BWLLY - Avance Gas Paid A 17% Yield Over 2022 But That's Not A Guarantee For 2023

2023-04-06 10:30:00 ET

Summary

• Avance Gas operates a fleet of VLGC carriers. Six new vessels are joining the fleet in the 2022-2024 era.
• The funding for the six new vessels has been secured which means the company can continue to focus on its dividend payments.
• Q1 2023 could very well be a record quarter for Avance Gas, but the world fleet will expand by about four dozen vessels this year.
• I'm on the sidelines as I expect the charter rates to come under pressure, but perhaps my fears are overblown.

Introduction

As it has been a while since I last discussed Avance Gas ( OTCPK:AVACF ) here on Seeking Alpha, it only makes sense to have a look at how the company has performed in the second half of 2022, and if its outlook is as bright as the picture painted by competitor BW LPG ( OTCPK:BWLLY ) ( OTCPK:BWLLF ). As explained in my BW LPG article , I anticipate quite a bit of tonnage to hit the water over the next three quarters so it will be interesting to see to what extent the market can absorb the additional capacity.

Avance Gas has a primary listing in Norway where it's trading with AGAS as its ticker symbol. The average daily volume in Oslo is approximately130,000 shares per day . Avance Gas is trading in NOK and at the current USD/NOK exchange rate of 10.4 , Avance Gas is trading at approximately US$6.40/share given its current share price of around 66NOK. As Avance reports its financial results in USD, I will use the US dollar as base currency throughout this article and where applicable, I will convert those amounts into NOK using the same exchange ratio.

Stronger charter and spot rates than I expected boosting financial results

Just like BW LPG, Avance Gas ended 2022 on a strong note as the time charter equivalent rate came in at in excess of $46,000/day (up from "just" $33,000/day in the third quarter, which still is a healthy rate) and this brought the average rate for the entire year at in excess of $38,000/day which is about 20% higher than the $31,302/day generated in 2021. While the fourth quarter had the best spot prices for VLGC carriers since 2015, the first quarter of 2023 will likely prove to be better and Avance Gas is guiding for a $55,000 daily charter rate on a discharge to discharge basis.

The total revenue as reported by Avance Gas came in at 67.4M in the final quarter of the year, resulting in an EBITDA of $41.5M (the company calls this the "operating profit before depreciation expenses"). The net income was a very respectable $34.7M which translates into an EPS of $0.45. The full-year net income was approximately $89M or $1.16 per share. The majority of the earnings were paid out as a dividend as Avance Gas paid a Q4 dividend of $0.50 per share on top of the three previously paid quarterly dividends of $0.20/share.

What the image above doesn't show is the comprehensive income statement which includes the net benefit from the hedge portfolio. Avance Gas was smart enough to hedge a substantial portion of its debt and the value of those hedges obviously increases as the market interest rates are increasing as well.

As you can see below, a swap liability was converted into an asset throughout 2022 and Avance Gas will gradually monetize and realize these gains.

The company's cash flow statement obviously does not deal with these unrealized gains on the derivatives portfolio. The starting point of the cash flow statement is the "cash flow from operating activities" and Avance Gas has provided more details in the footnotes of its annual financial statements.

As you can see above, the cash flow from operating activities contains a net contribution from the working capital position of approximately $5M. Additionally, it added the finance expenses back to the equation as well.

The image below shows the remainder of the cash flow statement. We see the net cash interest payments were $19.1M but Avance realized a $6.1M cash gain on its hedges, which is a very nice bonus. This means the adjusted operating cash flow was approximately $124M.

The total capex was $155.1M which sounds high but investors need to keep in mind that A) the majority of the incurred capex was actually funded through the sale of older vessels so Avance successfully recycled some of its capital, and B) the newbuilds that will be delivered to Avance Gas will rejuvenate the fleet.

The company expects to take delivery of two vessels per year in 2022-2023 and 2024. The capital expenditures will remain high but Avance Gas is fully funded. Additionally, a substantial portion of the $242M in remaining capex will likely be funded through the incoming operating cash flow as well.

While I don't expect the very strong charter rates to last for the entire financial year, I think Avance Gas is in good shape. It generated about $125M in operating cash flow in 2022 when the charter rates were in the mid-$30,000 range. In Q1 2023 we can likely expect an operating cash flow of $40-50M which means Avance Gas will be in a very comfortable position as it will continue to build a cash buffer. And although the newbuild capex is fully financed, it never hurts to have a cash cushion. Also keep in mind that as two vessels will be delivered in H1 2023, they also will start to contribute to the bottom line in the second semester and even if the rates would fall back to just $30,000/day, both vessels will contribute about $3.5M per quarter in net cash flow.

Investment thesis

I'm still quite cautious in the VLGC segment as I'm not sure what the impact will be of the additional tonnage on the charter rates. Avance Gas is more optimistic and the company dedicated a few slides in its presentation on the perceived risks. Convincing points and arguments but I remain cautious.

We know the Q1 results will have been excellent, but I'm more interested to see and hear if Avance Gas will provide an outlook for the rest of this year. I'm keeping tabs on both Avance Gas and BW LPG and I hope their optimism is warranted and LPG carriers are getting ready for another strong year.

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