Navigator Holdings Ltd. Q1 FY2021 Earnings Call

Thank you for standing by, ladies and gentlemen, and welcome to the Navigator Holdings Conference Call on the First Quarter 2021 Financial Results. We have with us Mr. David Butters, Executive Chairman; Mr. Harry Deans, Chief Executive Officer; Mr. Niall Nolan, Chief Financial Officer; and Mr. Oeyvind Lindeman, Chief Commercial Officer. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. I must advise you that this conference is being recorded today. And now, I pass the floor to one of your speakers, Mr. Butters. Please go ahead, sir.

Thank you and good morning, everyone, and welcome to our quarterly conference call. Now, as we conduct today’s conference call, we will be making various forward-looking statements. These statements include, but are not limited to future expectations, plans, and prospects from both the financial and operational perspective. These forward-looking statements are based on management assumptions, forecasts, and expectations as of today's date and are, as such, subject to material risks and uncertainties. Actual results may differ significantly from our forward-looking information and financial forecast. Additional information about these factors and assumptions are included in our annual and quarterly reports filed with the Securities and Exchange Commission. Now, before handling over the call to one of us, to Harry and our London team, it might be a little bit helpful to look back to where we were at the end of last year. As we entered 2021, we were full of conviction that we had reached an inflection point that we had been working on and waiting for the past number of years. Our export terminal was operational, and the critically important storage tank had just been commissioned in mid-December. Everything was good. Indeed, the operating results for December and January confirmed with an exclamation point that we were about to achieve operating performance not seen since 2015. But the February Texas freeze changed all that. Extraordinary natural events shut down the Texas and Louisiana electric grid for weeks and, more importantly, inflicted severe mechanical damage to the area's refining and petrochemical plants. Ethylene became scarce, prices spiked to global highs, and domestic inventories depleted. No barrels moved through our terminal in March. During this period, we issued a force majeure on our terminal, and our tightly scheduled ethylene vessels experienced complete disruption. Nevertheless, we generated positive quarterly results and an improved balance sheet. January's strong performance offset a very difficult February and March, showing us Navigator's underlying strength and powerful earnings potential under normalized conditions. As Harry, Niall, and Oeyvind will shortly discuss, since the end of March, conditions have gradually improved, suggesting that we may still be entering into an environment more characteristic of those prevailing at the end of last year and the very beginning of this year. So now, as just before I pass the call over to Harry and his team, I would like you to be sure that you open up your website to Navigator's site, and under the Investor Presentation section, refer to the supplemental information. I think you will find that to be very helpful as you follow along. So, Harry, why don't you pick up from there, please.

Thanks, David. Good morning to everybody on the call. I hope you're well and keeping safe. I'm pleased to report that Navigator Gas has performed robustly during the period and has had the best start to the year since Q1 2016. This is our fourth profitable quarter in succession, with income translating into earnings of $0.05 per share. During the period, the company achieved adjusted EBITDA of $31 million, representing a 22% increase in the same period in 2020. This reflects both strong operational performance by the company, as well as the fruition and completion of our significant investment into the business in prior periods. The final capital contribution to our Morgan's Point ethylene terminal joint venture was paid in late January, bringing our total investment in the terminal to $146.5 million. The shipping business has performed well during the period, and we look forward to more growth as the market environment improves. As we have previously announced, we completed the anticipated merger of Ultragas's fleet and business with Navigator. This transformative combination will create a fleet of 56 vessels, which will enhance our market offering and provide much-needed flexibility and support to our customers. Ultragas's fleet of seven more than 22,000 cubic meters handysize semi-refrigerated vessels, five 12,000 ethylene vessels, and six gas carriers under 10,000 cubic meters will position us to engage new clients and new markets through increased coverage and geographical reach. We anticipate that the enhanced scale and combined fleet will provide cost savings, significant synergies, and efficiency throughout the business. The additional vessels will allow us to capitalize on the structural growth of LPG and petrochemical gases being exported from the Repauno, Pembina, and, of course, our own Morgan's Point terminals. All of which are now on stream and ramping up for exports. We believe these incremental volumes, combined with the extremely low level of handysize new-build activity, as can be seen in slide 15 of the supplemental pack, will tighten the market, increase utilization rates, and further improve TCE rates. The proposed Ultragas transaction is progressing well, with completion expected early in Q3 2021 on the same commercial terms as agreed on the LOI. This combination is a cashless transaction, involving approximately 21.2 million shares issued to Navigator's common stock to Ultranav, and the assumption of approximately $197 million in the Ultragas net debt, as well as its working capital. When completed, this combination will introduce another major Navigator shareholder, with long-standing experience in the maritime industry, which we believe will be beneficial for all our shareholders. The transaction is accretive to Navigator's standalone budget in terms of revenue, EBITDA, and EPS. We expect the combination to complete in line with our expectations, subject to concluding definitive binding agreements, board approvals, and other customary closing conditions. We were very pleased to announce in late April that Navigator had successfully secured 12-month time charters with Mitsui, utilizing four of our semi-refrigerated handysize vessels to transport ambient propane from the newly commissioned Pembina terminal in Prince Rupert, Canada, to customers in Asia. This is a brand new trade route between the west coast of North America and Asia, which bypasses the need for a Panama transit, thus minimizing transit times and boosting efficiencies. On its own, that deal ties up over 6% of the total handysize semi-refrigerated fleet and approximately between 13% and 18% of the available semi-refrigerated spot vessels. As discussed in the previous call, utilization rates finished 2020 strongly and continued into January, reaching 96% before being hit by the headwinds of the southern freeze and the Mont Belvieu pipeline, and subsequent Morgan's Point terminal force majeure in early February. Unsurprisingly, given these issues, utilization rates fell to the mid-80s, leading to an overall fleet utilization in the quarter of 88.2%. This continued into Q2 as olefin capacity started up and the US domestic olefins pipeline was replenished, which brought with it strong domestic demand and pricing. All of this put pressure on export volumes regarding the ethylene arbitrage. But thankfully, there are plentiful supplies of the most advanced olefin feedstock in the US, ethane, which, coupled with olefin overcapacity and the efficient ethylene market, has again ensured product is placed for movement. As we've seen recently, the hubs have opened again to Europe and Asia. Our Morgan's Point ethylene terminal has now restarted and is ramping up throughput. We expect June's export volumes to be close to those of January 2021, and we anticipate exports for the remainder of the year to be at nameplate capacity of 1 million tons per annum. We are looking forward to running this unit at full rates to see if we can squeeze even more than the 10% incremental capacity we've already identified out of the plant. As previously discussed, the forward order book for new builds stands at around 5%, with minimal vessel deliveries in 2021, 2022, and 2023. Twenty percent of the entire handysize fleet is no more than 20 years old. So there's absolutely no pressure coming from vessel supply in our growing market. At long last, the three incremental US export terminals have been completed and are starting to export product. We estimate that these channels, when running at full capacity, will require around 12 to 19 handysize vessels to service them. These tailwinds are bolstered by handysize exports, which are also ramping up at Marcus Hook, even before the Mariner East 2X project is completed later in the year. It was no surprise, therefore, that we maintain a positive outlook on short- and medium-term TCE rates and the handysize market in general. There are many factors beginning to exert upward pressure on rates. With incremental exports, limited new builds, improving customer sentiment, and higher oil prices, it genuinely feels like we're on the cusp of a significant uptick in utilization and market rates. With our existing fleet of 38 vessels, our ethylene JV terminal now fully funded and fully commissioned, and with the company on the verge of a merger that will dramatically grow our presence in the specialty LPG and petrochemical gas sector, Navigator Gas is poised to capitalize on these conditions. We expect that benefit, when it arrives, will go straight onto our bottom line. With these few remarks, I'd like to hand you over to our CFO, Niall Nolan, who will take you through our Q1 financials. Niall?

Thank you, Harry. And good morning, all. The company generated net income of $2.8 million during the first quarter of 2021, which compares very favorably to the loss of $8.2 million made in the first quarter of last year. Last year, of course, was negatively impacted by the initial market's reaction to COVID-19, as the world at large reacted nervously to what was about to unfold. Who would have thought that a year on, the lasting effects of the pandemic would still be impacting our lives? Having said that, the recent quarter's profit has been the best, as Harry mentioned, since the first quarter of 2016. The total operating revenue from the vessels during the first quarter was $85.7 million, up $4.5 million from the $81.3 million generated during the first quarter of last year, but slightly behind the $87.4 million generated during the previous quarter, Q4 of 2020. Average charter rates during the most recent quarter were $21,950 a day or $667,830 per month, an increase from the $20,850 per day in the first quarter of last year, as well as an increase from the $21,100 achieved last quarter. However, utilization was more challenging during the quarter. As both David and Harry mentioned, January started very strongly with utilization of 96%. But following the mechanical integrity issues with a 16-mile pipeline between the ethylene caverns and our terminal and the Texas winter freeze that hit on February 15, the vessels we had lined up to load ethylene at the terminal at that time were unable to do so and had to suddenly find alternative employment. This affected their earnings, and utilization fell to the mid-80s during February and March, resulting in an overall utilization of 88.2% for the first quarter. This compared with 89% for the first quarter of last year and 91% for the fourth quarter of 2020. The Luna Pool earnings, which are derived from the current 14 vessels in the pools, are aggregated and allocated to pool participants in accordance with pool points, resulting in a net gain to the company of $1.1 million for the quarter from the other participants' vessels in the pool. Three vessels entered dry dock for their scheduled surveys during the first quarter, taking a total of 70 days. The cost of the two dockings that were completed during the quarter was approximately $2.7 million. In total, 14 vessels are scheduled to be dry docked during 2021 for an anticipated aggregate of 300 days and an estimated total cost of $18 million. Following the final capital contribution toward the construction of the terminal earlier in the first quarter, dry docking costs are the only remaining planned capital expenditures for the company during 2021. Voyage expenses decreased $1.9 million during the quarter to $15.6 million from $17.5 million in the first quarter of 2020. These are pass-through costs reflected in revenue, and the reduction results from both reduced bunker prices and bunker consumption. Vessel operating expenses were $27 million for the first quarter, equating to $7,892 per vessel per day, which is a 1.5% decrease from the vessel OpEx incurred during the first quarter of 2020. General and administrative costs were $6.3 million for the first quarter, a 3% reduction on the $6.5 million incurred during the first quarter of last year. Other income of $72,000 for the first quarter relates to management fees received from the other participants for our management of the Luna Pool. Interest costs for the first quarter were $9 million, 22.3% less than the first quarter of last year, primarily as a result of reductions in US LIBOR. Applicable US LIBOR at the beginning of 2020, prior to COVID-19, was 1.96%, whereas at the beginning of 2021, and as it remains the case today, US LIBOR is approximately 0.24%. Due to the issues with the terminal pipeline referred to earlier and the weather in Texas during the quarter, the share of results of the equity accounted joint venture showed a loss of $600,000 for the quarter. However, as Oeyvind will refer to, volumes are picking up and returning to normal. We did receive our first cash distribution of $850,000 from the JV during the quarter based on the operational performance of January 2021. Net income for the first quarter was, therefore, $2.8 million, or $0.05 per share, compared to a loss for the first quarter of 2020 of $8.2 million, or a loss per share of $0.14. Cash at March 31 stood at $85.2 million, an increase from the $59.3 million at the end of December 2020. We had a further $37.6 million available from undrawn revolving credit facilities associated with our secured vessel loans, taking total available cash to $122.8 million. In January, we made the expected final capital distribution of $4 million toward the construction of the ethylene terminal, taking our total contributions for the terminal to $146.5 million, which is under the budget set two years ago before construction started. It was delivered on time and safely, a significant success given the pandemic-related challenges over the past 12 months. We drew this $4 million capital contribution from the terminal credit facility during the quarter, as well as a further $14 million, which was available for general corporate purposes, resulting in that facility becoming fully drawn at $69 million. Reaching construction practical completion at the beginning of the quarter, the terminal facility was converted into a 5-year amortizing term loan, attracting interest at US LIBOR plus 2.75%. Our total debt at March 31 stood at $849.6 million, which incorporates six bank loan facilities secured on our vessels, the terminal facility, and two Norwegian bonds. There are no maturities on any of these facilities during 2021. With the exception of an $18 million repayment in March 2022, there are no maturities on any facility until late in 2022. And with that, I'll hand you over to Oeyvind.

Thank you, Niall. And morning, everybody. If you take a look at page eight of the supplementary presentation, the ethylene graph is quite telling on the right-hand side. It shows that global ethylene prices have gone through a roller coaster over the last six months. At year-end, US ethylene price stood at $700 a ton, the dark blue line, and US ethylene exports reached an aggregate of 100,000 tons, nearly 80,000 tons of this was exported through our joint venture terminal. Now we consider a total of 100,000 tons per month a normal state of operations from the US. Today, the US ethylene prices are quoted at $670 a ton, nearly half of what it was during its peak in April. The US ethylene price is projecting further backwardation, meaning it's reducing in the future, and exports are increasing as a result of this widening arbitrage to international markets. And why is that? Well, we are seeing the fundamentals of continued cheap ethane available in the US and excess domestic production getting back up, which will move the market to a more normal state of play. And that is good for us. The export volumes are reacting positively, increasing month-on-month, as you can see on page nine, illustrating the aggregate US ethylene exports. As you can see, the exports are moving toward what we call the normal state of 100,000 tons per month for July. A high oil scenario further underpins the attractiveness of these derivatives produced by natural gas liquids. To put into perspective, these 100,000 tons of exports of ethylene per month translates into about 16 handysize ethylene vessel demand, which, from a fleet of 38 ships on the water today, captures nearly half the available tonnage, which is quite extraordinary. We are also about to deliver the last of the four handysize semi-refrigerated ships to the Canadian West Coast LPG project, as Harry just mentioned. The first three have already successfully loaded from this new terminal and discharged in Northeast Asia. This is all incremental demand for our segment. Four LPG vessels are effectively removed from the spot market, supporting the rest of the fleet. In addition, it is the first structural handysize trade for LPG in the Asia region, with prospects of more to follow. The Repauno terminal in New Jersey is now operational. We loaded the first handysize cargo from this facility in April, with two subsequent cargoes in May. This translates into incremental demand for one semi-refrigerated vessel. But please note, a demand for one additional vessel may not sound like much, but in a pool of only 63 units, every new opportunity can influence the supply and demand balance in our segment. One of the short-term challenges facing the general LPG export markets for all LPG ship owners is the lack of arbitrage today from the US. This is less impactful for the specific handysize projects that we have mentioned but affects the shipping industry as a whole. Today, US propane is priced at $1 per gallon roughly, compared to about $0.5 per gallon at the same period during 2019 and 2020, and the inventory levels in Mont Belvieu are lower historically by about 10 million barrels today. At the same time, domestic propane consumption has increased by 10% during the last couple of months and the EIA gives an interesting explanation. Americans have been working from home due to COVID restrictions and many have had to heat their houses with LPG. Under normal circumstances, they would have gone to the offices, which generally use electricity or natural gas for heating. Once the LPG fundamentals normalize, we expect overall LPG exports to revert back to 2019 levels, supporting the wider business. In conclusion, the stars are aligning for our segment and for Navigator Gas. The ethylene fundamentals are reverting back to where they should be, creating demand for our ethylene Luna Pool. Incremental demand from the handysize terminals is starting to take effect. We have a historic low order book, negating any impact on the tonnage situation. Therefore, the overall market dynamics over the next half year show many similarities to what created the handysize high of 2015. Surprisingly, when I say this, going back to normal is good for Navigator. Thank you very much.

Annie, you can open up the call for the question and answers now.

Thank you very much, sir. Our first question today is from Sean Morgan from Evercore. Please go ahead. Your line is open.

Hey, guys. So, we've talked a lot about back to normal on the call. It's kind of a bit of a theme. But back to normal, we really, you know, haven't had a lot of normal because there have been all these sort of one-off disruptions that were macro-related and exogenous to the company. So, if we look at January as maybe a good benchmark for the ethylene export terminal, what does Q2 look like in terms of utilization that you see in, I guess, over the quarter of kind of a normalizing quarter? And how does that compare with Q3 if we can kind of hold the rates that we've seen in June so far?

Thanks, Sean. So, it kind of illustrates part of the answer to your question is on page nine, the US ethylene export graph. You can see the middle sort of peak there, which we call normal operation, everything was at our standard being 100,000 tons exported from the US during that period of December, January. So, then, of course, we know what happened. And you see that through March, April, May. So, the utilization, as a result, didn't exceed 90%, and it continued in sort of the same vein as the first quarter because of that valley as you see on that graph. Now - but then since then, June is kicking up, and then July. Our expectation is back up to the 100,000 aggregate mark with roughly 80% from the joint venture terminal.

And then in terms of actual dollar contribution for the income statement, we feel kind of targeting, I mean, it's been really lumpy, obviously, because of all these sort of one-offs. But are we thinking maybe like $9 million a quarter? Is that like a good - is that still kind of a good estimate? Or it was just 10% debottlenecking and then maybe bring that a little higher?

Sean, yeah. I mean, the terminal from Q2 is still going to be lumpy because of the reasons that both David mentioned at the outset and Oeyvind subsequently. I think from what - when we're talking about normal, we're talking about from June onwards. We have said that at that level, it would be around $20 million to $25 million of EBITDA on an annualized basis. So, it's about $6 million per quarter.

Yes. And if I could just squeeze in one macro question real quick. In terms of the US demand, I appreciate that the spreads are widening and that's going to be very advantageous. But do we - are you sort of contemplating a much more normal scenario for when we get back to say colder winter months and essentially like a lower domestic consumption so that that spread can kind of be maintained through the end of the year?

Yeah, I think the - on the ethylene spread, our belief is that that's not very much - it's not relating so much to seasonality, because the feedstock is ethane. Now, if you talk about propane LPG, yes, there is some seasonality in the US market because traditionally, consumption goes up in the winter for obvious reasons. But what has caused kind of narrowing of LPG arbitrage from the US - not ethylene, LPG as its lack of reduction in production during the freeze, increased consumption, as I mentioned about people working from home is quite interesting, and therefore, the arbitrage sort of shut down the trade of LPG. Now, we don't do - our business is less LPG from the US from the spot market. We do a lot now because of the projects we have talked about, and they are projects that are contracted and so forth, the less impact. But I think that LPG arbitrage will sort of increase again in general once the historic inventory levels get back up to where it's supposed to be, and that is ongoing.

Okay. All right. Thanks. Thanks for the time, guys.

Thanks, Sean.

And our next question for today is from Randy Giveans from Jefferies. Please go ahead. Randy, your line is open. Please ask your question.

Gentlemen, can you hear me now?

We can.

Yes, Randy, we're waiting for you.

Reunited and it feels so good. Two questions for me. First, does the Ultragas merger limit any future plans or maybe an expansion of the ethylene terminal? And secondly, now that you have acquired some small LPG carriers, is there any appetite for further acquisitions and consolidation on the smaller LPG side?

Yeah, the first one, let me take it, Randy. No, it doesn't. So we're completing the merger, which is a cashless merger, you know, which is wonderful. It doesn't over-leverage our balance sheet, and that would give us much more opportunity. So it's not either or.

Okay.

On the second question about the small vessels, Randy, we're still looking at it. It is something that is new to us. And we can't wait to actually get in because, as you know, we're not allowed to discuss certain things ahead of the close of the merger, so we can't wait to get and talk more details with our new partners at Ultragas to find out how these vessels operate and where they operate and look for other opportunities with them. We know they've done a very strong pool called the Unigas fill, which has been around for a long period of time, and those guys manage those vessels very efficiently and very well.

Got it. All right. And then, I don't know if you answered this earlier. Clearly, I had some phone issues, but I'll ask it. Obviously, on the Pembina, Repauno, great to see those both online. Were you able to quantify how many, maybe handysize semi-refrigerated vessels will be employed on those projects on an annual basis? And I know you showed some cargoes per month in your slide deck, but do you have an annual number on how many of those vessels are pulled out of the market?

Yeah. So, Randy, excellent question. The first part is easy to answer. So Pembina one, there are four ships on 12-month charters, so that will reflect four ship demand on an annual basis. Now, they're also talking about the fifth ship, so there might be more coming from that opportunity. On the other side, on the Atlantic side, the Repauno terminal, so we've loaded two cargos in May and that translated to full employment for one ship. And that went to the Caribbean. So we paid those tons to go further afield while they need more ships. Now, the specification or nameplate capacity of the Repauno, to the best of my knowledge, is 20,000 barrels a day or even more. Now, in the month of May, they only did 10,000, so half. So you'd be safe to say that that terminal, once fully operational, will need at least two handysize ships on an annual basis. So if we combine both of them, then it will be six or seven, and that going from zero to that number in our little segment is pretty cool.

Sure. Clearly impactful. I'm going to throw the third question because I think of it at the end of the queue, which is completely my fault, sorry. You mentioned current utilization. I think high to mid-80% range, continuing to climb. Is that your expectation for Q2 and Q3 now as a run rate? And how has that higher utilization impacted some of the spot handysize shipping rates?

So utilization, as we talked about on this call from Q1 to Q2, is pretty much a straight line. So it's continuing that pattern, as you just mentioned. Now, I think it was Ben's question earlier in terms of the third quarter and for the reasons we discussed, those projects, ethylene ramping up, and so forth, we expect the utilization in the third quarter to be 90 plus.

Perfect. And then in terms of impact on rates...

That should represent a return to normal state. So we're talking about the back to normalization. So that is definitely our expectation, so hopefully, that will materialize.

And is that kind of the threshold for when you really start to see rate inflection? Just trying to get the impact on rates...

From past experience, definitely. So if you go back five months to January, we had 95% utilization; it was fantastic. I think we've said that being able to push the market in the right direction in terms of freight. So by sensing, the past experience is anything to go by, we want to get 90 plus; you are getting into that zone where you can actually move the needle.

Got it. All right. Well, hey, thanks again for the patience. And it's been a long two years, but great to see things heading in the right direction. Thank you.

Thanks, Randy.

Thanks, Randy.

Ladies and gentlemen, I'll now hand back to your speakers for any closing comments.

Okay. Well, thank you very much for joining us this morning. Let's hope we don't have any other disruptions before our next call, and we look forward to that. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, that does conclude the call. Thank you all for joining and participating. You may now disconnect.