StealthGas, Inc. (NASDAQ:GASS)
Q3 2016 Earnings Conference Call
November 29, 2016, 11:00 AM ET
Harry Vafias - President & CEO
Fenia Sakellaris - CFO
David Sachs - Hockey Capital
Patrick Sheffield - Beach Point Capital
Good day and welcome to the StealthGas Third Quarter 2016 Results Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Harry Vafias. Please go ahead sir.
Good morning, ladies and gentlemen, and thank you for dialing into our third quarter 2016 earnings presentation and webcast. This is Harry Vafias, the CEO of the company and joining me on the call today is our Finance Officer, Ms. Sakellaris, who will discuss our company's financial performance.
Before we commence our presentation, I would like for all of you to be reminded that we will be discussing forward-looking statements, which reflect current views with respect to future events and financial performance. At this stage, if you could all take a moment to read our disclaimer on Slide 2 of the presentation.
It's noted that risks are further disclosed in StealthGas' filing with the SEC. I would also like to note that all amounts quoted, unless otherwise clarified, are implicitly stated in United States dollars.
Starting on Slide 3, we are summarizing our company key highlights for the third quarter of ’16. We faced quite a difficult environment this quarter as rates in these three months dropped by an average of 5%. Very low rates along with weak seasonal demand suppressed revenues and consequently profitability. In this environment, we managed to end the quarter with an operational utilization of 88.1%, a rather low figure given that in Q3’15 our operational utilization was 94.4%. However, we managed to arrange several new charter arrangements and charter extensions resulting in 87% of our fleet base secured on period charters for the remainder of ’16 with a total of $175 million in pre-contracted revenues.
In spite of the difficult market, we strive to manage our relatively young fleet as efficiently as possible. Due to the strong management, our board in close cooperation with the yard has rescheduled the deliveries of our 22,000 newbuildings so that the first will be delivered in Q2 ’17, the second in Q3 ’17, the third in Q4’17, and the last one in Q2’18.
Proceeding to our financial highlights, in Q3 ’16 we recorded revenues of $34.4 million, a decrease of 4% compared to Q3’15 while our EBITDA amounted to $11.2 million.
In terms of our leverage and cash position, we still maintain a low gearing of about 40% with a net debt to assets ratio of as low as 34% as our cash is about $61 million.
At this point, we are glad to announce the favour to the return of a guarantee issued for our Aframax tanker, the SPIKE, or unrestricted cash base increased in November by a further USD $10 million.
Slide 4 provides an analysis of our fleet employment. In terms of charter types, out of a fleet of 56 operating vessels as of November 16, we had 14 of these on bareboat, 35 on time charters, and 7 in the spot market. As customary to our conservative chartering strategy and in spite of very weak market conditions, we managed to increase our earnings visibility through new contracts and contract extensions for the remainder of ‘16 to 87% and preserve our secured revenue balance to around $175 million.
One sign of our investment plan success and the reflection of our company's capabilities is that 100% of our 12 new building LPG vessels delivered in ‘15 and ‘16 are all on period charters, while 13 out of 16 of our vessels above 15 years of age are also fixed on a period contract basis.
In terms of new employment contracts, since our Q2’16 results announcement in August, we concluded 9 new charter contracts and 5 charter extensions.
With regard to our fleet geography on Slide 5, 50% of the fleet trades in the Middle East and Far East, 30% in Europe, 11% in America, 4% in Australia and 5% in Africa. In comparison to our fleet composition presented in the previous quarter, one vessel is relocating from the Far East to Africa and three vessels engaging in voyages in the USA.
Moving to Slide 6, I will provide you with an analysis of our remaining capital expenditure program scheduled to take place up until April 2018. As mentioned in the beginning of our call, our last four deliveries were pushed back as per our board's decision. The deferral of these deliveries is one quarter for each of the first three vessels initially scheduled to be delivered within the first half of ‘17 and 8 months for the final vessel initially scheduled to be delivered in August ’17. All of these vessels are under construction in a top quality Korean yard and have additional upgrades, including an advanced cargo plant system making it possible for them to carry higher ethane content LPG that is suitable for the U.S. trade, and therefore have a competitive advantage against the common semi-ref fleet.
Looking at the table on the left hand side, the remaining CapEx excluding any related advances paid to date is in the order of $156 million. At the bottom of the table, we’ve provided you with a detailed breakdown of our remaining capital expenditure as to advances and final payments for our future deliveries.
In relation to the financing of this capital expenditure, which is presented in the right graph from a total contract value of approximately $208 million, 52 million are advances paid to date and $140 million are committed bank debts, a portion of which is still subject to definitive documentation leaving us with an equity injection of close to $16 million.
I’ll turn you over now to Mrs. Fenia Sakellaris for our financial performance discussion during the third quarter ’16 results and later will discuss the market and industry outlook.
Thank you Harry. And good morning to everyone. In the third quarter of ’16, we faced a challenging market. Compared to the second quarter of ’16, rates declined even further by an average of 5% and poor demand due to seasonal factors was quite evident.
Let us move on to Slide 7 where we see the income statement for the third quarter of ‘16 against the same period of the previous year. Our voyage revenues came at $34.4 million, marking a 4% decline compared to the same period of ‘15. Revenues declined primarily due to the low seasonal demand, which led to another low fleet utilization of 88% compared to 94.4% utilization in the third quarter of ‘15. In addition to these, half way into the third quarter of ’16, we had one of our product tankers switching from time charter to bareboat charter reducing the revenues from this vessel by approximately 50%. The voyage costs amounted to $4 million marking a 22% decrease compared to Q3 ‘15. The key driver of voyage cost reduction was the increase of time charter days by 19% and overall lower fleet utilization.
Net revenues, that is revenues after deducting voyage costs, came at $30.4 million. Running costs at $14.6 million increased by 9% compared to the same period of last year given the net addition of one vessel plus two vessels coming off bareboat. At this stage, we need to note that compared to the previous quarter of the year our operating cost base was stable. This is an outcome of the following that took place. Factors that reduced our operating cost base this quarter were the receipt of an insurance claim and one of our product tankers going on bareboat. On the other hand, we had the contribution on our operating cost base of our last newbuilding vessel where we took delivery at the end of the second quarter and one vessel coming off bareboat, again close to the end of the second quarter. Excluding the impact of these events, our OpEx in the third quarter remained at about the same levels as in Q2 ’16.
With regard to drydocking costs, these amounted to approximately $1 million given three scheduled drydockings taking place during the same quarter while only one drydocking had taken place during the same period of last year. Overall for the remainder of 2016, we have scheduled an additional one drydocking that will take place until the end of the year.
Our EBITDA for this quarter came at $11.2 million, quite a low figure attributed to the reasons explained above. Interest and finance costs marked an increase of approximately $900,000 as a result of the increase in our leverage in order to finance our CapEx plan. With a net loss of $2.5 million, our earnings per share for the third quarter of ’16 was minus $0.06 while for the six months of ’16 our net loss was close to $3.4 million which gives us an EPS of minus $0.09.
Slide 8 demonstrates our performance indicators for the period examined. As mentioned earlier on, our operational utilization was low in the order of 88.1% as a result of weak seasonal demand and very soft spot market. Focusing on the average daily results, adjusted time charter equivalent is lowered by 7.5% period on period indicating that the market has deteriorated.
Looking at our adjusted operating expenses this quarter and compared to Q3 ’15 we see a 2% reduction. This is mostly attributed to our product tanker going on bareboat. As per our daily G&A costs, following a sensible cost management strategy, they were reduced by more than 30%.
Looking at our balance sheet on Slide 9. In the first nine months of this year we did not see any significant change in our asset base with our vessel net value increasing by $15 million following the delivery of two new eco LPG vessels taking place in the first and second quarter of this year. In addition to these and compared to the end of year 1’5 we marked the cash reduction mainly as a result of our capital expenditure program.
Focusing on the equity and liability side, our gearing still remains low in the order of 40% while net debt ratio lies in the order of 34%. Compared to 12 months ’15 our leverage actually decreased by $12 million as no draw-down for vessel delivery was realized in the third quarter of ’16 and since the beginning of the year our loan principal repayments amounted to $43.4 million. Moreover our short term debt outstanding decreased further due to the refinancing of a balloon payment of approximately $22 million.
Overall we are pleased to follow a sensible and stable loan repayment schedule which allows us to preserve our debt at moderate levels in spite of our capital expansion. Up to Q3 ‘17 we have scheduled principal repayments in the order of 10% of our current understanding debt.
Slight 10 presents on a daily basis the evolution of our breakeven against the average time charter equivalent. It is clear that our average TCE is affected by the trend of the market, that of declining rates. With regard to our daily breakeven this follows a rather stable trend in the past quarters.
Looking briefly at the fleet contribution analysis at the bottom left, our company's strongest revenue stream is our time charters. While the weakness of the market is evident in the spot activity which has a low contribution to our net revenues, only 11% while committing 23% of our fleet voyage days and spot activity.
I will now hand you over to our CEO Harry Vafias who will discuss market and company outlook.
Let's proceed with Slide 11. The growth of the LPG market still stands strong despite of the oil price environment. In terms of export activity, even though U.S. oil production has seen a decline, US LPG exports have actually increased. LPG exports from the USA reached 20.5 million metric tons in the first eight months of ‘16 with a forecast of 26 million metric tons until the end of 2016 and just shy of 30 million metric tons in ‘17.
In terms of imports, China continues to have a leading role importing around 1.5 million metric tons in the first eight months of 2016 marking a 25% increase against 2015 volumes. It's important to note that smaller but important markets for LPG trade are emerging. The activity in Iran has intensified while the country of Bangladesh has issued 38 new licenses in titling holders to build storage and bottling plants for LPG. The country’s demand is expected to rise significantly in the years to come. Although a small area of intensification of LPG trade will benefit greatly the segment of small pressurized vessels.
In terms of the LPG price arbitrage that affects the LPG seaborne trade, we noticed in the third quarter a narrowing of price differentials. However this widened in October due to the seasonal demand picking up and an increase in oil prices evident during this interval. Overall should the price arbitrage widens even more, broader LPG trade is bound to intensify.
Focusing on our segment, during Q3 ’16 the pressurized markets remained challenging. West of Seaways [ph] the shipping length has been substantial for long periods with low freight rates. There is definitely a seasonal factor explanation to part of the softness during this period but still the element of oversupply of ships negatively affects our segment. The pressurized market has performed much better in Asia. Our signs of returning to a more balanced market are evident particularly during the last month.
Another important element of this has been a significant increase in petchem gas cargoes and this helps to explain the tightness of the market but also the vessel supply side has stabilized giving us reasons to be more optimistic for the futures trade in this area.
In Slide 12 we see the evolution of small LPG charter rates. As evident by the table presented, the small LPG segment has experienced sharply declining rates during the past couple of years. In addition the recent comparison to Q2 ’16 rates in the third quarter of the year marked the further decline driven mostly by low seasonal demand.
In terms of scrapping activity, even though the age distribution of the small LPG fleet favors scrapping, since the beginning of the year we only noted four vessels being scrapped. The strong point in our segment is the limited order book for the years to come. As per published orders we have two vessels to be delivered until the end of ’16 and 2.5% of the total fleet on delivery in the period ’17 to 2018.
I'll now continue to discuss further our company's outlook commencing with our share price performance for the last four months in Slide 13. The performance of our stock is presented along with selected gas carriers peer group. Again we stress the fact that all stock of our peer group exhibit strong correlation with oil price movement with the exception of the immediate post U.S. election period where all shipping stocks increased rather sharply. Focusing on StealthGas, during the interval examined our stock value decreased by about 4%.
Proceeding to Slide 14, we are showing different scenarios on the company's performance for ’17. The difference scenarios were created based on our existing fixed charters plus vessels open on the spot market. Revenues we’re calculating using an estimated spot rate based on current market and an individual utilization rate for each vessel. We estimate that a hypothetical $500 increase in spot daily rates will lead to an approximate $4.3 million contribution to our annual EBITDA. We find this quite interesting as it shows the sensitivity of our revenue stream to market rates fluctuation but most importantly our strong earnings improvement potential should rates increase even modestly. That is at an average percentage of 5% to 10% which is a realistic scenario for the future.
Proceeding to Slide 15, we can see some valuation multiples of StealthGas against comparable companies. All peer group companies trade at a discount to NAV while asset values exceed current enterprise values. As evident our company trades at a greater discount than its peers in terms of NAV but has a clear and safe capital structure with less gearing than its peers in spite of the heavy expansion plans that took place over the last couple of years.
Compared to our peer group, our debt to asset ratio is lower by 11%. We believe that low share price combined with solid company fundamentals, such as healthy capital structure make a good investment opportunity for medium term investors.
Concluding with Slide 16, we summarize all the reasons why we feel StealthGas is a good investment and present the market factors that with an improvement would allow our company to express profitability to its fullest potential. We base this belief to our capital structure, our solid fleet management, both in terms of chartering and operations and our consistency in maintaining top quality vessels striving to provide top quality services to our customers.
The third quarter of 16 was quite a difficult one. Although broader LPG demand was strong this quarter we faced lower day rates and extended idle time due to seasonal factors which suppressed our bottom line even further. In this poor market environment, particularly a very weak spot market, our earnings potential was affected. Despite the bleak outlook we succeeded to lock in nine new period contracts and extended existing ones. Our period coverage up until the end of the year increased to 87% while our secured revenues are in the order of $175 million.
In terms of operation, we continue to monitor closely our costs, try to contain our operating cost base and our G&A costs. Moreover in following our board’s decision we in collaboration with the yard pushed back the deliveries of our last four semi-ref newbuildings.
We have now reached the end of the presentation and would like to open the floor for questions. So please operator open up the floor.
[Operator Instructions] We will now take our first question from David Sachs from Hockey Capital.
So on these four semi-refrigerated that you pushed out, was there any concessions that you had to make with the yard to accommodate them or to compensate them for that or –?
Not really. Just to cover some costs, which is the warehousing of the ships and painting of the hull because it would get, how you call it, dirty from grass by being idle in the yard for a couple of months.
Okay, and then if you could talk a little bit about -- narrowing down the third quarter into a couple of months and sort of we now have October and most of November under our belt, can you give us some sense of what was happening with rate as you went through the month or through the third quarter and as you're seeing now in October, November, and what makes you feel that we are, in your term here, at the bottom of the cycle?
We feel that we're near the bottom because we see charterers keener to take ships on period. It is not that the rates are suddenly booming. But when you see older ships getting snapped up by charterers, that's what I see is a good signal that some really major charters are calling the bottom. And hopefully we’re expecting a cold winter which means strengthening day rates and limited idle times between the cargoes.
Last question, if you can comment a little bit about your MR and your Aframax in terms of your – one, what you’re seeing happening in the market; two, your long term intention of staying in that asset class, as opposed to perhaps using those as the source of additional liquidity?
Yes, I think we've discussed that before. As I said before, these ships are still generating very good money for StealthGas. They are fixed. All of them at above the current market levels and the values of tankers, I don't know if you follow they have fallen dramatically since last year, so even if we sold the ships, if we deduct the debt, there won't be so much cost left anyway. So it wouldn't really help StealthGas in the end of the day. So the strategy is the same: keep fixing the ships on periods, but they have a second source of income for as long as the LPG rates are soft.
Thank you. We will now take our next question from Patrick Sheffield from Beach Point Capital.
Hey, just a couple of quick ones. One, I thought I heard you say something about $10 million of unrestricted cash getting released or something to that effect. Would you mind repeating the comment you made earlier in the call?
Yes, we had a legal claim in South Africa for one of our ships. It was a totally unfair legal claim against us. We won the case and the money we had to put down as a guarantee were returned back to us. It's a significant amount of money and that's why we thought it would be good to announce it.
Is that cash -- where was that cash in the balance sheet I guess prior –
It was in the balance sheet as a restricted cash. Now it’s back as unrestricted cash.
And that was $10 million, you said?
And just sort of following upon David's question about rate, has there been any change I guess in October or November relative to the Q3 rates?
As I said, Patrick, it is a bit early to judge. I mean the winter is now starting and we actually see quite a rapid decline in temperatures. I don't know about the U.S. but at least in Europe, that's what we are seeing. We are hopefully going to have a cold winter which is good for the business. As I said the only significant signal that we have seen today – up to today are the increase period fixes on our older vessels because obviously the brand new vessels are easily to be – are easy to be fixed, but when you see vessels that are 18, 19, 20, 22 year olds getting fixed on periods, I think this is a good signal of what's coming. But I don't want to say too much because as you know we are quite conservative.
And then looking at CapEx for 2017, aside from the newbuilds that you laid out in the presentation, are there meaningful drydocking costs or any maintenance capital expenditures that you anticipate –?
No, not really. You know there's always drydockings but as you know drydockings for these ships are not significant amounts. The more significant amounts are obviously the newbuildings which are anyway pushed back and thus our equity contribution will be -- also be slightly pushed back anyway. So drydockings -- of course with such a big fleet, there are drydockings every single year.
And then as far as maturities of bank debt next year you just have, is it a $17.5 million facility that matures in December of ’17? Is that the only meaningful bullet?
Yes, yes, we have – as you know it's a bit forward, we cannot discuss with the bank 12 months or 13 months in advance. But the intention is to refinance it.
Thank you. We will now take our next question – a follow up question -- from David Sachs from Hockey Capital.
Hey Harry, in terms of environmental regulations that might be affecting the fleets of your characters, are there anything that’s projected or has been implemented that will happen over the next few years that will require fleet owners to invest significant money on environmental remediation for their assets and could that accelerate scrappage of the older vessels and maybe tighten this market up a little bit more?
David, you are a 100% correct. A very clever question. Indeed there are two sets of regulations coming within the next two to five years. One is water ballast treatment systems and the other is emissions, both are quite expensive. And obviously someone with 20, 25 year old ships would think twice before investing any money on such an old ship and I guess depending of course on the market would rather scrap I guess.
And can you give us some sense of what the capital upgrade costs would be for an existing vessel to modify it or achieve both ballast and emissions?
For the ballast there is no U.S. systems approved yet. So the answer is we don't know. For European systems it’s about $300,000 per ship. For U.S. as I told you we don't know yet. We're waiting for the U.S. Coast Guard to come out with approved systems. For the emissions there is no real cost because you can opt to burn distillates and therefore make no amendments to your ship. Or if it’s a brand new ship and you want to have an advantage over your competitors, you can install a scrubber, which means that you can burn much cheaper fuel in comparison to your competitors but of course a scrubber costs $2 million to $3 million.
And have you done an environmental assessment of your fleet and have a sense of where we would be looking either to put in scrubbers or your preference would be to burn more costly fuel?
Yes, we have done but our advisors cannot yet reach a conclusion as I told you since the U.S. Coast Guard has not yet approved the system. So without approved system it’s not very easy to reach a conclusion.
And what percentage of your fleet is compliant with what has been proposed as far as the environmental regs? I would assume some of your newer assets are all fully compliant at this point?
Some of the newbuildings have already water ballast treatment systems treated, not all of them.
And in the order book you mentioned only a few percent increase over the next two and a half years. And if I look further out 1920, those would be zeros right now on the chart?
And what would happen if we -- in your mind if we took 10% of the world’s fleet out based on the NAV exercise of investing $2.5 million, $3.5 million to upgrade a 20 plus year old vessel?
Not right, I told you, for a water ballast treatment which is obligatory is $300,000, not $2.5 million.
I know you're talking about the scrubber -- adding a scrubber that would be too high.
You don’t have to add a scrubber. Scrubber is only voluntary. If you want you can burn distillates and you make no changes to your ship as I mentioned.
Okay and in that case, you’d be passing that extra cost through -- it would just become an overall tax to the industry.
Yes, but it depends what you want. I mean if you want to put a scrubber you put an initial investment in but then you have a very attractive ship for the charterers. And you get your money back that way, or you don't invest anything, you have a normal ship let's say but you have to burn more expensive fuel. Depends what the strategy is and depends what your cash is and depends how you want to place yourself in comparison to your competitors I guess.
And just from an industry perspective we've had a series of deliveries of VLGCs, this was going to be – ’16 and ‘17 are big years for VLGC deliveries. Has that affected? It doesn't appear to have yet affected demand for your smaller pressurized vessels. Why hasn't that happened and will we see that happening in 2017? Is it yet another reason that the market becomes tighter or more dynamic?
David, as you know well, this coincided with the collapse in oil price and the weakening of most of the economies, right. So yeah, on one hand, we have a lot more bigger ships but on the other hand we have the problems we just discussed. So I think the one cancelled the other day. At the same time we had a big -- relatively always a big fleet of small ships and a big chunk of that fleet was over aged. But we have seen very few ships leaving the fleet. So that's what we have seen no real benefits but as we’ve discussed before the ships cannot trade forever. At some point they have to go.
And there's no clever alternative to moving these cargoes outside of using your small pressurized vessels to this secondary market.
No, not of what I know of.
End of Q&A
[Operator Instructions] There are no further questions in the queue at this time. I will turn the call back to your host for any additional or closing remarks.
We’d like to thank all of you for joining us at our conference call today and for your interest and trust in our company. And we look forward to having you with us again at our next conference call for our fourth quarter ‘16 results sometime in February. Thank you.
Thank you ladies and gentlemen. That will conclude today's conference call and you may now all disconnect.
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