Earnings Call Transcript - LPG Q1 2023

Ted Young, CFO

Thank you, Joe, and good morning everyone. Thank you all for joining us for our first quarter 2023 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 August 10, 2022. 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, 2022 that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Forms 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 the call over to John Hadjipateras.

John Hadjipateras, Chairman, President, CEO

Thanks Ted and thank you for joining John, Ted, Tim, and me to discuss our first quarter financial year 2023 results. The war in Ukraine has added complexity to our crew operation, and our crew departments work diligently and quickly to ensure the safety and well-being of many of our Ukrainian seafarers. The COVID pandemic and recent port closures in China have continued to create challenges around crew changes, but through close interdepartmental coordination, we have managed these challenges well without creating major deviations or delays. Global LPG exports increased 2.6 million tons or about 5% in the first six months of this year compared to the same period last year, with the Middle East as the main contributor to global export growth, up 13% year-on-year. Estimates for U.S. exports point to further growth in 2022 and 2023, and this July short-term energy outlook report from the EIA estimated that U.S. LPG exports will grow in 2022 and expects the trend to continue with exports increasing in ‘23, driven by continued production growth and flat domestic demand. Tim will give you more details on the supply growth and our view of the market. We are leveraging our in-house expertise to optimize our fleet’s technical and commercial performance. Our bunkering management and chartering operations departments are making considerable impact on sourcing the best quality and best price bunkers for our fleet and our pool fleet. The price spread between heavy fuel oil and low-sulfur fuel oil, currently at about $300 per ton, is providing a good return on our investment in scrubbers. The 2023 IMO emission regulations are coming up quickly and our technical and fleet performance teams are actively assessing and ordering retrofit equipment that will reduce our consumption and emissions footprints. Through the diligent assessment of hardware and software retrofits on our ships, we will be able to meet IMO targets and continue to harness the superior earnings potential of our modern fleet. John will provide much more information on this shortly. Considering the age profile of our fleet, our dual fuel new building, the time charter of three dual fuel new ships, and the additional flexibility following the refinancing of our term facility, which we announced today, we are well positioned to pursue an optimal capital allocation strategy. Our declaration of a $1 per share dividend supports this view and demonstrates our continued commitment to shareholders, which is possible because of our focus on serving our charterers and ensuring the well-being of our seafarers and shoreside staff, to whom we are grateful. I will now pass the line over to Ted for more on this and our financial results.

Ted Young, CFO

Thanks John. My comments today will focus on the recent capital allocation events, our financial position, liquidity, as well as our unaudited first quarter results. You may wish to refer to the investor highlights materials posted this morning on our website. At June 30, 2022, we reported $155.5 million of free cash. During the quarter ended June 30, we voluntarily prepaid $25 million of debt under our 2015 AR Facility and refinanced the Cougar, which generated about $30 million in net proceeds. We of course also paid out roughly $100 million in dividends. As John also just mentioned, we will pay another $1 per share as an irregular dividend, or roughly $40 million in total in dividends on or about September 2 to shareholders of record as of August 15. Since the quarter ended, we concluded a new $260 million loan agreement that will refinance debt related to our 2015 AR Facility, the Corvette, and the Concorde; the Concorde actually won't happen until September 6. In total, debt across the eight vessels in the facility today and the Concorde and the Corvette was about $242 million, and the new facility will begin with $240 million of term debt drawn, so it is a leverage-neutral transaction for us. We are extremely pleased to be working with Credit Agricole, ING, and SCB again, and to welcome BNP Paribas and Danish Ship Finance to our loan facility. We have summarized key terms of the new facility in the investor highlights materials posted this morning. A few highlights though: The facility is seven years in duration, carries an interest rate of SOFR plus 220, and has a 20-year age-adjusted profile which translates into $5 million of quarterly amortization. We will also have an undrawn $20 million revolver at close. In addition, we have a sustainability feature that can reduce our margin if we are ahead of IMO trajectory values on our Average Emissions Ratio, which we were at year-end December 31, 2021. The new facility has identical financial covenants to those of the current facility. More importantly, it moves our nearest debt refinancing event from 2015 up to 2027, which is our ball cap facility, and it moves out the maturity on the old 2015 AR Facility from 2025, all the way up to 2030 or July 2029. Also, and finally, we will be able to maintain our existing hedges which are priced quite attractively, although we will convert them from LIBOR to SOFR. We expect that the SOFR equivalent rate on both swaps will be below 1%. With the debt balance at quarter end of $663.7 million, our debt-to-total book capitalization stood at 44% and our net debt to net total capitalization at 34%. With our new debt facility and undrawn revolver and one debt-free vessel, coupled with our strong free cash balance, we have a comfortable measure of financial flexibility. We expect our cash cost per day for the coming year to be approximately $23,000 per day. I’ll now turn to our first quarter results, and again, we’ve summarized most of this information in the Investor Highlights materials that were posted this morning. For the first quarter, we achieved total utilization of 95.9% with a daily TCE, that's Time Charter Equivalent revenue over operating days, as we define those terms in our filings of $39,608, yielding utilization-adjusted TCE, that’s TCE revenue per available day of about $37,986. Spot TCE per available day, which reflects our portion of the net profits of the Helios Pool for the quarter, was about $38,416. Also, overall, the Helios Pool reported its spot TCE, including COAs, of approximately $40,165 per available day for the quarter. Daily OpEx was $9,378 for the three months ended June 30, 2022. That was virtually flat sequentially with the prior quarter. Crew costs trended downward, reflecting a somewhat more normal operating environment, and they were offset a little bit by modest increases in repairs and maintenance, and spares and stores. Our time charter and expense for the two Time Charter N vessels remained stable at $5.4 million. Total G&A for the quarter was $9.4 million, and cash G&A, that’s G&A excluding non-cash compensation expense, was about $8.8 million. That number included $3.2 million of cash bonuses paid during the quarter, plus our core G&A, really what we consider we incurred quarter-to-quarter to run the business was $5.6 million, which is consistent with our expectations. On that basis, our reported adjusted EBITDA for the quarter was $46.9 million. As we have said, we look at cash interest expense on our debt as the sum of the line items interest expense, excluding deferred financing fees and other loan expenses and realized gains/loss on interest rate swap derivatives. On that basis, total cash interest expense for the quarter was $6.5 million, which only reflected half a quarter with the Cougar financing in place. When we have a full quarter of the Cougar and a full quarter of the new bank facility, we estimate that our cash interest expense will be about $7.7 million. Although we currently hold a 90.7% economic interest in Helios, we have not consolidated its P&L and balance sheet accounts, which has the effect of understating our cash and working capital. As we believe it is useful to provide some additional insight to give a more complete picture. As of Tuesday August 2, 2022, the pool had roughly $26.8 million of cash on hand. The dividend declared today of $1 per share brings to $5.50 per share in dividends that we have paid in the last year. The other at our open market stock repurchases and $113.5 million self-tender offer, we will have returned over $444 million to our shareholders since our IPO. The significant dividend payments in the last year underscore our board's commitment to a sensible capital allocation policy that balances market outlook, operating capital needs of the business, and an appropriate level of risk tolerance given the volatility in shipping. With a solid freight market backdrop, we remain cautiously optimistic about our cash flow generation over the coming months.

Tim Hansen, Chief Commercial Officer

Thank you, Ted, and good day everyone. Thanks for dialing in. The second quarter of 2022 saw increased LPG export and import demand. The global seaborne LPG transport for the second quarter was almost 2 million tons above the levels that we reported in the first quarter. North American exports continued to increase on the back of record-setting production levels. Middle East export volumes also showed growth, particularly from the United Arab Emirates, Qatar, and Saudi Arabia. The export volumes for the second quarter were the highest second quarter on record, indicating that the open plus production charter vessels have indeed had a positive impact on the LPG transport. Freight levels for both BLPG1 and BLPG3, which are the indexes for the east and west markets respectively, were higher than in Q1, and even with bunker prices fluctuating and growing somewhat, earnings still increased versus the previous quarter. These consumer markets saw the BLPG1, the benchmark carrying the freight momentum from March into April, primarily due to a firm west market that had shown interest in capacity. Through May, there was a period of inactivity due to the Golden Week holidays, but by the end of May, a sudden burst of activity from the Middle East adjusted the vessel supply-demand balance, and the BLPG1 jumped above $100 per metric ton for the first time since January 2021. The rapid rise in the freight index was quickly followed by downward corrections in June, bringing the numbers more in line with what was seen in April. For the Western Suez market, April likewise carried on the momentum from the previous quarter. As was also the case in the East, May was the most active month. The beginning of the month was somewhat negatively impacted by a lot of vessels balancing in from the Far East, but one major exporter released a flurry of activity in mid-May, leading freight rates to increase significantly. As in the east, June was the month of downward correction. Although activity remains firm, the burst of exports from both east and west markets during May oversupplied the forward cargo delivery market, and there were fewer opportunistic cargos listing from the U.S. and Asia or Middle East Asia in June. It was expected that the second quarter of 2022 would see a fair amount of BG demand, increased North American production, and increased Middle East exports, as all this transpires along with the market adapting to the realities of the war in Europe. For example, VLGCs have been slowing down to control costs of bunker consumption and to deal with dramatically higher bunker prices. The second quarter also saw a renewed impact of the COVID-19 related lockdowns in China, while worries still loom about recessions in the news. The worries of reduced demand, specifically for China imports and globally, also were a factor for market players, resulting in more risk-averse behavior and reducing opportunistic trades. The impact of these macroeconomic factors for the next quarter remains to be seen, but the LPG fundamentals heading into winter remain positive and inventories in the U.S. continue to rise. Propane is still the preferred fuel, and in the Far East, they are going into the stockpiling season. Furthermore, more PLG plants in the Far East are coming online and ready to increase LPG demand. All these fundamentals are favorable for what is seasonally a period of firm activity for the VLGC market.

John Lycouris, CEO, Dorian LPG (USA)

Thank you, Tim. In the last quarter, the concerns of a global economic recession outweighed the supply chain concerns over the previous quarter and caused oil markets to retreat from their highs. It is interesting to note that the global very low sulfur fuel oil prices did not follow the oil market's move to lower levels. Refiners have been struggling to replace Russian exports of middle-distance products, causing them to outpace Brent crude prices, as has the very low sulfur fuel oil, which requires blending of distillates to produce. According to shipandbunker.com, very low sulfur fuel oil has significantly outstripped global crude oil markets, hitting a record high on July 5 of $314 per metric ton or 141% of the Brent crude price. Taking the average of the major bunkering hubs, very low sulfur fuel oil currently stands at 110% of Brent crude price. A more significant development for Dorian LPG has been the average bunker fuel spread of heavy fuel oil to very low sulfur fuel oil, which reached almost $400 per metric ton during July. For the second quarter of 2022, our average savings were about $270 per metric ton for heavy fuel oil supplied to our vessels against the very low sulfur fuel oil prices. Our original expectations continue to be validated, not only with our selection of hybrid multi-loop scrubbers as opposed to open single-loop systems, but also with our investment payback estimates having paid back more than 73% of the equipment capital expenditure and all the installation costs. As we move closer to 2023, we continue to plan to retrofit various energy-saving devices to run our fleet, which in conjunction with engine power limitation will improve fuel efficiency, reduce emissions, and render the fleet capable of exceeding the upcoming EEXI/CII regulations. The close monitoring and optimization of energy consumption onboard our vessels support our initiatives on vessel performance and emissions reduction. In general, younger vessels will have to implement less expensive retrofits compared to older, less efficient ones. Our new tech department is following the latest developments in our technologies that will improve the environmental score of our fleet. Several promising solutions exist, including partial carbon capture and storage, which we believe leads to improving the decarbonization of our fleet. For the time being, our objective is to implement marine technologies that have credible track records, while researching innovative solutions until they become available and commercially mature. Our decision to invest in scrubbers was possible because of our financial strength and has helped us generate very solid results, which gives us confidence as we look forward and evaluate the next wave in marine technology advancements. There have been some significant regulatory updates regarding shipping's enrollment into the EU emissions trading system. All three EU institutions - the commission, the council, and the parliament - agree on the inclusion of shipping, but disagree on the timing, progression, and intensity of the rules. The negotiation process and the ultimate finalization were set to begin now, but quite possibly may extend into 2023, pushing the implementation date to 2024. The EU, faced with the ongoing energy crisis, is under increased pressure to either suspend the emissions trading system or increase the number of available allowances, thus bringing the cost of carbon compliance down and ultimately reducing inflation in the EU. The IMO's MEPC 78 session was conducted in early June and finalized all technical guidelines for EEXI/CII and SEMP Part III implementation. CII correction factors and voyage exclusions for certain operational conditions were also decided. Moreover, it produced to render the Mediterranean Sea a special emissions zone effective July 1, 2025, which means that ships navigating these waters either have to burn 0.1% sulfur fuel oil, which is low sulfur, medium gas oil, or be fitted with an exhaust gas cleaning system. The proposal would be presented for adoption at MEPC 78 in December 2022. Meantime, the committee continues its work on developing lifecycle greenhouse gas and carbon intensity guidelines for marine fuels, which are expected to be approved at MEPC 80 in July 2023. If passed, a well-to-wake emissions approach will be adopted, which will significantly alter the environmental profile of existing and alternative marine fuels. At Dorian, our goal is to continue improving our greenhouse gas footprint, eventually reaching a zero emissions target, and we're optimistic that our fleet would be among the best positioned to meet the demands of charters, regulators, and shareholders.

John Hadjipateras, Chairman, President, CEO

Thank you, John, and we're ready to open for questions. If anyone has something to ask, we're here.

Omar Nokta, Analyst

Thank you. Hey guys! Good morning! I wanted to ask about the capital allocation. You know, you guys definitely over the past two years have ramped up the shareholder rewards with the buybacks, the tender offer, the special dividend, and the irregular dividend. I did want to ask, you know, we're starting to see these irregular dividends becoming more frequent, and just wanted to ask, what are your thoughts on dropping that monitor irregular and going with regular in the future?

John Hadjipateras, Chairman, President, CEO

Thanks for the question, Omar. It's something I’ll let Ted answer it and give you a – because we've been discussing that. But we're coming from a point of view that I think at the moment we're happy with where we stand, with how we described it and I think our shareholders are happy to receive what they've been receiving. But I want to congratulate you on your new position and good luck! We're looking forward to working with you.

Ted Young, CFO

So Omar, yes, it's a fair question. I think the alternative would be some sort of a formula, and we kind of struggle because it's not a great match between income statement accounting and shipping with cash flow necessarily. So for example, you know, a common metric has been EPS for people to pay out. You know, if you look at this quarter, right, you know, we reported $0.62 of net income. We paid out 133% or something. That's not a customary ratio and while I know people like to be able to expect something, you know, given the volatility we’ve seen in shipping, we think our approach makes the most sense because while we're obviously focused on doing right by shareholders, one of the ways we think we can best do it is by focusing on total shareholder return. Trying to manage for stock price or yield is going to be awfully tough in this sector, whereas you know, as we pay out dividends that improve our total shareholder return, which we think shareholders care about.

Omar Nokta, Analyst

Thanks, Ted. No, I appreciate that. It's just good to kind of hear that perspective. It definitely feels more and more with each passing quarter. I’m not sure if ‘conviction’ is the right word, but it definitely feels like you guys are more confident in how you're positioned, especially with recently refinancing your debt. I did maybe want to ask a bit more of a bigger picture, kind of looking at the company and the business. It looks like cargo flow here has been pretty plentiful in recent months as you guys outlined and it looks like that's going to continue from OPEC and from the U.S. We do also have a sizeable order book as we look into next year. How do you think about Dorian's positioning in the market as we move ahead here, over the next 18 months?

John Hadjipateras, Chairman, President, CEO

Tim, do you want to give our perspective on that?

Tim Hansen, Chief Commercial Officer

Yes, so as you rightly said, there’s a lot of new buildings coming into the market. I think we have, by our shoulder, a few of the older ships. You know, also as John mentioned, we have one new building and three long-term time charters coming. So I think we kind of key our position in the market size-wise, even though the market has grown, and we also see that this supply we expect from the U.S., which has been much more positive than previously forecasted, and the ramp-up of the Middle East supplies, is going to be enough to support and keep the market going, even with a number of new buildings coming in. That is being helped, and I think we mentioned it in the last quarter, also by the new regulations in ‘23, which we expect to somewhat slow down the growth in the fleet, and we are still seeing a lot of delays in Panama and so on. So we think that, all-in-all, these inefficiencies in the market, combined with the huge production and an increase of products, will be sufficient to sustain us safely through the next couple of years, and then it starts looking better again.

Omar Nokta, Analyst

Very good. Well, thank you for that, and John, thanks again for your comments. I'll turn it over.

John Hadjipateras, Chairman, President, CEO

Thanks a lot, and wishing you all a good August. We look forward to seeing you and hearing you at the next quarter call. Thank you very much.

Operator, Operator

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day!