'll pass it back to John Hadjipateras.

John Hadjipateras, Chairman, President, and CEO

Thank you, Ted. I'm not sure if we have Tim back on the line. Regardless, I believe he was nearing the end of his comments, and he will have the chance to finish them during the Q&A. At this point, I would like to open the floor for questions. Thank you.

Operator, Operator

Operator Instructions. Our first question comes from the line of Omar Nokta with Clarksons Platou.

Omar Nokta, Analyst

I just wanted to check in with you on the capital allocation, as you guys just discussed. Ted, you just brought it up. And John, in your opening comments, you mentioned that you obviously slowed down the share buybacks over the past few months, which makes sense given the uncertainty with the pandemic and the overall energy picture. How are you guys doing things right now, especially post the - John, you mentioned the AGM last week? Are you signaling that maybe we're at like maybe a pivot point that you're looking to recharge that remaining $50 million buyback? Is that sort of on the horizon?

John Hadjipateras, Chairman, President, and CEO

I think that's a reasonable interpretation of our comments. Yes.

Omar Nokta, Analyst

Okay. That’s fairly clear. Following up on that, you mentioned the buyback and that you are evaluating dividends. You're focused on deleveraging and other opportunities, with acquisitions also being a priority for both you and the Board. Can you rank those in order of preference? It seems like buybacks are at the top of the list, but it would be helpful to have a sense of the ranking for those different elements.

John Hadjipateras, Chairman, President, and CEO

It's very challenging to determine that since it changes daily. Currently, I believe you're correct that buybacks are at the forefront. However, we constantly review our options in the short term. There is significant value today, and I consider our stock, along with our competitors and the entire industry, to be undervalued. Therefore, while we will prioritize buybacks, we won't limit ourselves to just that.

Omar Nokta, Analyst

Yes. Good. Okay. We'll see as the weeks and months come. Just one follow-up or one separate topic, and I'll hand it over. Just on the chartering, you guys have always been partial to fixing ships on time charter. How has charter demand been here over the past couple of months, especially given the stronger market of late? Are you seeing opportunities to put some ships on charter here for the medium to long term?

John Hadjipateras, Chairman, President, and CEO

A little bit. Tim, are you back on?

Tim Hansen, Chief Commercial Officer

I'm back on, yes.

John Hadjipateras, Chairman, President, and CEO

Good. Tim, you can take that question. And also, if you want to take the opportunity to complete your comments, you can do that, too.

Tim Hansen, Chief Commercial Officer

Well, I'm not exactly sure where I left, but on the time chartering side, yes, we have seen more activity and opportunities, and we have also seen rates recover from where they were like 6 months back. So we are looking at some opportunities at the moment to see if we can charter out a few ships as we also have a few expiring at the end of the year.

Operator, Operator

Our next question comes from the line of Sean Morgan with Evercore.

Sean Morgan, Analyst

This may be something that Tim was going to address before he got cut off. In the press release, you mentioned the advantages of ton-mile expansion from U.S. exports and the negative impact on volume demands for VLGCs due to OPEC's curtailment. You also indicated that the spread to naphtha is favorable and benefits the global fleet. Considering this as a double-edged sword, if OPEC increases production again and Libya resumes operations, which could affect naphtha, how do you balance the advantages of higher production from the Middle East against the potential for a narrower spread and possible substitution of U.S. cargoes?

John Hadjipateras, Chairman, President, and CEO

Tim, do you want to take a shot at that?

Tim Hansen, Chief Commercial Officer

Yes, I believe that an increase in production from the Middle East would have a more positive impact than negative. It may influence the naphtha spread, but on the flip side, when LPG prices decrease, it tends to attract new users. Prices are expected to drop as more supply comes into the market. Overall, an increase in market volume would likely have a beneficial effect on LPG, even if it partially replaces naphtha in the cracking process.

Sean Morgan, Analyst

Okay, was there any disruption from the hurricanes or petrochemical issues that affected us during the quarter? The rates were different; we discussed how the Baltic doesn't show the actual returns we anticipate, but the Clarksons' TCE rates were possibly higher even on a delayed basis. I'm curious if there was any weather-related impact on utilization or what influenced that.

John Hadjipateras, Chairman, President, and CEO

Yes. Weather and...

Tim Hansen, Chief Commercial Officer

I think we have seen COVID.

Operator, Operator

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

John Hadjipateras, Chairman, President, and CEO

Okay. Well, thank you very much once again, and everybody stay safe and see you next time. Bye, bye.

Operator, Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.