AVACF - Avance Gas Holding Ltd. (AVACF) Q2 2022 - Earnings Call Transcript

Avance Gas Holding Ltd. (AVACF)

Q2 2022 Earnings Conference Call

August 31, 2022, 08:00 AM ET

Company Participants

Øystein Kalleklev - Executive Chairman

Randi Navdal Bekkelund - Chief Financial Officer

Conference Call Participants

Presentation

Operator

Good day and thank you for standing by. Welcome to the Avance Gas Holding Ltd. Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Øystein Kalleklev. Please go ahead.

Øystein Kalleklev

Thank you and good afternoon and welcome to Avance Gas second quarter earnings presentation. I'm Øystein Kalleklev, Executive Chairman of Avance Gas. Today, I will be joined by Randi Navdal Bekkelund, our CFO, who will guide you through the financials a bit later in the presentation.

So let's just have a look at the disclaimer before we start the presentation. I will remind you off the disclaimer as we will provide some forward-looking statements, use some non-GAAP measures and elements to the completeness of detail we can provide in this rather short webcast. So we also recommend that you review our earnings report.

So let's get going with the summary of our highlights. I'm pleased to say that in the first half of 2022 we delivered the best results since 2015. For Q2 time charter equivalent income or TCE income came in at $43.6 million, corresponding to an average TCE per ship of around $36,200 per day which is ahead of our guidance of around $32,000 to $33,000 per day.

This resulted in our EBITDA of $31.6 million and our net profit of $18.4 million translating into earnings per share of $0.24 per share. During the quarter we completed the sale of the 2008-built VLGC, Providence with a book gain of $4.5 million with the cash released of around $26 million given her order low leverage slightly below 50%.

I'm also pleased to say we have been busy on the financing side recently. In Q2 we closed the $555 million facility announced back in May, which boosted our cash by around $83 million in the quarter. Under this facility, we also had an accordion option to add bank financing of $115 million for the two large newbuildings, newbuilding five and newbuilding six.

We have however, a gain of $135 million sale leaseback at attractive terms, which in addition to providing us with $20 million more cash also extend our debt maturity profile. So with that financing in place, all remaining four newbuildings are fully financed with $250 million of debt finance commitments versus CapEx obligation towards the yard of $248 million, i.e. $2 million less than the debt secured.

Given the recent refinancing, good cash flow, and vessel sale, cash balance jumped to $199 million at quarter end, which we find very comfortable given the fully financed CapEx program and our market outlook.

Another reason that which I'm pleased to announce is that we have been able to recruit a new Chief Commercial Officer to take over for Ben Martin and we didn't have to look very far. Marius Foss whom I have enjoyed working with in Flex during the last four years, has agreed to also take on the role or as CCO in Avance Gas. Marius has a wealth of shipping experience after his maritime education, which also involved a couple of years at sea. He has worked basically 10 years with LPG and petchem, 10 years in very large crude carriers or VLCCs, and around 10 years in LNG. So altogether around 30 years in these three segments, which shares many similarities. Marius will likely also be fully dedicated to Flex LNG, but we find taking on Avance Gas as an exciting endeavor and by doing so we can just cut cost compared to having duplicate management.

In terms of guidance for Q3, this is admittedly a bit on the soft side as the market has been slightly weaker in Q3 compared to Q2. We estimate the TCE to be in the low 30,000 for Q3 with around 32,000 per day as the best estimate. Some of this is due to timing effects as we beat our guidance in Q2 due to similar timing effects. For Q4, we are booked around 50% and as we are now looking at fixing October date rates have pulled to us. So based on market today and forward freight rates so FFAs, we do expect TCE to bounce back up again in Q4.

So with good results, four remaining newbuildings are fully financed with some spare left actually, and $199 million of cash on hand, the Board has decided to also pay $0.20 per share in dividend this quarter. This should provide us with an attractive yield of around 16%. $0.20 is also in line with what I would call the clean earnings per share. This is our earnings per share, where we adjust out the gain of the vessel sale of $4.5 million and then add the noncash effects of the write down of debt issuance cost $1.6 million, which is booked under finance costs.

Turning to Slide 4, then our current fleet status, Avance Gas is a shipping company focused on seaborne transportation of LPG with a fleet consisting entirely of the larger ships in the segment, which we call very large gas carrier or just VLGCs for short. The VLGCs transport about 75% of all seaborne LPG. During the first half of the year we have sold two 2008 built ships while taking delivery of two new dual fueled LPG ships.

For the remaining three, 2008 and 2009 ships we have secured fixed higher time charter coverage for most of 2023. These have thus eliminated the fuel price risk as these ships are on average healthier than the newer ships and they are also not fitted with exhaust gas cleaning system or what we typically call a scrubber and I will get off with some more details on scrubber economics later in the presentation.

We have eight 2015 ECO design VLGCs, six of these eight ships are fitted with a scrubber which have significantly improved the competitiveness this year given the fuel splits. One of the ships, Chinook, which is not fitted with our scrubber we have put on available TCE until the middle of next year, giving us the some charter coverage.

During the first quarter, we took delivery of two of our newbuildings, which are equipped with LPG dual-fuel systems. These ships have very favorable freight economics compared to older ships as they are more efficient and have the flexibility to run on LPG fuel. As I will illustrate shortly, LPG has become very cheap to all the comparable fuels, so we remain a bit about not only the environmental profile of these ships, but also the economics. Next year, we expect to take delivery of three more dual-fuel VLGCs and the last remaining VLGC newbuilding is expected to be delivered in early 2024.

Before turning over to Randi for our financial aspect, I just want to highlight the compelling attributes of LPG. LPG is today cheaper than coal while being a clean burning fuel in terms of local emissions, which is a big problem for a lot of people around the world, especially in developing countries where access to electricity or natural gas piping is scarce and where often the only alternative is coal, biomass like wood, or even waste.

Every year, more than 4 million people die prematurely due to indoor air pollution caused by household air pollution. Additionally, propane also contributes currently to reduce CO2 emissions as well as ambient air pollution, which annual death toll is similar to the indoor air pollution. In total around 8 million people does die from poor air quality, so this is a rather big thing as I have also highlighted in the Flex presentations in the past.

So LPG is efficient in the sense that it has a high calorific value and it's pretty dense. It's fully portable, which is a great advantage in rural areas without pylon electricity infrastructure, like my terrace, where I fuel my barbecue with propane and I have done so very often lately. As I mentioned, LPG is clean burning with no sulfur and virtually no particular meth emissions. LPG is extremely versatile and can be used in transportation as auto gas in commercial businesses, industry like plastic and refinery, farming, domestic heating, and cooking to mention some. LPG is also very accessible. It can be transported with relative ease over sea, road and rail and infrastructure is not very complicated as illustrated with the canister on the slide.

And lastly, which is probably the main focus area today with energy crisis ravaging LPG is affordable. As mentioned, it's cheaper than coal. It's cheaper than crude oil and definitely diesel with today's refining margins. Natural gas is often considered its main competitor with advanced countries, mostly building out pipeline infrastructure to facilitate the movement of large quantities of gas. In developing countries, but also rural areas in advanced economies, LPG is often a very good substitute.

It's a bit hard to compare pricing with LNG or natural gas, LNG is still somewhat our regional market, where U.S. consumers have access to cheap natural gas even though Henry Hub recently hit a 14-year high. Henry Hub is now hovering at around $9 per million BTUs translating into around $50 per barrel of oil equivalent. If you buy LNG on a long term contract, which is the case for two thirds of LNG volumes, price is around 20% discount to oil at around $80 per million BTU. This is in line with the price of LPG, which is around 90. However, this is spot LNG, LPG compared to contracted LNG.

However, if you are one of the unlucky spot LNG buyers, where about one third of volumes are credited, then you are paying around $75 per million BTU. Today, European buyers dominate this space. European pipeline gas prices are actually even higher than spot LNG due to the congestion issues in Europe, so pipeline gas is priced about $20 higher at around $95 per million BTU or $550 on a barrel of oil equivalent. Thus European pipeline gas is today around six times more expensive than LPG. As I note this was recently highlighted by one of our competitors. Although I have a problem remembering which competitor, I think it started with a B, or was it a W, I'm not really sure.

Well, while I'm getting my brain working again, I think I can hand it over to you Randi for our financial review before I return with a short market update.

Randi Navdal Bekkelund

Thank you Øystein and let's have a look at the financial takeaways for the second quarter on Slide 6. As already stated by Standard Time Charter equivalent TCE earnings or net operating revenue and voyage expense came in at $43.6 million equaling a daily TCE per ship day of 36,200, which is slightly lower than previous quarter, but $3,000 to $4,000 a day ahead of guidance. And this is due to more favorable positions than anticipated resulting in a positive timing effect of revenues in the second quarter.

Operating expense, representing crew, repair, maintenance, spares and equipment for managing the vessels on a daily basis, also known as OpEx were $10.1 million, down from $10.7 million in previous quarter. This equals a daily average OpEx of $8,200 for the second quarter, compared to $8,500 for the previous quarter. We're still seeing high crew change expenses, but a small portion relates to COVID-19 as the vaccine has been rolled out and the local regulations have been lifted. But as we're all seeing these days either it is for business or pleasure, airfare expenses have increased significantly causing a higher OpEx and represents approximately $300 a day for the second quarter.

Administrative and general expense for the quarter was slightly higher this quarter compared to last one and is explained by one off personal expense for employees, which is expense in accordance with accounting standard. And this concludes a reported EBITDA of $31.6 million compared to $34.8 million in previous quarters.

Depreciation expense came in at $11.1 million. This is $1 million lower than previous quarter and is explained by one vessel less in the fleet during the second quarter, compared to the first quarter. Furthermore we have sold one of our 2008 built ladies, which was delivered to the new owner in May and thereby we recorded a gain on sale of $4.5 million in the first quarter and in total for the first half, we have recognized a gain on sale of $10.8 million, including Thetis Glory delivered to the new owner during the first quarter.

Next profit was $18.4 million or $0.24 per share, compared to $24.3 million or $0.32 per share for the first quarter. The first half results of $42.7 million or $0.56 per share is the strongest first half in seven years and is already 33% ahead of the full year results last year. As already stated by Øystein, we're happy to share the majority of that profit with our shareholders by distributing a dividend of $0.20 per share for the second quarter, which will be paid during September.

Furthermore, below the net profit, we have recognized $5.1 million in positive market-to-market adjustments related to our interest hedges, which is designated for hedge accounting through other comprehensive income and equity, which I will come back to in a minute.

A few comments to the balance sheet. At quarter end, we had a net interest bearing debt of $501 million equaling a debt to total asset ratio of 46%. We have solid equity of $579 million corresponding to equity ratio of 53%, and a strong cash balance of approximately $200 million, which leads us to the next slide number 7.

With the refinancing of the bank facility announced in the previous quarter we have significantly increased our cash position during the quarter, as we drew $325 million resulting in a net cash release of $83 million. Of the $325 million, $125 million is the revolving credit facility giving the flexibility to repay when we have the capacity to do so and avoid related interest expense and redraw when we need it.

Other movements in our cash balance is positive cash flow from operations of $22 million, sale of Providence generating a net cash release of just below $26 million offset by $15 million in dividend for the second quarter, three delivery capital expenditures in relation to our newbuildings, three, five and six, totaling $24 million and $3 million in scheduled debt repayment. And this adds up to an increase in cash of $88 million from the first to the second quarter.

Moving to Slide 8, we are happy to announce that a few days ago we signed $135 million sale leaseback agreement with Bocomm for financing the final two newbuildings for delivery second half 2023 and the first quarter 2024. The new financing bears a tenure of 10 years from actual delivery date of each vessel has a repayment profile of approximately 22 years and is so far based as the LIBOR will be phased out in June next year. The agreements will contribute with a total of $39 million in net cash release at delivery of these vessels resulting in no unfunded remaining capital expenditures and the funding of the newbuilding program has been completed.

Along with a robust cash position we are well positioned to continue returning value to shareholders through dividend, as we have done for this quarter. When we generate profits while handling a potential downward moving freight market into next year, when the order book is coming on water, even though we maintain our view that improving fundamentals and regulations, will likely absorb the order book. Øystein will talk more about that in a few minutes.

Moving to Slide 9, following the refinancing of the nine VLGCs executed in May, and the sale leaseback agreement with Bocomm, this slide gives an overview of our total commitment to financing and further demonstrates that we have secured financing for the whole fleet with a staggered debt maturity with the first maturation date in February 2027. We have further improved the profile, the tenure and the pricing on our financing in the recent 12 months resulting in an attractive average cash breakeven of below $21,000 over the debt duration of the whole fleet.

The financing portfolio is now diversified in 10 different well reputational lenders, including European banks and Asian leasing houses. We're also proud to have the majority of the debt linked and annual sustainability margin adjustments, which goes hand-in-hand with the company's ambition to reduce the carbon intensity of the fleet with support from the banks.

Moving to the next slide 10, provides you with an overview of the interest rate swaps, which is used to manage the risk of increasing interest rates. For the first half we were ahead of the interest rate curve, thus recognizing just below $17 [ph] million in interest rates book gains through the other comprehensive income and a positive market to market value of $9 million recognized as an asset in the balance sheet.

These books have a notional amount of $256 million by end of the second quarter. And subsequently in July, we blended and extended an existing $15 million LIBOR interest trade swap into SOFR swap and increased our hedging with another $100 million. In total $150 million fixed at an average rate of 1.87% basis SOFR maturing in 2030 and 2031 compared with fixed rate today of approximately 2.7% with the same duration.

Additionally, we now have LIBOR hedges with a notional amount of $206 million as an average rate of 2.82% maturing in 2025, compared with the stock pricing today of approximately 3.8% [ph] with the same duration.

And this concludes the financing portion and I will now hand the word over to Øystein for the market update and outlook.

Øystein Kalleklev

Okay, thank you, Randi. And the outlook basically as you can see, not only have net positive $575 [ph] million of debt financing, but she is also now embarking on raising her second child, more recently delivered more or less according to schedule three weeks ago. So congratulations to Randi. Well done both.

Randi Navdal Bekkelund

Thank you.

Øystein Kalleklev

So, let's review the little market developments. Slide 11 is the most boring slide in this deck. It's very similar to what we said in May. We'll just see a growth of 11% in the first seven months of the year, the same run rate as reported in May for the first four months. The big relative increases are still coming from the big oil producers in the Arabian Gulf led by Saudi, Iran and United Arab Emirates as OPEC has been pushing up oil volumes.

We do however continue the healthy growth from the U.S., which is the largest export market with around 50% of the volumes compared to market share of the Middle East producers of around 40%. On the import side all is steady everywhere, while China is really is the break on LNG imports in 2022 and with the imports down more than 20%, this is not the case with LPG import in China. It's up by about 5%, which is maybe not too surprising, given the affordability of LPG as I mentioned in the introduction.

Given the energy crisis in Europe, it's not too surprisingly also that we see growth from Europe eating into Asian market share with European buyers now increasing their market share from around 7% to 10% compared to last year.

Slide 12 and the cash cows, in our May presentation we had a slide on the capital discipline by the shale players, despite our record free cash flow, which investors special to maintain capital discipline being the main reason with about 60% of respondents saying this is the reason why they are not investing in drilling new wells. Since then expected free cash flow have increased even further from around $170 billion to around $200 billion according to our new Deloitte study.

So while shale plays have been cash drains the last decade, they have now been turned into cash cows. And it's not only the shale players that are generating huge sums of money, the same goes with the whole upstream oil and gas industry on aggregate. We are still of the belief that this super profit and rapid deleveraging will induce new investment increasing production with associated export growth potential given the short lead time of shale wells.

So the million dollar question is, how will share players spend the windfall of cash? So far focus has been on the leveraging with gradual increase on returning cash flow to shareholders through dividends and share buybacks. So capital discipline has been the name of the game. However, economic forces are usually like gravity [ph]. If there is profit to be made and we are here talking big profits, with shale players generally making profits with west Texas intermediate oil price in the range of $50 to $55 compared to our VTI price of closer to $100 today. Such profits are difficult to say no to, especially when the balance sheets have been repaired.

Additionally, Washington and even Brussels is now shorting drill, baby drill, which is certainly a big change in policy, but maybe not too surprisingly given the energy crisis. Shale wells are also fairly low risk investment as lead time is short and payback period, thus very short compared to large offshore oil field developments, which also enabled the drillers to hedge the price.

So Dallas has to have some regular service of participants in the industry. And as we can see, lead time is short with about 24% of the market participants able to drill and complete a well within six months and more than 90% within a year and more oil and gas also means more LPG exports. So I think I said 24%, I really meant closer to 45%. But as you know, as you can see, wells can be bought to the market very quickly and it's extremely profitable.

So let's talk about China. China is the largest market for LPG, market share close to 30% which is almost twice as all the key markets being India and Japan. What LPG is used for very greatly for the different markets. Worldwide [indiscernible] is the biggest share with around 40% share, petrochemical represents around 30%, with transportation, industrial refinery, each about 10% with some usage also in agriculture.

What is one of the key drivers for China's LPG demand is propane, the hydro generation plants or PDH plants in short. These are basically refining LPG into plastic, and there's been a construction boom in China for such plants. Plastic is our biggest product. During COVID-19 plastic had been essential, not only as plastic wrapping for your fresh tomato, but also a key input in all personal protective equipment.

The construction boom in China PDH capacity will create further LPG demand on the road and the key factor to monitor here is the utilization of these PDH plants will affect -- which will affect import volumes.

Turning to Slide 15, Panama Canal tolling fees. As those who follow shipping closely, we have already seen the Panama Canal clogging up regularly with long waiting time. The Panama Canal was expanded in order to facilitate the increased container shipping traffic. However, a sale boom in the U.S. resulting in a sharp increase in U.S. exports of oil, LNG and LPG was not anticipated. So the Panama Canal is therefore running at max capacity.

Since the Panama Canal is a monopoly, it can adjust this pricing according to the demand and with a high demand they are therefore pushing up the pricing by around 90% until the period 2025, slightly higher tolling fees for the ballast voyage than the laden leg. With more expensive transit and the unpredictable waiting times with things this means more will just see freight will be priced out of the canal with capacity being used mostly by container ships and LNG carriers, which has some more valuable cargo.

Our take is that this will result in longer sailing distances, just driving up freight demand. U.S. to China is around 10,000 nautical miles to the Panama Canal, but 15,000 nautical miles if you go through Cape of Good Hope, just increasing sailing distances by 50%. I think particularly on the ballast leg, where the tolls are increasing the most, this will be the case that voyage through Cape of Good Hope on the ballast will be more common. This also enabled Cape of Good Hope on the ballast will be more common. This also enables the ship owner more heading opportunities than being able to pick up cargos in the Arabian Gulf, West Africa in addition to U.S. cargo, and this gives owners a bit more heading flexibility in addition.

So freight market Slide 16, the biggest driver for the freight rates is the prices or arbitrage between the producing regions, U.S. and Middle East, and the main import destination, Asia. With arbitrage pad in Congo, heading into Q4 with U.S., Far East arbitrage going from around $120 per ton in September to closer to $150 at the end of there, we therefore expect freight rates to rebound in Q4, so we can generate somewhat higher earnings for this quarter compared to Q3 where freight rates have been slightly below the seasonal average while being above seasonal average in Q2. So while spot rates continue to be volatile, the one year time charter rates have been remarkable and stable this year with time charter rates of around $35,000 per day for a one year time charter.

Heading into next Slide 17, the scrubbers I mentioned the economics there has been fantastic. With the scrubber, you can burn the heavy fuel oil and use exhaust gas cleaner, and the spread has been extremely volatile, especially during Q2 and this also provided us some benefit on the fuel savings. The spread here went up close to $600 per ton translating into fuel savings per day of close to $25,000 per day. It's come down since the peak, but still at around $250 per ton and then converging towards $200 per ton in fuel spread.

So for the ships we have with scrubbers the fixed six to 15 ECO design ships, this represents a saving of close to $9,000 per day or $3.2 million per ship per year. So, a very short payback time on these scrubbers. Scrubber installation is costing around $2.5 million. So you are talking here less than a year payback time.

Last slide before concluding is the order book. The order book is always our team in LPG shipping. But if we look at the order book, we have a big chunk of ships approaching retirement, 30 vessels already passed 25 years, 17 vessels is above 20 to 25 years. These are in inefficient ships, which will be hit by upcoming decarbonation regulation with expected engine power limitation for these ships, as well as a lot of the ships built prior to the ECO ships of 2014 and 2015.

Additionally there are 46 ships for delivery next year. We do expect some slippage. It might also happen for us on the last ships, but in historical perspective, if you look at the numbers here we do see big peaks. It's the 2008, it's the 2015 and 16, and it's 2023 where you have similar amount of ships as we had in 2016. However, the fleet of ships has grown tremendously during this period driven especially by U.S. becoming a huge LPG exporter. So if we look at the order book in relation to the fleet, the order book today is around 20% of the fleet.

On the last two peaks back in 2017 and 2008 before the financial crisis, which really derailed the world economy, and then 2015 just a bit prior to the oil price cash, so at the oil price crash in the U.S., then order the book hit 46% of fleet. So we are talking a lot smaller numbers in terms of relative size of the order book compared to the fleet. In addition, we have the new IMO 2023 rules. There will be the carbonization taxation in the European Union for those ships calling into Europe. And we also have some movement on the joint comprehensive plan of action. This is the negotiations with Iran. There are about 30 ships, mostly older ships tied up in the trade between Iran and China. So these are good figures almost capping as capping has been very low in the recent years.

And lastly, newbuilding prices are affected by the high demand for building container ships and LNG ships, and generally high material prices and inflation. So, newbuildings today are at around 95 million, which deincentivised people running to the only new ships. So, we do think that the number of ships coming for next year is a bit high, but we do expect some slippage. We expect capping to come up and in general lower a bit compared to previous peak, it's much, much lower and much more manageable, especially when you have new decarbonization rules coming into force.

So with that, I think we summarized today's presentation, TCE income, or TCE of around $36,000 ahead of the guide around 32 to 33. We are making $18.4 million or as of x of 20 as $0.24, so 20 as the cleanups. We are paying out that all as dividend giving our investors a very good effective yield of around 16%. We have truly financed the fleet. We have actually $250 million of debt financing for the $248 million of CapEx obligations and we have a very big cash cushion of $199 million, which I think puts us in a very good position to navigate the market next year. We also do have some charter coverage. Earnings for next quarter, a bit softer than Q2, but hopefully we will be bouncing back in Q4.

And with that, I think we open up for some questions, Heidi. So you can maybe check the teleconference while we are checking the chat. Thank you.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] There seems to be no questions at this time via the audio.

Øystein Kalleklev

Okay. Thank you, Heidi. And thank you everybody for joining. I don't think we have any chat questions either, but you know, we are always here to serve you. So if you have any questions, please reach out to us and we will respond quickly. So with that, thank you everybody. We will be back reporting Q3 in end of November. So I hope you joined then as well. Thank you.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Avance Gas Holding Ltd. (AVACF) Q2 2022 - Earnings Call Transcript