Avance Gas Holding Ltd (OTCPK:AVACF) Q4 2015 Results Earnings Conference Call February 9, 2016 9:00 AM ET
Peder Carl Gram Simonsen - Chief Financial Officer
Christian Andersen - President
Michael Webber - Wells Fargo Securities
Mitchell Glynn - CVC Capital Partners
Good day, and welcome to the Avance Gas Holding Limited Fourth Quarter 2015 Earnings Presentation and Conference Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Mr. Peder Simonsen. Please go ahead.
Peder Carl Gram Simonsen
Thank you. Thank you for those dialing in and thank you for the audience to come to listen to us talking about our fourth quarter 2015 earnings release. I will start with the financial section and then Christian will follow up with the markets commentary.
We’ll move to slide 4, the time charter equivalent rate earned for the quarter was $61,144 compared to $96,825 in Q3 2015 and $64,629 in Q4 2014. During the quarter, we had the delivery of Pampero and now all eight newbuildings are delivered and operating in the spot market.
During the quarter, we made a voluntary offer for Aurora LPG which was later withdrawn during December, this quarter, and we had EPS of $1.31 in Q4. The board declared a dividend of $0.65 per diluted share.
If we move to slide 5, the operating revenue for the quarter decreased to $84 million, down from $110 million, reflecting the seasonal decline in rates. The operating expenses were up due to a larger fleet; however, the daily operating expenses per ship were slightly down. The operating expense per ship per day for 2015 was $7,850.
The financial expenses increased by $800,000, mainly due to costs associated with the Aurora offer. The A&G expenses also increased slightly mainly due to professional fees in relation to the Aurora offer.
Our net profit of $45 million, representing $1.31 per share, is down from [$73 million] and $2.11 per share in Q3. Our net profit for the full year 2015 was $183 million, compared to $78.9 in the 12 months ended December 31, 2014.
If we move to the balance sheet on slide 6, total assets of $1,119 million by the end of the quarter were up from $1,056 million, which is reflecting the timely delivery of the last newbuilding. Our receivables increased slightly, reflecting the new addition to the fleet, offset by lower seasonal freight rates and also [indiscernible] receivables.
Our interest bearing debt increased by $88 million, mainly reflecting the drawdowns relating to the Pampero and also utilization of revolving credit lines. Our free cash were up by $7 million to $70 million by the end of the quarter and our equity ratio was just below 45% by the end of the quarter.
Moving to the cash flow on slide 7, our net operating cash flow was $51 million for the quarter, down from $63 million due to lower rates. The net cash flow from financing and investments was negative $44 million, of which the Q3 dividends represented $73 million which was paid during the quarter, a net increase, as such, of $7 million in cash for Q4.
Then, I’ll give the word to Christian.
Thank you very much. Page number 8 is the picture of our fleet; 14 ships on the water. As Peder was saying, the last newbuilding from China was delivered during this quarter and today we have all 14 ships exposed to the spot market; 13 ships trading spot, the last ship is on spot-related time charter until July, plus/minus this summer.
Moving to slide number 9, we have a picture of the order book. And as you all are aware of, unfortunately the order book is still fairly high. If we count in the numbers, the ships also in [2018 and 2019], the order book is about 36% of the existing fleet.
There are 44 ships for delivery this year; five ships has been delivered in January and the majority of the ships will come over the next six to seven months. 24 ships are scheduled for delivery in 2017.
Of these, six to eight ships are Panamaxes which are designed to use the existing Panama Canal and these ships are, all but two, chartered out on long-time time charters to traders. The last two is owned by PETROBEC and they have a huge trading activity themselves, so these are also expected to go into their own trading activities.
The opening of the Panama Canal is expected to come second quarter this year. We expect three to four months trial period and we think that Panama will be commercially open sometime during third quarter. It’s not realistic to believe that VLGCs will be the first ships to trade in the new Panama, because unfortunately I recall it’s slightly more challenging than a couple of other ships occurring. So we think they will get into late third, early fourth quarter before we see VLGCs using Panama.
It remains to be seen how much and how many VLGCs will go through Panama. There is a cost element and there is a waiting element for Panama, but of course there is a huge savings in business.
In our fleet utilization models, on the right side on page 9, we show that we expect the annual fleet utilization this year to be pretty much in line with last year. The first quarter and the winter market this year is slightly more challenging than it was last year, it’s more in line with what it was the previous year, in 2013, and that is expected. There’s been a lot of deliveries towards end of last year and early this year and it will take a bit of time for the market to absorb these new ships.
If we turn to page number 10, I’m showing you on the left side the fixtures of Avance Gas during the fourth quarter and you can see that some of the dots are marked red and some are marked black. And the red dots are the Chinese newbuildings and the reason for presenting it this way is that we like to show you that the Chinese ships are trading at premium rather than discount to the market. So we’re extremely happy with the way our Chinese newbuildings have been accepted by the market, their speed performance is excellent and they are delivering very good returns.
We’ve done 12 fixtures during the quarter on fixed price, five of these are Indian business and most of the Indian business is above the green line, representing our spot index. [Four loadings are out of Houston] and roundtrip from Far East to Houston and back is about three months. So these ships will be out of circulation for quite some time.
And in addition to those nine voyages, we have done one voyage on floating rate. It’s Baltic related freight and the pricing period is, I think, I can’t remember, February or March. We have the portfolio of floating rates on February and March, most March really. And the remaining fixtures is traditionally Baltic fixtures, fixed price, loading Middle East for Far East discharge.
If we look at the right graph on page number 10, you can see that the waiting time is still very low. In October, we hardly had any. In November and December was slightly up. And for the quarter, as such, we have 1.12 days waiting per ship per month. This will give a fleet utilization for the fourth quarter at 96.3%. For the year, it’s slightly better; we had one day waiting on each ship every month. So the fleet utilization for 2015 is 96.5%.
Page 11 is showing us why the market has been strong in the fourth quarter. As you can see on the left side, the green bars are showing export from the Middle East. October, November at healthy levels, about 3 million tons per month. And December, slightly down as normal for December, that’s the start of the winter period.
If we looked at the right side, we see the export from US Gulf and I think the thing to keep in mind here is December numbers at slightly above 1.5 million tons. So in December, US Gulf had an export of more than 50% compared to Middle East and this is going to grow.
We are tracing the VLGC loadings and we are including the Panamaxes, the 74,000, 75,000 cubic meter ships. Included on the graphs on page 12 are not ships below this size and that’s why we have a bit of [verity] from month to month, and in particular we saw in March and in October, that’s some of the terminals had a couple of loadings on smaller ships. So it’s not included in our numbers. And the average loading for this quarter was 34 cargoes per month from US Gulf.
The direct export from US Gulf is 34%. The total export on the indices is higher, because as you will remember, some of these Panamaxes are reloading into VLGCs on the Pacific side of Panama and the cargoes are shipped all the way to the Far East. So we think that the total export from US Gulf to Far East in 2015 is somewhere between 36% and 38%.
The average time charter equivalent of Avance Gas last year was $77,000 per day, on page 13. And needless to say, this is the highest sale ever in this segment and I wouldn’t be surprised if this puts Avance Gas into one of the absolutely most profitable ship owning companies in the world.
We have 14 ships on water, as I said. The cash break even is $22,500 per day. The Board of Directors in Avance Gas decided yesterday afternoon in the Board meeting to withhold 50% of the earnings per share in the company. This is done to strengthen the balance sheet and to increase our financial flexibility.
I believe that [indiscernible] VLGC segment this year. We are extremely positive about the market. I had a presentation about three weeks ago, going a bit more into details in the market. This presentation is available on our website, both as a PowerPoint and I think the webcast is also available on our homepage.
So the outlook for 2016 and of course in particularly the strong summer market is very good. Enterprise had their expansion coming on stream for fill from January increasing the export from US Gulf by another 10 cargoes. In the mid of third quarter, we will have Phillips 66 coming on stream from the Texican Coast, adding another six to eight cargoes from US Gulf. And with average 38% of this going to Far East, there is a huge demand for shipping in 2016.
We are a bit more cautious when we are looking into 2017 and 2018. The order book for 2017 is high; the order book for 2018 is building up. So we think that within a couple of years it’s not unreasonable to believe that we will go from super profit onto a more normalized freight market. But we believe that 2016 will still be a part of the party and we expect to have strong earnings throughout the year.
We’d like to strengthen the balance sheet to increase our flexibility. It’s yet to be decided how to use the proceeds, we can keep it as a reserve, we can use it to reduce cash break-even having revolving facilities enabling us to take it back into cash if we needed. We can buy back shares, we can buy ships or we can continue to work on M&A.
It’s difficult to say today what is most realistic. I think the main message from us to our investors is that we think it will be good for the company and good for investors to have this flexibility and to enable Avance Gas to be a main force in the expected consolidation and opportunity we’re going to see later this year and into next year.
US Gulf volumes are maintained and growing. We don’t see any [indiscernible] production, although crude production is coming slightly down. We still see NGLs and LPG being produced to enable the export we are waiting for this year.
We don’t expect any big growth in the Middle East. Iran is quite likely to be invited back to the good company, but the short time increase in Iran is limited. We might be able to do another 500,000, maybe 1 million tons. But long term, Iran has a big potential for LPG. But within 2016 and 2017, it’s not going to be a big growth.
By having a stronger balance sheet, by having financial flexibility, we can continue to have the chartering strategy of the spot market as we have today. The spot market is expected to yield very nice numbers this year and the difference between the spot market and the fixed price market this year is going to be at least as wide as it was last year. So we will continue with the spot market exposure. We will continue the chartering policy we have today.
With our expectations for the market for 2016, and if the Board is deciding to continue to pay out 50% dividend, we will still have a very high direct yield based on the dividend we will be paying.
So with these words, I will open up for questions.
[Operator Instructions] We have an opening question from Michael Webber of Wells Fargo.
Christian, you mentioned I think in your remarks 2016 was still going to be a part of the party, but at some point we’d revert to a rate in a more normalized level. I mean, obviously, the order book hasn’t change, it’s been there, but the reduction in the dividend policy and the focus on a bit more of a COA – it’s been more of a COA focus, certainly points you guys getting a bit more defensive, which seems like it makes sense.
I’m just curious when you think about your rate outlook for 2016 and 2017, is there anything structural within the market that would keep rates actually just going to a more normalized level as opposed falling to break-even or below? I guess, we struggle with finding rationale as to why they wouldn’t just go to break-even if we’re looking at that kind of supply coming online?
I think it’s two questions which are extremely difficult to answer, one is rate level and the other one is share price. So what we see in our models for 2016 is that fleet utilization is going to be higher. So we are pretty sure that 2016 will play out with high rates and still in the super profit scenario.
The big question is when we come to the winter market of 2016 and 2017, further into 2017, the order book of 2017 is still above 20 ships. If we don’t get a lot of new supply, there will be pressure on freight rates. It’s really difficult to make a model to say they will stop at 40 or 30 or 20. It’s hard to say.
I think that in view of more challenging markets going into 2017 and 2018, it’s likely that some of the players in the industry will try to get there to be able to offer customers more flexibility and to try to keep some of the pricing power at the owner’s hand. So there are a lot of things which could happen over the next year, year and a half, which could support the market surviving at that nice level for another couple of years.
I just wanted two more and I’ll turn it over to my friends who I assume are in the room there. Memory serves, you guys acquired a tank, LNG carrier which I believe is probably going to go on to some sort of storage service. I don’t think it shows up on your deck, in your fleet list, I’m just curious as to what the status of that asset is and what you guys will be looking to do with it?
It’s [indiscernible] it’s a small investment and we are trying to develop storage business on that. It’s long-short, it’s a challenging task. We have some interesting dialogs with potential customers. I don’t know if and when it will materialize. But the only thing I know is that if we’re able to develop it, it’s not going to be a significant part of Avance Gas. And if we’re not able to develop the business, it will not have a significant impact on Avance Gas. So this is to offer our customers A to C service rather than A to B, with combing storage, contract of the freight rather than just have a seaway and a ship trading spot. But we prefer to keep, as I said earlier, we prefer to keep our ships primarily priced on the floating price.
It’s interesting business albeit small.
[Operator Instructions] Our next question comes from the line of [Nicolas Dewitt] of DNB Markets.
We see that in order for you to pay the third quarter dividend you announced you have to increase leverage in the quarter by taking use of the $50 million credit lower and at the same time if you look on a year-over-year basis, your working capital is up 3X. How much emphasize should we put on the deleverage aspects of your dividend policy and how much should we [put weigh] on taking advantage of opportunities as asset value start falling?
Peder Carl Gram Simonsen
This is 100% taking opportunities, looking at opportunities. The working capital of Avance Gas is, of course, more money is into the receivables with a larger fleet, you have to remember that the growth in our fleet from 2015 to 2016 is 42%. So a combination of larger fleet, a lot of long-haul voyages. As I said, the US Gulf-Far East voyage is a three-month voyage. So the receivables are increasing. But the working capital of Avance Gas is strong and good, and the decision made by the Board yesterday is to open up for opportunities and our flexibility.
[Operator Instructions] Our next question comes from the line of Mitchell Glynn of CVC.
Just for a moment on working capital and receivables comment, receivables upfront in your top line, your top line is growing significantly. Through next year now we’ve seen vessels all ordered. How much more of a working capital drain should we see on the business before it normalizes out? Are we thinking $5 million or $25 million? That’d be my first question, please.
Peder Carl Gram Simonsen
I think with a fleet of 14 ships, the receivables that we see by year-end slightly reduced would be a normalized receivables for the company. That is a combination of increased long-haul voyages from the US and also offset by a decrease in [indiscernible] receivables and it’s also very much linked to obviously the rate levels that we’re going to see. So we will likely see some increase in the receivables going into the summer months. But we have, in general, built up the normalized level in terms of having the fleet fully delivered.
Let me just remind you that in the VLGC space, the freight is paid up on this charge. So accounting wise, our voyages are starting from the previous discharged port and then balanced to the low port and go back to the discharge port. And only when she arrives in discharged port, the freight is payable. So that’s why you will see receivables increasing the course of longer-haul voyages.
Can I ask maintenance spend on the vessels, does that come through the CapEx line or does that go through OpEx, just thinking about how to think about CapEx going forward, now we’ve got the big newbuild spend out of the way?
Peder Carl Gram Simonsen
You have daily maintenance is on OpEx and if there is any big work it will be on a separate CapEx line. The daily maintenance on newbuildings are very low, so in a company with a fleet structure like we have, the OpEx will be lower because more than 50% of the fleet is very new. And as this fleet is aging, the OpEx will increase slightly. But the policy of Avance Gas is to take the daily maintenance all the time. It is possible to have a lower OpEx and to delay maintenance until later, we think it’s the best for the ships and best for maintaining the ships to do a proper maintenance from day one.
Are there any CapEx requirements for any big refurbs or refreshes you need on any of your older vessels this year?
Peder Carl Gram Simonsen
And then if I can just ask about potential dividend buyback, as you mentioned, you did one at the start of 2015 relatively small quantum, you ended up spending $12.8 million. Should we think that would be the kind of scale of share buyback that you may anticipate or given the fact that you do have a big cash balance, may you look to put more money to work, given the price to NAV is so depressed with the current prices?
Peder Carl Gram Simonsen
This is really for the Board to decide and it’s a bit difficult for me to have any comments on what the Board might do or not do. The only thing I can say is that the management is monitoring buyback on a daily basis and this is something which will be put on the agenda for the Board meeting and I can’t really say anything more than that.
Our next question comes from the line of [Donald] of Wells Fargo.
Just a quick question on the amortization schedule for 2016 and 2017, could you give sort of ballpark estimates for where that lies right now?
Peder Carl Gram Simonsen
We have repayment schedules for our [indiscernible] on average 14.5-year profiles. And obviously the deliveries of newbuildings will be [indiscernible] and so repayment of revolving credit facilitates. But I think you analyzed debt repayment is around $45 million.
[Operator Instructions] Actually it appears we have no further questions queued. I’d like to turn the call back to the speakers for any additional or closing remarks.
Peder Carl Gram Simonsen
Okay. Are there any questions from the audience?
Maybe you can say something about the end user demand [indiscernible]?
The question is about end user demand and we have a view that LPG is a supply driven product and our view is that except for the US all LPG produced will be put on the ships and sold. And the FOB price is the one which has to move in order to make the LPG attractive in the end user markets.
In the US, it’s slightly different because the production – there is domestic demand, there is possible to use LPG domestically in the US, but still the export in the US have sold their capacity on take or pay for close to 100% for 2016 and some contracts goes all the way into 2020.
So the contract holders of the terminal capacity will have to pay about $50, or some of them even more in cancellation fee if they don’t list the products. So there is a drive for lifting the product out of US Gulf. So we believe that [indiscernible] which is the price is US Gulf will react to competition and to make LPG overtime competitive into the Far East markets.
We’ve seen a huge growth in 2015 in China, that’s mainly driven by PDH plants, but it’s also surprisingly high driven by domestic use. We see a continued high growth in India and Indonesia, and also some of the other countries have in percentage high growth, but the volumes are quite small. So we do expect that volumes we’re talking about in 2016 will be easily placed into markets, mainly in the Far East and South America and some occasionally cargoes into Europe.
Europe is basically using cargoes as feedstock for petrochemical cracking. There are a very limited number of ports, we’re talking about five to seven ports, including Mediterranean. So the import into Europe is limited and it’s not expected to grow. Happy?
A follow-up question regarding the [indiscernible]?
P 66 has equity tons, so they produce their own tons. So I think it’s quite likely that they will export their volumes. They have invested significant amounts into their terminal. They have a fractionate there as well which is, as you might know, the capital CapEx of the fractionate is about $1 billion compared to the terminals as such which is just some few hundred million dollars. So I think that P 66 will make sure to use their facilities and to get additional cash flow from their production by selling LPG.
Peder Carl Gram Simonsen
We thank everyone for seeing us here at Nordea and for everyone calling in. See you soon.
Thank you. That would conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.
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