Earnings Transcript for AGAS.OL - Q1 Fiscal Year 2023

Operator: Good day and thank you for standing by. Welcome to the Avance Gas Holding Limited first quarter 2023 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. To ask a question during this session, you will need to press star-one-one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star-one-one again. Alternatively, you may submit your question via the webcast. 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, Chief Executive Officer of the company. Please go ahead.

Øystein Kalleklev: Thank you Heidi, and welcome everybody to Avance Gas’ first quarter results. On the front page here, you will see our newest addition to the fleet, the Avance Avior, dual fuel large VLGC which we took delivery not from DSME but actually from Hanwha Ocean - it’s the second ship delivered from Hanwha Ocean after they changed or rebranded the name from DSME to Hanwha Ocean just now taking place, and we took delivery of the ship 10

Randi Navdal Bekkelund: Thank you Øystein, and let’s go to Slide 8 and have a look at our income statement and key financial figures. As Øystein already touched upon, we are very pleased to present a net profit of $36.3 million or earnings per share of $0.47, which is the strongest net profit for the first quarter for Avance Gas ever. This corresponds to attractive annualized earnings yield of approximately 24%. The average time charter equivalent rate, or TCE rate for the quarter was $58,400 per day, in line with the guidance of $58,000 a day, and is considerably up from $46,500 a day for the fourth quarter. The good results are explained by a supportive LPG price arbitrage between the U.S. and the Far East, resulting in a high [indiscernible] to pay for the freight, combined with significant slippage of the new buildings and the VLGC’s carry out special service this year. Our TCE earnings include some negative effects of $3,700 a day which relates to the forward freight agreements and bunker hedging, which is derivatives, where the spot market was considerably stronger than our FFA coverage of 1.3 ships for the $2,000 a day for the first quarter. Just a reminder, the FFA and bunker hedges are designated for hedge accounting, where the fair value movement is taken through the other comprehensive income and equity and hits the TC earnings when they become effective. Our operating expense, or opex was $9.7 million, equaling a daily average of $8,600 a day. This compares to $10.2 million or $8,700 a day for the fourth quarter. The operating expenses were down due to less ships or calendar days as we saw promised in November, combined with improved crew change costs. Looking at our administrative and general expense, we continue to hold the lowest A&G expense by far compared to our industry peers. For the quarter, we had an A&G of $1.3 million for eth first quarter, equaling average per ship day of $1,200 and represents a normalized A&G going forward. Non-operating expense consists mainly of financial expenses, and it was recorded with $4.3 million compared to approximately $4 million for the fourth quarter, so even though we have seen rising interest rates during the quarter, this has been offset by recognized effectiveness of interest rate swap gains during the period and interest income on cash deposits, maintaining a relatively flat interest expense for the quarter. Moving to Slide 9, a few comments on our balance sheet. On the left-hand side of our balance sheet, we have approximately 75% consisting of our 13 VLGCs at quarter end, which became 14 today as we took delivery of our fourth dual fuel new building Avance Avior at 10

Øystein Kalleklev: Okay, thank you Randi. Let’s touch upon the markets. We actually have very fresh data here. We were sitting looking at some data last night, and we’re actually providing you with LPG export data from January to May, even though May is not finished yet, because we have predictive data based on loading schedules. In any case, volumes are up, especially driven on the export side by the U.S. where they have very high inventory levels, and where the oilfields are getting more gaseous, which means more gas available for export, so 18% in U.S. or North America 2023 compared to 2021, and even more so in Middle East despite announced OPEC exports up 27%, relatively flat the other major regions. On the import side, it’s driven by usually primarily Asia - it’s China and it’s India, going very steadily despite a period where there’s been lockdowns in China. Chinese LPG imports grew close to 10% last year, and it’s grown 28% over this period, driven of course by the affordability of LPG compared to other hydrocarbons. Europe, of course with less LPG arriving in Europe from Russia, not really VLGC, it’s our smaller parcel sizes or by rail. Nevertheless, Europe has been buying more LPG and also driven to some extent by affordability in relation to the [indiscernible]. The cargoes are getting bigger - VLGC shares in terms of exports going from two-thirds to 70% from ’21. Let’s look at U.S. in a bit more detail since this market is close to 50% of the VLGC exports. It’s been growing steadily the last 10 years, 7% annual growth. It’s tapering off a bit now but still the EIA forecasting 14% export growth from U.S. this year despite only 4% production growth, because more of the LPG is being exported, also to some extent driven here by more use of ethane in U.S. and then very high inventory levels in the U.S. which makes the price in the U.S. low compared to international markets, and this is driving the arbit cost, which is the next slide, No. 14. The arbitrage, as illustrated by the price difference, of propane price from Mont Belvieu in the U.S. compared to the Far East Index for Asia, and of course this is our main driver for freight rates. It became extremely elevated before New Year, which really drove [indiscernible] to new heights before Christmas. It’s come down since then but still at $185 per ton, really supportive of the freight rates, and as you can see on the right-hand side, these are very correlated with the spot price rates and arbitrage. To kind of dumb it down and simplify it, on Slide 15 we have a graph showing the key trading routes. It’s a traditional one, Baltic LPG1 from Ras Tanura to Chiba, today $107 per metric ton freight, which translates into about $92,000 per day on our eco non-scrubber ship. U.S. trade, Baltic 3, Houston to Chiba, Far East is $157 per metric ton, and of course as you can see, the product arbitrage here is $187 - that means the freight is $30 less than the arbitrage. Of course, you need some money for the terminal fees and other costs as well in order for the traders to make a profit. Right now of course, freight is getting close to the arbitrage, but when you have a very tight shipping market as we have today, the owners can take out a very big share of the arbitrage economics. The shortest route is the one that is most profitable these days, Houston to Flushing, $96 - it’s the lowest rate in terms of per metric ton, but since this is our short haul route, it calculates to $110,000 per day, so what this means is of course with this very elevated trade state, people like to lock in long voyages in order to get a good bottom line, and that means that the shorter routes have to be trading at a premium for people to fix their ships for shorter routes, rather than locking in longer term profits. Let’s head for No. 16, this is something we have been talking about since at least last autumn. We had said that we don’t believe we will see all the ships being delivered this year. We have seen it ourselves with slippage on boats numbers 3, 4, 5 and 6, and we saw slippage in Q1, 16 scheduled ships but only delivered 12. Those are slipping into Q2 and it’s a case of chain reaction, where you will see probably slipping throughout the curve and less ships than expected for delivery in ’23, and somewhat more ships for delivery in ’24. That balances out the market better. We also have a lot of dockings this year, so it means that fleet growth has been more muted than most people would expect. Slide 17, before I think I conclude, is the fleet overview. People have been worried about this big column here in ’23 for deliveries. We have been less so because the fleet has been growing, so the relative growth is much less than the two spikes in 2016 - 17, when we had a time where freight rates stayed relatively low, and then also the other spike here in 2008/’09/’10, where we had a lot of ships for delivery. What’s worth to say is scrapping has been extremely muted in this industry. A lot of the older ships are ending up in captive trade from Iran to China, and this is keeping older ships going. We’ve finally this year seen scrapping of two ships, both above 40 years old, but eventually decarbonization rules and probably more stringent rules will probably result in more of these ships being scrapped, and we see a large portion of the fleet being more than 25 years old, which is the normal economic life of these ships. That’s it for me. Just to summarize, good results, first quarter profits of $36.3 million, slightly better than the numbers we delivered in Q4. We have very good bookings for Q2, we are now booking at very elevated levels into Q3, and we have good spot exposure, a balanced spot exposure for the rest of the year. The near term looks very promising. We will have more ships in the water, both in Q2, Q3 and Q4, so that bodes well for our bottom line, and with our good financial position that Randi already touched upon, we keep our dividend at $0.50, which gives our investors a very nice dividend yield. With that happy message, I think we’ll conclude and open up for some questions.

Operator: Thank you. [Operator instructions] We will take our first question. The question comes from the line of Climent Molins, Value Investor’s Edge. Please go ahead, your line is open.

Climent Molins: Hi, thank you for taking my questions.

Øystein Kalleklev: Hi, welcome again.

Climent Molins: Thank you. I wanted to start with a market related question. Exports from the Middle East have increased materially year-over-year, and I was wondering, are you seeing any effects on volumes due to the recent OPEC production cuts?

Øystein Kalleklev: Not yet. Of course, the OPEC cuts are for crude oil, so depending on the use of propane--it’s not really sure they will cut anything on propane. So far, we haven’t seen any trend towards less exports, so let’s see.

Operator: Unfortunately, Climent’s line has disconnected from the call.

Øystein Kalleklev: Okay. We have a question from the web here, we can take this in case he returns, from Friedrich Caspar [ph]. If VLGC spot rates remain above $50,000 during the remainder of the year, will you increase charter coverage vis-à-vis FFAs or by putting additional investments on fixed rate TCs? That’s the million dollar question. I don’t have--I can only describe how we are thinking about it. Of course, we are looking at the market now and of course you can lock in 80, 90, even $100,000 on a spot voyage, depending on the route and the length, so it’s really something you need to calculate on, let’s say somebody is asking if you want to fix a ship for $50,000 to $52,000 a day for 12 months, then you really need to calculate, okay, we can do one long voyage here, let’s call it at $80,000, and it takes 80 days or so, what is the implied value of the back end of the curve, and then we look a bit at what we think the market will pay that and also the FFA, and then we--because you can also take that cover to FFA is that is more effective, which is something we did last autumn. I cannot give you a definitive answer. We’ll monitor the market if we feel that it’s value in doing it. I think right now, we’re quite comfortable with having 40% coverage for the second half of the year. Of course, we are fully open for next year, so it’s something we will consider day to day, monitor the market, do the calculations. I don’t rule it out, but we are actually also look to having more spot ships available because if we have more of our fleet in the spot market, we are really one of the very big players in the spot market. If we fix all the ships on TC, we become less [indiscernible] in terms of size. We are the fourth biggest VLGC owner, so if we trade all the ships spot, we get a dominant position, and if you have a dominant position in the spot market, it’s easier to position your vessels to trade ships on TBMs where you can swap vessels and maybe also invest less quality in Atlantic positions, where you are trading one on the VLGC route to, so you have a ship with a very fixed schedule for U.S. loading [indiscernible]. There are some synergies of being big in the spot market, and also in terms of the Panama ranking, so we like the spot market and I think we would probably grow our presence in the spot market rather than reducing it from, let’s call it the 60% exposure we have had to the spot market lately, and also we get more ships for delivery, which is also increasing our absolute size, not only the relative size. I hope that was a satisfactory question, and then we can maybe check--yes, we can take one more question from the web, from Eytan Morgan [ph]. How far into Q3 are ships [indiscernible]? We had a delivery this night, we’re just bunking up Avior and setting sail, so basically are then chasing loadings in the U.S. middle of July, and then you have the return trip, so basically to simplify, you’re booking into middle of August, I would say, so that’s basically in the middle of Q3. Then you have a sense of--you know, a feel on how your Q3 backlog is building, and of course we’re building that backlog every week now. Then maybe we can check whether the Value Investor guy is still online?

Operator: The participant hasn’t rejoined.

Øystein Kalleklev: Okay, thank you. In any case, thank you for the questions. I think we have to on this make some Avance [indiscernible] and give it away for best question from the Q&A session, so we get flooded with questions like we do in [indiscernible], so that’s maybe something we will think about when we return in August. [Indiscernible] orders which is locked in now with basically fully covered already and where we’re booking to Q3, so hopefully we’ll come back with some good messages for you in August. With that, I thank you for joining and I wish you all a good summer. Thank you.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.