Dorian LPG Ltd. (NYSE:LPG) Q1 2024 Results Conference Call August 2, 2023 10:00 AM ET
Ted Young – Chief Financial Officer
John Hadjipateras – Chairman, President and CEO
John Lycouris – Chief Executive Officer, Dorian LPG USA
Taro Rasmussen – Vice President of Chartering
Conference Call Participants
Omar Nokta – Jefferies
Brian Reynolds – UBS
Climent Molins – Value Investor Edge
Greetings. And welcome to Dorian LPG First Quarter 2024 Earnings. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally, a live audio webcast of today’s conference call is available on Dorian LPG’s Web site, which is www.dorianlpg.com.
I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, and over to you sir.
Thank you, Ryan. Good morning, everyone. And thank you all for joining us for our first fiscal quarter 2024 results conference call. With me today are John Hadjipateras, Chairman, President, and CEO of Dorian LPG Limited; John Lycouris, Chief Executive Officer of Dorian LPG USA; and Taro Rasmussen, Vice President of Chartering. As a reminder, this conference call, webcast and replay of this call will be available through August 9, 2023. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we can not assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended June 30, 2023 that were filed this morning on Form 10-Q. Also please refer to the investor highlight slides posted this morning on our Web site to accompany today’s discussion. Finally, please refer to our previous filings on forms 10-K where you will find risk factors that could cause actual results to differ materially from those forward-looking statements.
With that, I’ll turn over the call to John Hadjipateras.
Thank you, Ted. Good morning from pleasantly sunny Stamford, Connecticut. Thank you for joining, John, Ted, Taro, who is, calling in on behalf of Tim, who’s on vacation and me to discuss our first quarter financial 2024 results. The quarter’s results reflect a strong freight environment with Dorian earning a time charter equivalent exceeding 50,000 per day. We generated $46.5 million of free cash flow, which more than funded our $40 million dividend last quarter. Including the dollar dividend declared on July 27th, we will have returned nearly $610 million to our shareholders since our IPO. To strike the right balance in our capital allocation approach, our Board considers current and expected freight market conditions, the company’s capital and operating needs, our net debt to total capitalization, which is roughly 32% at present as well as potential strategic opportunities. Regarding fleet renewal, 25 ships with a useful life of approximately 25 years implies replacing one ship per year. We capitalized on a good set of market dynamics to build one ship and to charter in three more on initial seven year terms with options. These fleet renewal deals were economically attractive. As the chartered in ships give us market exposure, optionality on length and the potential upside of the purchase options while not requiring a large upfront investment. We price optionality in our investment decisions as we continue to evaluate fleet renewal and other opportunities.
We see increasing demand for LPG, both for residential and for commercial use in the petrochemical markets, supported by the relative cheapness of LPG versus naptha and LPG’s lighter environmental footprint. With additional delays expected due to the well publicized drought conditions in the Panama canal, we hope that our choice to charter in three ships whose beam enable them to transit both the Panama and the neo-Panama launch will be rewarded. It is appropriate to mention the importance to our business of our relationships with our charterers to whom we are committed to provide safe, reliable and clean transportation. And with our people at sea and onshore to whom we commit to provide a safe, inclusive and equitable workspace, these priorities we believe equips us to deliver the best returns for our investors. At a productive collaboration between our charters and seagoing and shore staff help us to achieve efficiencies and reduce fuel consumption and emissions as we evaluate and deploy new energy saving devices. I should also mention that in response to the crisis which continues to affect a number of our Ukrainian and Russian seafarers and their families, we introduced flexible arrangements for joining and repatriation, added free Internet on board, supplemented medical insurance and are providing a monthly allowance for displaced families. The current freight market level supports an optimistic financial outlook for the second quarter ending September 30th. Our cautious approach to capital allocation will continue to guide our decisions as I hand over to Ted.
Thanks, John. My comments today will focus on the recent capital allocation events, our financial position and liquidity and of course, our unaudited first quarter results. At June 30, 2023, we reported $155.5 million of free cash, which was net of the $40.5 million in dividends paid in the quarter. As of yesterday, we had $174.4 million in free cash, reflecting the current favorable market environment and free cash flow generation. Also, as previously disclosed, we will pay another $1 per share dividend as an irregular dividend or roughly $40 million in total of dividends on or about September 6th to shareholders of record as of August 10th. We fixed the interest rates on the Captain Markos dual fuel and Crest Japanese financings during the quarter and fixed the Cougar Japanese financing in late July with an effective start date in August following its next principal payment. With those fixings in place, our weighted average cost of debt is about 4.7%, which is actually below the current one and three month SOFR rates, which are around 5.3%.
Our next refinancing event is at the end of December 2026, which is the [Ballcap] facility. We amortized about $13.2 million in principal per quarter or slightly less than $53 million annually, which we consider quite manageable and largely inline with our book depreciation. With a debt balance at quarter end of $650.3 million, our debt to total book capitalization stood at 42% and our net debt to total book capitalization at 32%. With well structured and attractively priced debt capital and undrawn revolver and one debt free vessel coupled with our strong cash balance, we have a comfortable measure of financial flexibility. We continue to expect our cash cost per day for the coming year to be approximately $23,000 per day excluding capital expenditures for drydocking and scrubbers. For discussion of the first quarter results, you may also find it useful to refer to the investor highlights slides posted this morning on our Web site.
Turning to our first quarter chartering results. We achieved the total utilization of 98% for the quarter with a daily TCE, that’s Time Charter Equivalent operating days, as well as terms defined in our filings of $51,156 yielding a utilization adjusted TCE of about $50,142, which is the RTC revenue per available day. Though sequentially lower than last quarter’s results, the TCE still represents an attractive free cash flow to equity given our $23,000 a day cash cost. Spot TCE per available day, which reflects our portion of the net profits of the Helios Pool for the quarter was about $51,356. Also, overall, the Helios Pool reported a spot TCE, including COAs of approximately $58,280 per available day for the quarter. We note that the previous guidance that we’ve given about using the trailing two month [Baltic] did not hold true this quarter, which we attribute to more concentrated voyage bookings in May. This clumping reflects the regular ebb and flow of the VLGC trade. Daily OpEx for the quarter was $10,094, excluding drydocking related expenses, which was sequentially down from last quarter’s 10,304. Crew costs trended down and other cost categories contributed to the reduction as well. Our time charter in expense for the 5 time charter in vessels totaled $10.5 million consistent with our guidance last quarter. Note that the Cristobal, which delivered on July 10, 2023, will increase total [TCN] expense for the current quarter ending September 30th to approximately $12.2 million. Our total G&A for the quarter was $9.2 million and cash G&A, which is G&A excluding non-cash compensation expense, was about $8.4 million. That number included $2.2 million of cash bonuses paid during the quarter and it also included about $100,000 in support of the families of our seafarers affected by Russia’s invasion of Ukraine. Taking account of those two items, our core G&A came in at about $6.1 million, which is largely consistent with our expectations. Our reported adjusted EBITDA for the quarter was $74.8 million.
Turning to interest expense, which as you’ll recall we view as the sum of the line items of interest expense, excluding deferred financing fees and other loan expenses and the realized gain loss on interest rates swap derivatives. We reported cash interest expense for the quarter of $8 million. The sequential decrease versus the March 31 quarter was largely the impact of a full quarter of interest on the Captain Markos dual fuel facility and higher SOFR rates on our floating rate Japanese financings, which are now fixed. But we currently hold an 85.5% economic interest in Helios. We do not consolidate its P&L or balance sheet accounts, which has the effect of somewhat understating our cash and working capital. Thus, we believe it’s useful to provide some additional insight in order to give a more complete picture. As of Tuesday, August 1, 2023, the pool had roughly $15 million of cash on hand. The dividend declared last week of $1 per share brings $9.50 the total dividends that we have paid in the last nine quarters. While many investors and analysts like to suggest that these dividends are no longer irregular, we underscore that they are indeed irregular and subject to the discretion of our board and the various factors that John previously outlined in his comments. VLGC rates are not regular and thus we don’t think our dividend policy should be either.
Together with our open market stock repurchases and our $113.5 million self-tender offer, we’ll have returned in excess of $610 million to our shareholders since our IPO. The significant dividend payments in the last year underscore our Board’s commitment to a sensible capital allocation policy that balances market outlook, operating and capital needs of the business, including fleet renewal and an appropriate level of risk tolerance given the volatility in shipping in general and VLGC rates in particular. With a solid freight market backdrop, we remain cautiously optimistic about our cash flow generation over the coming months.
With that, I’ll pass it over to Taro Rasmussen.
Thank you, Ted. Good day, everyone, and thank you for dialing in. First quarter fiscal year 2024 saw increased global seaborne trade of LPG. The April-June 2023 period was the strongest quarter on record in terms of seaborne LPG trade. This is seen on Slide 5 of our accompanying slide deck. Regarding seaborne LPG trade, North American exports were buoyed by weak domestic consumption during the tail end of the mildest winter since 2010 and a warmer than normal summer minimizing the need for early crop drying. This was amidst continued record setting production levels. The quarter ending June 2023 was the quarter with the highest export volumes on record from North America. Middle East export volumes for the quarter also set a record for highest exports. Although, exports into India grew modestly. Southeast Asia and China absorbed much of the Middle East exports. The healthy import demand into China was partly driven by increased demand for propane as a feedstock for the petchem industry. This was a factor seen in the prior quarter but also the quarter ending June 2023. For Far East steam crackers, propane was at about an average 15% discounts than naphtha in January through March but an average 30% discount April through June for making one ton of ethylene. This testifies to the attractiveness of propane over the quarter.
Regarding the development of the freight market over the quarter. Historically, the April-June period for the VLGC freight market is characterized by an upward correction in the front and softening as summer approaches. In 2023, however, the start of summer surprised positively with worries of a summer lull quickly eroding. This was affirmed as the East of Suez market saw the BLPG1, the benchmark Arabian Gulf Chiba rate, correct significantly upwards from the beginning of the quarter with the momentum carrying through the period. Somewhat unusually for the Eastern market LAYCANs were reaching more than one month ahead of the fixing window in April. This is significant as the fixing of tonnage just a month ahead of LAYCAN tends to indicate stronger demand and affirming freight market, but also raises the likelihood of inefficiencies due to delays. The West of Suez market mirrored the East of Suex market. April saw an upward adjustment in activity and the widening arbitrage facilitated an upward correction in the freight market, as Mont Belvieu prices declined at a faster pace than Far East delivered prices. This is seen on Slide 4 of our accompanying slide deck. For most of the quarter, LAYCANs were being fixed about eight weeks forward. The benchmark Houston Chiba rate, BLPG3, steadily rose from the start of the quarter from about $102 per metric ton to about 184 per metric ton by the end of the quarter. Particularly towards the end of the quarter, when the freight market improved, we saw Far East importers concentrated on vessels scheduled for September arrival to begin stockpiling for the winter.
To wrap up, about 20 VLGCs have been delivered in the first half of 2023, including our own newbuilds and about 21 more are forecasted to be delivered in the second half of the year. Absorption of the 2023 order book was a primary concern previously but increasing seaborne trade, healthy demand for LPG and inefficiencies in the market allowed for a positive quarter. The positive market fundamentals for VLGCs remain in place as the focus soon shifts to the inventory building season in the Far East, which will provide further market support. And it seems oversupply risk in 2023 has been mitigated to a large extent. Thank you. I will now pass over to Mr. John Lycouris.
Thank you, Taro. We report on the daily scrubber savings realized last quarter by our scrubber fitted vessels of about $2,740 per calendar day net of all operating expenses. During the second quarter of 2023, price differentials between the benchmark light sweet WTI and the medium and heavy sour crudes narrowed as refining margins declined on supply and demand concerns. The average fuel cost differential in the last quarter between high sulfur fuel oil and very low sulfur fuel oil, the high five spread that’s called was $169.3 per metric ton less than the VLSFO fuel. In the next quarter, we expect a further narrowing of that spread as the middle distillates market supply has grown while the high sulfur residual fuel supply has tightened. With most of the VLGC spot voyages originating from Houston, our LPG dual fuel engine vessels have benefited from the good reliability and the attractive pricing differential of LPGS fuel versus the very low sulfur fuel oil. It currently stands at about $210 per metric ton less than the VLSFO after taking into consideration the energy density differential of the two fuels. On the technical front, during the recent drydocking of one of our vessels, we completed the retrofit of a scrubber unit, thus, increasing our fleet of scrubber vessels to 13. Installations of energy saving devices on our vessels are continuing as we also continue in reviewing new devices like for example, wind assisted propulsion or air lubrication.
We are progressing with the implementation of engine power limitation on our vessels in compliance with the 2023 EXI regulations and with installation of engine software upgrades that are expected to improve our CII ratings on our vessels. In July, the IMO’s MEPC committee met and adopted a revised greenhouse gas strategy that aspires to reach net zero emissions by 2050, also, to ensure a peak in emissions is reached as soon as possible. The committee also set intermediate checkpoints on the total amount greenhouse gas emissions, indicating at least 20% reduction needed by 2030 and a 70% reduction by 2040. It also agreed that to achieve such emission targets, there will need to be an increase in the uptake of zero and near zero greenhouse gas emission technologies on new fuels and energy sources, all of which should comprise about 5% to 10% of the energy used in shipping by 2030. Lifecycle assessment guidelines were also adopted that address the well to wake greenhouse gas intensity of marine fuels. Some further development is anticipated in the next committee meetings regarding methodologies, default emission factors, sustainability aspects and certification processes for these fuels.
The global greenhouse gas objectives have become more urgent as we experienced daily extreme climate changes around the world. The EU followed by the IMO more recently, have tightened their greenhouse gas strategies to net zero emissions by 2050 or earlier, a target that will necessitate significant reductions of greenhouse gas within this decade and the next after considering the numerous technical and operational improvements being implemented by the marine industry. The EEXI and CII regulations of 2023 and the increased use of alternative marine fuels, we still believe that additional measures will need to be implemented to achieve those tighter greenhouse gas objective for the 2030s and 2040s. In the medium term, we expect that carbon capture and storage will become one of those necessary measures, much like the SOx scrubbers of the 2020s, which will enable the marine industry to transition to more advanced fuels and engine technologies that can produce near zero emissions. And now I would like to pass it over back to John Hadjipateras for closing remarks.
Thank you. We are happy to take questions.
[Operator Instructions] Our first question is from the line of Omar Nokta with Jefferies.
I wanted to sort of just follow-up on a couple of items you mentioned in your opening remarks and perhaps maybe first on sort of capital allocation. You have added the final of the four dual fuel ships into your fleet here recently. We’ve got no commitments from here or no meaningful commitments. How are you thinking about the strategy of the company, the capital allocation? Obviously, Ted, you were pretty clear with the irregular dividends being irregular, you reiterated that. How are you kind of thinking about just the use of capital or use of cash as it comes in? Are there more deals available similar to the way you structured those three TCNs on the seven year durations, and can not be repeated, is that something that’s interesting? Maybe just big picture, how do you think about the use of cash going forward?
I think that what you heard is more or less everything we have to say at the moment. It is — I can’t repeat those deals, because history kind of repeats itself but circumstances are not. Right now, right to do the exact same thing with the exact same ships but similar deals and other opportunities are always in front of us and we’re evaluating them in the context of the discipline that we talked about.
And then maybe then just sort of thinking about the market, clearly, it’s been much stronger than many anticipated, especially with the newbuilding deliveries coming on. It was interesting just hearing the comments about the market. And I think one of the things that maybe is somewhat interesting is the fact that despite the OPEC cuts you noted that the Saudi volumes or the Middle East volumes were higher. Is that still the case, is that a surprise? Normally, we would’ve assumed that crude production declines have an associated decline of LPG. What’s happened there because of that decline not to happen this time?
Well, there’s two elements of that. One is that when you see crude production cuts, that doesn’t include gas production. So a lot of the LPG that we carry is associated with natural gas and the other is timing. And then you never know with the production cuts, especially with Saudi Arabia, whether they’ll be fully implemented, partly implemented or not implemented at all, it’s kind of a bit all over the place. So it can’t really — can’t say that what we’ve seen is we can use to predict what will happen. Another aspect — going back to your question before about our investment — how we’re looking at deploying cash, et cetera. Ted pointed out to me, of course, that it’s also — we’re also mindful of the cyclicality of our market, and that it’s a question of whether now is the right time or — in the cycle, which you can, we can never play. But that’s why I said, given a 25 ship fleet, which is approximately where we are and a 25 year life, which is approximately what it is, you really kind of as a guide to stand still, you should be doing the equivalent of one ship a year. Not all — not faithfully every year but over time, over sort of a trailing period, the average, you should be doing that to be keeping the same kind of fleet age profile and exposure and basically to be able to offer a quality product to our charterers.
And maybe just one more. Just kind of thinking about the — I think I noticed in your fleet table a couple of vessels that were in the pools have been put on time charter here. Any color you can give on what those charters look like? And then maybe just bigger picture on that, given the strength of the market, has there been a jump in overall opportunities to fix ships out on the medium term contracts, and is that something that’s interesting to you guys?
I think if you compare to six months ago, there has been a bit more interesting period. It’s the kind of interest that you observe when the market spikes really and the charterers are incentivized to take — to commit for longer periods to save the money upfront. So at the moment there is nothing from our point of view that is actionable. But we are always in the market and we do have a percentage of our Helios exposure committed on short, medium term time charter out. We think that we have a good product mix, but I’m not sure that we want to disclose exactly what it is.
It’s better for our competitors — it’s for our investors.
Our next question comes from the line of Brian Reynolds with UBS.
In your prepared remarks, you talked about firming of demands in the LPG market. So just curious if you could discuss whether you are seeing a bottoming in China PDH demand, just given some of the deferrals that we have seen on some of those projects? And perhaps how could that impact the arb given that we’re trading at historical lows for propane and butane as a percentage of crude?
Ted will pick that one up. We all have very firm opinions and we’re all aligned on it. So you will hear the party line from Ted.
Brian, as you know there is a lot of PDH capacity that’s come on in China. The economic recovery there has not been as steep as everyone hoped but it’s still coming along. So I guess the shorter answer is, we expect to see continued growth. Given the attractive pricing on LPG, it’s a good time to build inventories. The other thing that’s important to recognize in petrochemical demand broadly in Asia but particularly in China is that a lot of the steam cracker capacity that’s come on over the last couple of years and is on the books to come on is actually more flexible than in the past with respect to taking LPG. So we don’t think that segment should be overlooked either. So I think you look at LPG continuing to be very attractively priced to naphtha, naphtha as Taro talked about and you look at, I think what we all believe will be a more sustained, if not as steep economic recovery in China, and I think that sets up pretty well for PDH demand over the coming quarters.
And then my second question is just around IMO. With the meeting behind us, just curious if management is looking at any subtle or maybe more than subtle strategic adjustments after the meeting, or was that kind of inline with the current expectations and future strategic decisions?
Subtle. John Lycouris, are you capable of being subtle in answering that? We are pursuing a lot of initiatives, but John, on the specific IMO results, can you comment for me — for us, please?
Yes, of course, John. So Brian, it was all expected. The IMO was obliged to tighten the strategy and revise it to 2050 just like everybody else has done and it was expected. It is what we have been working for that we will be looking at a tighter strategy for greenhouse gas emissions. And hence our comments about doing all that we can and is available to us at this time and looking at new technologies as they come around. But I’m highlighting again, the last few lines of my comment, which say that we’re going to be looking at alternative fuels, at advanced fuels. We will be looking at various measures that we could do, but also carbon capture and storage is one of those measures that we will have to undertake just like we did scrubbers in 2020s.
And maybe just a quick follow up on that, I know you guys are investigating potential CCS technologies for your vessels. Just kind of curious if there’s any initial comments from some of your early findings of how that would work on a lot of your fleet and potential CapEx implications there?
John, you can continue.
The key to carbon capture is marinizing the technology and reducing the footprint, so it can be installed onboard ships. This is what’s been going on right now. We think it will happen and we expect that eventually we will be able to install marine capture technology onboard ships initially to be able to capture part of the CO2 eventually more. It’s just a matter of the technology improving in the next few years. And it is there, it has been used by industry for decades, the oil and gas industry and it will be marinized and it will be onboard ships. CapEx will come down, of course, as more sets of technology are being installed on onboard ships. But I think it is viable and possible and likely.
Our next question comes from the line of Climent Molins with Value Investor Edge.
It has been a few months since you took delivery of the first dual fuel. Could you provide some commentary on the savings you’re generating relative to burning VLSFO? And secondly, is there any appetite to explore potential dual fuel retrofits on the existing fleet?
The answer to your second question is no. And the answer to the first question, John Lycouris will provide you.
We just mentioned or discussed this, and I’m happy to repeat part of my comments that the benefit of burning LPG as fuel versus very low sulfur fuel oil currently stands at about $210 per metric ton on a energy density adjusted basis. Because as you probably know, LPG has higher energy density than low sulfur fuel oil by about 10% or 11%. So yes, it is beneficial and it is attractive.
And I also wanted to ask a bit about the Captain, John. I mean, you have a modern ECO fleet and that would be the sole exception. How do you think about it, is it kind of non-core or are you happy to hold on to it going forward?
We are happy with the ship. She is a good performer and she is not as new as the other ships, but we still consider her to be a very viable asset to use. So she is there for — we never say no about selling anything. But at the moment, she is not held-for-sale, to put it that way.
And I also — Climent, it’s worth noting that, first, nothing is ever core at shipping, nothing strategic. So like John said, we will consider anything. But also that ship, because when she was constructed actually is ammonia capable to a great degree. So that does provide some optionality as ammonia becomes an increasing part of the decarbonization discussion.
Makes sense. That’s everything from me. Thank you for taking my questions and congratulations for the quarter.
Thank you, Climent.
Thank you very much. And Ryan, we are done here I think. Wishing everybody happy August and looking forward to seeing you again in October. Thank you.
Thank you sir. The conference of Dorian LPG has now concluded. Thank you for your participation. You may now disconnect your lines.