Avance Gas Holding (AVACF) Q3 2016 Results - Earnings Call Transcript

| About: Avance Gas (AVACF)

Avance Gas Holding Ltd. (OTCPK:AVACF) Q3 2016 Earnings Conference Call October 20, 2016 9:00 AM ET

Executives

Peder Carl Gram Simonsen - Chief Financial Officer

Christian Andersen - President

Analysts

Herman Hildan - Clarksons Platou Securities AS

Lukas Daul - ABG Sundal Collier

Operator

Good day and welcome to the Avance Gas Holding Ltd. Third Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Peder Simonsen. Please go ahead, sir.

Peder Carl Gram Simonsen

Thank you. And thank you for dialing in to this third quarter earnings release conference call.

If we start to go to Slide 4 in the presentation, the company recorded a net loss of $13.5 million, excluding the impairment charges of $45 million for the VLGC fleet and $1.9 million of goodwill in the quarter. We recorded the TCE rate of $10,131, down from $15,000 in Q2.

Our TCE earnings was approximately $13 million, down from $19 million in Q2. And we previously announced we sold the LNG carrier Gaea for net cash proceeds of about $13.3 million, which will be closed during Q4 this year. We also in a press release earlier today we announced a comprehensive refinancing plan agreed with a bank with our lending group, which is subject to raising new equity.

If you move to Slide 5, the TCE earnings are down to $13 million, reflecting a weaker market. Our operating expenses were down recording at $7,300, [ph] this compares to $10.5 million in Q2, which was reflecting a one-off expense for Gaea in the previous quarter. The impairment charge totaling $47.2 million was reflected in the results, which ended up at a net loss of $60.7 million or $1.77 per share. The adjusted net loss excluding the impairment was as mentioned $13.5 million.

Moving to the balance sheet, we had a cash position of $87.8 million - this is Slide 6 - at the end of the quarter. The cash position was influenced by drawdown which was announced during the Q2 presentation of $25 million under our revolving credit facilities, which are now fully drawn. And also the collection of approximately $15 million in demurrage, which was recorded during the quarter, offset by regular debt repayments and the operating cash, we recorded a cash position of $88 million.

Our equity ratio adjusted for the changes in debt and reduction in receivables, and also the mentioned depreciation and impairment, ended about 39.7% down from 44% in the previous quarter.

On our cash flow on Page 7, as mentioned, the operating cash flow was influenced by the receipt of approximately $15 million in demurrage and the $25 million in drawdown under our revolving credit facility. So this resulted in a net increase in cash of $13.5 million during the quarter, compared to a negative cash flow of $13.9 million in the previous quarter.

Moving to Slide 8, we have announced today, yesterday we’ve reached an agreement with our lending banks in a comprehensive refinancing plan. This includes 50% reduction in our scheduled repayments under our loan facilities, commencing in January 17 and until the June 2019 for a total period of 2.5 years. This totals a liquidity effect of $55 million. Post this period in the third quarter of 2019, we had a cash sweep mechanism which will apply - which will bring us down to the original scheduled repayment profile when the market improves.

Our covenant adjustments are also included in this plan include a reduction in our minimum value to outstanding loan covenants of 110% for the period, including the fourth quarter of 2016. We have also adjusted our minimum book equity and equity ratio from $250 million and 30% down to $200 million and 25% for the next 2.5 years.

This gives us comfortable headroom and reduces the risk of a covenant breach in this period. We are currently in compliance with all our covenants, so this is a precautionary measure. We incurred limited cost in this refinancing plan. The margin will be increased by 25 basis points across the facilities for the period. The restrictions on dividends and investments and indebtedness, which are customary for these types of transactions, are in place until original covenants and maturity schedules are restored.

And the company is in - have the ability to cancel the amendments when the original covenant and maturity schedules are restored at zero cost. And as mentioned, the agreement is subject to the company raising minimum $55 million in new equity.

I’ll give the floor to Christian.

Christian Andersen

Thank you very much, Peder. If we return back to Page #4, we can see that the freight market this year has been a big disappointment. And this has continued into third quarter and through third quarter. And the Time Charter Equivalent for the company is about $10,000 per day during the third quarter, which is very much in line with the Avance Gas index, 30 days prior to the month. This is telling us that we have less floating fixtures, less freight based on floating fixture this quarter than we had in previous quarter.

If we go to Page #9, on the left hand side we can see that the majority of the order book for this year has been delivered. There are another 8, 9 ships to be delivered this year. And when last of these ships are delivered, we have reached a total delivery of this year of 44 ships, which is a record-high. It’s the highest number of newbuildings in this space ever.

The main reason for the company being cautious for 2017 is that we see that another 24 ships will be delivered next year. The good news in all this is that beyond 2017 there are hardly any ships on order. We are talking about 7 units for 2018, 2019 and 2020. The order book today is down 17% of the fleets. If you look at this year deliveries, we are close to 80% done so far.

Turning to Page #10, as I mentioned, there are less floating freights in the spot world just in this quarter. And we have been able to fix at market and slightly above. Also on Page #10, the weighting time is low. The fleet utilization of our fleet year-to-date is at 94%. So we have a very high utilization, which is very much in line with our predictions for this year, given on different occasions. So needless to say, the freight market has been disappointing, particularly when we look at the utilization.

If we turn to Page 11, and just a couple of words about product side of it, on the left hand side we show you the export of LPG from the Middle East. And it’s worth reminding you that during the summer the LPG export peaked and this was close to 4 million tonnes in the month, this is the highest volume seen from the Middle East ever.

On the right hand side on Page 11, we are showing you number of VLGC loadings in U.S. Gulf. And as you can see, the peak here was in May. We had 47 cargos listed in May, and this came down to 34 in August. There has been what we normally will call cancelations of listings. The market tends to this delays and postponing of loadings, but normally it’s really cancelation.

And we can conclude that there is no bottleneck in the terminal capacity in the U.S. time being. We have indicated that the number of listings in September is higher. From the numbers we - the preliminary numbers we got so far, it seems like we have 34, 35 loadings of VLGCs in U.S. Gulf in September. So the activity in the U.S. it seems to be coming back. Very much of this is that this year there are more spot rated and spot priced volumes in the Middle East compared to previous years. So there were - some people call the arbitrage, the probisit [ph] margins from U.S. Gulf to Asia, needs to be open to lift the marginal tonnes.

In the summer, we had some challenges. It is still difficult for the traders, for this arbitrage probisit margins are now coming somewhat back. Recently, there has been lot of fixtures in the spot market. There have been a lot of fixtures loading in the U.S. So the activity in the U.S. for October/November has been very high.

Right now, there is a small drive in the freight market, the Baltic have been increasing more or less every day for the past couple of weeks. Unfortunately it’s still a very low market. The Baltic was quoted yesterday $24 per tonne, which on an old ship will give you about $8,000 per day. On the modern ship it will be about $10,000 per day.

So we hope that this development in the freight market continues. Our charting table is optimistic about the short-term outlook. So we cross our fingers.

If we turn to Page 12, we like to summarize and say that the main reason for difficult freight environment during third quarter was reduced exports from the U.S. It’s worth mentioning the last VLGC terminal in the U.S., the P66 terminal is planned coming on stream fourth quarter. The first commission in cargo has been fixed. There is the ship going to load at the terminal. Normally, this first cargo will take a bit more time, because they need to cool down pipes and the systems. But this is good news for the activity.

It’s also worth mentioning that the exports from U.S. to Asia are very high. And year-to-date this is including August, the direct export from U.S. to Asia is 50%. So it’s very [high in terms of supporting total miles] [ph] which is giving us the hope that the freight market might firm up somewhat.

We have seen two ships being sold for recycling this year, this quarter. It’s been two older ships, one built in 1986 and one built in 1989 has been sold for demolition.

And we like to mention once again, that the proceeds of the sale of the LNG carrier Gaea, which you might remember was acquired to pursue LPG storage project. This cash is expected to arrive in the company in December.

The refinancing plan we have reached with the banks will strengthen our balance sheets and will enable us to work through difficult chartering environments even if our worst case scenarios come true. As you will have seen, the bank package is subject to the company raising equities. We have amended a couple of bankers, advisors, to guide us on the possible equity issue. And this is something we are working with right now.

And with this, I like to finish my presentation and we open for questions. Normally, we will take the questions in the room first. But there is hardly anyone here. So I think we can go directly to the dial-ins.

Question-and-Answer Session

Operator

[Operator Instructions] We can take our first question now from Herman Hildan from Clarksons Platou. Please go ahead, sir.

Herman Hildan

Hey, guys.

Christian Andersen

Hello, Hildan, how are you?

Peder Carl Gram Simonsen

Hi, Herman.

Herman Hildan

Hello, hi, just a brief question. Two short questions on the impairment, $47.2 million, could you give some color on what vessels it specifies to?

Peder Carl Gram Simonsen

This was an impairment applied to the whole fleet. We follow the IFRS requirements on this. And we have impaired the ships down to the higher of the fair value, which is broker values less cost to sell and the value in use calculation. So it was supported by both of these evaluation parameters and across most of the ships.

Herman Hildan

Okay, thank you. And is it also possible then to say what the average value is - that has been applied for the 2015 deliveries?

Peder Carl Gram Simonsen

Well, this is - yeah, I can’t comment on that right now.

Herman Hildan

Okay. So the - obviously, the interesting point there is on the sum, what kind of difference there is in Chinese and Korean built ships. I’m not sure if you’re able to give any guidance on that.

Peder Carl Gram Simonsen

No, not really.

Herman Hildan

Okay.

Peder Carl Gram Simonsen

We did say that that there is - as we do not have any discounts in the freight markets for our Chinese vessels, we rather do opposite with the freight, with the benefit of fleet’s consumption on these ships. These are values on the basis of their expected cash flow.

Herman Hildan

Okay. That actually takes me to the second point. I mean, obviously you fixed above benchmark and then lately I guess on the consistent basis. And particularly now the spread is quite large to your actual earnings versus what the benchmark has been. Could you give some color on this? Is it due to, call it, demurrage or as you highlighted, the fuel consumption? But would you say that the benchmark rates reported by BDIs, call it, underestimating the real earnings in the VLGC sector?

Christian Andersen

You know, this is always a bit tricky, because when we report our index on a weekly basis, we will always use the bunker on the prices on the Friday. If the ship has more cheaper bunkers on board they will make more money. If they buy more expensive bunkers they will make less. In a high market this doesn’t mean a lot, but in this very low market, the price difference of bunkers of $30-$40 will have a big impact.

So I think what we are trying to illustrate is that we are basically fixing the market. And sometimes the ship have discharged at the good locations, so there will be a slightly shorter balance back to the loading port. Sometimes we are further away. But the slide on Page #10 is trying to show you that we are fixing basically market on all our ships. So that’s the main message really.

Herman Hildan

Okay. That’s all for me. Thank you.

Peder Carl Gram Simonsen

Thank you.

Operator

Thank you. [Operator Instructions] We can now take our next question from Lukas Daul from ABG. Please go ahead.

Lukas Daul

Thank you. Good afternoon, guys. Peder, I was wondering, the outstanding demurrage, when do you expect that to be collected?

Peder Carl Gram Simonsen

Well, we have demurrage coming all the time. So there will always be demurrage outstanding. And normally the demurrage collecting will take six to eight months as general. Over the past year, we had some loan overdue demurrage, which we have on an active collecting list, and we have collected most of this demurrage. There is still $3.2 million - $3.7 million on the longer outstanding demurrage, which is on an active collecting. We expect to receive this pretty soon. Is it month or next month or will it into January, I don’t know. But we are confident that this will be collected in a fairly short-term.

Lukas Daul

Okay, okay, thank you. And on the - on your OpEx, you were writing your report that the improvement in OpEx has been sort of mainly achieved through reduction in maintenance and insurance costs. When it comes to maintenance, are those permanent savings or is it temporary, can you elaborate a little bit more on that?

Peder Carl Gram Simonsen

I think on the general basis the OpEx will average out the - well, will vary during the periods of the year. It’s a seasonal effect primarily. We are obviously working hard to reduce our OpEx across all cost elements on the general basis without comprising our quality of service. But this is a seasonal effect to a large extent. So I will not say that the level that we were at for this quarter is normal at the new level.

Lukas Daul

Okay, okay. And then, Christian, you sort of mentioned that you are setting up the company and preparing for even a worst-case scenario. And I was wondering what that would be?

Christian Andersen

I think, we obviously when we do our budgeting we have some high-case, some low-case and some worst-case scenario. This is internal use and we haven’t really communicated that to the market.

Lukas Daul

Okay. But standing here and looking at 2017 versus 2016, what are you thinking, looking at the volumes, looking at the fleet et cetera? Can you set of share some of your thoughts?

Christian Andersen

I think what we have been communicating quite clearly is that we don’t expect the market to be improve until earliest the spring of 2018. So with our planning we do expect that 2017 is going to be a difficult market as we also had this year.

Lukas Daul

Okay. Thank you, guys.

Operator

Thank you. [Operator Instructions] We don’t seem to have any further questions at this time, gentlemen, ladies. I’d like to turn the call back over to you for any additional comments.

Christian Andersen

Well, I think we have said what we like to say. And we’d like to thank you all of you calling in. And, of course, if there is anything else, please call or send an e-mail, and we will try to follow up as good as we can. Thank you very much.

Operator

Thank you very much. That will conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.

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