Avance Gas Holding Ltd. (OTCPK:AVACF) Q3 2018 Earnings Conference Call November 8, 2018 9:00 AM ET
Peder Simonsen - Chief Financial Officer
Christian Andersen - President
Marius Furuly - Carnegie
Lukas Daul - ABG
Petter Haugen - Kepler Cheuvreux
Wilhelm Flinder - Pareto
Thank you. Thank you for dialing in and coming to our Third Quarter 2018 Earnings Presentation. As usual, I will go through the financial highlights for the quarter and Christian will follow with the fleet update, market update and the summary and outlook.
If we move to Slide 4, our TCE rate for the quarter came in at $15,300 versus the adjusted spot index of just below $12,000 per day. We have, in accordance with the new revenue recognition standard implemented this year, there was quite a large adjustment compared to a discharge-to-discharge revenue recognition by almost $1,000. So if we look at the bottom table, we have also shown the discharge-to-discharge TCE achieved rate for the quarter. We had an OpEx of $7,500 per ship per day, which was down by almost $500 quarter-on-quarter largely due to lower storing and M&R expenses. The OpEx will fluctuate throughout the year. And the average OpEx year-to-date is around $7,600, which we aim to achieve for the full year average. Our A&G came in at just below $1.3 million, which corresponds to $990 per day which is in line with the previous quarter and what we expect for the full year. Our net loss was $8.8 million or $9 million compared to $19.2 million in the previous quarter.
If we look at our balance sheet, we have maintained a 42% equity ratio. We have a cash position and undrawn liquidity reserves of a total of $67.3 million. This was impacted by an increase in receivables, which led to the cash position coming in slightly below expectations. And our current liquidity position as of today is approximately $79 million, which includes undrawn reserves of $25 million.
Moving to Slide 5, we have a cash breakeven rate, which is calculated on three quarters’ actual cash breakeven and estimates for the full year at $7,900 and it is unchanged quarter-on-quarter. As you know, we have a 50% installment deferral on our bank loans. And by third quarter next year, we will commence normal amortization, which then will increase our cash breakeven up to $22,200 or $23,200 per day. We have a protection through our interest rate swaps, which we expect will benefit us going forward with the increase in interest rates we have seen lately, and they will mature in 2025. So this protects us from further cost increase. We have dry-docked one ship during the quarter. And we have an estimate of $1 million in remaining CapEx in the fourth quarter, where our last ship will be dry-docked of the 6 ships dry-docked for 2017 and 2018. We also expect some cost or some cash costs to slip into ‘19 relating to the dry-docking of Promise.
Moving to Slide 6, we have had an improvement in fleet utilization from 94% to 97% this quarter. The 3% of planned dry dock relates to the Providence, which was dry-docked in the quarter, and 1% unplanned off-hire, down from 2% in the previous quarter. Our TCE, as mentioned, was $15,200. If you adjust for waiting days, you can see that there’s only a slight difference as our utilization commercially was 99%. This compares to 88% in the previous quarter, where you can see the difference in the TCE when you adjust for the waiting days. We have had an increase in the spot utilization, as seen by the commercial utilization charts, from 40% to 55% in Q3.
I will then hand the word to Christian.
Thank you very much. I need the clicker as well. Thank you. We start with Page #7. And as for the previous quarters, we concentrate on spot market and spot market fixtures. We have actually had a couple of very short time charter voyages this quarter, also going into the fourth quarter, but based on the pricing and the term of the business, it’s calculated as spot.
We have had 7 spot loadings and 15 COA liftings in the third quarter this year. This one is not updated, so we will skip that one. And we have had 1 scheduled dry dock as Peder was mentioning. This was the 5-year period of dry dock and this is the 5th of the 6 ships which are planned for the period in dry dock this term. Our next dry dock program will start early 2020 when we are going to dock the Chinese-built ships. We have had 1 off-hire incident during the quarter and close to 11 days. Of the spot market loadings, we have had 8 liftings in the Middle East. We had 12 liftings in U.S. Gulf and we had 1 lifting in Australia and 1 lifting in West Coast America. The part of spot market fixtures in the U.S. Gulf is increasing. And that’s shown here by the number of loadings in the U.S. Still for us and for the part of the global fleet, most of the global fleet are discharging into the Far East. Of our loadings, we have had 17 discharges into the Far East. We have 1 ship discharging into Turkey and 3 ships discharging into Caribs and South America. No big change in the fleet or in number of employees.
If you look at Page #8, we’ve been calling 18 different countries during the quarter. And we have had 1,288 ship days during the quarter. The graph on this page is showing waiting time. And as some of you might recall, we had a terrible waiting in April and May with the more than 5 days per ship per month. This has come down dramatically. And since June, we have hardly had any waiting time at all. And this was also shown by the graph Peder was talking about.
Page #9 is showing the Middle East. Middle East, in number of tons, still the most important market. And if we look at the left hand graph, the three main exporters, Saudi, Emirates and Qatar, are pretty much on 3 years’ average. It’s worth mentioning that June was a bit down. However, it’s been recovered since June and back to normal again. If we look on the right hand side, this is also including Kuwait and Iran. And we can see that the graph is ending with a dip. And this is basically Iranian tons, also a bit down on Kuwait, which we can show, as seen more clearly, on Page #10. Left hand side is showing the different load countries and ports. We have split Saudi into two ports. This one Ras Tanura is in the Gulf and one is the Yanbu in the Red Sea.
Again, worth mentioning is Iran. The yellow or orange graph, it’s down. This is based on counting ships loading. And some people are claiming that Iran is still loading ships. And they say that these ships are turning off GPS. So they go in and load without making any trace and they turn on their computers again when they are out of Iranian waters. This is very difficult to get verified. And we can’t really see the tons anywhere. So in the more or less official statistics, Iran is falling, but it’s worth mentioning that it might still be – they might still be exporting tons we don’t see. On the right hand side, we compare number of liftings in the Middle East with the 2 previous years. And you can see that we are down from ‘16. In ‘16, we had crude cutbacks and LPG came down. However, this year is above last year and good news.
If we turn to the next page, it’s a bit the similar picture. Here, on the left hand side, we compare liftings through 3 years’ spread and the 3 years’ average. And in the U.S., we are much above previous years. You can see on the graph here, there is a small dip in June. We had the same in the Middle East. So this has had a bit of impact on the freight market recently. However, when we compare the summer liftings in the U.S. this year compared to previous years, U.S. have been maintaining export during the summer. And that’s been supporting freight for late summer and for the autumn. On the right-hand side, we can see the graph from exports in the U.S. started in ‘13. And this is positive and we expect this to continue.
If we turn to Page #12, we look at each terminal in U.S. Gulf and East Coast, Marcus Hook. It’s worth mentioning that it’s quite volatile over the year. This is, of course, a lot of different reasons. Some of the reasons are playing prices. Very often when you sell LPG, your sales price is decided on the loading dates. So when you have a ship loading towards end of the month, sometimes you will hurry up loading and get the current month’s pricing. Sometimes, you will delay loading a bit to get next month’s pricing. So that’s one of the reasons it’s volatile. Again, we can see that it’s enterprise, the biggest terminal in Houston, which has been the swing terminal. And the drop in June export is mainly because of enterprise. The interesting part to look at on this graph is the lower graph, the Marcus Hook. We have been talking about the Mariner East Pipeline 2 for quite some time. We have been – we started hoping this one will start to show some increased export already last year. It has been delayed. There’s been lot of problems. Now it’s up and running. And they have started to ramp up fuel down the pipeline. And we see that in October, Marcus Hook have high liftings. It’s the highest number of loadings in Marcus Hook ever. But it’s not a big increase because the average has been 2.5 to 3 cargoes. We do expect Marcus Hook to continue to ramp up exports. And as I have mentioned on a couple of occasions, the good thing about molecules arriving in Marcus Hook is that there is hardly any storage. So any ton going to Marcus Hook on the pipelines will end up on a ship pretty soon and be exported. Comparing number of liftings in U.S. Gulf on the right hand side, again, the red line is this year. It’s higher than the previous years. And again, it’s very obvious that the summer period this year has been much more active in the U.S. and supporting freight.
On Page 13, we’ve been on the thick line. We have put together all loadings of VLGCs globally, maybe except for Norway. It’s not the biggest impact anyway. So you can again see that with the combination of a bit lower export in the U.S. Gulf and a bit lower export in Middle East, June is down. The 2 dotted lines below is just showing each of the 2 main regions to compare. The interesting thing on this graph on Page 13 is that the past 2, 3 months is showing good export and the graph is showing on an upward trend.
I’ll just briefly mention on Page 14 the destinations from the U.S. this is, of course, extremely important. We are talking about ton-miles. And to remind you, to move 1 million tons on an annual basis from the Middle East to Far East, you need 3 ships. If you move 1 million tons on an annual basis from U.S. Gulf to Asia through Panama, you need 4.5 ships. And if you go via Cape, you need 6 ships. So the destinations in the U.S. is extremely important and certainly which route. We all remember a lot of discussions about Panama and Panama capacity. And I think all of us today have realized that there is hardly any bottlenecks in Panama. We are able to book slots. After we have started ballasting over the Pacific, we book slots in the auctions. And we don’t really see a lot of waiting time. So Panama has ample capacity to take VLGCs. And 60% of the U.S. tons are going to Asia by end – this is end of September. And what we have seen is that it’s February which have destroyed the percentage when you compare to last year. And for every month now, the past few months, we had an export to Asia between 66% and 68%. So we do expect that the part of Far East destinations from the U.S. is increasing.
Let’s talk about the supply side of ships. The global fleet by end of the quarter was 264 ships. By end of the quarter, 5 ships have been sold for recycling. Since the end of the quarter, one more has been sold for scrap. By end of quarter, there were 3 ships for delivery this year and another 37 ships bound for delivery the next 2 years. Since then, 2 more ships have been delivered. So we have now 1 more ship to go this year. The order book is just about 14% of existing fleet. And as we can see next year, we expect 23 ships delivered and 14 ships in 2020.
Going a bit more into details on Page 16, on the left lower side, you can see that the majority of the ships for delivery next year is coming in the second half. And we know that there will – you can say average, you need 20 to 30 days from taking delivery of a ship before the ship is load-ready. A bit depending on the competition on the freight market, it sometimes can be a bit challenging to get new ships conditioned. Other times, they will just take whatever they can. If we look at the upper left graph on Page 16, this is the historical scrapping. In ‘07 and ‘08, the scrapping was quite high to be in this market, 8 ships. The line is showing you the average annual freight rates based on the right-hand axis. And you can see the freight market in 2011 went from 30,000 and up to 82,000. In that period of course, no scrapping and then as we all of us remember, unfortunately, the market fell in ‘16 and scrapping started picking up again. We had 2 ships sold for scrap in ‘16 and then so far this year, as I said, we have 6 ships. Age is important when you are to take the decision. If we look at that right-hand side on this page, you can see that the average age of scrapping each year is a bit above 25 years. Actually, in ‘17, it was quite amazing to see that the average year of scrapping was more than 30 years. Interesting thing with this is, of course, that when we enter or when we come towards 2020, there will be a repricing of fuel. And the less fuel-efficient ships will have challenges to compete in the freight market. And based on the ships today, by 2020, 33 ships will be 25 years or older.
And if we go back to Page 15, you can see that next year, 23 ships are expected to be delivered. And the potential of ships leaving the freight market is more than 30. I don’t say and I don’t think that we will see scrapping of 33 ships. That’s not realistic. But we do think that an increasing number of ships will be scrapped in ‘19. And we do think that a lot of ships will disappear from the freight market either as a storage project or in specific trades where they are not competing with the global freight market. So we think that the fleet balance next year, although the order book might look a bit high, is going to be much, much, much more narrow. And this is, of course, good news for freight.
If we look at Page 17, I am going to say a bit of about fourth quarter. I think I already talked about Marcus Hook and this is very important. Marcus Hook is going to add more cargoes both in November and December. So Marcus Hook is going to support the freight market already this month and next month. We’ve seen stable exports from all the main areas in October when we compare to September. And if we think that the analysts saying that Iran is able to export cargoes behind the screen we actually had quite a nice increase into October from September. It is a bit difficult to understand why the spot market was a bit disappointing. And if you look at the lower left hand graph, you can see that from April 17 up to mid-October, the spot market in the Middle East increased by 142%. It came a bit off very end of October. And now we have had an increase since the April 17 year-to-date in the Middle East spot market of a bit more than 100%, so still a good increase. But the fall we had during 10 days in October, it’s a bit difficult to see. We think it’s a bit impacted on lower export in June. But I think also one very important thing is that the percentage of the spot market in October in the Middle East is down compared to the previous months.
And if you look at the right hand graph on Page 17, this is showing the U.S. Gulf dollar per ton market based on Japan. And there has been a fall in this market as well, but it’s much less than the Middle East market. So we think that the drop in the freight market in October is temporary. We are quite sure that with the increased tons in Marcus Hook U.S. Gulf, we will have support in the freight market. We have to date booked about 74% of the fourth quarter business. And our guidance for next quarter is well above cash breakeven. And right now, it looks like we will come in at somewhere between $20,000 and $21,000 per day. However, some of the business – some of the ships sailing are being priced as they sail. And with improved Baltic, we will – this estimate will go up. And we still have 25% of the business on fixed. And we are increasing our spot business in the Atlantic. So most of the ships we have open for the remaining part of fourth quarter will be open in U.S. Gulf and take advantage of today a slightly higher market – freight market in U.S. Gulf than in the Middle East.
I am going to say a couple of words about outlook as well. This is a lot of statistics on Page 18. If we compare Middle East to previous months – previous quarters and last year, it’s up, so Middle East LPG exports are up. And the same with U.S. Gulf, it’s up a lot comparing to the two previous quarters. And if we compare third quarter ‘18 to third quarter ‘17, the LPG exports in the U.S. Gulf is up 35%, it’s a huge increase. I have talked about East Mariner II pipeline. Most of the pipeline is new. Some parts of the pipeline, they had re-commissioned an old pipeline, which they will use temporarily until the new part is 100% completed, expected sometime mid-second half next year or early 2020. It’s not important. The current EM II pipeline has enough capacity to take all the molecules we need into Marcus Hook. And we do expect that when it’s up and running for full, we will have another six to eight cargoes per month out of Marcus Hook.
Some of you will remember that Enterprise, the biggest terminal in Houston, have announced that they will increase their capacity by 30% mid next year. Houston or Enterprise has a nameplate capacity somewhere between 27 and 30 cargoes per month. Increasing their nameplate capacity by 30% will give another up to 10 cargoes per month. We do see however, that Enterprise is not utilizing their terminal 100%. So if we use the same utilization on Enterprise next year with the added capacity, we expect Enterprise to have another 6 to 8 cargoes per month. So just with these two projects, we think that the U.S. will have around 15 cargoes per month additionally next year compared to this year. And with the 60%, 70% of the cargoes going to Far East, this is going to take away a lot of ship capacity. So the combination of these two increases and expected ships leaving the spot market, we are optimistic for freight already now, but certainly also next year.
There is LNG project in Darwin in Australia. Again, typical LNG has been delayed again and again and again. However, they loaded their first energy cargo around 20 October. And since that, they have loaded another two LNG cargoes. So Ichthys LNG is up and running, loading ships, sailing to Japan and China and they will have 1.2 million tons of LPG on an annual basis. What we have seen from other LNG linked LPG projects, the LPG is normally coming 4 months, 6 months maybe 8 months after the LNG. So we do think that Ichthys LNG will start ramping up their LPG export some time late first or second quarter next year. 24 cargoes – 26 cargoes is more than two cargoes per month in addition to the increase in the U.S. I am not going to repeat recycling or the two new ship orders we have seen lately done by Lexis for delivery late 2020.
I am going to open up for questions. I think we will start first locally. And there should be a microphone somewhere.
Q - Marius Furuly
Hello. Marius Furuly from Carnegie, my first question is on Mariner East II pipeline, is the stated 6 to 8 cargoes full capacity of the pipeline or is that the hybrid solution?
That’s the hybrid solution. And it’s based on expected utilization. So we think there is room for slightly more and we certainly think there is room for slightly more when they have the full capacity. But this is the short-term. What we have learned from the U.S. export is that oil terminals seems to be operating below nameplate capacity. So this is a realistic number of new cargoes for Marcus Hook.
And can you quantify that full capacity?
No, I can’t.
My second question is can you elaborate something on Far Eastern imports, what’s the share between the major importers right now?
I don’t really have that on the top of my head. But I think what is interesting to see is that China is now completely out of importers from the U.S. So China has shifted all their volumes from U.S. to the Middle East. They still are importing Iranian tons. And they also swap with the other clients. And particularly, the Koreans have been active in taking U.S. molecules and giving them Middle East molecules. So we don’t really see a big change in the market in the Far East. So when you compare the two big loading areas, the U.S. and Middle East, there is growth in all the South areas in the Far East and there is not so much growth in North. And this goes very well into the use of LPG in the Northern part, they use it for industry. And in the Southern part, it’s more domestic. So the growth market in Asia is very much supported on domestic, except for PDH plants. And China is about to launch a new set of FIDs, final investment decisions, for PDH plants. And we do expect the next wave of PDH demand in China will come into the market late 2021, early 2022.
Not in the short-term. We are still hoping for Angola LNG to be able to produce LNG sustainable. And we do expect that once Angola LNG is producing, there will be more LPG out of Angola. But this is something we have been waiting for 5 years. And it’s a bit the same with Nigeria. We are still waiting for more LPG to come out of Train 6 of Nigeria LNG. It can come tomorrow, but it’s a bit difficult to bet on it because we have been waiting some time to see these molecules.
Thank you. Lukas Daul from ABG, you mentioned in your report that you are evaluating different solutions for IMO 2020 sort of thinking is and given that we are 13 months away, what kind of solutions could you put in place in the course of that period?
Yes. Of course we are – we do have three options. One is LPG conversion that we are talking about the eight Chinese ships, the wind class. One option is LPG conversion, one option is scrubber and one option is to go for compliant fuel. We are working very hard on understanding the timeline for LPG conversion, are we able to convert these ships at the timing, where we can get most out of the 2020 spreads, we don’t know. I am just out of anything discussing this. So we are getting very closer to the decision time. Another option is scrubber. We are still able to get scrubbers to the eight ships delivered late ‘19, early ‘20 if we want. So this is up to the Board to decide. And we do expect that the decision will be taken pretty soon. Going for compliant fuel is also absolute an alternative. And we are pretty sure that with the Baltic LPG1 as the only official quoted freight in LPG, we think that the Baltic will use marine diesel oil as input for bunkers from 2020. And once compliant fuel are available gradually shift into compliant fuel. Listening to the oil companies, we think that compliant fuel will be available in the big bunkering areas where we go. We mainly bunker our ships in Singapore and in the Middle East, to a certain extent, also up in Japan and in Korea. And with our reading of what we have from the oil majors is that we will be able to source compliant fuel at our bunkering places.
Okay. So whatever you do, if you do anything, you will only do it to the Chinese vessels?
The remaining six that you have in place?
Okay. Thank you.
Petter Haugen from Kepler Cheuvreux. A quick follow-up on that one, if you go for the scrubber option, how would you then finance those scrubbers?
Finance are available through different – maybe you can talk on this, Peder?
Well, I think that we have access to capital from several areas. We have a strong bank group that supports us and we have strong shareholders that support us. And we also have Japanese and Chinese markets, where financing for such projects is available. So I think that this will be financed fully without any impact on our cash position and liquidity position.
I think what we can say is that the scrubbers or whatever solution we might end up with can be financed in a combination with borrowing money from agencies financing just the solution, combined with different ways to free up cash for the equity part.
A quick follow-up because recently – well, recently since Q2, the freight rates has improved while vessel values and lifting prices are quoted at more or less stable prices, where would you put a 5 year old vessel now and what extent is there an interest in the secondhand market for vessels?
I think in general you can say that there is hardly any interest for secondhand ships in this market. This market is so small. But for us or for anyone really, there is very few options for an outright sale of ships. There are a lot of appetite for different lease structures. And you can probably, as I think Dorian has shown put an age of ship into those structures and there are appetites of outright sale, secondhand sales in this market is extremely limited.
Just one final question in terms of your fixtures, you have a division between spot and COA and Middle East and U.S., is this so that you predominantly lift from the COA portfolio from the U.S. or is that just the mix of everything?
It’s a mix of everything. And the number of spot liftings in the U.S. is increasing a lot already this quarter and it has been the whole year. But it’s increasing a lot now. And as I have said, most of the available ships we have open for the remaining part of fourth quarter are positioned for loading in the U.S.
But your COA portfolio sources from both Middle East and the U.S.?
Wilhelm Flinder from Pareto, one quick question on the Iranian volumes, there is eight countries I think have received waivers to able to import some crude volumes, how do you see this impacting the LPG let’s say?
We are still trying to find out if they also are allowed to import LPG. And so far we have not got that confirmed. But what our conclusion is that the sanctions on Iran is going to be softer than we expected some time ago. And it’s going to take longer time to reinforce it. So we think there will be more export out of Iran. I think today, when you ask me today, I think there will be more export out of Iran than if you asked me three weeks or four weeks ago. So we do expect that there will be waivers for LPG as well. We saw that last time there were sanctions in Iran. There were waivers on LPG for quite a much longer time than for crude. So it’s not unrealistic that, that will happen again. And I also think that we see a lot of political movements in both in Europe and in the Far East to question the U.S. sanctions. So I think that we will see that some countries and some companies will be able to lift Iranian LPG tons even if there are U.S. sanctions in force.
Any more questions from the audience? Okay, I think we will go for the callers.
There are no questions in the phone queue at this time.
Okay. Then thank you for coming to the presentation.
Thank you very much.