Avance Gas Holding (AVACF) Q4 2016 Results - Earnings Call Transcript

| About: Avance Gas (AVACF)

Avance Gas Holding Ltd. (OTCPK:AVACF) Q4 2016 Earnings Conference Call February 14, 2017 9:00 AM ET

Executives

Peder Carl Gram Simonsen - Chief Financial Officer

Christian Andersen - President

Analysts

Operator

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

Peder Carl Gram Simonsen

Thank you. And thank you for those dialing in and thank you for showing up here today for the fourth quarter earnings release.

I will start off by going through the highlights financials for the quarter and Christian will cover the market and fleets update as well as the summary and outlook.

If we move to slide 4, as reported the TCE rates for the quarter was $9,600 slightly down from the previous quarter of just north of $10,000 per day.

We recorded a net loss of $14 million compared to a net loss of $13.5 million previous quarter, this excludes the impairment charge of $47.2 million in Q3.

We have in the quarter also as previously announced comprehensively refinanced our company including investment, installment referrals, waivers of key financial covenants and also raising approximately $60 million in new equity.

Our year-end cash position is $149.1 million compared to $88 million in the end of previous quarter and our cash break even with the revised installment schedule is approximately $17,500/per day.

If we then move to slide 5, the P&L the TCE earnings were approximately $12 million for the quarter, slightly down. Our operating expenses slightly up from the previous quarter representing a daily rate of $7,700 compared to the full year OpEx of $7,800.

Our G&A expenses were down mainly reflecting reducing personnel cost and also as a result of cost efficiency measures taken throughout the year, and also year on adjustments.

Our non-operating expenses were $5 million slightly up due to increased LIBOR and net loss as reported $14 million for the quarter.

Moving to the balance sheet on slide 6, the cash as mentioned that’s approximately $150 million, which is the result of the proceeds from the equity issue at $58.7 and the sale of Gaea which was closed in December this year -- last year.

We saw that the receivables decreased mainly due to the receipt of $4.5 million in the demurrage payments and otherwise working capital was fairly stable from quarter-to-quarter.

The interest bearing debt followed the normal schedule repayment which was 100% scheduled for this quarter and then we will commence our reduced installment schedule the following quarter in Q1.

The shareholders equity was increased by the share issue and it’s at $460 million in the quarter.

Looking at the cash flow on page 7, and that’s cash flow from operating activities was $0.5 million which compared to $17.1 million in Q3 where we saw working capital releasing cash into the company.

And the operating cash flow included the $4.5 million in demurrage, which compared to the $14.6 million we received during the third quarter.

The sale of Gaea affected our investment cash flow with $13.4 million and the finance activities were positive with $47.7 million which gave us an increase in cash flow of $61 million during the fourth quarter.

I’ll then give the floor to Christian.

Christian Andersen

Thank you very much. It’s a bit difficult to use a lot of time on this, so we are moving quite quick. It’s interesting to see the spot market in the fourth quarter. If you look at page number 9, we came in at very quite low levels and then we saw an improvement as we came into November and throughout November it fell a bit before it started going up again in December.

And fleet utilization has been very high, both in the fourth quarter and in the year. If we look at the fourth quarter, on the right graph you can see that we had approximately one day waiting per shift for these three months.

All-in-all, we came in at 2016 with about two days per ship waiting time per month. This was mainly due to a ship sitting idle in January, except for January the waiting time has been very low in 2016.

If you look at the left hand graph on page 9, you can see there the different dots representing our fixtures, and it’s nice to see that we are mainly fixing above the index. There are a couple of dots on the left bottom line. This is fixtures on floating rates. So it will have a certainly have a positive income, but it doesn’t necessarily reflect the index at the time of fixtures.

We did basically non fixtures to India during 2016. This is basically that Indians have been covering their -- needs in times charter mainly and that this is [very much attractive] in the spot market in 2016 compared to 2015.

India has been a bit more active as we come into 2017. If we turn to page number 10, on the left hand graph is the export from the Middle East. This is all LPG exported from the Middle East and basically all these cargoes are listed on VLGCs.

All-in-all Middle East export of 2016 ended at about 35 million tonnes, Qatar, Abu Dhabi is the biggest ones, followed by Saudi Arabia, Kuwait and Iran.

It’s interesting to see that Iran reached the highest level of exports in 2016 since we started this company in 2007. We do expect Middle East LPG production and export to come down this year, mainly because of the OpEx cuts in crude oil production and it’s mainly Saudi Arabia and Kuwait producing LPG from crude oil. But we do expect that the Middle East will come down towards 31, 32 million tonnes in 2017.

If you look at the right hand graph on page number 10, this is U.S. exports and when you compare the two graphs, it might look like its similar levels, but if you look at the axis on the graph you can see that the export in U.S. has been much less than Middle East.

21 million tonnes was the export from U.S. Gulf and U.S. East Coast during 2016. You can see from the graph here that the peak was in May and as we are going through the summer, the export from U.S. Gulf was less.

If we analyze this a bit further on page 11 on the left hand graph this is a number of VLGCs cargoes, the green line is total U.S. Gulf, U.S. East Coast and the different terminals are in different colors.

And again you can see from this graph that May had the highest number of cargoes with 47 cargoes. And as we went through the summer, the number of cargoes fell – fall and it’s [down] again in September and from September number of cargoes again started to improve. And in December, we listed not we, but there was exported 45 VLGCs cargo in December.

And this is very important, because this is a big change in pattern compared to 2015. In 2015 and in previous years, most of the U.S. exports were sold on take or pay contracts, and most of these contracts were swapped into other price elements. So the list is of the owners of capacity, listed the cargo even if they didn’t make money, because on the fiscal terms because they had [paper] positions and made money or didn’t lose us lot as it could look like.

In 2016, this has been changing; it’s less contracts on fixed price volumes. So we see that the traders, our customers are more dependent on the FOB/CIF differential to be open to list the last few cargoes.

So what I am saying is that in a market where you have the spread between the FOB prices in U.S. Gulf and the CIF prices in Far East, when the spread is open there would be a lot more activity, and we will see the last few additional cargoes being lifted. This happened in fourth quarter and we saw the activity, as I said towards end of 2016 increase. Of course the spread was opening and people saw the lifting more tones, more cargoes. This continued into 2017 and activity in January was also quite interesting.

So, I'm saying that in order to have a full cargo capacity export of U.S. Gulf we are more dependent on the FOB/CIF differential, the spread to be open. It's very interesting to see on the on the right hand graph on page number 10 that the export to the Far East from U.S. is very high and it's continuing at that level.

Last year, 52% of the 21 million tons went from U.S. to Far East. Most of this is using Panama, but we do expect as we come into spring and early summer that we will see more of these cargoes going via Cape. The product market is normally more in Contango when we come to the spring market and the trade is a more interested to use the long route rather than short route to play a bit Contango in the product market. We also see congestion in Panama and we see there are more difficult to get let’s say, spot slots in Panama which is also going to put some of the cargoes go in Cape, and that's good news for the ship-owners because this take away shipping capacity.

If we go back to page number eight, this is the flip side of the coin. This is [order-book]. And as you can remember, the orders in the 2014 -- the orders in 2015 and 2016 was record high. And also this year we have 24 ships for delivery. Right now, three of these ships are delivered and there are another 24 to come. The majority as you can see on right hand side of page number eight, the majority of these ships are expected to come second quarter. We are expecting a bit slippage from the Chinese yards, but not a lot. So, we do expect that the majority of the 27 ships will hit waters this year.

If we look at export capacity, as I mentioned, we do expect that Middle East will reduce export this year and we saw last November, Phillips 66 as the last export terminal in U.S. Gulf starting exporting, so full year capacity in 2007 is higher than full year capacity in the 2016. We estimate that the capacity this year is somewhere between 33 million and 35 million tons from U.S. Gulf. So with the FOB/CIF differential wide open and with the volumes being cut down in Middle East there is upside for a higher export from U.S. in 2017 compared to 2016.

Apparently, there are some technical problems there. The summary on page number 12, the freight market in 2016 has been a big disappointment and although we saw a small improvement towards end of the year, it was not very much to be happy all and even we do have record exports out of the U.S. Gulf, we do expect to see higher U.S. Gulf exports this year. We do expect to see more tons going -- more fiscal tons going from U.S. to the Far East, but we do have to see the pricing window being open to lift these additional cargoes.

Summary for 2017 is that we do expect this to be a challenging year. We think it's going to be difficult to reach cash breakeven, so we think we think 2017 is difficult. However, there is upside, and the upside is that we can't get out the last additional cargoes from the U.S. which will take away cargo capacity, and we can see the market rebound in 2017, but we are realistic and a bit careful to promise 2017 as a nice year.

The good news in this market is of course that they owe in 2017, there’s hardly any ships for order. Right now, there are four ships for order in 2018. So once we get the 2017 order book delivered and absorbed into the market there’s good the outlook for 2018 and 2019. We’ve seen one order -- and we haven't seen any orders recently, we’ve seen one Letter of Intent from an Indian ship-owner for six new buildings. It remains to be seen if this is materialized and when the delivery will be. We don’t think there would be a lot of more 2018 deliveries added to the order book, and we don’t really expect to see a lot 2019 orders either. So the outlook past 2017 is very good.

As Peter was mentioning, we are in a very strong financial position with the agreement we did with a very good bank group. We’ve reduced our cash back even down to 17.5 and the year end we had a cash position of close to $150 million. We are in a good position to live it through difficult markets if it's going to be extended there in 2017. And if not we are in a position to cancel our bank deal and go back to where we were and looking at interesting opportunities in the VLGC market.

Peder Carl Gram Simonsen

We’ll have the questions from the audience here, first.

Question-and-Answer Session

Q - Unidentified Analyst

[Indiscernible].

Christian Andersen

That’s depending really. It's for our Board to decide. Of course when we will approach the bank to cancel our bank deal, I think it has more to do with outlook for 2018 than what is happening in 2017. We are prepared for 2017 and if the market is going back to a normal freight market from let’s say late 2017 or early 2018 it's quite likely that we will address that issue pretty soon.

On the other hand, if any interesting opportunities arises in the market before that we will certainly [fit them] and with our supporting shareholders and with our supporting bank group we will look up those opportunities.

Unidentified Analyst

[Indiscernible].

Peder Carl Gram Simonsen

No. It’s normal when you extend the amortization profiles. You have restrictions on investments on new debt and so on.

Unidentified Analyst

[Indiscernible].

Christian Andersen

It's very difficult to get these cancellations concerned, so there are some rumors that there are cancellations in February, but we will not really know until we see the confirmed liftings and sometimes what you see when the contract nominations are cancelled, the terminal operator would take his -- take a pay fee and then he will mark the cargo, so the windows in the spot market at the lower fees. Sometimes we see that even if there is a cancellation the windows are used and export is done.

When we looked at the nominations in December it look like the nominations were about 50 Cargoes, when we got the final lifting program it turned out to be 45. So this is very difficult to see really before it happens.

Unidentified Analyst

[Indiscernible]

Christian Andersen

I think the main reason for the arb being closed is that the month value, the spot price in the U.S. is too high. So, when the arb is closed and it's too much local domestic demand in the U.S. to support export. It's very difficult to find the model which can predict the arb, you can follow the forward market on value and on Far East index on CP, but it doesn't really give you a robust model. So, we are not very good at estimating the liftings going forward.

Unidentified Analyst

[Indiscernible]

Christian Andersen

It's very dynamic. As soon as the arb is opening up the traders are on the phone immediately trying to buy cargoes and trying to nominate ships into the windows. This is happening very fast.

Unidentified Analyst

[Indiscernible].

Christian Andersen

I don't know. I'm very uncertain, because the pattern we saw this winter was that was a very active freight market in the winter and it turn slightly strong during the winter. Some people are suggesting that we might go back to the old days when the winter market was a strong freight market. If the contango is very strong this spring and summer, it's quite likely that we might see a stronger freight market in the summer, but some people are divided, some people believe really that the freight the strongest in the winter and some believe that it’s -- as it has been the last couple years with a strong summer market.

Unidentified Analyst

[Indiscernible]

Christian Andersen

We are always considering their charting strategy and we are always looking at what is available on fixed price and what is available on floating price, so this is the fit that absolutely something we are discussing.

Unidentified Analyst

[Indiscernible].

Christian Andersen

No. Not really.

Peder Carl Gram Simonsen

There’s no more questions from the audience. We will take questions from dialers in.

Operator

[Operator Instructions] We’ll take our first question from Mike Webber from Wells Fargo. Please go ahead.

Unidentified Analyst

Hey, good afternoon guys. This is Donald [Indiscernible] stepping in for Mike. How are you?

Christian Andersen

Hello, how are you?

Unidentified Analyst

I’m doing well. Thanks. So, my first question is on asset values. I guess over the summer we saw at least based on BWs implied acquisition of more VLGC resell asset values in the mid to high $50 million level. Where is your sense on where VLCG resell asset values are currently given the rise in the spot market. We haven’t seen a print, but are you seeing any [sort of bid] or asset liquidity there?

Peder Carl Gram Simonsen

No not really. There are not any, to my knowledge there are not any firm or willing seller or willing buyer and that’s one of the disadvantages with this little segment in the industry is that there are hardly any second hand transactions. We see -- so normally we are valuing that the second hand value of ships based on new building price, we believe that the new building price of VLGC in Korea today is in the region of $67 million.

Unidentified Analyst

Okay. Thank you, that’s helpful. And my next question just on the spot market. Generally speaking and what’s the share of tonnage positioning in the Middle East versus the U.S.? Have you seen the bulk of public owners and the bulk of owners who are now positioning off the U.S. Gulf based on renting exports, is that market 50:50 or what’s your view of that moving forward?

Peder Carl Gram Simonsen

The VLGC market is a bit different from most of the other markets and the owners are very rarely paying for the positioning from Pacific to Atlantic or vice versa. So basically the spot market is covered by ships open in the Far East. And normally a ship which is unemployed will anchor up somewhere close to Japan which is the deviation point between Far East and U.S. Gulf using Panama, and you will sit there until you have a cargo and it will tell you which direction to go.

However, there are some few ships working out off the Atlantic Basin and as the U.S. export is growing and as we expect a bit more let’s say opportunistic export of the U.S. we do believe that the Atlantic based positions will increase. But right now it’s basically more ships compared to the growing fleet that were above 250 ships.

Unidentified Analyst

Okay. Thank you for that market color. That’s it from me.

Operator

[Operator Instructions] It appears there are no questions signaled at this time over the phone. I’d like to turn the conference back to you for any additional or closing remarks.

Christian Andersen

Okay. I think we’ll just thank you for coming.

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