Navigator Holdings Ltd. Q3 FY2022 Earnings Call

Welcome to the Navigator Holdings Conference Call for the Third Quarter 2022 Financial Results. We have with us, Mr. Mads Peter Zacho, Chief Executive Officer; Mr. Niall Nolan, Chief Financial Officer; Mr. Oeyvind Lindeman, Chief Commercial Officer; and myself, Randy Giveans, Executive Vice President of Investor Relations and Business Development in North America. I must advise you that this conference is being recorded today. As we conduct today's presentation, we will be making numerous forward-looking statements. These statements include but are not limited to the future expectations, plans and prospects from both a financial and operational perspective and 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. With that, I now pass the floor to Mads Peter Zacho, the Company's Chief Executive Officer. Please go ahead, Mads.

Thank you so much, Randy, and good morning, everyone. Thank you for joining our call. The third quarter of 2022 was an exciting period of growth for Navigator. We have announced two joint ventures to expand our operational capabilities in the global liquefied gas supply chain. In September, we announced that the Company has entered into the Greater Bay Gas joint venture to acquire a total of five ethylene-capable liquid carriers. The first vessel is expected to be acquired next month. The joint venture with Greater Bay Gas will result in a reduction in the average age of Navigator’s fleet and will allow us to take advantage of more efficient vessels that reduce our emissions while also offering improved economics for our customers. We’ll see the rest of the fleet being acquired during the course of 2023. What’s more, yesterday we announced our participation in an expansion project at our existing export terminal joint venture with Enterprise Product Partners in which we own a 50% share. The expansion project consists of modifications to an existing ethane refrigeration unit, which will provide the capability to refrigerate both ethane and ethylene alongside providing additional ethylene refrigeration capacity to our export terminal, which is the world's largest ethylene export terminal. Looking at the quarter overall, our operating revenues for the third quarter increased by 7.9% compared to the same period last year. This was mainly due to an increase in vessel available days, fleet utilization, average monthly time charter equivalent rates, and pass-through voyage costs. Notably, the demand for ethylene from Europe that we witnessed in the second quarter of 2022 continued into July and August, with about 80% of U.S. ethylene exports transported to Europe. This highlights the growing importance of energy security both nationally and locally in Europe. Utilization for our fleet in Q3 was 85%, which was in line with the same period last year and in line with our guidance for the quarter. I'd like to thank all staff of Navigator for their excellent work and contributions during this period and I'll just hand it over to Niall, who will take you through the financial performance of the quarter. Please, Niall.

Thank you, Mads, and good morning all. The operating performance for the third quarter of 2022 generated an adjusted EBITDA of $41.5 million compared to $40.5 million for the third quarter of last year. Although this is lower than the $55 million achieved in the first two quarters of 2022, we expect that the fourth quarter will return to or exceed those earlier quarters of this year. The total operating revenues for the third quarter were $106.8 million compared to $102.7 million for the comparative third quarter of last year; $2.2 million of this increase was primarily due to the additional handysize vessels joining our fleet as part of the Ultragas transaction in August 2021, along with a further $9.6 million generated from the nine smaller vessels that operate within the independently run Unigas Pool also acquired as part of the Ultragas transaction. Vessel utilization improved slightly during the quarter to 84.9% relative to the third quarter of last year, which achieved 84% utilization, contributing an additional $800,000 of income. Charter rates also improved slightly compared to the third quarter of last year, accounting for an additional $0.5 million overall increase in revenues. Average charter rates were just over $22,000 a day or $670,000 per month for this quarter compared to $21,900 per day or $665,000 per month for the third quarter of last year. Four vessels entered dry-dock for their scheduled surveys during this third quarter, in addition to seven during the first half of this year, taking a total of 106 days with a capital cost of $3.7 million. The dry-docking of two of these vessels either has finished or will finish during the fourth quarter, along with a final single vessel entering dry-dock during this coming fourth quarter. As there are no new builds on order, these dry-docking costs are the only capital expenditures the Company has for the remainder of 2022. The operating revenue from the Luna Pool was $3.2 million for the quarter, representing our share of the other participants' net revenues with voyage expenses from the Luna Pool of $3.6 million, representing the other participants' share of our net revenues from the pool. Consequently, our vessels contributed $400,000 to the other pool participant during the third quarter, but we achieved a net benefit of $600,000 in aggregate over the first nine months of 2022; however, overall, this number should net to zero over the longer term. Voyage expenses increased by 20.5% or $3.4 million during the quarter to $20.2 million, primarily due to the additional vessel in the fleet, most of which were on voyage charters, thereby incurring these pass-through voyage expenses. Higher fuel costs, which form part of voyage expenses, are passed on to our customers through higher charter revenues. Our vessel operating expenses increased by 10.6% to $38.7 million for the third quarter compared to last year, much of which was due to the additional vessels in the fleet during the quarter relative to last year. Vessel operating expenses per vessel, per day did increase quarter-on-quarter by 4.2%, but remain below $8,000 a day at $7,930 per day for this quarter compared to $7,607 per vessel, per day during the third quarter last year. Depreciation on our vessels increased by 36.5% or $8.8 million compared to last year's third quarter. As I stated previously, this is in part due to the 16 additional vessels that joined the fleet in August 2021, accounting for $1.3 million of this increase, but also $6.2 million as a result of the Company's decision to reduce the estimated useful lives of all of our vessels from 30 years to 25 years as of January 1, 2022. General and administrative expenses decreased by 23.2% or approximately $1.8 million to $6.1 million relative to the comparative quarter last year. Other income, being management fees earned from other participants for the management of the Luna Pool, reduced to $60,000 for the quarter due to reduced revenue generated by the Pool. An unrealized foreign exchange gain on the retranslation of our $600 million Norwegian kroner bond at September 30 was $5.1 million, fully offset by an unrealized loss on the foreign exchange swap that we have in place, which is included in gains and losses on derivative instruments. In addition to this foreign exchange loss, the unrealized gains on derivative instruments also include a $7.6 million gain for the quarter related to further gains on the interest rate swaps as LIBOR swap rates continue to rise during the quarter as central banks globally try to grapple with rising inflation. We have fixed interest rates on approximately 55% of our debt as of September 30, 2022, at levels between 0.36% and 2%, significantly below current levels. The interest expense for the quarter was $13.2 million compared to $10.1 for the third quarter last year due to rising interest rates on the floating interest rate portion of the debt, as well as interest on the additional debt assumed as part of the Ultragas transaction. Our share of results from the ethylene terminal was $4.7 million for the quarter based on throughput charges relating to 189,000 tons of ethylene exported through the terminal during the third quarter, lower throughput than the past three quarters, but higher than the 128,000 tons of ethylene throughput during last year's third quarter, which generated $3.3 million for our share of the profit. Terminal depreciation amounts to approximately $1.3 million per quarter, giving an EBITDA for our share of the terminal of approximately $6 million during this third quarter. Our net income for the third quarter was $2.4 million, a reduction from the earlier quarters, but we expect significant improvement during the fourth quarter of this year. On the balance sheet, as outlined on Slide 7, the Company had cash of $157.1 million at September 30, with a further $20 million available from undrawn revolving credit facilities. Our minimum liquidity covenant from our various banks and credit arrangements remains a maximum of $50 million, providing significant headroom. Our total debt, which stood at $881.4 million at September 30, was reduced by $38.8 million during the third quarter. Our debt comprises loan facilities secured on our vessels of approximately $666 million, a credit facility associated with the terminal at $44 million, and two Norwegian bonds which, in aggregate, total $171.7 million. We are currently documenting the refinancing of our $215 million vessel loan facility into a new six-year facility, as well as converting our September 2020 facility from U.S. LIBOR to SOFR and at the same time extending its maturity by one year to September 2025. In addition, the 600 million Norwegian kroner denominated bond equivalent to approximately $71.7 million, with a maturity of November 2023, has a current call option enabling the Company to exercise the call on this bond, resulting in a redemption payment premium of 1.79%. On Slide 9, we outlined the estimated cash breakeven for 2022 at $18,570 per day. This low level allows us to generate positive EBITDA even in the toughest of market conditions, and we have remained cash generative throughout the shipping cycle. Our expected daily OpEx across the vessel segments ranges from $6,900 per day for the smaller vessels to $9,100 per day for the larger, more complex and older ethylene vessels. We also provide a range of expected annual spends for vessel OpEx, G&A, depreciation, and interest expense on that slide. On Slide 10, we outline our historical quarterly EBITDA, showing an uplift in Q3 2021 and in Q4 2021, the quarters in which the positive impact of the Ultragas transaction were achieved. It also shows a consistent EBITDA of approximately $55 million over the prior three quarters, with only a dip in the third quarter to $41.5 million, which we anticipate will be addressed in the fourth quarter. With that, I'll hand it over to Oeyvind for his remarks.

Thank you, Niall. Before we get into the detail, I just want to highlight that the third quarter, albeit challenging, met our guidance of 85% utilization. However, Q4 is shaping up in a very positive way, which we'll talk more about. It's really a tale of two quarters and quarter four with higher volumes of ethylene exports, destinations being in the Asia-Pacific region, and 10 ships are now fully employed on their time charters. Ammonia is really driving utilization up above 90%, but we'll spend a little bit more detail on that later. If you move to Slide 12, we are seeing increasing production of U.S. natural gas liquids, including ethane, propane, and butane, while U.S. domestic demand remains flat, driving the growth in U.S. exports, which, in turn, has a positive impact on gas carrier demand. In addition, U.S. propane has widened its competitiveness compared to oil, both as a fuel and as a feedstock to the petrochemical industry. We're starting to see an uptick for handysize exports in the graph to the lower right, where October had 40% higher handysize LPG export volumes compared to September of this year. Similar to LPG, ethane remains competitive as feedstock for the production of ethylene. Cheap ethane translates to low-cost production of ethylene for U.S. producers. The graph on Page 13 shows ethylene arbitrage opportunities to international markets. The one next to it shows U.S. exports of ethylene, which increased from about 70,000 tons in September to about 110,000 tons in October. There's a significant increase for a small market. Not only do we see export volumes going up, but we also see changes in importing locations. During the third quarter, the majority of the ethylene volume was heading to Europe, while during the first weeks of the fourth quarter, we see this shifting to primarily Asia-Pacific destinations, effectively doubling the north per mile sale for each ton exported. The underlying demand for additional ethylene exports is evident. Just to give you an example, during October, we maxed out on our export capacity at the terminal. If we had more capacity, we would have exported more. With NGL production increasing and continued ethane rejection, we firmly believe that the expansion of this capacity will add value to the ethylene supply chain for both producers and international consumers. Frankly, the industry needs it, and Randy will share a bit more color on this later in the presentation. The other major story is ammonia. Due to the supply constraints of traditional ammonia exports from Ukraine and high natural gas prices, Europeans are facing low domestic production, leading to a double negative for Europe, but the demand is still there. People need fertilizer for food production and food security. Hence, European countries need to look beyond their borders to source their ammonia supply. Europe is now sourcing ammonia from locations we would never have dreamt of in the past, such as China, Australia, Bangladesh, and the Middle East. You can clearly see a decrease in ammonia imports from Europe since February of this year on Page 14, followed by a sharp increase thereafter; however, from places outside of Europe. Consequently, we have increased our ammonia employment during the third quarter from 7 to 10 vessels. We now allocate about 20% of our earning days across the fleet to this segment and 25% if considering only the handysize portion of our fleet. This is a significant change, and these vessels are removed from the normal market, so they're not now competing for LPG or other easy petrochemical cargos, improving the supply-demand balance in those segments. You can clearly see the impact on our earning days in the following page, Page 15, where the rapid increase of ammonia in our earning states is illustrated. That is alongside ethylene, pushing utilization up to 95% in October, a stark change from the third quarter. In conclusion, the third and fourth quarters are extremely straightforward. Today, we have high volume from the terminal for ethylene with the majority of the volumes heading towards Asia-Pacific; we did not have this in the third quarter. Currently, we have 10 vessels fully employed in ammonia at the beginning of the fourth quarter, removing tonnage availability for other cardinals, compared to a 30% less utilization in the third quarter. Additionally, we see higher exports of ethane and LPG from North America for the first month of the fourth quarter compared to September in the third quarter, which positively underpins the supply-demand balance. All of this is driving utilization above 90%, and rates are following the rate increases illustrated by a sharp uptick during October for handysize, semi-refrigerated, and handysize fully refrigerated vessels. In this environment, with a very low order book, there won’t be many ships being added to the fleet. We are quite excited about what the fourth quarter can bring to Navigator. With that, I will hand it over to Randy.

Thank you, Oeyvind. Yes, it’s been a very busy few months for us recently, with the Company announcing three meaningful announcements regarding our uses of cash. First, on September 30, we announced that we entered into a joint venture agreement with Greater Bay Gas Company. The joint venture is 60% owned by Navigator and 40% by Greater Bay Gas, and tends to acquire five ethylene vessels listed in the table below. Two of the vessels are 17,000 cubic meters built in 2018, and three of the vessels are 22,000 cubic meters built in 2019. The vessels are expected to be acquired on a staggered basis between December 2022 and November 2023. The total purchase price for the five vessels is $233 million, and Navigator’s 60% portion of that is a little under $140 million. For capital outlay, assuming 65% debt financing, around $90 million of Navigator's $140 million commitment will not be needed up front, with the total cash required for the acquisitions likely being less than $50 million, spread out upon vessel delivery over the next 12 months. Secondly, on October 18, we announced the board's authorization for a share repurchase program of up to $50 million of NVGS common stock to be implemented via open market purchases, privately negotiated transactions, or in accordance with an approved trading plan. There are numerous reasons for this, primarily that repurchasing shares below NAV is an effective use of cash and boosts our NAV per share. Also, our share price was above $15 just as recently as June, but has been sold off with the broader markets in recent months. Additionally, this program diversifies our uses of cash, which will likely be split between debt repayment, terminal expansion, fleet renewal, and capital returns to shareholders. Most recently, yesterday afternoon, we announced a project under our existing 50/50 joint venture with Enterprise Product Partners to expand the ethylene export terminal at Morgan's Point. Construction is expected to commence in the first quarter of 2023 and end in 2024, at which time the expansion project is expected to be fully operational. Current limited spot cargo availability is leading new customers to discuss multi-year off-take contracts, so we expect to contract the majority of the off-take volumes before project completion. In terms of specific volumes, CapEx, and timeline, we will not be able to provide exact details today, but we do expect to publish a joint press release with all of these details in the coming weeks. Please stay tuned. With that, I'll turn it back over to Mads for closing remarks.

Thank you, Randy. So if you look at our financial position in Navigator, right now you can see that we have built cash and debt during the past, and the flexibility that our robust balance sheet provides allows us to pursue both growth opportunities and capture returns. In Q3, our fleet utilization was subdued as expected, and so was the terminal throughput. Ammonia, though, was strong, and we now see that we have 10 vessels transporting ammonia. In Q3, we announced two exciting growth prospects and a share buyback; looking into Q4, we can see significantly higher utilization than what we saw in Q3, with October running above 94%. We believe we are on solid ground when we expect that our utilization will exceed 90% for the full quarter. All three product segments that we transport show strength in demand, and as we speak, the terminal is running above nameplate capacity. Therefore, we think the outlook for the coming months looks robust, and we will be happy to take some questions from you. Back to you, Randy.

Yes. Thank you, Mads. Operator, we’ll now open the lines for some Q&A. So first question, your line should be open.

Hey, can you hear me?

We can hear you, Ben. How are you?

I'm good, thanks. So I have a couple just really quickly. I appreciate that you can't, or that you're not in a position to be able to talk too much about the terminal, but congrats for finally getting it. But I'm curious how, if you could maybe Niall, how are you thinking about funding? We'll see how much it is or whatever, but clearly, it's going to be some CapEx. What's the source of funds for this, do you think?

Yes Ben, hi. The CapEx, as Randy has said, is likely to be spent over the next two years. So it's quite spread out. With our starting point in terms of cash as to where we are now, we actually have sufficient cash and existing resources to pay for our share of the extension. That said, having an asset which has cost north of $250 million in total, and having no debt is not particularly good use of capital. So, we are exploring options as to how we can best finance it using the lowest cost of capital. You're aware that there is no debt allowed within the joint venture itself, making traditional bank financing more difficult.

Okay. Yes, that makes sense. And if I've got three questions so far. But I wanted to dig in a little bit on utilization. Obviously, it sounds like it's getting a lot better, which is good to hear. But if I just think of this from the perspective or think of your utilization, especially after adjusting for vessels that are on time charter. So, utilization for those not on time charter would appear to be well below 80%. It seems to me that from a net basis you’d be doing a whole lot better to just put those vessels on time charter and have full utilization, even if you give up a little bit on rate. Can you help me understand why that might not make sense?

So Ben, on Page 15 in the presentation, there's a chart that shows the earnings states and where the ships are employed across different segments. In October, you can see a significant spike with ammonia time charters, LPG time charters, and petrochemical time charters making up a large portion of those vessels. Most of them are on time charter. We've been exploring some of the reasoning behind your observations. The LPG spot is currently not very active, while the petrochemical spot tends to be more reliable, as it operates more on a spot basis rather than being as structured as some other segments. I believe that graph from October illustrates our progress regarding the points you're raising.

Okay. And assuming that ammonia continues to be a bigger piece of the pie, you would expect, let's say, next year or into the future better utilization across the fleet, is that fair?

I mean, if you're generally the larger time charter portion, you generally have a higher utilization. So that is correct. We believe that ammonia is going to grow and is definitely not going to decrease for us, given how we see the world and what's happening in Europe with energy prices. So, I think that is there to stay, which will obviously prop up utilization overall at a higher level than had we not. So, I think that’s the road forward.

Okay. And then lastly for me, just strategically, I appreciate that you sold one of another one of the older planet vessels. As I think about sort of where the business is shifting a little bit more toward or increasing your footprint on things related to infrastructure and connecting the dots with respect to supply chains, et cetera. Then I compare it to the LNG business, where especially in the last number of years, you've seen a number of LNG carriers being converted into floating storage or re-gasification units or whatever. Is there any possibility of being able to do that with your fleet, maybe even some of those older vessels? Or are the dynamics too dissimilar and it's not really practical?

Mads, will you take that?

Yes. When it comes to our overall strategy about the mix between shipping and terminal operations, we are certainly looking into this and would like to expand. We see some very good synergies in this vertical integration, allowing us to deliver better service by having a broader piece of the total supply chain. Therefore, we will work with some of our existing partners to explore further opportunities in this area. We've talked about how we expect opportunities to emerge, possibly more than we can see currently on the import and export side. I think Navigator would be well-positioned to engage in those discussions which we see as attractive. I'll leave it to you to talk a little bit more about how we might use our existing fleet for such purposes.

There are definitely opportunities for using assets, even older assets for infrastructure projects. For instance, we are in discussions within a location where we can use the tanks, the gas tanks in a ship, one of our older ships, as storage either floating or onshore. The ship hull has a finite life, but the ship tanks can live for a very long time. So, there is added value in having those assets and our interest in developing infrastructure with some of the aging assets.

So a possibility maybe, maybe nothing that or at early stages, I suppose, is how I'm hearing that. Is that correct in terms of using existing assets for that?

Correct.

Ben, just one point of clarification: you mentioned this sale, referring to the Navigator Magellan, which is our oldest ship, at 24 years of age. It is not one of the ethylene-capable ships; it's a regular semi-refrigerated ship. And at 24 years, given our 25-year policy to sell it with one year of its economic life left, at $12.7 million, it was considered to be a good deal.

All right. With that, next caller. Omar, I think you're on mute.

Sorry about that. Can you hear me now?

We can hear you.

Omar Nokta from Jefferies. Just a couple of quick ones for you. Randy, you mentioned the share purchase program as a way to take advantage of a discount of stock price relative to NAV. How are you thinking about that buyback at the moment? One, have you put that to work since the announcement? I know there are blackout periods, but has it been put to work? And then two, how do you think about deploying that capital while you await the finalization of the agreements with Enterprise Product on a CapEx plan for the build-out of the terminal?

Yes, good question. First, we are still in the blackout period. Obviously, we had the project announcement as well as this earnings call. So, following these two events, we should be lifted from the blackout in the near term. We have not repurchased any shares yet. Regarding balancing the two, as Niall said, the CapEx payments for the terminal expansion will be spread out over the next 18 to 20 months, so we certainly have room for both. I would expect a simultaneous use of cash.

Thanks, Randy. And then just as a quick follow-up, I know you mentioned, and you're pretty clear that you can't give specific details on the expansion. Is there anything you can provide in terms of the big picture magnitude? Are we talking about a doubling of the facility? Any color you can provide to give us a frame of reference?

It would be good for us to wait and have that discussion once we do the joint announcement together with Enterprise. This is really when we will fold out more detail for you.

Okay, I’ll try. I’ll think about that. And Randy you've warned it. Okay. Now thanks. That's it for me. I'll turn it over.

Thanks, Omar. Right, next caller.

Hey team. Can you hear me? This is Sean Morgan.

Howdy, Sean. Yes, we can hear you well.

All right. Okay, so, given the constraints on your ability to talk about the current terminal expansion, maybe we can kind of shift gears and sort of look at the broader possibility for other JVs or other partnerships across the U.S. Gulf and other existing maybe brownfield sites that you think or partners that you could do expansions of ethylene exports beyond the Morgan's Point location.

Hi, Sean. I think, ethylene, we have the most efficient, largest ethylene export terminal in the world together with Enterprise Product Partners in the U.S. Gulf. So, we are expanding it. Any additional ethylene infrastructure beyond that, I would certainly doubt. We are focused on ethylene, together with Enterprise. However, there are other products, C4s, C3s, ammonia, blue ammonia, green ammonia, and CO2. So, there are many infrastructure opportunities beyond ethylene which we're taking very seriously.

Okay. So potentially partnerships in different products and maybe more focus on existing ethylene with Enterprise. In terms of the production exports out of the terminal, it flagged a little bit. Was that primarily driven by sort of, I know we talked before about the bottlenecks of having to ensure that you have the capacity to contractual requirements for throughput? Was that more demand-driven? Or was it more constraints on the latter factor of making sure you had enough available capacity to hit your Q4 obligations in Q3?

I think it's a very complex question. It’s quite difficult because it is partly ethane, partly ethylene, partly domestic production, inventory management, demand worldwide, and polymers. During the summer, there was a readjustment from the Europeans whereby the Asians didn’t buy because they had enough already in their inventory levels, which reduced demand, while Europe is relatively smaller than Asia Pacific. There were also issues with storage and so forth in the U.S. So, it was a whole myriad of issues that seemingly have now been sorted out, definitely for Q4 in both October and November. We also see robust demand for December. I think the world is getting back on track from an ethylene point of view.

Okay. So, if I’m understanding correctly, then the biggest barometer for kind demand and throughput, then even though Europe is gathering headlines, is still going to be China and Greater Asia, and we should focus on that as we forecast?

If you're forecasting demand for shipping, I think we go back to the general rule of thumb. We have these 25% to Europe, 75% to Asia. If you look at one of the graphs, we have it clearly shows that we are kind of in that arena again.

Thanks, Sean. Next caller.

It's Turner from Clarksons. So, just listening to prepare remarks, there were a couple of comments about fourth quarter being an improvement or seeing significant improvement. Can you give us a sense of magnitude of the snapback we could see in Q4? I mean, you previously mentioned adjusted EBITDA levels in the mid-50s. Is that kind of the benchmark that we should be thinking about?

Mr. Nolan?

I think it is. We would be disappointed if we didn't achieve at that level. We're halfway through November, so we're halfway through the quarter right now. What we’ve seen in October and to date in November indicates that would be the case.

Okay. Thank you. And then a question for…

The important number here is, of course, utilization, because an extra day of revenue goes straight to the bottom line. That’s a very direct impact, which is also why we are guiding on utilization because it's such an important factor.

Understood, appreciated. A question for Oeyvind: on the ammonia ships, if I understand correctly, those are generally at higher rates. Correct me if I'm wrong, you had a big increase there, and you talked about some of the structural drivers in Europe for ammonia demand? I mean, obviously we still need to grow food, but with 70% or so of the capacity in Europe shut down, it just seems structural at this point. But what do you see as the potential for the number of ships you could put on ammonia looking over the next few quarters?

I think we've had exponential growth already this year. Having 10 of our handysize ships in ammonia is quite extraordinary. Is it going to stop there? I think there are still some opportunities that we are exploring. I don't think we will have 20, but a few more. In a small segment, every other ship we take away from the normal market into ammonia has a positive impact. There are still some opportunities available, but I think the real point is the longevity of it. This isn’t going to drop off tomorrow. I believe this will be a structural change for some time, which is beneficial for us. Having 10-plus ships in ammonia, as you can see, already has a strong impact on some of the other business streams.

Yes. To continue with that theme on the sort of structural demand factors for shipping; there’s a lot of talk about the terminal, certainly in terms of the cash flows that could generate on its own right. But in terms of demand for shipping for your ethylene carriers, what could that mean as those additional volumes come online in terms of shipping demand or numbers of vessels or however you want to think about it?

I think it's more of a value chain going back to the value chain of ethylene. The producers in the U.S. need ethylene. Our partner, Enterprise Product Partners, is creating efficiencies in connecting crackers, expanding the pipeline network, and creating indices in view so people can manage the risk-forward curves and so forth. Expanding the terminal is all connected in making U.S. ethylene production more efficient and competitive. The international markets are contemplating whether to continue producing ethylene from NAFTA or to diversify and import from the U.S. It's transitioning from spot-play to more structural thinking about whether to build or buy. I think this is evident, and it will impact shipping.

Sure. But if I understand correctly, I guess it's fair to say that if you bring on another, say, 1 million tons of ethylene export capacity, that has to move on ships. So, that will translate to vessel demand as well.

Yes, it will impact the supply-demand balance, absolutely.

Good morning, Climent Molins from Value Investor's Edge. Thank you for taking my questions. Regarding the vessel acquisitions you announced a month or so ago, pricing seems quite attractive. Is this something you could maybe repeat going forward or was it more of a one-time opportunity you took advantage of given the existing relationship with the seller from the Luna Pool?

Mads, will you take that?

Yes, I can kick us off here. We are definitely looking to continue to consolidate the market. If you look at Navigator's history, we've done this throughout our history by buying ships when they become available in the second-hand market. This is something we are looking at closely. New build prices are very high, and the lead time before delivery of a new build ship is long. It doesn't seem very attractive to go out and build new vessels for fleet renewal or ordinary expansion of the fleet. Thus, we would much rather look around in the second hand market and see if there are owners interested in selling. That being said, it’s not a huge market. There are limited opportunities as many owners are quite content where they are. If the market starts showing more firmness, those discussions will likely stall. However, it's clearly part of our overall strategy to continue to consolidate our operations and we will be looking at any transactions that are available. Again, we’re not going to go out and pay top dollar just to be the consolidator; we will only pursue accretive deals.

That's helpful. Thank you. And you've been clear you cannot provide much commentary into the concrete numbers of the expansion. But should we expect existing capacity to continue operating normally, or should we expect some kind of impact while the expansion is constructed?

No, we should expect that the current capacity continues; so the build-out period would be separate, hence there shouldn’t be an impact.

Thank you. That's all from me.

Thanks, Climent. I believe we have one more caller.

Hi, Lisa Spandeck from CTBC. Am I clear?

You are clear. How are you?

Hi. First I would like to thank you for the clear presentation, and here I have two questions. First, I noticed that you just announced you would like to buy five vessels from Greater Bay Gas, which was operated in Luna Pool, but on Page 6, I noticed that the operating revenue from Luna Pool has actually halved compared to the same period in 2021. So is there any specific reason for the decrease?

That would be you, Niall? Maybe just talk a little bit about how that shows up in our P&L.

Yes, it's more of a commercial question. The fluctuation is due to the spot market of ethylene and there was simply less utilization on those ships that accounted for that.

Okay, thanks. And then move on to my second question. I would like to raise a question about the price gap on Russian oil and oil products, as we also have customers from Russia, and the time charters would end until 2023. I'd like to know if the price gap would have any effect on the LPG and gas carrier market.

So the two ships you referred to are on 10-year charters, so they have one year remaining. The products they transport are generally propane and butane. The buyers are in Morocco or Turkey. They’re trading between the Baltic to those countries with the LPG. We don’t take title of the products, so we don’t know the pricing that our customer and the buyers agree on.

Okay. So there won't be any effect, right?

No, not really. Not over the next 12 months in terms of the supply-demand balance of what ships are available and which ships are not. That's correct.

Thank you so much. Mads, closing comments.

Yes. Good, thanks a lot for listening in. It was great to hear a lot of good questions, some of which were answered online and some during our dialogue. We will, of course, be available for follow-ups if there are any more questions that you may have. Otherwise, we look forward to seeing either at conferences or in investor meetings. Thank you.