StealthGas Inc. Q4 2009 Earnings Call Transcript

| About: StealthGas, Inc. (GASS)
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StealthGas Inc. (NASDAQ:GASS) Q4 2009 Earnings Call Transcript March 22, 2010 11:00 AM ET


Andrew Simmons - CFO

Harry Vafias - President and CEO


Daniel Burke - Johnson Rice

Tom McKay - Simplon Partners


A pleasant good morning, everyone. Welcome to our conference call and webcast to discuss the results for our fourth quarter and 12 months ended December 31st, '09. I'm Harry Vafias, CEO and President of StealthGas. I'd like to remind you please that we'll be discussing forward-looking statements in today's conference call and presentation. Regarding the Safe Harbor language, I would like to refer you to slide number one of this presentation as well as to our press release on our fourth quarter and 12 months '09 results. With me today is Andrew Simmons, our CFO. And if you need further information, please contact myself or Andrew.

Slide number two, we continued with our stated business strategy in the fourth quarter of '09. And later, I would like to discuss the outlook for 2010 and beyond. Our primary objective continues to (inaudible) highly efficient and modern fleet on secure employment contracts with first-class charters that serve a very specific niche market. Our Courchevel [ph] fleet has no correlation whatsoever to most of our shipping sectors, many of which, as you know, will continue to experience significant downturns in both charter levels and particular vessel values.

During the fourth quarter of '09, we negotiated the cancellation of the (inaudible) brand new product tanker albeit the cost in the short term. But I certainly believe that this was a prudent decision as the vessel's value had declined substantially from the time of contraction to (inaudible), until now when we have all the (inaudible) substantial portion of debt at the time when we are seeking to consolidate the already strong financial standing of the company.

Last, we have realized sales concerns with respect to the design of the (inaudible) ability to charter going forward. We have no further scheduled deliveries of such until the first quarter of '11. And as we highlighted the last time we spoke, the (inaudible) $11 million of states' payments due during 2010, we expect to meet comfortably from our internally generated cash flows and existing cash position.

We have started to maintain moderate levels of leverage at all times despite the near five-fold increase in the size of the company since October ‘05. After taking into consideration the total fleet of 41 ships at the end of the fourth quarter ‘09, our net debt to capitalization ratio stood at 46%, which in our view, particularly in these challenging times coupled with our employment charter profile and overall quality of our charters, should have to continue to underpin the underlying financial stability of our company.

Our third objective has been to secure and maintain a visible revenue stream, with stable and predictable cash flow enabling us to continue to pursue a prudent growth strategy. At the moment, fixed employments for our fleet for 2010 stands at 60% of available days. We have about 25% already covered for 2011. As we announced last week, in January, we have secured some attractive field of business for our fleet in last two months or so.

As you would have seen from our results for Q4, our time charter equivalent rate was $6,400 per vessel per day, compared to $7,132 in the corresponding quarter last year, which represents a decline of about 10%, but less than the 14.5% decline we saw in Q3, with highlighting the continued challenges faced by increased trading in the spot market and overall lower prevailing spot trades year-on-year.

We also have again included an adjusted time charter equivalent on a blended basis in our slide presentation for both the LPG vessels and the product tankers, but none of our vessels were on bareboat charters. This not only gives you a more realistic figure in terms of our average time charter equivalent, but we have also adjusted the vessel operating expense line later in the presentation as we (inaudible) to be responsible for the operating expenses of all the vessels in our fleet.

On this basis, our daily fleet was $7,324 in Q4, against $8,614 at the time -- at the same time last year, a reduction of $990 a day or 14.9%, again less than the 15.9% declines here in Q3, which again underlines the challenges that we have faced in the fourth quarter and throughout '09 as we have predicted would be at the beginning of last year.

However, despite those lower income levels, I’m very pleased to report that we remain comfortably above our net income breakeven level. We currently have eight of our LPG vessels and three of our product tanker vessels on bareboat charters, which are the most secure in terms of operational risk, plus we are protected from such expenses as bankers (inaudible) on insurance costs as is in all other expenses for the bareboat charter's account.

Our fourth goal has been to own and operate a modern fleet of LPGs and (inaudible) our average ages of today is 11.5 years, not including the tankers and not including the five brand new LPG vessels that are going to deliver in the next few years, compared to the industry average of about 21 years.

We continue to believe that within our cost structure, this gives us a competitive advantage and that this factor will be important as we move forward into the latter part of 2010 and beyond. One as we so discussed, there is an expected contraction in the overall size of the Handy Size LPG fleet unlike any other active shipping sector, plus the prospects of a sustained economic recovery may well be firmer.

Our fifth objective has been to maintain core customer relations. The quality of our customer relation is exemplified by our continuing and consistently high fleet utilization of the quality of our charters, which also lowers our counterparty risk. I'm pleased to say that today we continue not to have any issue in terms of charter's performance. And as you can see from our balance sheet, we have -- where we are unsure of the credential of a small number of charters making cash deposits or revolving bank guarantees to secure the high risk.

Our sixth goal has been to maintain cost-efficient operations. I’m pleased to report yet another good performance in Q4 ’09 and 12/2010. Our net income breakeven level decreased by $645 per day to $5,535 per vessel per day, compared to $6,600 and $6,359 in the prior quarter. Also in a year-over-year basis, excluding losses on derivatives, our daily net income breakeven was almost unchanged at $5,636 per day, compared to $5,546 per day last year.

I believe it’s a very credible performance in terms of managing our cost base and has gone somewhat to preserve the profitability of the company at a time when we have seen not surprisingly income levels on our ships coming under some pressure. And this close and cost effective management of our vessel continues to be a vital and important area of operation of our company, given a relatively narrow margin, which we expect to produce. And I believe we have demonstrated this throughout ’09.

Finally, in the gas business strategy and following the flow, a review of the company’s financial situation and the continued under-valuation, in our opinion, of the company, we have decided at our Board meeting today to instigate the buyback of the company’s stock -- common stock of up to $50 million. We hope that this measure, which has taken -- which has been taken after careful consideration will lead to an improvement in the company’s stock price, which will more closely affect the value of the company, which we’ll detail later in this presentation.

Slide number three, this slide demonstrates the development of our fleet. By the end of the fourth quarter ’09, we have a fleet of 39 LPG carriers and 3 tankers. Thus, continuing our number one position in the Handy Size LPG carrier sector. By the end of 2010 as currently structured, we will own 30 sea gas carriers and 3 modern tankers. I want to confirm again that apart from some $11 million of states payments due during 2010 to the yard in Japan constructing the five LPGs we have ordered, we have no capital commitments or need to raise our finance in the first quarter of 2011 when they commence those deliveries.

I’m pleased to say that in the past few weeks, several banks have expressed very serious interest in the potential financing of these vessels. And we intend to commence further discussions, refer to their financing during the second quarter of 2010.

StealthGas continues to hold the number one ranking in the owned vessels in the 3,000 to 8,000 segment of the LPG segment, upon which we are concentrating. We’ll continue to focus primarily on this segment because of its strong fundamentals, coupled with a relatively stable rate as we will show later. We also continue to obtain, even in this difficult period, a favorable order book in safe gross, compared to Handy size segment in the LPG sector and indeed many of the other sectors of shipping.

Slide four, this slide demonstrates our fleet deployment profile and provides you with the earnings visibility for our each of our 40 current ships. At the bottom of the current profile chart, we have included the percentage of earnings [ph] days fixed. This then averages into a certain stability and predictability of our earnings. As you can see, 60% of (inaudible) is already fixed for '10 and 25% already fixed for ’11.

We now turn to the financial highlights for the fourth quarter and 12 months '09. So I'll pass it on to our CFO, Andrew Simmons.

Andrew Simmons

Thank you, Harry. Good morning, everybody. With slide number five, we now turn to the financial highlights of the fourth quarter 2009. With an average of 42.8 vessels owned and operated in the fourth quarter, we realized a net loss of $27.2 million on voyage revenue of $28.4 million, and produced a negative EBITDA of $17.6 million.

For the fourth quarter of 2009, we reported (inaudible) loss of $4.4 million on interest rates local currency hedging arrangements, which included an unrealized non-cash loss of approximately $3 million and a realized cash loss of approximately $1.4 million, plus a non-cash provision of approximately $200,000 for restricted stock portion of deferred stock-based compensation.

Also in the fourth quarter as previously announced, we incurred a $9.9 million non-cash impairment loss on vessels held for sale, plus we incurred a loss of $10.75 million, plus the forfeiture of a previously paid deposit through the cancellation of the contract to acquire Stealth Argentina. Including these non-cash items and the payment via the cancellation of the Stealth Argentina, net income was $2.3 million or $0.10 per share calculated on 22.3 million average shares outstanding.

Our net debt capitalization stood at 46% at the end of Q4 ’09. We continue to believe that maintaining our leverage at moderate levels is important. As currently structured, no further debt will be incurred by the company until early 2011. (inaudible) in our recent press release, we have kept -- we are currently refuting our overall level of indebtedness through the sale of some of our smaller and older LPG vessels.

We now turn please to slide number six. This slide provides you with an overview of the development of our income statement for five consecutive quarters. In comparing our results flow from the fourth quarter of 2008 to the fourth quarter of 2009, revenues incurred by 0.07%, EBITDA decreased by 110.7%. Our EPS, excluding non-cash items, impairments, and the cancellation of the contact to acquire Stealth Argentina was $10 per share. With regard to EBITDA for Q4 ’09, if we adjust this to exclude the impairment loss and the cost of canceling the Stealth Argentina, the EBITDA in Q4 was $8.7 million, compared to $15.9 billion in Q4 2008.

We now turn please to slide number seven. These are our operating highlights for four prior quarters, Q4 of 2009, plus our full year figures for 2008 and 2009. In terms of fleet base in the fourth quarter of 2009, we owned and operated an average number of 42.8 vessels. Total charter days for the fleet during the fourth quarter were 2,941 days. We also had 957 total spot market days. This compares to 379 spot days in the same quarter last year.

In terms of average data results per vessel for the fourth quarter of ’09, we achieved a time charter equivalent to $7,324 per day per vessel on the adjusted basis, compared to $7,802 per day per vessel in Q3 of ’09. Vessel operating expenses per day on the adjusted basis, i.e. no vessels on bareboat charter over, were $3,473 a day, compared to $3,675 in Q3 ’09. And we continue to be relativity pleased with the performance and the day-to-day running expenses of our fleet. The measures we instigated at the beginning of 2009 carry the more stringent management on costs. As a consequence of the overall prevailing economic conditions continue to defray and to extend the effects of a soft sport market.

We now turn please to slides number eight and nine. With slide number eight, we turn to the financial highlight for the 12 months of 2009. With an average of 42 vessels owned and operated in this period, we realized net income of $15.8 million or $0.71 per share net of the $800,000 loss on the sale of the Gas Sophie, a $1.5 million non-cash loss due to derivatives in ship -- the impairment charge via vessels held for sale, and the costs associated with canceling the purchase of the Stealth Argentina. EBITDA for the 12 months 2009 net of the aforementioned impairment loss on the sale of the vessel and the cost of canceling the Stealth Argentina stood at $47.8 million.

We now turn to slide number 10. As we have already discussed, we continue to run our fleet in a very cost effective manner, concentrating extremely hard on operating our ships efficiently and safely. We also are pleased that our vessel operating expenses in Q4 09 were virtually the same as to the same quarter of 2008'. While accruing still remains a challenge, we are hopeful that the rate of increase in operating costs will continue to moderate in 2010.

So on a cash flow basis, our daily breakeven per vessel for the fourth quarter of 2009 was $6,018 per day. If we deduct the realized loss on derivatives, compared to $5,607 per day in Q3 of ’09, what is encouraged from a cost standpoint, if you turn back to slide number seven, is that our total vessel operating expense in 2009 increased by $398 per day per vessel or 8.7%.

On a net income basis, our daily breakeven per vessel net of realized cost on derivatives was $5,373 per day in Q4 of ’09, compared to $5,665 per day for the third quarter of 2009, a reduction of $292 per day per vessel or 5.2%, which again underlies the attention the management is attaching to this area.

We now turn please to slide number 11. Using the input given on this slide, our shareholders can estimate our financial performance in 2010. This slide provides you the revenues we have already secured as of today until the end of 2010 based on contracted revenues on the timing of bareboat charters.

Total contracted revenue to-date is $70.1 million, which is 62% of total 2009 revenues, plus we have the variable in-revenues to be generated by those of our vessels with days that are not yet contracted for in the remainder of 2010. And we have provided you with that number of days to $5,768 as the fleet stood at the 1st of January, 2010. So you can input the rate you wish to assume on (inaudible) vessel not yet chartered for all the reminder of 2010, and you can calculate our projected performance for this year.

Thank you very much. And I will now hand you back to Harry for some further comments.

Harry Vafias

Moving on to slide 12, this slide shows the volatile spread markets of the past six years for the medium-sized and large-sized gas ships. In comparison, the mid-sized and smaller semi-raft and the fully pressurized ships, our core sector, have experienced the much lower volatility, and until recently, steady growth in freight earnings from mid '05 onwards. It’s clear from this data that our type of ships, which form the core of our business and that are far remote from dry or wet or the container markets for over the past six years of experience; the wild fluctuations in rates that these other shipping sectors have seen.

And we are hopeful that this relatively non-volatile trading pattern will continue to remain intact as I believe we have proven today despite the prevailing economic conditions through our reported revenue for ’09. And this is further emphasized at slide 14, which shows that the one year time charter equivalent volatility since the year 2000 between the dry bulk and crude tanker sector, and the 3,500 fully pressurized gas ship, and 3,200 semi-rough LPG vessels, which are typical of the majority of our fleet. As you can see, based on the mean average for these sectors over this quite extended period, the level of volatility is far higher in the dry and wide spaces than our core segment.

We continue to expect that the supply of products will increase next year, plus demand is expected to continue to be steady, particularly in the Far East, and developing well. We therefore continue to believe that the outlook for our core market is encouraging. And thus, we will continue with the contracted acquisition during ’11 and ’12 of five brand new LPG ships, while in the meantime as we have already commenced looking to reducing the number of some of our smaller and older vessels in the fleet.

This streaming will not only keep our fleet in terms of age at the forefront of the market, but the proceeds from these sales will enhance our already strong liquidity position and further reduce our debt level, which is already quite conservative. In addition, some of our increased liquidity will be utilized to repurchase common stock and also to selectively expand the company if attractive opportunities are found in the gas segment or in other segments.

Slide 14, this slide indicates the fair trade evolution for 12 months time charters for our markets. The figures are based on independent estimates by Lorentzen & Stemoco. As you can see highlighted in yellow, this segment continues to be as we have just discussed, characterized by relative stability, and the rates have been reasonably steady over the past two quarters in the independent forecast for the first quarter of ’10 is that the rates will drop. This is currently being obtained. These projected rates, which slowed down on what we were achieving early in the company’s history (inaudible) not in any way pushed the company towards a loss-making situation.

Slide 15, we continue to believe that the forecast for minimal fleet growth of the Handy Size LPG segment in the year 2010 and the negative fleet growth in ’11 at the time when several large-scale gas projects are due to come on stream give us a defining positive outlook for our core sector. There is an expectation that the supply of LPG products that must be shipped at this time will increase. We continue to believe that the supply-demand access is very encouraging for our company, and it's virtually a unique situation within the shipping industry, particularly given the conditions being faced by many of the average sectors of shipping today.

Slide 16, we have included this slide to emphasize the point I have just made referring to the different order book outlook for the LPG sector as opposed to the more main stream sectors of shipping. I should add that the figures shown here in the graph are for all LPG sizes and are just for our core Handy Size segment.

Last, as we discussed, the overall size of our specific fleet sector is projected to decline during 2010 and '11, which given our market leading position should be a positive factor for the company.

Slide 16, we have included this slide. And now for the past three quarter results, taking a sample of different types of listed shipping companies and making a comparison of their price to net asset value compared to ours. We have also included a comparison of price to earning ratios to further underline our point. As you can see from the slide, based data made available to us, recently, we seem to continue to present a very attractive prospect to investors when benchmarked against these companies who do not benefit from the sector fundamentals that we have been discussing. So in my view on this, at least as highlighted earlier, our comparatively low debt to market will continue to be valued inappropriately by the market. And so thus, in my view, continuous to be an attractive company to invest in based upon this valuations and the outline we have discussed here today.

To summarize, we have taken measures, some of which on the short term, have been painful. However, I firmly believe that these measures will enhance the already sound financial standing of the company. And we'll be in a good position to take advantage of improvements in our market and also opportunities if they present themselves to us going forward.

I would again stress that we have not needed to issue the use of equity during (inaudible) period and now nearly two years old, and that the company remains operationally profitable and able to comfortably meet its ongoing obligations.

We have now reached the end of our presentation. We would like to open the floor to questions. So operator, please open the floor. Thanks.

Question-and-Answer Session


(Operator Instructions) We'll pause for just a moment so everyone (inaudible) for questions. The first question is from Daniel Burke from Johnson Rice.

Daniel Burke - Johnson Rice

Good afternoon, guys.

Andrew Simmons

Good afternoon.

Harry Vafias

Hi, Daniel.

Daniel Burke - Johnson Rice

Hey, Harry, just to start off, there was a bit of a winter-related bounce in rates. I was curious if you were able to capture any of that in terms of either rate improvement that we'd see or maybe improved spot utilization, after your spot (inaudible) here in the first quarter of '10?

Harry Vafias

We didn’t see the winter firming that we have seen the previous years. Whereas you might remember, we saw some really crazy rates being pegged. Indeed, we saw multiple (inaudible), which obviously is a good thing. We didn’t see so many new inquiries for a long period, but (inaudible) we negotiated them with fixed amount you saw from our announcement. So generally, a far smaller boom than the previous year, I have to say.

Daniel Burke - Johnson Rice

Okay. I understand. And then, you mentioned yourself, just in your answer, “not too many inquiries for a long period.” You picked up a couple in the press release towards the end of last week. Your comment this morning, I noted, you are resisting, to some extent, period business. Can you maybe elaborate then on what you see are the intent of interest in term business and maybe what type of price levels you see now and how many you see that unfolding as we go forward?

Harry Vafias

You saw what we did to fix. And you saw the average rate of those charters. Those we did fix, which means those weren't at acceptable levels and for longer period as well, longer than one year, I mean. Obviously, there are a lot more charters that are at lower levels. But as I said, I think 2011 will be a much better year not only from the LPG point of view, but from the global economy point of view. So we don’t want to fix too much at low levels because we need to have the significant amount of free vessels next year to take advantage, hopefully, fix at much better levels than we have done in '09.

Daniel Burke - Johnson Rice

Okay. And then, I wanted to talk a little bit about the fleet strategy. You've been selling a couple of vessels ahead. I have two questions. They're unrelated specifically, but both deal with how you are thinking about your fleet. The first was post the announced asset sales, how many vessels will you have in the China cabotage trade? The second question was it looks like four to five semi-refs are on spot. How are those performing? And what’s your interest in the semi-ref coastal market versus the fore fresher fleet. Can you differentiate how you're thinking about the assets?

Harry Vafias

In the Chinese market, we will have about four vessels. I'm not sure because some are coming to an end, and I do not know if it will be extended or not. So that is what is happening at the moment. And on the semi-refs, despite the semi-refs being more flexible ships and more expensive ships, on a pro rata basis always, the majority of the interest we've seen for the period or for selling the vessels has been on the pressure side that’s why we have not fixed the semi-refs' period. That’s why we have not sold any of the semi-refs. So that’s what it is.

Daniel Burke - Johnson Rice

Okay. Great, maybe if I had just one last question for you or for Andrew. Just wondering post-asset sales, how the -- have the account changed any in terms of how may unencumbered LPG vessels you all currently have?

Harry Vafias

We have six.

Daniel Burke - Johnson Rice

Okay. Thank you very much, Harry.

Harry Vafias

Thank you.


(Operator Instructions) And we’ll take our next question from Tom McKay from Simplon Partners. Please go ahead.

Tom McKay - Simplon Partners

Good morning. Given your decision to cancel the Argentina and forfeit the deposit, can you elaborate on the -- your original thinking in ordering the four product tankers that represent the fundamental departure from your small LPG tanker strategy?

Harry Vafias

Your question was first, why we bought the tankers. That’s the question?

Tom McKay- Simplon Partners

Right, because you -- continuing in your calls over the last couple of years, you've emphasized stability of the small LPG tanker market and the niche market aspects to it. And now, you have something like a third of that capacity of the balance sheet devoted to three product tankers that are -- that you don’t even operate. So it doesn’t seem to make sense to me. and I just wondered what your rationale has been?

Harry Vafias

A tanker level question. First of all, during the good times, there was a lot of free cash flow and we needed to do something with it instead of filing it in the drawer and earning nothing or earning an significant interest from the bank.

Number two, we are always of the belief that you should not always have all of your eggs in one basket because if that basket breaks, you break all your eggs, meaning that I would never want to have 50 gas ships and nothing else. It's very, very dangerous. If something happens in the gas market, then that sends you exposed on a 100% basis.

Thirdly, we never bought product tankers to gamble or to play the market. We always bought them in advance, having arranged the long bareboat charter, which is the safest charter that exists. So not operating the ship is exactly a good thing because as you know very well, if you operate the tanker and you have the pollution incident, or an accident, or something like that, then you’re finished. In the State, especially, there's no limit on the damages, which means it might take over your whole company. So actually, not operating the tankers, I think, is something you should congratulate, as I not say it as a bad thing.

Don’t forget that on the debt side, you are correct. These are expensive ships. But obviously, these are brand new 50,000 deadweight vessels and not brand new or 10-year old 5,000 deadweight vessels as the majority of the gas ships are. So we're not comparing apples to apples.

And secondly, don’t forget that these ships bring in approximately 15,000 net bareboat per day, which obviously, not the G ship or many of the G ships together cannot bring. So having three such tankers on long bareboats bringing this kind of money in the company I think is a very good thing and a very good floor if the LPG rates fall further, which I don’t think. But in this market and in this heart of the crisis, if I can say that, you’ll never know what will happen.

So obviously, we bought them on quite high prices. Nobody can disagree with that. But instead of gambling like other companies did, and obviously, bridging long covenants and having to drop off with cash, and of these things, we did not. We fixed them along charters and the charters are performing. And therefore, we have a very good cash flow, and very easily repaying this big debt, as you mentioned. So that’s my thought on there.

Tom McKay - Simplon Partners

So on the Argentina, was the Argentina on a bareboat charter subject to delivery?

Harry Vafias

Yes. Yes, solar tankers, we never buy a tanker because they are very big, and expensive, and dangerous assets, if I can say that. We’ll never buy them unless we have lined up a good charter, a long charter.

Tom McKay - Simplon Partners

So the charter though is not responsible, in part, for the loss and cancellation?

Harry Vafias

Why would the charter be? We cancelled the ship because we felt it was twice the price we had to pay. It was nearly twice the market value. And on top of that, there was a design flaw, which meant that at the end of the charter, we would not be able to fix with some oil majors. Why would the charter be responsible for that? The responsible parties are the buyers, ourselves, and the owners that built the ships, i.e. the sellers.

Tom McKay - Simplon Partners

Right, right.

Harry Vafias

So no, the charter -- we’re not responsible whatsoever.

Tom McKay - Simplon Partners

Okay. All right. Well thank you.

Harry Vafias

Thank you.


(Operator Instructions) As there are no further questions, I’d like to turn the call back over to Mr. Vafias and Mr. Simmons for any additional closing remarks.

Harry Vafias

Thank you. We would like to thank everyone for joining us at our conference call today, and for your interest and trust in our company. We look forward to having you with us again at our next conference call for the first quarter 2010 results. And I’m sure that next year will be definitely better than the last one. Thank you very much.


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

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