Earnings Transcript for AGAS.OL - Q3 Fiscal Year 2024

Operator: Good day, and thank you for standing by. Welcome to Avance Gas Third Quarter 2024 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I will now hand the conference over to your speaker, Oystein Kalleklev. Please go ahead.

Oystein Kalleklev: Thank you, and thank you, everybody, for joining our webcast today. We have some exciting news for you all and, which you might already be aware of. I'm joined now as usual by our CFO, Randi Bekkelund, who will run you through the financials a bit later in the presentation. Just to remind you, you can also ask questions either by the -- or by the chat function. And we once we conclude the presentation, we will do some Q&A in case there are some questions to today's presentation. Before we begin, I'm just going to remind you about our disclaimer. We will be giving some forward-looking statements and use non-GAAP measures like TCE and our limit to how many details we can cover in this presentation. So I recommend that you read the presentation together with the earnings release, which we also published today, this morning, 7 o'clock. So let's kick-off. I think one of the big highlights today is dividend. We've been ramping up the dividend quite a lot -- the last couple of years. And for this quarter, we are prepaying some of the gains we are booking for the BW transaction. So back in 2022, we paid $1.1. We almost doubled that to in 2023 $2.15 per share. And then, given the sale gains we recorded in the first quarter of this year, we actually paid off the same number, $2.15 per share, $165 million in just one single quarter. We paid out $135 million in Q2. We also had some savings in that quarter. So altogether, for the first half of the year, we paid out $3.50 or $268 million. With all of the fleets now sold, we don't see any reason for you guys to be waiting for the money. Interest rate per dollar is not zero anymore. It's actually, yes, quite attractive returns on cash[2

Randi Bekkelund: Thank you, Oystein. Let's go to Slide 11 for the key financial figures from the income statement. The third quarter was a good quarter. We recorded a TC earnings of $46 million corresponding to a TCE per day of $41,900 which is actually above or about twice our cash breakeven. And despite being $5 million lower than previous quarter, we're actually $5 million ahead of the last year results by looking at the year-to-date figures. In TCE numbers, year-to-date, we reported $56,000 a day for '24 compared to $52,000 a day last year.

Oystein Kalleklev: I'm not planning to pass for you, but you said $5,000,000 ahead of plus here with $10 million.

Randi Bekkelund: Yes, but on the TCE year.

Oystein Kalleklev: Okay, okay, I was thinking profit.

Randi Bekkelund: Yes, now we're speaking in TCE year. Although we didn't record any gain on sales this quarter, the sale of the VLGC fleet resulted though in an accounting effect in the third quarter. We announced the transaction in August in accordance with the accounting standard IFRS. The VLGC fleet was reclassified to assets held-for-sale from the announcement date. And as a result of that, the depreciation stopped. As I said, this is an accounting effect. And if the VLGC fleet were depreciating following the lifetime of the vessel, the $5 million would have been allocated to the gain on sale, which explains the $5 million lower depreciation for the quarter compared to previous. The operating expenses, a bit high this quarter, mainly explained by timing effects in relation to Spears, repairs and maintenance, resulting in an OpEx per day of $9,400, while we will come closer to $8,500 for the full year, which is more or less in line with our year-to-date OpEx. The A&G remains at the lowest of our peers, $1,300 for the quarter. And by including the net finance expense, we reported a net profit of $26 million equal to $0.34 per share and a net profit of $233 million year-to-date corresponding to $3.04 per share, which is the best ever result for a nine month period despite including the $121 million gain on the sale of the four VLGCs for the first half of the year, we are still ahead of the last year's results by $10 million. By looking into the next quarter, on Slide 12, we have prepared a pro forma income statement, which is estimated nonrecurring effect following the sale of both the VLGC fleet announced in August and the MGC fleet announced today. Both sales are expected to be recorded in the fourth quarter. Booked gain on sales from the VLGC fleet is expected to be $284 million presented as a separate line in the P&L. In accordance with IFRS accounting, [Technical Difficulty] settlement in BW LPG shares will initially be booked at the share price at the announcement date on August 15th. And yes, basically, it's $16.18, which calculates to the gain $284 million. Additionally, depreciation expense stopped on the announcement date, resulting in $5 million lower depreciation in Q3 as explained and $7 million in lower depreciation in Q4, bringing the total gain on sales to $296 million. Subsequently and at each period end, the BW LPG shares are measured at fair value, the share price with the market to market changes recognized through the P&L presented as a finance item. Based on the yesterday's share price of BW, the market-to-market effect is negative $57 million as presented in the table on the left hand side. However, this will change, as the actual effect is based on the last trading day on the stock exchange before year end. At year end, we don't have any debt basically, and thereby we have terminated all the interest rate swap position. We expect a positive effect to the finance net finance expense of $10 million of which $4.4 million is gain on swap terminated in October and the remaining related to interest rate swaps terminated the last two years, which has actually been sitting on our balance sheet and has been amortized over the maturity of the loan. We also have some transaction cost or debt issuance cost, in relation to the debt financing that need to be taken through the P&L, which will offset the gain on the swaps, negative effect of $5 million. All in all, we expect a positive effect to the net finance line of $5 million which will be recorded through our P&L in Q4. Net cash proceeds from the VLGC sale $235 million, up from the previous guidance of $217 million. This is mainly due to scheduled debt repayments. Positive load to discharge effect of $5.3 million to our TCE income or earnings corresponding to $7,000 a day. This is positive basically, because we don't have any spot voyages to adjust for at the quarter end. We can jump to Slide 13. By looking at our cash movement, we started the year with a cash of $268 million. We generated $38 million in operating cash flow net of scheduled repayment of debt. We have paid $7 million sin CapEx, primarily related to pre-delivery yard installments for one of our MGCs. This brings the total CapEx for the MGCs to $50 million since we acquired these vessels last year. And the last bridge that brings us to the cash position of $193 million is the dividend payment of $103 million equaling $1.35 which was paid in September, and there's more to come. During the fourth quarter, we have, as you know, a lot of net cash proceeds from the vessel sales, which we aim to distribute as soon as possible. And we haves, therefore, announced a dividend payment of $268 million. In total, we will receive $319 million in net cash proceeds from the VLGC and the MGC sales, of which almost all of it, except of $34 million is expected to be received within year end. Looking on Slide 14. As I mentioned already, we don't have any debt by year end. We had $490 million in outstanding debt at the end of the third quarter. And as we have delivered four vessels so far in Q4, in November, we have already paid $155 million paid and no weighted $155 million of outstanding debt. And as we don't have any debt to hedge, we have also terminated the interest rate swaps in October at a gain of $4.4 million as mentioned. Bringing actually the total gains on the interest rate swaps to $11.3 million for the full year 2024, which we're pretty happy with as Oystein had said.

Oystein Kalleklev: Yes, I think so. We're able to terminate the swaps at the right time. We did wait to October as some of you recall, interest rate in America plummeted during August and especially September when Fed cut 50 basis points. And then we've been on this ballistic rally in interest rates, since probability of a trend collection started to become high and then especially when it was the result. So we would have made even more, if we were terminated in November, but still we're pretty happy about the termination of our swaps that we waited until at least October to get a really good more profit on these swaps. Looking at the markets, of course, we don't really have much market exposure. We have already booked all our ships, but it's a interesting story anyways. And I hope for a lot of our investors, they might be become now BW investors, so it's nice to also look at the market. In terms of export, export market is pretty healthy. We still have U.S. fantastic growth on the export volumes. There's nothing wrong with the supply side here in terms of orders for sure. Middle East, pretty flat. We have the OPEC holding back barrels. Iran is shipping out a lot of volumes. So we still -- we don't really see a lot of growth in this area unless OPEC changed our stance in terms of holding back barrels. And I will come back to that because it's a bit interesting dynamic. It's not really only about Middle East volumes. It's also about who in the Middle East is producing this barrel. In terms of the import side, not surprisingly, China is ramping up a lot of PDH plants increasing imports by 11%. And India is the second biggest market, also healthy growth of 8% year-on-year, which is also healthy on the import side. So then you might wonder with these kind of fundamentals, why it's priced so low. So we will cover that on next slide. So again, looking at U.S. healthy metrics inventories on very high levels, which means production is high, inventory is high, giving a very low domestic U.S. price for LPG, giving a very high arbitrage or price difference, between the American market and the main markets in Asia. So if you look at the price arbitrage, we are hovering ahead around $200 per ton. We have been even higher. So it's a bit we have a disconnect in freight compared to other spreads. And as you can see it here, you will usually also have a seasonal effect in Q4, where that tends to be the strongest market. There's quite a few shipping segments this year experienced that Q4, which tends to be a peak market, is not developing as a peak market. You only have to look into LNG and tankers for that matter. But we see Q4, which everybody thought would be the best quarter, it's turning out to be maybe the softest quarter of the year. And the same goes for LPG, where we've hit very low levels, but especially very low levels, when compared to the price arbitrage, how much money can be made by shifting our cargo from U.S. to Asia. So where is this money ending up? So that's something we cover on the next slide, which is actually a very good analysis by RBN Energy, which is a research, I like quite a lot. Generally, in the past, historically, the term linked fee for LPG in America has been around $0.06 per gallon. And then we've been in a market with a lot of growth in U.S. exports and where freight has been able to skyrocket. And that's why also, if we look at our stock price the last couple of years, it's been a fantastic journey. I just read in the financial analysis today, we're giving whether arbitrage a total return last five years at 400%. So of course, we've been benefiting from the fact that America has been putting more barrels in the market and arbitrage has been healthy, but this year is different. Actually, this year is different in the sense that it's a soft Q4. Despite all these issues, as Randi mentioned, we delivered actually better than trading ourselves for the 9, 4, first months. So we're $10 million ahead of last year and last year was fantastic. But gradually, we have seen a creep-up in the terminal fees. And why is that? And it's really about we had this growth in Panama last year. Panama transit was reduced by about 50%, 55%. And when that happens, it's the VLGC being pushed out of the market, container ships and to some extent LNG ships are willing to pay more in order to get a slot in Panama, which means, the VLGC was pushed out and a lot of the VLGCs had to do longer voyages going Houston to Chiba via Panama. It's a 60 days on trip. But if you're going via Cape of Good Hope, because Suez hasn't really been an alternative this year, you're talking 90 days. So we had last year a situation, where ton mileage on those voyages grew 50%. But with the drought over in Panama going from El Nino to La Nina and the water levels in Lake [Nathan] back to normal level, transits are also back to normal level, which means that, the high fleet growth experienced last year was a lot of ships for delivery last year, 40 in total. That was masked by the issues in Panama. But this year, it's become evident that there's a lot of ships in the market, when Panama Canal is working in a normal manner again. So that means that, somebody else has been able to extract the super profit there, and that's been the cargo owners, as evidenced on the product services for certain BW for third quarter where they generated $60 million in that quarter. So people who have a contract to buy cargoes at a terminal fee of, let's say, $0.06 per gallon, those are the winners. And also the terminals, who are able to sell spot voyages where they can actually charge a much higher terminal fee than the regular fee and where this fee has gone up from all the way up to $0.30, where we have the situation. It's been coming down a bit now and freight has been staying stable. So today, the paradox is that, both freight and the terminal fee is around $0.20 per gallon, which means, a crazy thing is, it's the same cost of shipping the LPG to 100 feet pipe from the short terminal to the ship, as a cost to ship that cargo from Houston to Japan, which is 11,000 nautical mile, that translates to 67 million feet. So the cost of doing 100 feet versus 67 million feet is the same. So it's really that the arbitrage has ended up with somebody else than the ship owners. It's ended up with cargo owners and terminals who have had the scarce capacity this year, this not being shipped. So what can we expect going forward? We're just going to look at the next slide. Deliveries of ships come up -- come down. We had the highest fleet growth last year. This is normalizing now and it looks even better in '25 and '26 with tailing used to the growth in shipping. So we think that will give a better balance. However, as I mentioned, the tonne mileage due to the reopening of Panama Canal has really reduced demand for shipping. And then, there has been slightly less congestion also in Panama. This is also related to the fact that, they changed the booking system where you have to pre-book a slot and there's not really a lot of ships idling on Panama Canal waiting for a slot anymore. So it's kind of despite having less growth in number of ships coming to the market, the ton mileage effect has kicked off the market and sent the super profit to the other actors in the industry. So looking forward now for '25 and '26, we really do see a period here with muted growth, very few ships for delivery in '25 and '26 before you have a new wave of the so called very large ammonia carriers, which can also carry LPG coming from '27 and '28. However, that said, this typical ordering cycle in VLGC goes in cycles. So you have some year where you have a lot of more deliveries, which means this year has been a year with very few ships going to dry dock. That's not going to be the case next year. Next year, drydocking is up a lot, and it's even more in '26. So that will take ships out of the market and give less fleet hold. On top of that, you also have an aging fleet. 15% of the fleet is older than 20%. And this is a lot due to a lot of the older ships going into sanction trade or basically a dock trade, shipping cargoes from Iran to China. That's why you have had very limited staffing. A lot of the older ships ended up in that trade. But, I'm calling now back to this with the Middle East because in the FX presentation, we had some effects from [Copernicus] 2.0. It's a bit same here for LNG. It's really about deregulation and bringing a lot of more U.S. LNG to the market. For the LPG and I would say also the tanker market, it's a different dynamic. And it's really about Trump has declared he's going to be putting in a maximum pressure of 2.0. So during his first four years, he has a lot more harder sanctions on Iran. In the Biden administration, it's been softer regulation, which has been made Iran be able to ship a lot more both crude oil, refined oil and LPG. So the big question now is a $1 billion question, you might say, is how is this going to develop under the Trump administration, if it's going to put in maximum pressure of 2.6? It involves reducing the number of cargoes from Iran, where Saudi would be the natural swing factor, has to provide more barrels to the market being both oil, petroleum and LPG, which means that, the demand for the white fleet rather than the dark fleet will increase because the ships involved in dark fleet will not be able to ship compliant products. So that could also have a big effect on this market in '25, '26. We will know more January 20 next year once the Trump gets into the White House how much pressure it's going to put on Iran, and that might have a big implication for the product tankers, crude tankers and also LPG. So with that, I think we conclude today's presentation. As I mentioned, numbers in line with guidance we generated strong results, trading results for the first nine month of the year, $112 million net profit from trading, $10 million higher than last year, which I think is a really good number given the softer market. So we've been able to navigate the market in a good manner. Q4, a bit softer also for us, because it's been harder to fix the ships once everybody knows we're leaving the industry. Then today, we are leaving also the listed environment soon with the sale of the four remaining new builds on the MGC side to Exmar. I think it's a deal that makes 100% industrial sense, just like the BW deal, where we're selling to -- who can benefit from scale and scope. And the same goes with Exmar, and I wish them the best of luck running these ships, which I'm sure they're going to do a terrific job on. And so our job now is to close down the shop, return all the money to your shareholders, and we're starting off today with $268 million payable for Q3, where we are fee funding some of the gains. And as mentioned, we have a process and a timeline and a to do list for calling the general meeting, reducing the capital, doing the wind up process and trying to return the money to shareholders in a cost-efficient quick manner so you can reinvest in whatever you like. So thank you everybody, and I think we then conclude with our Q&A session.

Operator: [Operator Instructions] And at this time, we have a question coming from the line of Climent Molins with Value Investor’s Edge.

Climent Molins: Hi, good afternoon. Thank you for taking my questions. I wanted to start by delving a bit deeper into terminalling costs. Could you tell, I mean, broadly speaking, about what portion of propane exporting capacity is priced at spot? Is it a large portion of the market? And secondly, do you expect terminalling costs to remain relatively elevated compared to the $0.06 per gallon average until additional export capacity comes online?

Oystein Kalleklev: Okay. How this generally works? It's a bit similar to LNG. It's like, once you are starting an expansion project, it involves some cost. So you want to be able to finance those CapEx cost involved typically by having some offtake agreements, not like in LNG where it's 20 years or so. But you have offtake agreements, where some -- are subscribing to a certain volume and where they can then take those volumes FOB and where they have a fixed terminal fee. And we've seen some tenders lately, and we are talking a $0.06 to $0.8 per gallon range for kind of agreed term deals on the terminal fees. However, you might have situations where the terminal have had some term deals, which have elapsed and not been renewed. And then, of course, they can price this based on the market, and the market is really about product and tightness of shipping. So like last year, when you had like a super tight shipping market and basically sold out, then the terminals is the price taken and they need to ship that cargo and then the marginal cost for them is very low. So then they might sell at a very low terminal fee. Now when shipping has been oversupplied, they're able to take out the rent on that. And it's not only the terminal, but it's also active with a term fee. So let's say they have been buying a certain number of barrels on a term contract. So rather than shipping that volume, they might find out why do we do it. We can rather sell the cargo FOB and extract the super profit on the terminal end, because FOB price will then reflect the tightness or looseness of shipping. So it's -- I don't have the exact number on how much of the terminalling capacity in America is contracted and not contracted. But we also see that, people who have contracted volumes are telling the volumes in the spot market and just taking benefit of this huge super profit on the terminalling fee.

Climent Molins: Makes sense. That's very helpful. Thank you. I also wanted to ask about Iran ending up utilizing the older side of the fleet. Could you provide some commentary on the number of VLGCs owned or operated currently by Iran? And secondly, on the 20-year old plus cohort, could you talk a bit about the trades these vessels are usually employed on?

Oystein Kalleklev: Yes. I think last time I checked the number of ships in the dark fleet, which is basically in dark fleet and tankers, you have Venezuela, you have Iran, you have the gray fleet, which is Russia, if you don't adhere to the price cap. So in LPG, it's a bit simpler. It's really about Iran, China. Last time I checked, 54 VLGCs in that business. Basically, most of the ships above 20 years. So as I mentioned, it will be interesting to see what will happen next year, whether there will be a crackdown and some of these ships not being able to find job. So most of these ships are doing this trade. Iran, ship-to-ship transfer somewhere in the Middle East and then going to China. Keep in mind, some of these old ships are quite old, cost a lot of money to maintain them. They're not very fuel efficient. They might have less cargo space. So if you look at the kind of unit freight cost of these ships compared to our dual fuel VLCC, it's a hell of a lot more. But in this game, efficiency doesn't really matter. It's about shipping this cargo and Iran being able to monetize our gas resources or oil resources.

Climent Molins: Thanks for the color. And final question from me. As you wind up Avance, could you give us some guidance on the costs you expect to incur?

Oystein Kalleklev: Cost to incur on what?

Climent Molins: On winding up the company per say.

Oystein Kalleklev: I don't know. We always start laying off people, some left, some will be leaving at 1st January once we have divested the VLCC space. It's really -- we need to do certain filings with the Bermuda. We need to liquidate some SPVs around there. She's a -- what do you call it, CPA in Norway. So she is doing a lot of that work. It's really about the kind of paying out papers and liquidating. So this -- and the cost is so small that we're not even putting it in as an item, because it's fairly low cost of liquidating a company. Nobody really has big -- there's no golden parachutes for anybody. We are a Norwegian company with Norwegian terms, so nobody is getting golden parachutes for sure.

Climent Molins: All right. Makes sense. That's all for me. Thank you for taking my questions, and congratulations on the work done in Avance over the past few years.

Operator: And there are no further questions from the phone lines.

Oystein Kalleklev: We do have a couple of them on the chat. I can go through some of them. Which funds will be used to pay off the loans and rents? So we already once we're settling and selling some of the ships, we are quite flushed on cash. As I said in the CEO statement, we are a liquid at the 7 Cs. So what we're actually doing is that we have some ships scheduled for delivery to BW. It just makes life simpler if that ship if we have repaid the debt prior to delivery of those ships to BW and the ship being unencumbered. So we typically paid on the mortgages on the ships prior to them delivered to BW. And we also paid on some, which are scheduled for delivery, so we can save banking costs, because there is a cost associated with having a mortgage. So we're just using internal funds and trying to kind of optimize that and making sure that we are not lending too much from the banks and having that money on the cash. Just today, so far it's today around 4.5%. On average, we have a margin on the loans of around 200 basis points, so meaning that, we will get 4.5% on our cash, but we will have to pay the bank 6.5%. So we'd rather pay down as many loans as we can. So all of these are made from our internal funds. And our internal funds are affected by then, the delivery situation to BW, where we typically get a certain amount for each ship delivered. We get a certain number of shares in BW, and then a certain cash release for each ship delivered. How many be BW shares will be divided into Avance Gas share? I think I mentioned this earlier in the presentation. It's about 77 million shares in Avance Gas. We will be receiving 19.3 million shares in BW. So for every share you have in Avance Gas, you will be getting around a quarter of a share in BW. Is Russian dark market a significant factor in LPG? No, actually not. Russia is not really a big exporter of LPG. They use most of it internally. They do ship a bit by train, but they've never been a player in the VLGC market. So in that sense, the dark market or Russian dark market for LPG is irrelevant, because it doesn't exist for the MGCs at all. Yes, LNG has ship oversupply concerns. What is the status in LPG? Yes, I think we covered this. We have had too many ships this year, because of the Panama improvements, improvements for the Panama Canal, not really an improvement for ship owners. Actually, we like inefficiencies and that's usually, when the rate goes up. However, we do see that, the market is balancing very few ships for delivery in '25 and '26, more drydocking. And then we do see more containerships being delivered, more LNG ships being delivered. So there will be a scarce place for the VLGCs in the Panama Canal going forward. So we do think that taking the shares in BW looks like a good proposition for our shareholders.

Oystein Kalleklev: So that was pretty much it, I think. Yes, that's it. I think we will be back then in February. We'll then have closed the BW deal, hopefully also closed and organized all the MGC papers with the exception of the final milestone payment scheduled for April. So our plan then is to provide you with another duty dividend and the BW shares. But, yes, until then, you have to enjoy yourself with the dividend paid out today. And we thank you all for listening in.

Operator: Ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may now disconnect.