BW LPG Limited (BWLP) Q4 2016 Earnings Report, Transcript and Summary

Welcome to the BW LPG's Fourth Quarter 2016 Financial Results Presentation. We will begin shortly. You will be brought through the presentation by Martin Ackermann, the CEO, and Ms. Elaine Ong, CFO of BW LPG. They will be pleased to address any questions raised after the presentation. [Operator Instructions]. We will begin the presentation now. Please go ahead.

Hello. Good afternoon. Thank you. Welcome everyone to the presentation of BW LPG’s results for the fourth quarter of 2016, the financial period ending December 31. I'm joined by our CFO, Elaine Ong. We appreciate your interest in our results and encourage your queries at the end of the call. Freight rates improved slightly to $13,600 on the benchmark Baltic route due to expansion of geographic LPG price spreads. This recovery in Asian LPG prices was led by significant restocking demand ahead of the winter heating season, as well as rising crude prices and delays in receiving U.S. sourced cargoes. After rebounding to about $20,000 per day in January, the markets have since softened as extremely high U.S. LPG prices and a heavily participated Asian LPGs forward price curves, both the arbitrage window and prompted cargo cancellations in the U.S. Gulf Coast. However we remain encouraged by the responsiveness of freight rates, the improvements in geographic LPG price spreads with the January and we continued to believe that a resumption of U.S. LPG production growth will be the key to a sustainable freight rate recovery. Spot rates currently stand at around $15,000 a day and we have seen a pickup in the West East trade in the [indiscernible] as they are reopened. The market is awaiting the announcement of March CP declines [ph] with expectations in the $475 to $480 per tonne range for propane. Turning to Slide 4. We review the highlights of 2016. 2016 was a difficult year but the company remained profitable and grew its fleet by nine VLGCs at attractive values. We generated net revenue of $407 million based on daily rates on $27,100 for the VLGC segment and $23,400 for our LGCs with total contract coverage of 50%. EBITDA came in at $210 million, while net profit was $24 million. Excluding non-cash non-recurring items, we generated a net profit of $81 million in an extremely challenging market environment. The Board of Directors will not propose final dividend for second half 2016 due to adjusted NPAT of only $300,000 in the period, keeping the full-year payout at $0.09 which was incurred for the first half of 2016. This is fully consistent with our policy of paying out 50% of NPAT and we’ll not pay out a dividend if we have generated losses. In order to further solidify our balance sheet, we upsized our unsecured revolving credit facility with OCBC to $150 million. In November, we sold the 2001-built BW Borg for $3 million and leased her back for two years. In December, we completed the acquisition of Aurora LPG, which allowed us to renew our fleet at below replacement cost. Since then, we had also completed technical and commercial integration of the Aurora LPG fleet, and Elaine will provide you with a brief update on the refinancing a bit later on in the presentation. Lastly, we recycled the 1991-built LGC BW Havfrost, and we took delivery of VLGC newbuildings, BW Mindoro and BW Messina in January, thus concluding our DSME new building program. Now if you please turn to Slide 5. We’ll provide you with the financial highlights for the fourth quarter of 2016. Our net revenues was $90 million, which was a decrease of 44% relative to fourth quarter of ‘15. This decline was driven by weaker spot rate and offset by a bigger operating fleet. Our EBITDA was $35 million, 68% lower year-on-year. Net profit was $80 million for the quarter. But if we exclude one-time events, we generated a loss of $600,000 for the quarter. Our leverage remains at manageable 56% following a major acquisition. I’ll now turn to Slide 6 for an overview of our commercial performance in the fourth quarter. TCE rates on our VLGC fleet averaged $21,720 per day in fourth quarter, total contract cover of 42%. Our LGC fleet generated TCE rates of $28,770 per day for the quarter. Focusing on our VLGC chartering performance, we recorded 499 total CoA days, or 14% of the VLGC revenue days. Our CoA TCE rate of $37,300 was in line with our guidance which we released last quarter. Our CoA performance of $40,760 per day is also in line with the probable minimum guidance and almost double that of the spot market for the full year of 2016. We also made no adjustments to our CoA portfolio for the full year of 2017 and we reiterate guidance for probable minimum levels in today’s freight rate environment. Time charter days came in at 1003 or 28% of the VLGC revenue days with a blended time charter rate of $32,805 per day. This is slightly lower than previous guidance as we entered into short-time charters throughout the quarter at rates that were lower than those of our legacy TCE contracts. Our spot fleet generated $12,700 per day and accounted for 58% of the VLGC revenue days. The underperformance relative to the Baltic was mainly due to the adverse effect of integrating the Aurora fleet in our December results. Switching to our LCG fleet, we recorded 422 time charter days, with our entire LGC fleet on time charter coverage. All of our clients continued to perform within the contractual limit for both time charters and CoAs. The performance confirms our strategy to contract our ships out only to blue chip charters. On Slide 7, we see the global fleet of VLGCs on the water to-date stands at 244 vessels, with 36 VLGCs still to be delivered for the order book ratio of 15%. Three vessels are delivered this year to [indiscernible] and one of them scrapped. We expect the further 23 in 2017 with five set to enter the fleet in 2018 and another six in 2019. With the acquisition of Aurora, our fleet of VLGCs increased to 49 and now accounts for 20% of the total VLGC fleet. Including LGCs newbuilds, our total fleet comprises 55 vessels with an average age of slightly below six years. On Slide 8 & 9, we provide an overview of seaborne LPG trade in fourth quarter and full year of 2016. Seaborne LPG trade grew by 3% in the final quarter of 2016 compared to the fourth quarter of ‘15, led by import growth of 20% and 5% in India and China, respectively, and slightly offset by declines in Japanese imports. For full year 2016, seaborne trade increased by 6% to 90.7 million tonnes with Asian import growth of 15% more than offsetting import declines in the Mediterranean and Latin America. U.S. seaborne LPG export volumes rebounded strongly to approximately 7 million tonnes in the fourth quarter of 2016, reaching 25.4 million tonnes for the full year, a growth of 23% year-on-year. Middle Eastern LPG export volumes also registered healthy growth of 5% during the fourth quarter on the back of increased Saudi Arabian production, registering 39.3 million tonnes for the full year. Now let's please turn to Slide 10. Here we provide an updated snapshot of the EIA’s outlook for LPG balances in the U.S., which now also includes 2018 forecast. U.S. LPG production grew by 2% in 2016 while the domestic U.S. consumption declined by 2%. For 2017, the EIA expect net U.S. LPG exports of 24.9 million tonnes while production is forecast to grow by 2.9% to 78.6 million tonnes and domestic consumption to remain flat at 54.2 million tonnes. Looking ahead to 2018, EIA’s forecast call for stronger LPG production growth of 6.1% and minimal domestic consumption growth of 0.8%. Net exports are forecasted to grow by 12.3% in 2018, hitting 28 million tonnes. With that, let me now turn you over to Elaine Ong, who will talk you through the financial position and our results.

Thanks Martin. Starting with our income statement on Slide 11, our net revenue for the quarter was $89 million compared to $160 million in the same quarter last year. Charter hire expenses for the quarter decreased, as we operated one less chartering vessel. Operating expenses were approximately $6.3 million higher year-on-year, reflecting in a large BW LPG stand-alone fleet, as well as the December expense contribution from the Aurora fleet. We generated EBITDA of $35 million in the quarter compared to $111 million in the same quarter last year. Finance expenses were higher by $4.5 million year-on-year due to the drawdown from $221 million ECA facility as well as the consolidation of Aurora’s December interest expense. Recorded net profit for the quarter of $80 million due to the recognition of $111 million of negative goodwill arising from the acquisition of Aurora LPG; $8 million of non-cash gains, offset by $38 million of the impairment charges on vessels. Excluding non-cash non-recurring items, we reported a loss of $600,000 in Q4. Turning to Slide 12. We provide a snapshot of our balance sheet and cash flow position. We continued to maintain a strong balance sheet with a leverage ratio is 56% following a nine-ship acquisition and an asset base of $2.6 billion. In the first quarter of 2017, we paid the final installment on our two newbuilds of approximately $70 million. This concludes our newbuild program, and as of today, we have no remaining growth CapEx commitment. Cash and cash equivalents at the end of the quarter was $81 million. On Slide 13, you will see our net debt position at $1.3 billion at the end of the quarter. Available cash and undrawn facilities were $326 million. As of December 31, we had seven debt facilities, four of which are pre-existing and three were assumed as part of the Aurora acquisition. For BW LPG’s pre-existing facilities, the first of the $800 million facility was $433 million outstanding and $215 million of undrawn revolving credit. Secondly we had the $400 million ECA facility with $367 million outstanding. Next we had the $221 million ECA facility with $154 million outstanding. We then have the newly upsized $150 million unsecured revolving credit facility with $120 million outstanding at the same all-in cost of LIBOR plus-160 and now maturing in March 2018. Switching to the three acquired Aurora facilities, we had $322 million outstanding on the nine vessels and $5 million outstanding from the $200 million NOK bond, which we did not own at quarter end. Following the quarter-end, we have bought back some more of the bond with only $2 million outstanding currently. We have also repaid the outstanding amount under the $150 million commercial facility in full with proceeds for all $300 million revolver. We have agreed on a term sheet with the ABN Amro and KEXIM for the refinancing of the six 2016-built ships at very competitive pricing and are currently in the documentation phase. We will provide an update once everything is finalized, but as guidance, we are looking at a notional amount in the $280 million to $300 million range. As of today, our total liquidity is $190 million and this is before the refinancing. Assuming a constant rate of $12,000 per day, we have sufficient liquidity one way until the beginning of 2020. With that, I'd like to hand it back to Martin to conclude our presentation.

Thank you very much, Elaine. So if you please all turn to Slide 14. I would summarize the presentation, after which we will open up for questions. We generated earnings per share of $0.18 in 2016 and $0.58 in the fourth quarter, while the board has proposed a no final dividend to be paid for the second of 2016, in line with our policy. We completed the acquisition and integration of Aurora LPG and are close to refinancing the Aurora vessels, as described by Elaine earlier. As result of our large fleet, we established commercial and technical operations in Oslo and Houston to better service our customer base in the West. Looking ahead, we expect total contract coverage of between 24% to 31% for the full year of 2017. I'd like to conclude our presentation with some thoughts on our current financial position and outlook. In the last month, we have taken significant measures to strengthen our balance sheet and liquidity position. We sold the BW Borg, freeing up more than $40 million of liquidity; sold the BW Messina, which freed up more than $20 million of equity and a further $6 million cash gain. And finally, we upsized our OCBC facility by $50 million. These three initiatives alone saved $150 million of liquidity without distorting to any issues of issuing dilutive equity below NAV in an already depressed asset valuation. We still remain cautious on the market short-term due to the forward curves, substantial newbuilding deliveries in the first half of the year and a potential for further inventory drilldowns in the U.S. keeping LPG prices elevated. The medium term fundamentals for VLGC trade however are positive. U.S. production should track to recovery in oil prices following the OPEC product cost; signal by the recent announcements of increased E&P spending by a major producer and an increasing rig count; softening in the U.S. domestic LPG pricing as a result of renewed LPG production growth and sharp drop in newbuilding deliveries by late 2017 should allow for an improved in freight rates in 2018 and beyond, assuming no more ships are ordered. But we would be proactive in managing our balance sheet. We can make it through a $12,000 per day market until beginning of 2020, assuming no additional debt capital from our unencumbered fleet. We hope for the best but always plan for the worst, and we are very well prepared to ride out the current downturn. So this concludes our results update for the fourth quarter of 2016. We appreciate your interest in our market update. And now I'd like to open up the line for questions. Thank you.

Thank you, sir. We'll now begin the question-and-answer session. [Operator Instructions]. We will now take our first question from Peder Jarlsby from Fearnley Securities. Please go ahead. Your line is open.

Good morning guys. Just a quick one on your contract portfolio. So given that rates remain below cash cost breakeven level throughout the year, is it just fair to assume that you’d rather have the optionality of having the vessels in the spot market than, call it, firming up further contracts going forward?

Good morning, Peder, and thanks for asking. We were expecting questions on our CoA. And to your point, that is a yes, exactly, and maybe I can elaborate a little further on that question. So as I said during the call, in 2016, our CoAs generated rates that were almost doubled also the spot market and CoAs are and will remain a core part of our charter portfolio strategy. So we’re keen to contract with players across VLGC value chain but only at the right rate levels and we are seeing a healthy demand for CoAs but we will hold off on entering into contracts that are based on extrapolation of today’s sweet markets into the future. So our current CoA books expires at the end of the year and we have already started talking about renewals, even though they do not expire for another 10 months. So it’s still very early days.

Okay. Thank you. And just the question on your fleet. You’ve done quite a lot on in terms of renewing the fleet through the Aurora acquisition, and just looking at your fleet now, I think you have your one 1990-built which I think is on a long-term contract and then you have three or four early 2000-built VLs. I’m just curious as what are your thoughts on these vessels going forward? Is there room for further, say, leasebacks or what are your thoughts on these vessels going forward?

Well, there is always plenty of room for, say, leasebacks, and we no shortage of those being pushed through us. I would say as a general note, we are a little bit careful with, say, leasebacks and typically we see them being primed at levels which are slightly above what Elaine is able to do on our financing. So we only do a very moderate amount of these, but of course it’s always something we can restore to free up additional liquidity. Right now I don’t think we need to.

Okay, that makes sense. And just a final one for me. I think last year or in the fall we saw two VLGCs scrapped and then we saw another one this year. And I think the first ones were ‘87 or ‘90 built and then the last one this year was, I think it was north of 40 years. I’m just curious to hear what’s your view on scrapping potential of the fleet going forward is, and you probably know more of the private fleet and what kind of contracts they have, so just curious to hear your views and at what age do you think we will see uncontracted vessels to be scrapped through 2017?

Well, you saw we did one LDC [ph] ourself.

Yes.

I think the ones that we have seen being scrapped so far had been rather old and much older than the normal average. I think it’s natural when we come from a market which is very high in ‘14, ‘15, that there was very little scrapping. I think now a year of challenging markets probably changing that and I think owners that are operating vessels, say, in the late 20s or anything above 25 years old is probably considering their options typically when they reach the next dry-dock. So I think we’ll see more of that.

Okay. That makes sense.

I’d say another key element to that is that the Ballast Water Maritime Convention will come into effect in September 2017. So the estimated cost for retrofit of the VLGC with U.S. Coast Guard approval for Ballast Water Treatment Plant is about $0.81 million. So effectively it’s a large CapEx increase if you’re operating in older ship and of course this also incentive earlier scrapping of vessels, but again we would probably see some of these ships being able to operate elsewhere, so certainly be a new effect of a positive.

Okay, perfect. That’s all for me. Thank you very much.

Thanks Peder.

Thank you. We will take our next question from Lukas Daul from ABG. Please go ahead.

Thank you and good morning. Martin, I was wondering if you could shed some light on the current situation in the market in terms of very strong January U.S. exports. How is that panning out right now? And obviously we see the increase in exports in 2018. My question is, what you think happens if OPEC ramps up production again later this year. Is this going to be a competition for - against the U.S. LPG just like we saw it last year?

Good morning, Lukas, and thanks for calling in. Well, on the short-term market outlook, we saw the ARP [ph] window opened in Q4 but very large one and inventory brought on some U.S. for all the domestic LPG price two or three year high and closed the ARPs [ph] again from very late January through to last week where it opened again slightly. And as we’ve seen also the Middle East prices have firmed on tighter supply of cargos following the production cost as you mentioned. So ARPs [ph] have reopened as U.S. needs with the end of this - with their heating demand and I think we are moving forward on the curve here. So Asian buyers should also return to the market for inventory restocking since they’ve been absence since the late of January due to the of the aggregation [ph] of the price curve and I think before they do we expect weaker demand in the short-term as the domestic prices in Asia roughly equal to seaborne delivered prices. And I think as a consequence of that, we’ve seen lot of owners balancing west in the recent weeks. In addition to that, we have 23 more ship to deliver this year. For these reasons afraid to remain at low levels for the short-term. So as of right now, the Middle Eastern LPG prices are not very competitive, and as I mentioned earlier on, all eyes are on the CP March pricing.

Okay. Thank you. And the second question regarding the CoA renewal. Obviously you have stated before that you want to price the optionality in the CoAs in the right way and we are not there as of now. So my simple question relates, if you don’t succeed with that, how is the spot market going to look like if you move your vessels into the spot market?

Well, I mentioned the uptake we have on our contracts as of now and I think we have a sizable portion of our fleet already operating in the spot market and we’re, of course, willing to do that. I think we’re - to be very clear, we’re not going to be pushed into taking any CoAs based clearly on an extrapolation of today’s freight rates into the future and I think also our clients realize that’s not going to happen. Everyone knows that for us to remain here on longer term as VLGC owners, we have to have sustainable freight market. So I think it’s a good sign that both our existing as well as new customer wants CoAs. And for us it’s good not to have full exposure to the spot market in order to cover the freight needs, and to that extent, we also understand the role that BW LPG must play in order to facilitate the continued growth of LPG trade and this aligns with the long-term view we take on the market. But again we’re not balanced clearly the need to generate a good return on our assets and our capital and contract at a rate that recognizes the agility CoAs offer our customers and I do think our customers see great benefits in the flexibility and the service that they are getting under these contract and of course we have to price that in. So going forward, we’re happy to look at contract with other parties wherever optionality is priced appropriately and wherever rates are at least at parity with our internal spot forecast. So I hope that answers your question.

Okay. Thanks for the color.

Thank you very much.

[Operator Instructions]. We will now take our next question from Eirik Haavaldsen from Pareto Securities. Please go ahead. Your line is open.

Yes, hi. Just you say there is a lot of interest from charters to secure CoAs. Is it possible to give any indication on what levels you’re seeing there, or is that something you want to keep for yourself?

Good morning, Eirik, and thanks for asking. And you’re absolutely right, that is exactly something we like to do for ourselves. That could be probably my shortest reply on the day.

Very well. And secondly, if we look at this in the broader scheme of things, BW today has a different leverage. It has more operational leverage and financial leverage than what BW LPG has had historically at least. So is this just a way of sort of managing the cycle or should we also interpret this as the way BW LPG will go into the next up-cycle in a way? Will you be more opportunistic when rates eventually will cover now or go back to the sort of 40%, 50% coverage once rates reach to this actual level?

I think this is - of course what you’re seeing right now, 56% leverage is a result of investing countercyclically. So I think you will see our leverage respond to that and our vision which we’ve also been very clear about is to grow during downturns in the market and of course then the deleverage from the market is high. So I think we’re in a very comfortable position right now both on bank debt and liquidity, and so this is a fairly big investment.

Sure, I understand that. But also in terms of your operational coverage terms, so your CoAs and TCEs again, as rates go back to a healthier level, will you seek to increase coverage again to the same levels you had in two, three years ago or will you - will the new BW LPG be more of a spot company than what it has been before your time essentially?

No, there is no change in our strategy on this. As I said before, CoAs are and will remain a core part of our charter portfolio strategy and - but of course we are also slightly opportunistic on the other opportunities that are out there. And of course in this situation that we’ve just had here in 2016, we’ve managed to invest countercyclically and grow the company, and with that comes slight increase on the leverage for a shorter period of time.

Thank you. And finally one for Elaine. Will the G&A impact - or D&A, is that increasing from January on the back of Aurora or will you sort of maintain the same overhead costs as you’ve had previously?

It will likely be pretty much the same.

Okay. Thank you.

At the current levels that we’re currently seeing.

Perfect. Thank you.

Thanks Eirik.

Thank you. [Operator Instructions]. Thank you. There are no more questions. I would like now to hand the conference back to today’s presenters. Please continue.

Does that mean that there are no questions on the webcast?

Yes, that’s correct. There are no more questions on the webcast and via phone?

Okay. Well, thank you very much for that. So thank you everyone for your attention and for the ongoing support of BW LPG. I hope we answered your questions appropriately. I’d like to take this opportunity to alert you to the availability of our 2016 Annual Report which we have also released this morning. You will find further insights on the LPG market as including few stories and further insights and as well as the macro sight to grow further into the outlook and our numbers. So everything is available on our web page and we hope that the Annual Report becomes a go-to source for the world of LPG and we welcome your feedback. So thanks again everyone and we’ll speak again soon.

Thank you. We have come to the end of today’s presentation. Thank you for attending BW LPG’s fourth quarter 2016 financial report presentation. More information on BW LPG is available online at www.bwlpg.com. Goodbye.