2023-11-20 20:08:22 ET
Summary
- Dorian LPG reported strong Q2 results as spot rates climbed to highs in September from issues at the Panama Canal.
- The company has a lot of spot exposure and may benefit from high spot rates if they remain high.
- Concerns arise from low Chinese PDH facility utilization and potential weaker LPG demand, which could impact shipping rates.
Back in May , I placed a “Hold” rating on Dorian LPG ( LPG ), noting that the LPG shipping market had been solid, but that spots rates had also shown a lot of volatility. The stock has had a monster run since then, generating an over 80% return versus 8% for the S&P. With the company recently reporting earnings, let’s catch up on the name.
Company Profile
As a refresher, Dorian operates a fleet of 25 VLGC (Very Large Gas Carriers) that carry LPG (liquified petroleum gas). Twenty-three of its vessels are a part of the 27 vessel Helios LPG Pool, which it co-manages along with Phoenix Tankers. Nineteen of its vessels are ECO VLGCs, and one is a Dual-fuel ECO VLGC. Fifteen of its vessels have scrubbers.
Its two vessels not in the Helios pool are on time charters, one of which expires in Q1 of 2024 and the other that expires in Q4 of 2024. Eight of its vessels in the Helios Pool are on time charters.
The average age of Dorian's fleet is about 6.9 years.
Fiscal Q2 Results
For the most-recent quarter, revenue rose nearly 91% from $68.7 million to $144.7 million. However, that did miss analyst estimates calling for revenue of $158.1 million.
Its Average Time Charter Equivalent rate per operating day climbed 60% to $65,128 from $40,632 a year ago. The Helios Pool earned a TCE of $78,643 for its spot and COA voyages. About 70% of the Pool’s vessels had spot exposure.
Spot rates were particularly strong in September, with the U.S. Gulf to Japan route hitting $150,000 a day due to issue with the Panama canal. With rerouting through the Arabian Gulf as a result and an increase in vessels there, the Middle East to Japan route hit $170,000 rate per day.
Its fleet utilization, meanwhile, rose from 90.7% to 96.5%.
Vessel operating expenses climbed nearly 20% to $21.0 million from $17.6 million. On a per calendar day basis, operating expense per vessel rose nearly 14% to $10,858 per vessel from $9,541 per vessel. The increases came from such things as spares and store, higher repairs & maintenance, drydocking, and miscellaneous expenses.
The company noted that the cost of high sulfur fuel oil and very low sulfur fuel oil narrowed during the quarter. Dorian has invested in retrofitting 60% of its fleet with scrubbers. Scrubbers reduce the sulfur in fuel to allow them to comply with the international cap that enacted in 2020. This allows shipping companies to buy cheaper high sulfur fuel, leading to savings in the process. However, there is less savings when the spread between high sulfur fuel and lower sulfur fuel narrow. There is also some controversy with some scrubbers, as they help with air pollution, but are leading to more ocean pollution.
Adjusted EBITDA soared 126% from $46.2 million to $104.6 million. Adjusted net income, meanwhile, climbed from $17.2 million, or 43 cents per share, to $75.0 million, or $1.85 per share. Analysts were looking for adjusted EPS of $2.04.
Turning to the balance sheet, the company ended the quarter with debt of $631.5 million and cash and equivalents of $192.0 million. Its net debt to total capitalization was about 30%. Leverage is just over 1x.
Discussing the current market on its fiscal Q2 call, CCO Tim Hansen said:
“The primary driver of the firm freight market was the widening U.S. arbitrage vessel delays and subsequent vessel routing decisions to best handle the widening arbitrage and delays. First, when looking at the arbitrage, continued weak domestic demand in North America covered with record breaking production for natural gas liquids continued to increase inventories, which resulted in lower export prices. Meantime in anticipation of the seasonal stock building, typical in the autumn months, Asian importers bid off the import prices, widening the price arbitrage, which should continue to increase the closer that the commercial working window gets to the winter months. The widening arbitrage was therefore a reality over the quarter as were the delays. Delays for transiting the Panama Canal increased compared to the prior quarter with an average waiting time up on both the new Panamax and the old Panamax locks. As important as the actual increase of average waiting time was the increased volatility in the projected waiting time in August and September, further strengthened the arbitrage. While the volatility and occasionally two weeks plus waiting time at Panama Canal falls in September already created market inefficiencies. This was excavated by the delays in the far east, resulting from three particularly violent typhoons that happened in short succession of each other over the August months. Ship owners had particularly difficult time anticipating vessel availability for loading in August and September, depending on the next loading area. For ship owners looking to load in the U.S. Gulf, the Panama delays added to the complexity. These factors contributed to more VLGCs avoiding balancing towards Panama altogether.”
With spot rates surging to highs in September, Dorian posted a strong quarter. The company has a lot of spot exposure, and five of its 25 vessels are coming off time charters in the next two quarters. That should bode well for its results if spot rates remain high.
The issues with the Panama canal continue, with Japan’s Eneos Group recently paying a record nearly $4 million to secure a spot and jump the line in a recent auction. The long wait times and costs to transverse the canal are likely to continue to impact VLGC spots rates. At the same time, though, Chinese PDH production has dropped due to high feedstock costs and low margins, as well as an oversupply of polymers in its domestic market. These are two counter-acting forces that are likely to push and pull the market in the near term.
Valuation
Dorian trades at 5.1x the 2023 EBITDA of $415.9 million and 8x the 2024 EBITDA consensus of $268.8 million.
On a PE basis, it trades at 6x EPS estimates of $7.94. Based on the 2024 consensus for EPS of $4.02, it trades at 6.3x.
Dorian's stock trades towards the high end of other marine shipping companies. With newbuilds costing just over $80 million, you could replicate the company’s fleet for a similar value as its Enterprise Value, albeit with newer ships. Overall this seems pricey for the stock, and fair value would seem to be about -20% to -25% lower given the age of its vessels and a potentially weaker market next year. That would put a fair value price of between $30-$35.
Conclusion
Dorian posted a great quarter, powered by strong spots rates. However, the recent news on low Chinese PDH facility utilization is a bit concerning. Much of the LPG demand growth was expected to come from China, which would absorb some of the new shipping supply from the newbuild ships coming online. But China looks to be weaker than expected, and high shipping rates will likely come down if the demand for LPG dries up. The low water level issues at the Panama canal may keep shipping rates elevated, both only if Asian LPG demand remains strong.
Given Dorian’s relatively high valuation, both versus peers and the cost of fleet, I’d be cautious on the name at this time and prefer to stay on the sidelines as this situation plays out. Rates are at historic highs and are unlikely to stay there for an extended period of time.
For further details see:
Dorian LPG: Rates At Historic Highs, But China Could Become An Issue