Earnings Call Transcript - NVGS Q4 2021

Dag von Appen, Chairman

Good morning, everyone. Welcome to the Navigator Gas Fourth Quarter Earnings Call, and I'm glad to give some introductory comments. As we conduct today's conference call, we will be making various forward-looking statements. These statements include but are not limited to the 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. Today's call will include comments from Niall Nolan, our Chief Financial Officer; and Oeyvind Lindeman, our Chief Commercial Officer. As we are confronting special geopolitical times in Europe and in shipping, I wanted to share some thoughts with you. Of course, the overriding news of the last two weeks is Russia's invasion of Ukraine. The future geopolitical scenario in Europe is being reshaped as we speak. The sudden invasion of Ukraine will have major ramifications not just for the energy market but also for the security and well-being of Europe. Major ramifications in energy, commodity and shipping markets have already started. We all want to know the impact on shipping but without knowing the end game of this invasion and imposed sanctions. We can't estimate the scope and duration of potential disruptions. Creating sanctions to the Russian economy and its companies has impacted trade supply chains already and is increasing commodity prices. Open markets and free trade are about buying from the nearest most competitive source. Geopolitical tensions and sanctions normally increase per miles because of shifting trade patterns, which require cargo shipping over longer distances. This, of course, supports increased freight rates. Europe will seek to become less dependent on Russian fossil fuels, oil, refined products, natural gas, LPG, coal and others, which, of course, is not easy to tackle in the short term. Now talking about Navigator, I would like first to thank the staff of the company for their continued hard work during the final quarter of 2021. As a result of their dedication to our company during the period, we started this year in a stronger position. Another thank you should go to the executive management team comprised by Nolan, our CFO; by Oeyvind, our Chief Commercial Officer; and Michael Schrader, our Chief Operating Officer. They have been working very well together and leading the company as a strong team in the last five months. Now let's go to Slide 3, where we have some highlights. Operating revenues were up 26% compared to Q3 2021. And before impairment losses, net income was $16.7 million, up 149% compared to the $6.7 million of Q3 2021. Net utilization increased compared to the same period in 2020. Furthermore, the company has seen increased ethylene volumes from its Morgan’s Point ethylene terminal joint venture in Houston as well as increasing ethane exports from the United States, primarily through the pricing competitiveness compared with oil. In addition, we continue to see new synergies and contributions to our revenue as a result of the Ultragas merger and are delighted by the new opportunities this has brought us. In the face of uncertainty with world events, the company can be confident that its robust balance sheet, strong cash position, flexibility and unique position in the market will continue to facilitate further growth. I would like to take this opportunity to welcome Dr. Anita Odedra to the Board of Directors of Navigator Gas. Anita was appointed as of March 10th, and we look forward to welcoming her to the Navigator Board and to benefiting from her considerable industry experience. In this exciting time for Navigator, Dr. Odedra will be an extremely valuable contributor to our Board of Directors. Okay. I would like now to hand over the call to Niall Nolan, our Chief Financial Officer, Navigator Gas, who will give you a more detailed financial review. Thank you.

Niall Nolan, Chief Financial Officer

Thank you, Dag, and good morning. During the fourth quarter of 2021, the company generated a net income of $16.7 million, or $0.22 per share, before impairment losses on nine vessels amounting to $63.7 million. This is considerably higher than the net income of $3.4 million for the fourth quarter of 2020 and $6.7 million for the previous quarter, Q3 of 2021. This $16.7 million represents the highest quarterly net income since the first quarter of 2016 and is attributed to market improvements across shipping segments and increased volumes at the ethylene Marine Export Terminal. Adjusted EBITDA for the fourth quarter was $55.2 million, in comparison with $32 million for the same quarter in 2020 and $40.3 million for Q3 of 2021. Total vessel operating revenue for the quarter reached $129.4 million, up from $87.4 million in the same period last year and $102.7 million generated in the prior quarter. The $42 million revenue increase from last year’s fourth quarter can be partly attributed to seven additional Handysize vessels that joined the fleet through the Ultragas transaction in August 2021, contributing $11.5 million, along with an additional $15.9 million from revenues generated by the Unigas Pool, which includes revenue from smaller Unigas vessels. The Unigas fleet consisted of 18 vessels, seven of which are 22,000 cubic meter semi-refrigerated Handysize vessels, similar to those operated by Navigator, while the remaining 11 were smaller 4,000 to 12,000 LPG or ethylene vessels. Two older vessels have since been sold, with the 1999 Happy Bride sold for $4.75 million in October 2021 and the 1999-built Happy Bird sold for $6.1 million earlier this month. Average charter rates increased to about $22,500 per day or $684,300 per month for the fourth quarter, up from $21,123 per day in the fourth quarter of 2020, contributing an additional $5.1 million to total revenues, and utilization slightly increased from 91% a year ago to 91.4% this quarter. Three vessels underwent scheduled dry dock surveys during the fourth quarter, totaling 88 days. Over the past 12 months, 14 vessels were dry docked at a total expense of $19.2 million. There were no other capital expenditures in 2021 and no further capital expenditures planned for 2022, except for dry dockings. Operating revenue from the Pool was $8.3 million for the quarter, representing our share of the other participants' revenues, which included voyage expenses of $6.4 million from those participants. Therefore, our net benefit from the Pool stood at $1.9 million for the fourth quarter of 2021, in contrast to a $600,000 deficit from the fourth quarter of 2020. Voyage expenses rose by $5.4 million this quarter to $21.9 million, primarily due to additional investments in the fleet, most of which are under voyage charters, resulting in these added expenses. We have also observed significant increases in bunker costs, which are part of voyage expenses, due to concerns regarding global oil shortages stemming from the situation in Ukraine. Vessel operating expenses surged by 43.8% to $40.8 million in the fourth quarter, all due to the increased fleet size. Vessel operating expenses per vessel per day decreased by $120 to $8,000 for the quarter compared to $8,119 during the same period in 2020. The $63.7 million impairment loss on vessels, mentioned earlier, was related to nine older vessels, resulting from a review in which we reduced the estimated useful life of all vessels from 30 years to 25 years. Consequently, the future cash flows from these vessels could not support their carrying values, leading to the impairment loss. As a result of shortening the estimated economic life of all vessels to 25 years, quarterly depreciation starting Q1 2022 will rise to approximately $30.9 million from around $25.7 million based on the current fleet. General and administrative costs rose by $3.9 million to $10.3 million for the quarter, mainly due to Ultragas G&A costs of $1.4 million, severance costs of $1.1 million, and one-time legal and other expenses of $1.3 million associated with the Ultragas transaction. Additionally, other income from management fees earned for managing the Luna Pool amounted to $100,000 for the quarter. Interest expense for the fourth quarter was $10.7 million, a rise of $1.6 million or 18% from last year, mainly due to interest on the additional debt incurred as part of the Ultragas transaction, amounting to approximately $197 million with tax at U.S. LIBOR, subject to a fixed rate swap of around 2% plus varying bank margins. Our share of results from the ethylene Marine Export Terminal yielded a profit of $6.4 million for the quarter based on 241,500 tons of ethylene throughput. Depreciation for the terminal was $1.5 million, resulting in an EBITDA of $8 million for the quarter from the terminal. As shown on Slide 7, the balance sheet reflected a cash balance of $124 million at December 31, with an additional $22.9 million available from undrawn revolving credit facilities related to our secured vessel loans. The minimum liquidity covenant from various bank loans and credit agreements requires a maximum of $50 million. Our total debt as of December 31 stood at $932.8 million, comprising loan facilities secured by our vessels totaling approximately $707 million, a credit facility related to the terminal of $54.4 million, and two Norwegian bonds totaling $171.7 million. One vessel loan maturing this year involves three 6-year-old vessels for $50 million, and we are currently negotiating the refinancing of this facility along with two other facilities that mature in the second half of next year. Earlier this year, on January 1, we sold Navigator Neptune, a 2000-built ethylene carrier for $21 million. This vessel served as security under one of our outstanding Norwegian bonds. In compliance with fund terms, we tendered an offer of the net sale proceeds of $20.6 million to bondholders at 102% of par. However, with no acceptances, the bondholders opted to retain their bonds, which mature in November 2023. As a result, net proceeds from the vessel's sale have been released to the company for general corporate purposes. The company retains an existing call option on that bond at a redemption rate of 102.864%. That's all from me. I'll now pass you over to Oeyvind for his remarks.

Oeyvind Lindeman, Chief Commercial Officer

Thank you, Niall, and good morning, everyone. If we look at Slide number 10, in 2021, our fleet safely and efficiently delivered 5.6 million metric tons for our LPG, petrochemical, and ammonia customers. The largest portion, 31% of this volume, was exported from North America, and we expect this portion to rise this year. However, changes in our trade flows are likely due to the ongoing conflict between Russia and Ukraine. As shown on the slide, Ukraine is one of the largest ammonia exporters, with an annual export volume of 2.5 million metric tons, accounting for about 15% of global seaborne ammonia demand following disruptions in the Black Sea ports. Consequently, international ammonia consumers will need to source from other regions, which may affect shipping distances. The world still requires ammonia as a key ingredient in fertilizer production. Similarly, LPG exports from the Baltic Sea are expected to continue, subject to regulatory frameworks. However, we anticipate a decline in volumes over the next nine months in line with the EU's goal to cut Russian gas imports by two-thirds by the end of the year. Nonetheless, Europe's need for LPG persists, and we foresee sourcing shifting to nearer locations like Algeria and North America. On Page 11, Navigator's fourth quarter employment shows increasing LPG and petrochemical earning days, peaking in December at 95.4%. As mentioned in a recent trade update, we estimate first quarter utilization will remain above 90%. February typically sees a dip in activity leading up to the Lunar New Year, further impacted by limited Chinese imports due to government restrictions. Looking at Page 12 and the rate environment, despite a slowdown in February, the rates for handysize gas carriers, both ethylene capable semi-refrigerated and fully refrigerated vessels, have remained stable. However, larger fully refrigerated LPG carriers have seen a decline with minimal impact on the handysize assessments. The very large gas carrier segment has improved recently as consumers secure LPG for energy needs in uncertain times. Moving to Page 13, the current high energy costs, with Brent prices over $100 a barrel, enhance the competitiveness of North American natural gas liquids and their derivatives. Although North American ethane exports via handysize and medium-sized gas carriers dropped in January and February, March is expected to nearly reach December's record peak. Ethane, used as a feedstock for ethylene production, is much cheaper compared to naphtha, prompting petrochemical producers to import as much ethane as possible. For example, one of our handysize vessels is currently transporting ethane from the U.S. to China, a route typically reserved for larger ethane ships, highlighting the high value of U.S. ethane at this time. Similarly, ethylene exports have decreased in February but are projected to surge in March, possibly setting a historic record with over 120,000 tons exported from the U.S. Navigator stands to gain from increasing North American exports, whether they are ethane or ethylene, with strong indicators of rising demand in March. On Page 14, we see North American ethylene producers in a unique position. The graph illustrates U.S. ethylene cash costs compared to other regions. With Brent prices over $100 a barrel, North American producers benefit from a significant competitive advantage. This reinforces our outlook for sustained ethylene exports to Europe and Asia, which occupy less favorable positions on the graph. Consequently, amid high energy and commodity prices, North America is poised to enhance its leadership in natural gas liquids and derivatives production and exports. Navigator is well-positioned as the logistics provider connecting U.S. producers and midstream companies with global consumers. We look forward to achieving new export records with our partners in the upcoming months for this segment. I will now pass it back to the operator to open up for Q&A. Thank you.

Operator, Operator

And we will now take our first question.

Omar Nokta, Analyst

Omar Nokta from Clarksons Securities. Nice to see the business, obviously, firing on all cylinders in terms of the fleet performance and also the terminal. I just wanted to ask maybe, as you highlighted regarding the Russia exposure, those four vessels that are on charter to the Russian counterparties. Those contracts are obviously still in force, but become void if the entities or the ultimate entity are sanctioned. Are there any restrictions at the moment, I guess, in terms of where those ships are able to transit under the current sanction framework? And are these going into Russian ports at the moment? Can you maybe discuss that a little bit?

Oeyvind Lindeman, Chief Commercial Officer

Yes. Thanks, Omar. So clearly, it is something that we are highly focused on with continuous monitoring of all sanctions. So just to make it clear, those ships on the existing charters comply with U.S., U.K. and EU sanction policies and regulations. And that might change, of course. In the contracts, which is quite typical and very normal across the industry, not specific to Navigator, sanction clauses are present. So should something change, it will give you the option to terminate if sanctions are either on the product or the counterpart. Now the counterpart for us is based in Austria, which is then in turn owned by Seawell Holdings in Russia. And that company is not sanctioned and complies with both U.S., U.K. and EU sanction policies as they are today. Should that change, time will tell. At the moment, its products, which are propane, are being bought by European consumers, nothing to do with Navigator, but European consumers are currently unrestricted in buying those products for the time being. And the ports that we go to are still allowing ships to call those ports. So good question, and it's in flux, and we're monitoring on an hourly, minute-by-minute basis.

Omar Nokta, Analyst

Makes sense. And I guess should the sanctions become more stringent, and the contract becomes void, is there any concern that the charter just doesn't come back to ship? Is that a possibility? Or does that seem just a moot point considering you are actually operating the vessel?

Niall Nolan, Chief Financial Officer

There is no chance. The ships are manned by our crew and are not involved in privatized trade, meaning they won't remain within any specific country, in this case, Russia. If they were to go into international waters, we would clearly direct the ship to go where we wanted. So essentially, no.

Omar Nokta, Analyst

Okay. Very good. You know what I've got a few more questions, but I'll hop back in the queue and let other analysts ask.

Operator, Operator

We will now take our next question.

Sean Morgan, Analyst

This is Sean Morgan from Evercore. Great production from the ethylene terminal this quarter. I'm trying to understand how we should set base rates for the rest of the year given the volatility in production volume from quarter to quarter. Should we expect seasonality, or can we plan for high utilization once we overcome the operational issues related to chillers and construction? Will we see a more consistent flow, or will there continue to be significant variability in the terminal's utilization moving forward?

Oeyvind Lindeman, Chief Commercial Officer

I'll try to answer that. The operational issues from a year ago in February 2021 are noted. The total itself is operational and working. The question then is about the fundamental dynamics of production and its attractiveness in the international market. Speaking with our enterprise partners earlier this week, indications show that we expect our terminal to reach over 100,000 tons. Additionally, the commentary regarding our April offers is very strong. This aligns with what we discussed about the unique position of America, which has access to cheap ethane that produces affordable ethylene. Compared to other regions like Europe and Asia, utilizing these petrochemical products makes perfect sense for the international market. That's the environment we're currently in, and we anticipate seeing strong numbers from the terminal for North America.

Sean Morgan, Analyst

Okay. Given the current market, we can infer that if in three years things return to a more normalized state and crude prices stabilize, then utilization may decrease from the peak demand we are currently experiencing.

Oeyvind Lindeman, Chief Commercial Officer

The terminal itself is almost fully contracted. We discussed reaching 10% to 20% of our nameplate capacity. Our partners at enterprise have certainly demonstrated their ability to increase and boost exports when necessary. The base capacity is nearly 100%, which equates to one million tons per annum. Additionally, they have shown they can handle 20% more than that during peak demand.

Sean Morgan, Analyst

Okay. Could you clarify the rate on the 13 ships for the new Ultragas related facility? I understand it's swapped out at 2%. Is that the all-in effective fixed rate, or is the 2% above some other benchmark? I realize it’s fixed, so LIBOR wouldn't be applicable, but 2% seems quite low, and I want to understand the appropriate rate for that.

Niall Nolan, Chief Financial Officer

Yes. So LIBOR is fixed, Sean, at 2%. On top of that, you have a margin between $1.9 and $2.65.

Operator, Operator

We will now take our next question.

Ben Nolan, Analyst

This is Ben Nolan over at Stifel. I had a couple of other follow-ons. I did want to just clarify a little bit of what you're talking about with respect to Russia, not necessarily your contracts with seaborne, but when you're looking at whether it's the ammonia coming out of Ukraine or the LPG coming out of Russia. It's your view that there's excess capacity elsewhere in the world, such that there won't be necessarily fewer cargoes or less capacity of those products. It's just it will be produced elsewhere and probably go a longer distance. Is that how you're thinking about it?

Oeyvind Lindeman, Chief Commercial Officer

Interesting question, Ben. Let’s get back to the basics. Last year, Europe imported 1.5 million tons of LPG from Russia, with 350,000 tons arriving by sea and the remainder by rail. The majority of Russia's LPG supply to Europe primarily comes via rail, and I expect some restrictions on that. This means that these quantities will need to be sourced from alternative suppliers. If the seaborne trade ceases, Europe could face a shortfall of 1.5 million tons, assuming 2022 mirrors 2021. Consequently, as I mentioned earlier, the principle of close proximity will come into play. So, where can Europe find this 1.5 million tons or whatever the shortfall might be? The Mediterranean has capacity, but the most significant source is likely the United States and the transatlantic trade. This presents a substantial opportunity for North America to fill any LPG shortfall resulting from this conflict for Europe. If this occurs, it aligns with what Dag noted in his opening remarks regarding longer ton miles. As for which vessels will handle this, it will be a mix. I want to highlight that Navigator's cargo shipments last year derived less than 5% of that from Russia. Should that supply be eliminated, it represents only a tiny fraction of our business. In fact, even shipments from Trinidad and Tobago were greater for Navigator. Nevertheless, that’s a separate discussion.

Ben Nolan, Analyst

Okay. No, that's helpful. I appreciate that. Just switching gears for a moment. You guys sold the Neptune, which was a 22-year-old ship, but it is an ethylene carrier in a market where, clearly, there's a lot of tightness in the ethylene carrier side, specifically on the handysize portion of the fleet. Can you maybe talk through that a little bit what the thinking was behind that asset sale?

Niall Nolan, Chief Financial Officer

Ben, I think that it was probably twofold, one commercially and financially. It is, as you say, a 22-year-old vessel, and therefore, there is a timeline. And I also mentioned that we've revised our albeit accounting estimated economic life to 25 years. So it's got three years of life. If you look at any of the analysts, the shipping analysts who are valuing the ship, nobody valued that ship and it's we're approaching $21 million. So it was a very good price. And I guess, thirdly, the purchaser is a Chinese counterpart who we understand is going to use the ship for their own purposes in or around China or at least at that side of the world. But it's not, but we do not believe that it is going to be competing with us on the business and trades that we tend to operate on.

Operator, Operator

And we will now take our next question.

Climent Molins, Analyst

Climent Molins from Investors Edge. Following up on the terminal, you expect March throughput to be very strong, and you also underline how high oil prices increase the competitiveness of North American ethylene benefiting your terminal. And I was wondering, are you currently looking at increasing throughput capacity? And if so, what kind of timing would we be looking at for the facility to come online?

Oeyvind Lindeman, Chief Commercial Officer

It's an interesting question, which is very relevant in this environment. High commodity prices and high oil prices definitely put U.S. ethylene exports on the agenda for international businesses to produce polyethylene or ethylene derivatives. So the last two years of COVID and depressed markets arguably, that hasn't really featured in people's minds. But now as the world has changed over the last few weeks, security of ethylene from the states is definitely back on the agenda. So we will be working extremely hard and diligently with our partners to drum up interest internationally for possible expansion, absolutely.

Climent Molins, Analyst

All right. That's very helpful. And you've been divesting the oldest portion of the fleet after the merger with Ultragas and you're now also sitting in a comfortable financial position. Could you provide some commentary on what your capital allocation priorities will be going forward?

Oeyvind Lindeman, Chief Commercial Officer

That's a good question too. I think the first part of that would be debt reduction. We would also be looking at other options, alternative investments. And then considering introducing a dividend or share buyback policy. That's obviously a subject for the Board, which has yet to consider that. But that would not be unreasonable. But certainly, in the short term, I mentioned, we've got a number of facilities coming up for maturity next year. So we would look at reducing some of our debt in the initial phase.

Operator, Operator

And we will now take our next question.

Ben Nolan, Analyst

Sorry, I was muted, sorry. I didn't want to overstay my welcome the first time. So I appreciate you taking another question for me. There had been some noise in the market over the last, I don't know, three or four months about you guys having a partnership that was possibly moving into the transportation of CO2. I'm curious, if you could frame that in a little bit. And then also, given that everything that's going on in Russia and energy prices and everything else, maybe CO2 or carbon capture and the movement of that has sort of taken a little bit of a backseat to energy security and that kind of thing and maybe is being a little bit more sporadic that it happened?

Oeyvind Lindeman, Chief Commercial Officer

Yes, that's a broad question. It's twofold. You're right. The joint venture between Ultragas and Evergas, now Navigator Gas, is focused on developing CO2 transportation services. They have designed a specialized type of CO2 ship with a containment system necessary for transporting CO2 within a supply chain. There are several earlier projects and ongoing discussions in Europe about the logistics, economics, and feasibility of this trade. One notable public project in Denmark is the Green Sand project, which this joint venture is involved in. Progress is being made, albeit slowly, but there is potential for significant growth. Regarding the second part of your question about the current status, I believe the opposite is true. The push to reduce energy dependency in Europe is gaining momentum, and environmental concerns along with alternative sourcing are becoming increasingly important. Consequently, Europe will need to confront its carbon issues. Therefore, I think there is no decline in interest in CO2 transportation; in fact, it's quite the opposite.

Operator, Operator

There are no further questions at this time, gentlemen. Back to you.

Dag von Appen, Chairman

Okay. I would thank you all for attending our fourth quarter earnings call, and we will speak to you all again at the first quarter of 2022. Thank you very much, and goodbye.

Operator, Operator

Thank you. Ladies and gentlemen, that does conclude your conference call for today. Thank you for participating, and you may now disconnect.