2023-05-02 04:00:02 ET
Summary
- The LPG shipping market has been solid, but a large number of vessels coming online represents a risk.
- Spot rates can be volatile, and moved down sharply at the start of April.
- LPG demand from China will likely be the biggest factor in whether the new vessels can be absorbed and not disrupt the rating outlook.
How well the market can absorb a large LPG vessel order book will likely determine how Dorian LPG ( LPG ) performs from here.
Company Profile
Dorian operates a fleet of LPG (liquified petroleum gas) vessels. At the end of February, the firm owned and operated 22 VLGC (Very Large Gas Carriers), of which 19 were ECO VLGCs, one was a modern VLGC (older), and two were chartered-in. Thirteen of its ships are fitted with scrubbers. Dorian provides in-house commercial and technical management services for all owned and bareboat-chartered vessels in its fleet.
It is also the co-manager of the Helios LPG Pool along with Phoenix Tankers, which operates 23 vessels. Dorian has 20 of its vessels in the pool and Phoenix three. Dorian's other two vessels are on long-term charters that are not in the pool. Earnings for the pool are allocated based on vessel carrying capacity and fuel consumption. Vessels in the Helios Pool may operate either in the spot market, pursuant to contracts of affreightment, or on time charters of two years or less.
The average age of Dorian's fleet is about 8.5 years.
Opportunities and Risks
The LPG shipping market is more niche than the shipping of oil and refined products. Much of the growth in the LPG market is coming from China, where the country is growing its petrochemical industry. The re-opening of the Chinese economy combined with new PDH projects is driving demand growth.
China saw seven PDH plants begin operations in 2022, and it has 36 panned projects with completions expected to come online between Q1 2023 and 2026. Twenty-two of those projects are expected to come online in 2023, adding ~14.7 MTPA of additional PDH capacity, with another 10.5 MTPA capacity coming online between 2024-25. Dorian said that typically 4 LPG vessels are needed for transport 1 MPTA of LPG, so that would require 101 new vessels.
Meanwhile, the U.S. is becoming a larger and larger supplier of LPG to China. U.S. supply has been increasing as more frac capacity has been coming online and propane inventories have been on the rise. The U.S. supplied 37% of the LPG exports to China in 2022, up from 30% in 2020 and 24% in 2017.
India is also a large LPG market. Dorian has said that it is expected to become the largest LPG using nation by 2030. However, its growth is currently a bit below that of China. Additional Asian cracking capacity could also help drive LPG growth. Crackers can generally use naptha or LPG, and the spread between the two often determines which is used. LPG is usually cheaper to use, but that is not always the case, and naptha was actually cheaper to use in 2021.
While future LPG demand appears strong, of course these projects need to come online. Meanwhile, unlike with crude and refined pipeline ships, the order book for LP vessels is actually quite robust. There are over 40 vessels expected to be delivered this year, which would increase the LPG fleet size by about 13%. There are 58 vessels older than 20 years old that could eventually be scrapped, but much of the fleet is pretty young with an average age of 11.5 years.
Dorian also notes that about 62 vessels are due for maintenance is 2023. As such, they may be temporarily removed. The company noted that many ships delayed maintenance in 2020 because of Covid and high rates, while Dorian did most of its maintenance in 2019-20 as it installed scrubbers. It also noted that with Panama Canal delays, more vessels could start to travel from the U.S. to Asia through the Cape of Good Hope, which would add ton milage.
Discussing the number of vessels entering the market and how they may be absorbed on its Q3 earnings call, Chief Commercial Officer Tim Hansen said:
One thing that you can't hide is obviously is evident to everybody is at 46 ships or so delivering in this year. But what we think we believe will balance this out the additional production, especially from the U.S., which have surprised quite a lot on the upside. So we see that most of the you could say 80% of whatever is produced in the U.S. will go to the Far East. So the demand side is really in the Far East. So when we model that, we see kind of around 20 ships absorbed due to that increase of volume at least, and that's without any inefficiencies. On top of that, then we have more congestions in the board as we see more and more as a lot of places, the infrastructure isn't built out for the increased volume, especially like India and other places. We're also seeing a lot more going into Europe due to the war in Ukraine. So here, we've also seen more delays than usual as it's bigger volumes coming in.
And then as I think we mentioned a few times, the Panama Canal delays. We do see them increasing. … And then we have, as Peter mentioned earlier, the regulations on the EEXI and CII, which will have an impact on the shipping fleet as VLGC normally goes very close to full speed, where you see the tanker market and the dry markets previously has not been running on full steam. So for them, the EEXI reduction is not so significant, sorry. But for VLGC, this will have an impact on fleet, which is quite significant, actually. So we see these factors as being able to absorb this shipping fleet coming in."
For its part, Dorian took delivery of a dual-fuel newbuild vessel in March. It also expected to take delivery of three more dual-fuel Panamax new-built ships this year that are under long-term charter-in contracts. The company is looking for its ships to potentially use LPG as a fuel, and is also evaluating whether to retrofit some of its fleet for this.
Right now, the company is paying a what it calls an irregular dividend, which means it's not guaranteed. However, it has declared a quarterly dividend of $1 each of the past four quarters. The ex-date for its next dividend is May 5th. While not considered a "regular dividend," the consist irregular dividend equates to an 18% yield.
Valuation
Dorian trades at 6x the 2023 EBITDA of $239.2 million and 6x the 2024 EBITDA consensus of $237.6 million.
On a PE basis, it trades at 6x EPS estimates of $3.63. Based on the 2024 consensus for EPS of $3.49, it trades at 6.3x.
Dorian's stock trades towards the high end of other marine shipping companies.
Conclusion
The big question surrounding Dorian is how does the large order book coming online this year impact rates this year and over the next few years. In addition rates can move quickly. Shipping research firm Clarkson raised its yearly outlook for VLGC rates at the end of March, only to note a sharp -41% correction in rates a week later.
There are potential factors that can absorb the increased fleet, including increased LPG demand from Asia, as well as vessel scrapping & maintenance and Panama Canal delays leading to longer routes. China in particular looks set to increase LPG import demand, as the country re-opens and it has numerous PDH projects set to come online. However, there is always a bit of certainty when it comes to China.
In general, a large order book is always a risk, and marine shipping investors have gotten burnt by these types of scenarios before. As such, I'm a bit cautious on Dorian. If I'd own the stock I'd continue to "Hold' and collect the nice irregular dividend, but I wouldn't be a new buyer given the rate uncertainty.
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Dorian LPG: Large LPG Vessel Order Book Is A Risk