Avance Gas Holding's (AVACF) Management on Q4 2018 Results - Earnings Call Transcript

Avance Gas Holding Ltd (OTCPK:AVACF) Q4 2018 Earnings Conference Call February 7, 2019 9:00 AM ET

Company Participants

Peder Simonsen – Chief Financial Officer

Christian Andersen – President

Conference Call Participants

Lukas Daul – ABG

Marius Furuly – Carnegie

Wilhelm Flinder – Pareto

Peder Simonsen

Thank you for coming to our presentation, and thank you for also dialing in. We will start, as usual, by going through the financials, which I will do, and then Christian will take over and go through the fleet and market update and outlook.

If you move to Slide 4, our TCE rate per day came in at $21,300, which compares to the adjusted spot index for the quarter at $17,666. We had maintained our low A&G, as per usual, and we had an OpEx of just above $8,000, which is an increase of about $600 per day, which relates to non-recurring items related to the collision of Passat that we recorded in the first quarter, so normalized OpEx was 7,000 – just below $7,600. Our full year OpEx was just below $7,800.

We have had a strong operating cash flow development, which resulted in a positive $13 million inflow of operating cash flow compared to negative $7 million in the previous quarter. This is largely due to higher rates, but also the timing of freight payments, which mostly relates to a negative development from the previous quarter rather than this quarter where we were more normal and balanced in terms of operating cash flow.

We have maintained a strong balance sheet of around 42% equity ratio and a liquidity of – at today’s date of around $80 million. This includes a drawdown subsequent to quarter-end of $25 million on our revolving credit facilities. We announced today that we are likely to install scrubbers on the Mistral and Monsoon, which are the two first of the wind-class ships that are due for docking late this year in Q4.

Moving to Slide 5. If we look at our cash breakeven rates, we had a cash breakeven adjusted for the one-off OpEx element in Q4 of – or for the full year of 2018 at $17,900. The estimate for first half 2019 is $18,200, and the increase is largely due to higher average debt outstanding and LIBOR forward curve adjustments. The estimate on cash breakeven that we have for the full year is $20,000, just above $20,000 for the full year. And this assumes the current financing structure that we have in place.

We have initiated the refinancing of our outstanding debt, which we expect to conclude within the second quarter. And we do not expect any material increase in our cash breakeven that we have in place today, meaning, the normalized cash breakeven of approximately $22,500 per day. As you can see, we have two ships due for dry-dock, and between today and then, we don’t have any CapEx obligations until the fourth quarter this year.

If you look at next Slide 6, our operating performance, we – looks very much like previous quarter. Our commercial utilization have been split between COAs and spots, we incurred a very high utilization of 99%, slightly higher COA coverage than spot this quarter than previous quarter. And the fleet utilization, we had to promise dry-docking this quarter. And apart from that, hardly any off-hire compared to a little hire last quarter. Our full year TCE came in around $14,350 compared to the $21,000 we had this quarter and $15,300 last quarter.

I’ll then give the word to Christian.

Christian Andersen

Thank you very much. Let’s turn to Page number 7. This is a picture of the business we’ve done in the fourth quarter. We’ve done a couple of very short time charters to time charter voyages of about 90 days. This is business out of U.S. Gulf, so this is reflecting a volume trip for each TCE from U.S. Gulf to Asia and then back again. We had 12 COA loadings during fourth quarter. We had eight spot loadings during the fourth quarter. The majority of the spot loadings have been U.S. Gulf and thus, also, U.S. Gulf priced.

The waiting days in the fourth quarter have been very, very low. We have an average of 0.34 days per ship per month, which is as close to nothing as you can get. Peder has been mentioning, we dry-docked one ship, took about 28 days, including the positioning. We had two minor – we had four minor off-hire. All together at three days. So this is just basically a couple of hires here and there to do some minor work on the ships.

If we look at the loadings, we have loaded five cargoes in the Middle East, we have loaded 13 cargoes in U.S. Gulf, and we had four other loadings. This is basically Ferndale on the West Coast of U.S. and this is also Mediterranean in Algeria. The majority of our ships are still going to Far East with the cargoes. We have 11 discharges into the Far East. Well, we had more discharges, but 11 voyages ending up in the Far East. Quite normally, these ships discharge two to four different ports on each voyage. We had five destinations, five voyages going to Europe, and we had three voyages to South America and Caribs.

All in all, we’ve been to 17 countries over the 1,256 shipping days we had during the quarter. And if we looked on Page number 8, on the right-hand graph, you can see that the waiting time last year came early second quarter and both first quarter and the second half of the year, we had very good utilization of the fleet.

Let’s move a bit to the markets. And also, in 2018, the Middle East has been the biggest market for VLGCs. On Page number 9, we have changed the left-hand graph slightly this time compared to previous presentations by including also Kuwait and Iran. So the graph on the left-hand side is now including all products in the Middle East. And on the right-hand side, it has always been left. So it’s just continuing the same. Looking at the left-hand graph, you can see that the Middle East volumes are a bit down compared to three years’ average. And especially during the summer and early part of last year, it was down compared to three years’ liftings as well.

If we turn to Page 10, we can see a bit more on the specific number of loadings. The orange graph on the left-hand side of the page is showing us that Iran, as expected, has loaded much less after the sanctions came. There are still rumors that some Iranian cargoes are exported without the system seeing it. So we can’t confirm that, but that’s what shipbrokers tell us. But this is more the official numbers, and it’s interesting to see that the two big countries in the Middle East, Qatar and the Emirates, are holding out at high exports.

If we are comparing 2018, on the right-hand side, to the two previous years, we can see that last year was pretty much close to 2017, which is down from 2016. So 2016 LPG export in the Middle East was higher than what we saw last year.

But, again, it’s the U.S. we are talking about. And moving to Page 11, on the left-hand side, you can see that the liftings last year were, except for first quarter, above the three year’s high. So there is an increased export from U.S., and you can also see that on the right-hand side where the graph is continuing to grow. We saw that during fourth quarter last year, the export from U.S. Gulf – U.S. East Coast averaged out a bit, and the graph came a bit more flat than it has done in the previous years.

If we turn to Page 12 and look at the different terminals, we can see that Marcus Hook on East Coast is still only exporting one to three cargoes per month. Enterprise is, as we know, the absolutely biggest terminal in U.S. Gulf, and almost as big as the three other U.S. Gulf terminals together. It’s interesting to see that the volatility of the Enterprise terminal is a bit higher than the three other terminals, which is quite normal with the size taking into consideration.

If we look on the right-hand side on Page 12, you can see the red graph is showing us that last year, we did have a good support for export during the summer, which we haven’t seen the two previous years, and we do hope and we think that what we saw last year with the LPG export maintained during the summer and even growing is something we are going to see this year as well.

On Page 13, I’ve included a graph showing the global VLGC liftings. So it’s – of course, it’s U.S. Gulf and the Middle East being the two main sources for LPG, but we do load LPG also in Norway. There are some loadings in Algeria. We are talking about Australia. We are also talking about West Coast Africa and West Coast U.S. So about 120 cargoes are loaded from U.S. Gulf and from the Middle East, expected now in January, and another 22, 23 cargoes are lifted worldwide out of these two areas.

Maybe the most interesting part of this slide is that the blue line and the green line are crossing. So this is the first time ever that we see denominations of cargoes in the U.S. are at the same amount as the Middle East. Two reasons: One is that nominations in the U.S. Gulf is much higher than we have seen for some time; and that export from the Middle East in January is lower than it has been. 60 cargoes are nominated out of U.S. Gulf in January. We do expect this will come down a bit – well, nominations won’t come down, but actual liftings will come down, and we do expect that when we get the final figures, we think that there will be 52 or 53 cargoes loaded in the U.S. Gulf, U.S. East Coast. But this is still quite a high number.

The LPG continues to flow to the Far East from U.S. This is, of course, the most important driver for the market, and looking at the right-hand graph on Page 14, you can see that the percentage of U.S. cargoes going to Far East is 61%. This is basically the same amount of cargoes as 66% in 2017. So from 2017 to 2018, there has been hardly any increase in the LPG import to Asia from U.S. You might remember that in February, the exports from U.S. Gulf were lower and also the portion of exports to Asia were pretty low, down to 50%, and this is the main reason that the build up of 2018 has been lower than expected, we expected to come in at 63%, 64%.

Moving over to the fleet. By year-end last year, we had 268 ships on the water. five ships had been scrapped during the year. Actually, six ships were scrapped or six ships were sold for recycling during the year. But much to everybody’s surprise, one of these ships were resold into trading again and was taken into dry-dock. And so the final conclusion for recycling last year were five ships.

The order book for this year looks slightly better than last year. We had 20 ships or maybe 21 ships delivered last year – excuse me, we had 11 ships delivered last year, and expectations for this year are 18. But the shipbrokers are still a bit differing between delivery dates of the ships. So some brokers suggest that there will be less ships this year and slightly more next year, remains to be seen.

What is interesting to see is there has been hardly any activity for new buildings lately, we had one confirmed new building last year and there is also one more new building which have been placed in January this year, which is still to be fine, but I’m pretty sure this one will be confirmed as well. So order book for 2021 is now going to be one ship.

I talked a bit about scrapping. Page 16 is taking this a bit more into detail. As you can see in the good markets between 2012 and 2016, there was no scrapping whatsoever. And since then, we had a bit more scrapping, but it’s still pretty low. So we do hope to see more ships being recycled. On the right-hand side here, you can see the average age of the scrapping. Last year, the average age for ship scrap were 30 years, and we like to think that the lifetime of a ship is 25 years, but you can see, in the last 10 years, there have not been any ship – or the average ship age has been more than 25 years.

If we looked at the lower graph here on Page 16, you can see that there are about 30 ships being 25 years or older as we come into next year. Most of these ships are 75,000 and 78,000 cubic meters. There was slightly smaller than today’s, let’s say, average highs of 83,000, 84,000 and even 85,000 cubic meters. And of course, the consumption on these ships are pretty high so it’s unlikely that these ships will continue to compete in the freight market.

We also are pretty sure that these ships will be too old to have the scrubber installment. An average scrubber installment on a ship during a scheduled dry-dock is about $3 million in investment. So I’m going to summarize to remind you what I said. U.S. nominations for January are very high, and still, if that slips a bit, and we have 52, 53 lifting as we expect. This is higher than the average of the fourth quarter.

The interesting thing is that this is not including Marcus Hook expansion. As you will remember, Marcus Hook pipeline, the ME II pipeline, was announced completed 29th of December last year, and this pipeline is now ready to take LPG down to the terminal of Marcus Hook. Marcus Hook has a limited storage capacity, so the volumes coming to Marcus Hook will be quite quickly put onto the ship and exported. And we do expect that this pipeline will add another six to eight cargoes to Marcus Hook, and this might happen already in February, March.

There are two LNG projects in Australia started and – or during fourth quarter last year. This is – each is LNG having a bit more than two cargoes per month, and this is also Prelude at the big Shell FLNG, which is having slightly less than two cargoes per month. So we have added four more cargoes from LNG projects in Australia this year. We all remember the Enterprise announcement that they plan to increase their capacity by 30% by midyear. This will increase the capacity by about 10 cargoes per month from Houston.

I did talk about ordering new ships, quite limited. I was quite happy to read in the newspaper in January about Qatar’s intention to build another 60 LNG carriers to meet their needs for export of LNG. As you know, there are really only two big shipyards in the world building VLGCs, Daewoo and Hyundai in Korea, and this is also two of the most important yards for LNG carriers. So if Qatar continues with their huge LNG project, both Daewoo and Hyundai are likely to be tied up in LNG business. And we think their interest to do low-cost VLGC rebuildings will be less. So we hope that the ordering on new VLGCs will continue to be limited going forward.

And I’m pretty sure as I said that most of these 29 ships getting 25 years next year will disappear from competitive freight, so I don’t expect all of them to be scraps but there are other projects which can employ these ships. So I’d like to repeat, we are disappointed by January and the start of February. Fortunately, the board tick dollar per ton rate, had a positive rate yesterday. This was the first positive quote this year. And although it was just an increase of 0.5%, I do hope that this is telling us that the market has turned, and we are now starting to build up towards freight.

I think that February is still going to be a challenging month. We do see a lot of activity on the trading desk. Most of the February positions are fixed away, at least for us, and we do have some March positions, particularly in the U.S., so we are still positioned to benefit from a raise in freight, which we do expect continuing from February, March. We are optimistic for the balance of 2019 based on the new export capacity as I’ve talked about based on some ships disappearing from freight, and we think that the three years long walk in the dark is now towards an end, and we are optimistic for 2019.

So with these words, I’d like to open up for questions. And just to remind you what we think about this year and next year. I’d like you to have to look at Page 18.

Question-and-Answer Session

A - Christian Andersen

We’ll start with the audience if there are any questions.

Lukas Daul

Thank you. Lukas Daul from ABG. Can you shed some more light on your thoughts around the refinancing as you sort of mentioned it both in the report and now in the presentation. What sort of – what was the best case that you are working with?

Peder Simonsen

Yes are. We’ve started the discussions with our banks. I think what we can say is that we expect to refinance the outstanding debt, including deferred debt, and that we will have similar cash breakevens as we have in a normalized scenario with existing financing.

Lukas Daul

Okay. And the last time you mentioned that for the installation of the scrubbers, you would also probably seek some debt financing and use the cash balance to fund the equity portion. So is it still the case? And what would you think the scrubbers that you mentioned would require in total CapEx?

Christian Andersen

I think before Peder says something about that, we’d like to stress that we haven’t really taken any decisions on scrubber or LPG fuel. We have earmarked the two first ships as candidates for scrubbers. We do have a firm offer from scrubber makers. So we can install scrubbers on these two ships up on their scheduled dry-dock during fourth quarter this year. We think when we’re looking at the offers we have, that the CapEx on these two scrubbers will be about $3 million each, but the decision is still to be made. It’s likely to be made pretty soon. And I think we also say that it’s pretty likely that they will be positive, but the decision hasn’t been made yet.

Peder Simonsen

And in terms of the financing, I mean, we are exploring our options, been using market free cash flow from the market with debt financing. I think we are very focused on our cash breakeven. And if I needed financing on that road, increase our cash breakeven significantly, we would – we’ll focus very much on how that will play out. But there are also, I mean, there are – we have all sorts of options on how to finance this $6 million that we are talking about.

Lukas Daul

Okay, thank you.

Marius Furuly

Marius Furuly from Carnegie. Can you shed some light on why freight trade have fallen so much in the beginning of this year? Has there been any disruption to U.S. exports, cold weather, or influx of new billings that have contributed to this or...

Christian Andersen

It’s a very good question. And it’s a bit difficult to understand. Let’s say if we go back to Page 13, you can see that during fourth quarter, there have been increased number of global liftings. The freight was really difficult most of the fourth quarter, but of course, we book our freight a bit in advance. So we managed to book most of – or significant part of Q4 voyages at a good rate we saw in September, October. So if you look at the graph, you can see that towards end of third quarter, early fourth quarter, the activity fell and the ships coming back to the loading areas take between three weeks and six weeks.

So there’s been a gradual buildup of open tonnage as we are approaching year-end. And in LPG, as in – look at other markets that the trading activity is coming down for Christmas and New Year. So after the first couple of weeks of December, there is hardly any activity, and this lasted into mid-January, and the activity was slow to pick up. Very much of the spot market is set in the Middle East. And with the Middle East exports coming down, this is giving a downward pressure to the freight. So there are good reasons to understand what happened, but we were surprised how much it came down. But with the growth we’ve seen in liftings continuing into January, we think that the bad market over the worst and we think it’s going to rebound.

And what we see every now and then, unfortunately not always, but what we see every now and then is that when the charters see that the market is getting entity of ships, they get a bit panic and the freight has a tendency to rebound quickly. But we have to say that as the freight is – or much of the freight is set in the Middle East, Middle East is looking a bit slow also for first quarter, so it’s a bit difficult to be 100% clear on when the market will start picking up again.

Unidentified Analyst

[Indiscernible] What do you estimate that the global fleet utilization is standing at now? And what do you expect it to be on average in 2019?

Christian Andersen

I – we haven’t really seen any reports on what it is now, but we know that one of the other peers reported.

Peder Simonsen

90%.

Christian Andersen

90%. Our utilization has been in January pretty close to what we saw in the fourth quarter. But of course, with bad rates, the utilization is normally lower. So if I’m to make a guess, somewhere between 85% and 90%, and we are pretty convinced that this will increase again or go up. I don’t know exactly if it’s going to happen in February or March.

Wilhelm Flinder

Wilhelm Flinder from Pareto. Regarding your vessels, you don’t install scrubbers, and you need to clean the tanks, et cetera, to kind of get them ready for the compliant fuel. Can you clean the tanks basically anywhere? And will there be any related costs to this and also downtime?

Christian Andersen

We – normally, it will take a bit of time and probably a bit cost. We don’t think it will be any significant time nor any significant cost. We have started working on this, and we are getting close and planning how to do this. This will probably be done towards end of third quarter, early fourth quarter. So it’s a bit too early to say where and when and at what cost.

Peder Simonsen

More questions from the audience? No? Then we can take questions from the dialers in.

Operator

Thank you. [Operator Instructions] There are no questions from the phone lines at this time. Please continue.

Peder Simonsen

Okay, that concludes the session. Thank you for coming.

Operator

Thank you very much, ladies and gentlemen. That does conclude the conference for today. Thank you all for participating. You may now disconnect.