NVGS - Navigator Holdings: Key Updates On A Top Pick (Podcast Transcript)

Summary

• Value Investor's Edge Live continues with an exclusive interview focused on a key shipping company.
• Navigator Holdings was profiled as an "emerging top pick" at Value Investor's Edge last fall.
• We recently followed up with the management team to discuss the current market conditions and their strategy into 2023.
• We reviewed their fleet additions, the recent ethylene JV expansion decision, and the potential for additional terminal projects in 2023.
• A full audio recording (with time stamps) is attached below along with a transcript.

Shipping Interview Series

This is the fourth iteration of a recent series of shipping sector updates, featuring top firms from each key segment. I suggest checking out the other interviews as time permits:

• TORM plc (TRMD): Product Tanker Market Update
• Eagle Bulk ( EGLE ): Midsized Dry Bulk Update
• Frontline ( FRO ): Crude Tanker Market Update

Navigator Holdings Update

I recently profiled Navigator Holdings ( NVGS ) last September as an "emerging top pick with multiple catalysts." Since then, NVGS has followed through with several of these catalysts including completing comprehensive refinancing deals, launching a share repurchase, and confirming a significant expansion of their ethylene export joint-venture with Enterprise Products Partners ( EPD ). Our latest "fair value estimate" for NVGS is $16/sh, which implies at least another 20% upside. If further projects are confirmed, this estimate could easily reach into the $20s.

I'm very pleased with NVGS thus far, but I wanted to get an update on the latest market prospects from the management team, so we invited them into our virtual studio in mid January to discuss ongoing strategy and capital allocation into 2023. Mads Zacho, CEO of NVGS, joined us on Jan. 11, 2023, along with Oeyvind Lindeman, CFO, and Randy Giveans, VP of Project Development.

We spent about 40 minutes discussing the latest market prospects for LPG and NGL shipping as well as specific strategy and capital allocation plans for 2023. Our discussion is relevant for anyone with investments in related LPG firms such as Avance Gas (Oslo: AGAS), BW LPG (Oslo: BWLPG), or Dorian LPG ( LPG ). NVGS also has that significant joint-venture with Enterprise Product Partners, which is likely to be a key growth vehicle through at least 2025.

Topics Covered

• (0:00) Intro/Disclosures
• (2:00) Review of 2022 transition and market conditions
• (11:00) Where is the most likely growth for 2023?
• (15:15) Potential for another terminal project in 2023? Timing?
• (17:15) When will improving shipping markets show up in results?
• (19:30) Any potential for more bolt-on fleet additions?
• (23:00) Additional refinancing initiatives remaining this year?
• (24:45) How do you plan to finance the JV terminal expansion?
• (27:00) Timeline and availability of $50M repurchase authorization?
• (28:45) Internal estimate of company NAV?
• (31:30) Any plans for a formal dividend policy?
• (33:15) Potential for growth in ammonia, CO2 carriers, etc.?
• (38:15) Timing of these projects? Economics?
• (41:30) Balance between repurchases vs. funding future growth?
• (43:45) Any competitive overlap with VLEC markets?
• (45:15) Panamax Canal congestion factor? Transloading proposal a threat?
• (48:00) Key risk factors to NVGS in 2023 and beyond?
• (50:30) Why invest in Navigator Holdings vs. other peers?

Full Interview Transcript

J Mintzmyer: Good morning, everybody. Good afternoon, if you're joining us from Europe. We're hosting another iteration of our exclusive VIE shipping interviews in January 2023. This morning, we are hosting Navigator Holdings, stock symbol ( NVGS ). We're hosting their CEO, Mads Zacho; CFO, Oeyvind Lindeman; and Randy Giveans, who is the Vice President of Project Development. Recording on the morning of January 11th at about 10am Eastern Time.

As a reminder, nothing on the call today constitutes official investment advice or company guidance of any form. I currently have a long position in Navigator. However, if you’re listening to a recording at a later date or reading a transcript, please be advised, positions may have been updated. Good morning, gentlemen. Thank you for joining us today. I'm excited to talk about Navigator and your prospects for this year.

Mads Zacho: Thanks, J. Thanks for having us.

Randy Giveans: Thank you.

J Mintzmyer: Yeah. Absolutely. Very excited to have the whole team here together. Thank you, all three of you, for taking your time out this morning. I want to, you know, jump right into it, but start-off big picture. So, 2022 was a big year of transition for Navigator. I know Randy, you came online earlier in the year. We had new hires in management team, as well. Just a lot of turnover, a lot of new folks in gear. Can you just, kind of briefly recap some of the operational changes that happened in 2022 and some of the progress that Navigator made?

Mads Zacho: Yeah. Sure. Maybe I can just kick us off and then Randy and Oeyvind, you can pitch in when I'm forgetting something, but yeah, true. 2022 was a really exciting year, not only because Randy joined and so did I later in the year, but more on the business side, particularly the second half of the year was very exciting for us and there were some big events and some big announcements.

I could mention that we took over control of five relatively new ethylene carriers from our commercial tool where we have managed the five ethylene carriers since 2020. And what we announced late in the year was that we took over a 60% stakes through our joint venture with Greater Bay and those ships. So, it's an important part of our fleet renewal and also our consolidation efforts in consolidating the handysize ethylene carrier market. And these are really good ships. We think we got them at an attractive price that is accretive to our earnings. So that was one thing.

Another thing to mention is that we announced also in the second half that we would be expanding the Enterprise Navigator joint venture terminal where we export ethylene out of Morgan's Point in Houston. So, right now, we have a capacity of a million tons per year and we will be looking to expand that significantly.

We expect that we will be giving more detail and flavor to how much the expansion will be like, the cost and the CapEx schedule that will be a little bit later, maybe within a couple of weeks' time, but so far, we have clearly expressed, you could say, that the joint venture with Enterprise for the existing terminal is going really well, all according to plan. And that we have great plans for expanding it together and continuing to develop the joint venture that we have.

Thirdly, we also announced that we would be starting out our share repurchase program. We announced that in the latter part of last year, and we have initiated that we will be coming back with exactly the amounts and the price that we bought at when we do our Q4 announcement in March. But what we can say now is that all the constraints and restrictions had prevented us from starting it has had been taken out and we have initiated the program.

So, we're quite excited about that. We see it as a very efficient way for us to return capital to shareholders and strengthen the shareholder return. Given the relatively large discount we are trading at to our net asset value, we think this is particularly accretive to the returns for the shareholders. So, those are some of the big changes and maybe I can ask you, Oeyvind, to pitch in and talk a little bit maybe about the change to the ammonia transportation and stuff like that also?

Oeyvind Lindeman: Yes. You're absolutely correct, Mads. So, whilst we look back of 2022, there has been some very notable changes to our trading patterns and opportunity set in a positive way. So, in the beginning of the year, out of our 56, 58 ships at the moment, at the beginning of the year we had three vessels trading ammonia. So, there are three cargos types we carry, it's: LPG, petrochemicals, and ammonia. So, a relatively minor part of our business at the beginning of the year. Then February happened, 24 of February, where you had the war in Ukraine. And the things changed in ammonia.

So, Europe traditionally relied on ammonia being shipped from – through Ukraine, Russian ammonia through Ukraine to Europe, but that was no longer there. And in combination with that, natural gas prices is very high. Why is that important impact to our ammonia business? Because natural gas is used as an input to the production of ammonia. And ammonia in turn is an input in the production of food, because ammonia is used as input to agriculture. So, what happened is that, Europe – the European producers, importers were desperately looking elsewhere to replenish the lost supply of ammonia.

So, never seen before Europe importing ammonia from far West, China, Indonesia, Malaysia, Middle East. What that means to shipping is that, the voyages are so much longer, needing more ships. So, it ended with us having 10 vessels in ammonia, which in itself is great and very accretive to our business, but it has a double impact, because those additional 7 vessels in the handysize segment were not competing for the traditional LPG and petrochemical cargoes, tightening the ship supply balance, further underpinning the strength in the shipping market in our segment.

So, the ammonia story was one of a surprise for 2022. And that is still ongoing. Natural gas price is still very high in Europe, at least. Ammonia from – Russian ammonia through Ukraine is still not there. And people need food security and we believe that to continue into 2023. Another impact, which is equally perhaps even more important, is that the fluctuations on the ethylene export volumes from our terminal are stabilized.

So, in Q4, nameplate capacity every month during October, November, December. So, volumes are coming out demanding shipping, ethylene ships to carry the volume, but there was a change. So, during summer Q2 and Q3, the volumes that were exported from North America on ethylene went to Europe. That completely changed during fourth quarter. Not only have you – did we see a consistent export of ethylene from North America on our terminal, but also the volume predominantly changed from going to Europe to Asia.

And what does that mean? Similar as in the ammonia story is that the voyages are twice as long needing ships to carry, tightening this ship supply balance and therefore, again, underpinning the strengthening in the handysize market. So those two items on the ethylene side and the ammonia really helped fourth quarter for Navigator and that is continuing into the New Year. In addition to generally a relatively strong market in the winter months because LPG that we do transport is a hot commodity in places like Europe, and the demand for that has picked up over the recent months. So, those three things are pulling in the same direction supporting a strengthening market and utilization rates for Navigator.

JM: Yeah. Thanks to Oeyvind and Mads. I appreciate you hitting the highlights, Mads in terms of the overall business moves, and then Oeyvind, diving into more of the trade specifics. It sounds like a steady behind the scenes strengthening of that trade, which, you know, unfortunately, we didn't actually see it in the financials throughout 2022, but I'm imagining that as we enter 2023, we'll see a tighter market, at least I'm hoping so.

So, pivoting then to talk about 2023 and going forward, where is the most likely growth going to come from? I mean, you announced the Enterprise ( EPD ) expansion, of the ethylene terminal, but that's not going to happen until 2024. Is it just mostly a shipping business next year? Are there going to be potentially any new terminals announced or is that a little bit too premature at this stage?

MZ: Again, maybe I can just kick us off and Randy and Oeyvind please join also. You're entirely correct that the expansion plans for the ethylene export terminal in Houston, that's not going to kick in until 2024. So, for 2023, what we're going to see is, of course, we'll be bringing more detail about size, of course, of the investment and then what we're going to bring, but our bottom line is not going to show up.

The vessels acquisitions that we did late in 2022 are definitely going to kick-in. We'll have the earnings days of those five vessels that we have acquired and you'll see that showing up in our revenue and in our bottom line. It's also going to be, as Oeyvind mentioned, what we see as being good stability in the rates and the utilization picture that we saw in the Q4. Our guidance for Q4 on utilization was above 90%. And we'd like to confirm that guidance that we have seen a relatively robust utilization of our fleet in the fourth quarter. So, that's carrying on into 2023, it’s also going show it's up in our P&L.

RG: Yes. J, I'll chime in here. In terms of growth, there will certainly be opportunities for additional terminal projects or onshore infrastructure projects. But again, none of that will come online, obviously, in 2023, but hopefully some announcements at some point. That's said, in terms of growth, I think you'll certainly see more focus on ammonia, as well as just the further reopening of China is certainly going to be a big factor for our ships, right.

In the first nine months of the year, the majority of our – especially the ethylene cargoes coming out of Morgan's Point here in Houston were just going to Europe. Good for volumes for the terminal, but not great for ton mile demand. Now since really October, you start to see that shift where the majority of cargoes are now going to Asia and we think that continues throughout 2023, which again should increase that ton milage.

OL: In addition, in 2023 the opportunity set, which I think we're going to talk more about in a minute, but in the blue ammonia, green ammonia, opportunities, particularly from North America in blue ammonia where you produce ammonia, but you capture the CO2 emissions and store it. There's a ton of projects in that space and that is generally coined for export markets. So, there will be a lot of discussions, negotiations, and opportunities there. I firmly believe that that will come. You'll see more of that in 2023.

And then you have CO2 transportation, which is coming in Europe. So we are participating on some tenders and so forth in the CO2 capture transportation storage value chain. It’s a little bit more on an infant stage than blue ammonia, but it's going to come. And those discussions are really picking up definitely in 2022, but in 2023, I think you'll see some more tangible action – actionable contracts and so forth on those two arenas.

JM: Yeah. Thanks, Oeyvind. Yeah, the CO2 carbon capture is very interesting. I mean, obviously, it's long-term. It's very far out. I don't want to get too far down that rabbit hole yet, but I'm definitely going to circle back and ask more questions in a little bit about the CO2 aspect. Because it's certainly interesting, and it also puts you into a sort of ESG bucket, which is rare, right, for a shipping company to fall into that category.

Randy, I'll bat this one back to you since you're, you know, the VP of Project Development, you're in Houston, you're where all the action is at. Obviously, you can't disclose something that's, you know, not public or anything like that, but just, I guess, in terms of optimism or sentiment or an odds calculator if it were, what do you think the potential is for a new project or a new terminal to be announced in the next couple of quarters? Is that decently high or was that more of a multi-year sort of framework?

RG: Yeah. I would say, if you include the third quarter, fourth quarter, next couple, I'd say decently high in terms of another project outside of the ethylene terminal, which Mads mentioned, we will be having much more details on that in the coming weeks. But later this year, I think there should be another announcement on an additional project with some, as I mentioned, onshore infrastructure component to it here in North America.

OL: I can maybe add here that it is, you could say, right in the center middle of the fairway of our strategy to continue to develop the terminal side of our business as well, so that we get an even better balance between our shipping activities and our terminal activities. We see very strong synergies between the two. It gives a lot of important insight and information that we can use to position our fleet to have the right relationships to the customers and so on to have both the terminal side and the shipping side go together. And it's a big benefit for the customers too, because we can help them plan and use their supply chain even better.

So, we see a lot of potential for this and this is definitely an area that we expect will be a larger part of our total earnings going forward and an important part of our growth story.

JM: Yes, certainly, it’s something I'm looking forward to especially, because the economics on these terminals are fantastic and the industry multiples are far, far higher than anything we see in shipping. Randy or Mads, whoever wants to answer this one, you know, you talked about the shipping aspects improving in 2022, right. The pickup of ammonia, the shifting of ton miles, I guess, it was Oeyvind who explained all of that to us. But it did not show up in the rates and/or the utilization that was reported by Navigator. In fact, Q2 and Q3 numbers were, you know, in my opinion, kind of disappointing. When are we going to start seeing that? Is that something that – you know, Q4 we're going to see the noticeable impact or is that something longer-term where we're not going to see better utilization and more rates for another year or so?

MZ: Well, I can just kick it off by saying that in Q3, we guided a utilization of 85% and that's where it ended up. For Q4, we guided above 90% and we've just confirmed that. So, here you'll definitely see an effect of those firming markets. Oeyvind?

OL: Yeah. Some of the audience might have their resources, whereby they get the rate assessment from various ship brokers or industry specialists. And you can see on those indexes that shipping rates – handysize shipping rates being ethylene semi-refrigerator or fully refrigerator ships have moved up, and we can it, because one-third of the market, if the shipping rates move up, it's likely that that will filter through Navigator as well. So that's – it's a positive trend underpinned by the things we have with the opening statement, J.

JM: Yeah. Thank you. Thanks both.

OL: But it really kicked in from October onwards. So, you didn't see it in the third quarter results that we have talked about in the past?

JM: Yeah. No. I think that makes sense. And that's really helpful sort of squaring that corner, because I know we've had dialogue over the last six months, seven months and it's been continually improving, right. The dynamics of the market, but that just has not shown up in your previously recorded financials, just because, you know, shipping is a trailing lagging sort of business, right? It takes whenever you read about a headline, right, in the news, it takes six months before that comes through your financials. And so, we're hoping to see a strong Q4 and hopefully even better results in 2023.

Is there any more potential for these, sort of bolt-on deals to grow the fleet at the margins? You did a very interesting one recently with the joint venture project. Is there going to be more of that potentially or are you pretty much full up?

MZ: We're definitely looking for these. We would like to continue to consolidate the market as Navigator has a long history of doing. We are in constant contact with our competitors in the market. And of course, it takes two to tango here. We will need to be able to finalize those deals. We're looking for them and we're definitely interested in using either our paper or our cash in adding to our fleet here. We think that there's a great benefit for consolidating the market further than this, both for customers and also those that are selling it potentially becoming shareholders in Navigator if that was to be.

JM: And just circling back on the joint venture, because you made this 60/40 joint venture to buy that last bolt-on transaction. Can you talk a little bit about the rationale there? Was it – was that the only way to buy those ships was joint venture or was it a matter of, you didn't want to deploy all the equity all at once? What was the kind of a mindset behind that framework?

MZ: Yeah. These ships were and still are in part of a shipping pool that we commercially manage and run Navigator. It's called the Luna Pool. And they were Chinese owned, by our long standing partner. And they wanted to continue to have participation in the ethylene opportunities. So, they also believe very strongly in the future of ethylene exports from U.S. and imports to China. So, they didn't want to let go of all the equity, but they were very comfortable in Navigator through our – what we have proven through the Luna Pool, but we have the majority.

So, being a silent partner, if you like, tailing of Navigator does with the ship. So that was really the reason behind the 60/40. They believe in ethylene, they didn't want to let it all go, happy to be a silent partner and take the – follow the lead of Navigator Gas.

OL: And maybe I can add here also that we would like to continue having that relationship with Greater Bay that if they were to decide to build new ships or acquire ships in the future that we would be their partner. We would be the ones commercially managing the ships or potentially partnering with them. So, we see it as an avenue for further growth and the partnership for us to continue to maintain.

JM: Yeah. Hopefully, there's more potential, because if consolidation is key and this is one of those sectors of the market where it's so much more niche and there actually is legitimate consolidation, right? I mean, we hear that in bulkers and tankers, but let's be honest, it's, you know, 1% to 1.5%, right? The consolidation is not real. And in this sector, I think it is. So, I'm optimistic about it. I'm wishing for the best for you guys.

Let's pivot a little bit and talk about capital allocation going forward. You had a lot of refinancing transactions that you've been pushing through over the last few months. I know you mentioned one of them had a covenant that wouldn't let you repurchase, you kind of cleared the air at the start saying that's out of the way. Is there any more refinancing to do in the near term or are you kind of done for now?

MZ: Yes, we have one more to do and we expect to complete that in Q1. We have one that matures towards the end of 2023. It's actually two facilities, but we'll be looking to refinance those with potentially into one. And we are in pretty advanced discussions here. In the end of 2022, we repaid our Norwegian kroner bond. It was NOK600 million or US$72. We paid that back ahead of time because we thought it was expensive. We also extended the maturity of one that was due to mature in 2024, so we pushed it to 2025. And then we also had one more facility that was maturing in 2022 into 2023. We increased the value of the facility and refinanced it for another six years.

So that means that, where we stand right now, once we have finished the refinancing that I said we would complete here in Q1. We are actually done for and don't have any further maturities until 2025 and after. So, I think we're in a pretty good situation here where much of the work has been done and we can then focus on growing the business and lining up financing for new initiatives rather than focusing on refinancing.

JM: Yeah. It certainly makes sense. The one sort of follow-up I had with that is, what about this terminal expansion? I know there's some restrictions on how the joint venture, right? My understanding is, the joint venture itself cannot carry debt, if that's true. And then so how do you plan on financing that expansion? Is there some creative ways around that?

MZ: Yes. I mean, we will come back to that once we do the more detailed announcement here. We have quite significant capacity from our own balance sheet and from the cash position we have today and on the back of the de-levering that we've done over the past few years. So, I think we have a lot of capacity to equity finance if we wanted to do that, but we also have the opportunity to take a more financing with external debt. And we, of course, looking into that, what makes more sense. My guess would be at the right point in time, we would do a mix of debt and equity in the financing of that expansion.

RG: Yes. And I'll chime in here too, J. For the first terminal, we were pressed for cash, right? So, we had to do the knock on. We had to do some other financings to make sure we had the liquidity to show enterprise, right? There we had the liquidity for the terminal. For this one, it's going to be spread out over the next at least 15, 18 months, kind of the staggered CapEx schedule as well as, you know, like Mads said, our balance sheet now is in such strong position that we don't have to finance anything on the JV expansion to pay for it.

Now, during the expansion construction, we will also be contracting out a significant portion of the offtake and with contracted cash flow come better terms for financing. So, we're not in a rush to finance it today. But, yes, as Mads said, we do expect to have some kind of financing against a very strong cash flow, high cash flow visibility asset like that at some point later this year or early 2024.

JM: Thanks Randy and thanks Mads. Yes, I’m very much looking forward to that update, which I imagine will have more specifics on expected EBITDA growth and, sort of CapEx budget. Is that fair? We should expect to see some multiple discussion in that update.

MZ: Sure.

JM: Alright. So, let's talk about shareholder returns a little bit. We've talked about growth, right? And we've talked about the market dynamics a lot. You have a $50 million share repurchase program. What's sort of the timeline for that? Is that something you were thinking maybe that's a year worth of repurchases? Is that a multi-year program? How do you think about that allocation?

MZ: You know the SEC rules that there are certain limitations to how fast you can do it. There's a certain percentage, I think, a quarter of the previous month's volume that you can buy over time. So, you can have a look at the historical volumes and that can guide you a little bit as to what the maximum pace could be. I mean, where the stock is trading right now, we think it's attractive to buy back shares, because we're trading at a large discount to our net asset value. So, we'll report this in mid-March when we do our quarterly report and we'll say how much we've bought and at what price. So, I think that's probably the closest we can come to giving guidance to it, but right now, there's nothing holding us back so to speak other than those limitations on how fast you can do it?

JM: Yeah. That's good to know. So, it sounds like my understanding from what you just said is, the $50 million has been allocated. The $50 million is available. It's really just a matter of what the market offers you. Is that…

MZ: That's right. No. That's right.

JM: Yeah. No. I think I think it's really bullish and not just – you know, I think too many shareholders or even management teams, you know, focus on repurchases for the wrong reason. Right? They focus on, you know, hey, can I boost the stock price, but the entire point of the repurchase is to buy at huge discounts to NAV, right, and accrete value, right?

MZ: Exactly.

JM: It’s basically value creation. I'm curious internally, because you have, you know, your own numbers, your own estimates. Where do you guys, sort of handicap your NAV ranges at? And I imagine where you landed NAV depends on what sort of multiple you apply to the terminal and the EBITDA, but I am curious internally where you, sort of see your NAV?

MZ: Randy?

RG: Yeah. So, you know, looking at various broker reports, you know, we have – every six months we have to provide some assessments for valuations to our banks for different covenant reasons. Vessels value is out there, obviously, as well. We are very active as you can probably see in the last few months on the S&P market for second hand ships. We've been selling some of our older tonnage and, obviously, looking for modern, secondhand replacements of those. So, we have a pretty good handle on what the true market value is of our ships.

Couple that with the terminal valuation. I think it's just looking at sell-side analysts and not using our own internal numbers. Somewhere between $200 million $290 million, which, again, that $90 million is about $1.75 or so per share, so not a huge variance depending on what you pick there. But all that being said, it's certainly in the high teens. I don't want to give the exact number, but well above $16, $17, higher than that. So, certainly, well above $12, where we are today!

JM: Yeah. I mean, if not the analysis, I mean, 16, 17, 18, I think at Value Investor's Edge in full disclosure, and again, I'm personally long talking my book here. But we have you guys in the $16-$17 range as well. And I mean, that's pretty damn accretive to repurchase shares in the $11s when you're basically getting a guaranteed return like that on your own NAV. I mean, it's pretty incredible! So, we're wishing you the best of luck on this repurchase. Has there been any consideration or thought? Maybe not today, right, but if there is a market panic or if there is, sort of weakness in the share price, and maybe the volumes are, kind of low, has there been any thought or consideration to a tender offer?

MZ: We haven't made any plans for making any tender offers here, but I think there is some flexibility within the SEC rules that you can do some block purchases if those opportunities occur. So that there will be opportunities if we find a seller that has a block of shares and we'll be interested in having a negotiation and discussion around that. So, there could be events where we end up buying more than the 25%. So – but no tender offer planned.

JM: Yes. Thanks, Mads. Yes, it's just very attractive at these, sort of discounts. So, we talked about repurchases. I know a lot of folks are interested in dividend policies and dividend programs. Is there any desire or plans for a more formal policy in terms of dividends?

MZ: Yes. I mean, if you look back at the history of Navigator, we haven't been paying out dividends. And that was probably the vision of the previous Chairman and major shareholder that we want to grow ourselves the business so fast that it makes no sense to pay our dividend. And I think that has changed. And I think we've indicated that with the share repurchase program that we have initiated here that returning cash to shareholders is no shame, to the opposite, it can be a very accretive way to use your – deploy your capital.

So, I think in due course, having a dividend policy in place will happen. Right now, I think it's more efficient to do it through repurchases because we're trading at such a last discount. But when we come to a day when that's no longer the case, then I think having a formal dividend policy program in place would make a lot of sense. I think we have the earnings capacity to both grow our business and at the same time return capital to shareholders.

JM: Yeah. Thanks, Mads. And then, you know, unsolicited advice from my corner, but, you know, my viewpoint would be as long as the NAV discount is significant. And by significant, I mean, 30%, 40% or higher, it just makes sense to do repurchases and not do a dividend, but obviously if that closes, right? If you if you can get to, you know, 80% or 90% of NAV, you know, then it makes more sense to pay dividend. And, you know, if the market wants to keep value you guys cheaper, then take advantage of that, right? I mean, the worst scenario is that the market values you guys had a huge discount, and you just don't do anything about it, right? And it just sits there forever, right? Nobody wants dead money.

MZ: And totally aligned on that one.

JM: Excellent. So, you know, I think that's good on capital allocation. I think folks will look forward to, I mean, two things really. I mean, first of all, I think people want to see the economics of that terminal and that getting announced. I think folks want to see better utilization and rates on the shipping fleet. And then I guess a bonus on that is I think it would be really helpful for people to say, hey, look, there has been repurchase volumes. The company is serious. Navigator has a long history and I would say, good operations, right? But Navigator does not have a history at all of shareholder returns. And I think turning that corner will be excellent for you guys.

I have a couple follow-ups, and this is more niche and that's why I saved it towards later. I really want to talk about this, the CO2 carriers, the carbon capture, that sort of business. I mean, this is really interesting stuff, but as we all know, you know, the regulations aren't really set yet for, you know, IMO 2030 and beyond. There's a lot of debate on how that's going to look. Propulsion hasn't been decided yet, and the shipyards are all full. So, how does Navigator fit into this? What are sort of the high level strategy?

MZ: Well, I think some of it does not have to wait for new technologies and so on. We already today transporting ammonia, as Oeyvind explained, 20% of our fleet is deployed to transporting ammonia today. And those ships, they don't care about whether the molecule is of a fossil origin or whether it has been combined with carbon capture, whether it's a green. So, we can transport those ammonia volumes that will be coming out and that we think will start ramping up maybe three years from now once the carbon captured storage capacity has been attached to the existing ammonia plants. So, we'll see those that blue ammonia starting to flow in quite soon actually. So, this will, of course, give additional demand to our fleet as it is.

And then there will be later on, you could say even more volumes and it may be that there will be people including us that are building ships that are on long contracts that will be sailing on green fuels so that we can have a complete zero carbon operations as part of that, but that's going to take a little bit longer. So, both the mid-term and the longer-term, a very positive outlook and then some real business opportunities. But you need to keep in mind that this is all in addition, incremental on top of our existing business where we have very sound business in ammonia, in LPG and in petrochemicals.

So, these new areas with blue, green ammonia and CO2, they're entirely incremental and on top of our existing business. So, we can both you could say, change our Co2 footprint and we can take part in this energy transition while growing our business at the same time. It's not going to show up in our quarterly P&L this year, but it's definitely, you could say, showing the way for Navigator where we have real growth opportunities mid to long term that many other shipping segments don't. I invite my colleagues to complement me.

OL: Yes. On the CO2 front, J, Europe has a project that is underway. They have some other tender – there's some other tender projects that is under – ongoing at the moment. EU and Europe will be one of the first places whereby you will see – but it's medium term, where you will see CO2 transportation as part of the value chain. So that is going to come in a bigger way than, certainly, what is today, because it's zero. But that's a big opportunity that will come and – but the legislation is being developed, carbon tax, there needs to be a real cost to carbon and then slowly, but surely many of these carbon capture transportation storage projects will come into the green economically once that kicks in.

JM: Yeah. It's exciting. It's not something that I've usually invested in myself or have much expertise in, but as I mentioned earlier in our conversation, I do like the aspect of a discounted, attractive shipping company that also offers this, sort of ESG approach and narrative and in a way that actually makes money, right? Because the biggest problem with all these ESG programs is that, most of them are just, kind of pie in the sky. So, I am very interested in this. I’m looking forward to hearing more prospects.

How soon could – because I mean, the ammonia stuff that you already do and you can expand into that business without a lot of effort. Carrying CO2 is extremely advanced. I mean, realistically, like, what sort of – I mean, I know this is far in advance, but I mean, what sort of budget are we talking about here? How expensive would these shifts be? When they could be delivered? I mean, it seems to me this is like a vision for 2028 or 2030? I mean, is that – is it sooner than that?

MZ: It's sooner than that. I think some of the tenders that are ongoing right now would include that the ships are being built or ordered as from this year and be delivered, let's say, two years from now. So, they'll be in operation from 2025 onwards. And it can be – some of the tenders are sufficiently large to make a difference for a company like Navigator who were to win it. It's not going to, you could say, transform our business, but it would be an exciting growth opportunity at par with the terminal investments that we're looking to do and the potential ammonia growth opportunities as well.

So I think the good thing is that the portfolio and the opportunity set is so wide that if we were to win one another, there's still plenty for us to deploy our capital at and make quite good returns on it as well, while you could say transforming our business mix to a more sustainable profile.

JM: What's the structure on those tenders? Is it like a single vessel-by-vessel, sort of like a 10-year lease sort of deal? Is it similar to what we've seen with LNG tenders or is it more complex or a little different?

MZ: It'll typically be long term, the 10, 15 years. It's more than one, two. If it's just one, two vessels, it's probably not worthwhile, you could say, to spend as much time on putting together a tender. So, typically, it would be four, six, eight ships or something like that. So, it can be reasonably significant.

JM: And what's the sort of CapEx spend on one of those ships? I'm completely – this is a completely new universe, right? What's the sort of cost for a specialized vessel like that?

MZ: That could be in the range of $65 million to $80 million each.

JM: Yeah. Okay. Very interesting. So, you know, let's just round up and say $80 million and eight vessels. So that's $640 million. You know, financing packages on something like this, is that – and I know it's very premature, but long term charter, right? So, it's a pretty high leverage, I would imagine. But even if you assume 70%, 80% leverage, that's still a pretty big potential CapEx spend. I guess my only pushback or my only question is how do you balance that? And then it might be super attractive. I'm not saying it's not. But how do you balance that CapEx potential spend with: A, your terminal developments, which are also very accretive and very attractive; and, B, your stock, which trades at 40% discount to NAV? How do you kind of juggle and balance those three things?

MZ: Yeah. And that will always be – when we're trading at a discount, this will always be a dilemma that we will be in, but we are adamant that we want to grow and develop Navigator. So, we need to find a way where we can do both. We can both return capital to shareholders and we can grow the business at the same time. I think it's pretty unlikely that we would go out and deploy the capital that you're outlining there in just one project. But that wouldn't – we would be more prudent than just making one big plunge like that.

I think we have such a good strong pipeline that we would want to do more projects and do maybe slightly smaller ones so that we can build and learn along the way and also de-risk, you could say, the total business portfolio that we have. So, it would be a cautious approach. We're not going to plunge into deploying $600 million into to one new business area with a relatively untested technology.

JM: Yes. Thanks, Mads. And I know it's all speculative at this point. It's an interesting discussion worth having, and I think it hasn't really – lot of folks aren't even thinking about this stuff yet. So, I appreciate how far ahead of the curve you are. I will pass one over to Randy real quick. Earlier in our call, you know, it's all hypothetical, but we said the odds of a new terminal announcement are pretty decent. I think was your words for second half of 2023, with that new terminal announcement, if it did happen, would that likely be in this sort of like ammonia-carbon space or would it be more of like the traditional NGL, you know, ethane-ethylene sort of thing?

RG: Yeah. We're certainly looking at all of the above. I think the ethylene was, obviously, focused on the expansion of Morgan's Point and only Morgan's Point. So, I think ethylene is already there. So, it would probably be more on the ammonia side, green ammonia, blue ammonia, something to that nature.

JM: Okay. Yeah. That that makes sense. Bringing that back together. Two quick follow-ups for you. These are more technical questions, but we're looking at the order book and we see a chunky – we talked about the VLGCs before, right? The commodity trade and the large propane ships, so we won't rehash that one, but what about the VLEC, the Very Large Ethane Carriers? Is that any sort of competition for your business? Is there any sort of overlap there?

OL: The very large ethane ships are all constructed against projects, specific projects and individual company that is producing ethylene constructs a cracker and they value U.S. ethane because of its competitiveness. They then go and tender or do themselves a very large ethane carriers. And all the ones, at least 95% of the ones that are built or under construction against 10 or 15 year or longer time charters.

So, once the very large ethane carriers come trading, loading, it's a specific route, it's a specific cargo, it doesn't hinge on spot market, if you like. But they are providing a pipeline and runs between the U.S. and that individual ethylene cracker are shorter.

JM: Yeah. Thanks, Oeyvind. And then another follow-up we had, you know, there's been a lot of discussion and talk about these Panama Canal delays for the larger VLGC vessels. And, of course, that's – those are ships that you do not operate. Has that impacted sort of the midsized ships at all the stuff that you do or are you able to just go through the smaller locks and not have any delays, either for yourself or for your market overall?

OL: You know, I mean, we are Navigator, we're top 17 companies through the Panama Canal every year. We utilize the old locks. The old locks are very little delays. And it doesn't really feature in our view of the world or logistics when we go through the pass eastward or westward. So, for us, it's not a thing, but we do recognize that delays do happen on the new canal for the larger ships. So that is a logistical challenge for that segment, but not for us.

JM: Yeah. It certainly makes sense. This is sort of out of left field, but it was it was a project that was announced or at least, white paper project a couple of years ago, there was a proposal to do a sort of NGL transport hub around Panama. I think it might have been energy transfer that was looking into that. Yeah. Has anything came with that? I know it was kind of weird when it was announced. Has anything come with that? Is that something to be concerned about?

OL: It's all in the name of efficiency. So, you have a discharging operation on the east side in the Gulf and then there was a pipeline and you reload on different ships or on separate ships on the West Coast. I do not know – I think they're still working on it, you need to ask energy transfer partners for an update, but I don't think it's dead, however, I haven't seen any real developments on it since that announcement. But again, that is coined, it’s more targeted on the bigger ships again, not for handysize vessels.

JM: Yeah. Thanks, Oeyvind. Yeah, I guess the idea was that, if the congestion continues to be a multi-year issue, right, the VLGCs could just skip the canal, right? They could just load on one side and then skip that. So, it would potentially, right, cut down on ton miles or at least the time factor in ton miles, because it would eliminate delays, but anyways, yeah, like you said, that's probably a better question. Obviously, for energy transfer and probably bigger risk factor for the company like that.

OL: I don't know all the discussions that has been going on in Panama on that, but the Panama Canal authority, which is the state, to me, why introduce competition? But anyhow, that's a different question.

JM: Yeah. I know. Definitely a pretty messy situation. So, as we wrap up here, gentlemen, I do want to focus a little bit on some of the risk factors that could happen in 2023 or going forward. What are some of the big risk factors? I think everybody is concerned about the broad economy, so we can kind of assume that that's already included. But what other things specifically keep you folks up at night or have you concerned? What could go wrong in 2023 or 2024 for you guys?

MZ: I think from my perspective, it is the global demand. We see China opening up now after COVID. And we haven't quite seen the full effect of COVID running through the population in China. I get the feeling that it has been and will be a positive thing that the COVID restrictions have been removed. And I think it's going to be a better outlook for the global economy as a result of that. But of course, it can turn in different ways than we expect.

Another one is, of course, the war in Ukraine. So far, it's gone stalemate and we are all concerned that somebody is going to do something really stupid there and that will have not only on sentiment, but also on the global economy some negative consequences. So, what we're talking about here is really some, I wouldn't call it, a black swan, but a dramatic event on the geopolitical front coming out of that war.

You could also say that trade friction between China and the Western world, Taiwan frictions have continued through last year and I think we should expect they'll continue, but my best bet would be that, China has too much at stake to be more aggressive in their approach to the future of Taiwan here. So – but these are some of the areas that could, of course, throw the global economy off course, and that would have negative consequences for global trade and for our business as well.

JM: Yeah. Let let's hope those factors don't materialize, but, obviously, we're all watching that, especially the Ukraine situation. Last word to all your gentlemen who joined us, again, thank you for your time. Why invest in Navigator? Why pick NVGS versus all the other stuff in the LPG sector, LNG sector, shipping segments, I mean, there's tankers, there's bulkers, why invest in Navigator?

MZ: Well, you have a company that has a great track record with good operations and we've shown that we stay loyal to our core business. We have three main markets, be it LPG, ammonia, and petchems where the outlook is pretty robust and that we can expect that utilization is going to stay at good levels in the near-term. So, I think the near-term outlook is good and at the same time you'll be buying into a stock that trades at a significant discount to the net asset value. It's an attractive proposition right now, particularly when we also look to return capital to shareholders the way that we are.

And then I think also the medium-term growth prospects where we will be particular beneficiaries of the energy transition that we see will happen and we have some very strong opportunities in both the ammonia space and in the CO2 space where we could gradually complement our existing business with these new growth prospects.

Thirdly or lastly, I think, we are slowly changing our business composition towards more infrastructure to complement our good shipping operations. I think it should also be a strong benefit and hopefully also something that will change the way that we are being valued going forward. So that will more be some of the parts and put a different valuations on our infrastructure assets as we grow that proportion of our business.

RG: Yes. And just to piggyback on that. Certainly, J, I am a long-term investor with my career being shifted to Navigator. So, they're certainly that long-term and medium-term aspect. But I know you and many listeners are shorter-term sometimes investors. So, with that, we've already guided to, kind of a record earnings and results in the fourth quarter, at least above or where we were for the first and second quarter after the third quarter pullback of 2022. We've got the upcoming, kind of joint press release on the ethylene export terminal. Should be in the coming weeks or at least by February, earnings coming out in March.

We're seeing China reopening, utilization remains firm, rates are on the rise, the balance sheet continues to be strengthened. We have another debt refinancing as Mads was alluding to earlier, hoping to close here in the next weeks or months or so as well. So, a lot of near-term catalyst as well. So, it's not just, hey, invest today, in the next three years we will be better, right? It's invest today and join us for the ride.

JM: Yes. Thanks, Randy, and thanks, Mads. It's a good rundown. Short, medium, long-term, we'll hope to see it develop, obviously, you know, broad market conditions, broad economic situations, a lot of things in flux. Thank you so much, gentlemen, for your time this morning. I think it was helpful for all of us here.

MZ: Thank you, J. Thank you so much for organizing it. Thanks a lot. Have a good day. Bye.

JM: You as well. This concludes another exclusive interview at Value Investor's Edge. We just hosted Navigator Holdings, CEO, Mads Zacho; CFO, Oeyvind Lindeman; and VP of Product Development, Randy Giveans. We discussed Navigator Holdings, their overall market prospects, as well as the more niche mid-sized LPG and ethane, ethylene, ammonia transport developments.

As a reminder, this is recorded on January 11, 2023 at about 10:00 a.m. to 11:00 a.m. Eastern Time. I have a long position in NVGS. If you are listening to a recording or a transcript at a later date, please be advised, positions may have been updated.

For further details see:

Navigator Holdings: Key Updates On A Top Pick (Podcast Transcript)