Dorian LPG Ltd. (NYSE:LPG) Q2 2024 Earnings Conference Call November 2, 2023 10:00 AM ET
Theodore Young – Chief Financial Officer
John Hadjipateras – Chairman, President and Chief Executive Officer
Tim Hansen – Chief Commercial Officer
John Lycouris – Chief Executive Officer, Dorian LPG USA
Conference Call Participants
Omar Nokta – Jefferies LLC
Welcome to the Dorian LPG Second Quarter 2024 Earnings Conference Call. 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 website, which is www.dorianlpg.com.
I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young, please go ahead.
Thank you, Asha. Good morning, and thank you everyone for joining us for our second quarter 2024 results conference call. With me today are John Hadjipateras, Chairman, President, and CEO of Dorian LPG; John Lycouris, Chief Executive Officer of Dorian LPG USA; and Tim Hansen, Chief Commercial Officer.
As a reminder, this conference call webcast and a replay of this call will be available through November 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 September 30, 2023 that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K where you will find risk factors that could cause actual results to differ materially from those forward-looking statements. Finally, you may find it useful to refer to the investor highlights slides posted this morning on our website as we go through our prepared remarks.
With that, I’ll turn over the call to John Hadjipateras.
Thank you, Ted. With a very strong quarter and record EBITDA, our Board declared another $1 per share dividend. The strength of our balance sheet with net debt to total capitalization of about 30% and attractive financing conditions enabled us to return about $650 million to shareholders since our IPO, while also pursuing a conservative fleet renewal policy and continuing to invest in fleet operational efficiencies and decarbonization initiatives.
We installed scrubbers on two additional ships and plan to install a scrubber on one more in calendar year 2024, bringing our total scrubber fleet to 16 ships, including one-time charter-in. And with our four dual-fuel ships being up under our operation, 20 of the 25 ships in our fleet reflect investments in greener technology. We are at the forefront of the new environmental regulations and continue collaborating with charters to ensure compliance while optimizing our fleet operational utilization.
Our fleet performance and new tech teams evaluate and have deployed energy saving devices and silicone paints, resulting in significant savings and consumption and reduction of our carbon footprint. The record rates and the spot market indicated tonnage in supply demand equilibrium, and effective absorption of the order book bulge in 2023.
We are cautiously optimistic about the market in 2020 supported by U.S. production and exports and by demand in Asia and PDH demand in China. Our caution relates to geopolitical and trade tensions. To the list of unknowable issues, we recently added the climate impact on Panama Canal transits. We are closely following and evaluating prospects for future trades, including ammonia. The outlook for transportation of ammonia is sanguine and manufacturers claim to be progressing their plans for a deployment of engines capable of using ammonia as a propulsion fuel.
As members of The All Aboard Alliance, we have participated with a group comprising 11 leading maritime companies in the launch of an initiative to promote diversity and inclusiveness and equity on board with a view to broadening the appeal of the seafaring profession and increasing the participation of women who currently make up less than 2% of the workforce.
And with this, I’ll pass on to Ted Young.
Thanks, John. My comments today will focus on capital allocation, our financial position and liquidity, and our unaudited second quarter results. At September 30, 2023, we reported $192 million of free cash, which was a significant increase from the $155.5 million reported at the end of June. As of November 1, we had unrestricted cash balance of $171.7 million, which is net of the $40.3 million dividend payment made today.
With a debt balance at quarter end of $637.1 million, our debt to total book capitalization stood at 40.8% and our net debt to total book capitalization at 28.5% with well-structured and attractively priced debt capital, an undrawn revolver, and one debt-free vessel coupled with our strong free cash balance, we enjoy a comfortable measure of financial flexibility. We currently expect our cash cost per day for the coming year to be approximately $25,000 per day, excluding capital expenditures for dry docking and scrubbers.
For the discussion of our second quarter results, you may also find it useful to refer to the investor highlight slides posted this morning on our website. I would also note that my remarks today will include a number of terms such as TCE, operating days, available days, and adjusted EBITDA. Please refer to our filings for the definitions of these terms.
For our second quarter chartering results, we achieved a TCE of $65,128 per operating day with a total utilization of 96.5% yielding utilization adjusted TCE of about $62,818. This TCE result represents the second best in the company’s history. Since we only have two vessels trading outside the Helios Pool, both of which are on time charter, the spot results that Helios reports are the best measure of our spot chartering performance.
For the September 30 quarter, the Helios Pool earned TC of $78,643 for its spot in COA voyages, which is the highest spot rate the pool has ever earned for a quarter. Well, we’ve always provided information on the number and length of our time charters and our filings. For convenience, we have replicated that information on Page 4 of our investor highlights materials. Based on that information, you can see that we have eight Dorian vessels on time charter within the pool, indicating a spot exposure of about 70% for the 27 vessels in the Helios Pool.
Turning to the quarter ending December 31, 2023 i.e. the current quarter. We are pleased to report that we have 69% of the available days in the Helios Pool booked at a time charter equivalent in excess of $85,000 per day, which obviously reflects a very strong freight market. Please note that the 85,000 includes both spot fixtures and time charters.
OpEx per calendar day for the quarter, excluding dry docking related costs was $10,399, which was up somewhat sequentially. Sequentially, crew costs were down while lubricants and spare stores were increased modestly. Our time charter-in expense for the five time charter-in vessels came in at $12.1 million consistent with our guidance last quarter. That number reflects three vessels for the whole quarter, one TC-in vessel that was re-delivered at the end of August and the crystal ball, which delivered July 10, 2023.
Total G&A for the quarter was about $13.6 million and cash G&A. That’s G&A excluding non-cash comp expense was about $9.4 million. Within that amount was $3.4 million of cash bonuses paid during the quarter. Therefore, our core G&A came in at roughly $6 million, which is consistent with our expectations. Non-cash compensation expense was higher this quarter because U.S. GAAP requires us to book all service-based grants at the prevailing stock price on grant date. Thus, while the number of shares granted was flat versus the prior year, the price was virtually double, which explains the increased expense.
Going forward, we expect non-cash comp expense to be around $1.4 million per quarter. A reported adjusted EBITDA for the quarter was $104.6 million, which is the best quarterly adjusted EBITDA in our corporate history. Our adjusted EBITDA for the last 12 months is over $350 million, nearly $360 million
Turning to debt service. Our cash interest expense, which we calculate as the sum of the line items, interest expense excluding deferred financing fees and other loan expenses and realize gain loss on interest rate swap derivatives for the quarter was $7.7 million, a decline of about $200,000 from the prior quarter reflecting lower average debt and our all-in debt cost of about 4.7%, which we note is below the current floating SOFR rates.
Quarterly principal amortization remains steady at $13.3 million. Our trailing 12-month income is approximately $256 million and with a book shareholder’s equity at September 30, 2023 of roughly $923 million, we generated a 27.7% return on shareholders’ equity. We are proud of this result because it not only reflects the strong profitability that our platform is capable of generating, it also shows that we’ve managed to keep our shareholders’ equity in an appropriate level, balancing retention of necessary earnings with paying out meaningful dividends to our shareholders.
Although we currently hold a roughly 86% economic interest in Helios, we do not consolidate its P&L or balance sheet accounts, which has the effect of understating our cash and working capital somewhat. Thus, to provide some additional insight, we note that, Wednesday, November 1, 2023, the pool held roughly $38 million of cash. The $1 per share dividend declared in early October and paid today brings our total dividends paid to $10.50 per share, or nearly $425 million in the aggregate. We underscore again that these dividends are irregular dividends reflecting the irregular nature of VLGC rates.
Together with our open market stock repurchases and our $113.5 million self-tender offer, we have returned over $650 million to our shareholders since our IPO. Our Board remains committed to enhancing total shareholder returns and as John has mentioned on numerous occasion, also recognize the importance of retaining capital to renew and expand the fleet as market opportunities present themselves. These goals are balanced against the market outlook, the operating and capital needs of the business, and an appropriate level of risk tolerance given the volatility in shipping. With strong LPG trade fundamentals, we remain cautiously optimistic about our cash flow generation over the coming months.
With that, I’ll pass it over to Tim Hansen.
Thank you, Ted, and good day, everyone. The second quarter fiscal year 2024 is primary characterized by record highs being registered on the Baltic indexes for VLGCs during September. The primary driver of the firm freight market was the widening U.S. arbitrage vessel delays and subsequent vessel routing decisions to best handle the widening arbitrage and delays.
First, when looking at the arbitrage, continued weak domestic demand in North America covered with record breaking production for natural gas liquids continued to increase inventories, which resulted in lower export prices. Meantime in anticipation of the seasonal stock building, typical in the [indiscernible] months, Asian importer bid off the import prices, widening the price arbitrage, which should continue to increase the closer that the commercial working window gets to the winter months. The widening arbitrage was therefore a reality over the quarter as were the delays. Delays for transiting the Panama Canal increased compared to the prior quarter with an average waiting time up on both the new Panamax and the old Panamax locks.
As important as the actual increase of average waiting time was the increased volatility in the projected waiting time in August and September, further strengthened the arbitrage. While the volatility and occasionally two weeks plus waiting time at Panama Canal falls in September already created market inefficiencies. This was excavated by the delays in the far east, resulting from three particularly violent typhoons that happened in short succession of each other over the August months.
Ship owners had particularly difficult time anticipating vessel availability for loading in August and September, depending on the next loading area. For ship owners looking to load in the U.S. Gulf, the Panama delays added to the complexity. These factors contributed to more VLGCs avoiding balancing towards Panama altogether.
On average, the quarter ending September 2023 had about 13.5 VLGCs balancing to the U.S. via Suez per month. This compared to an average of 7.5 VLGCs per month on the quarter prior. [Balanced route] via the Cape of Good Hope were also higher compared to the quarter prior for vessels commencing the balanced from the Asia during early August. More VLGCs balancing to the U.S. Gulf not only increased ton miles in the market, but also decreased the number of presumed load ready vessels in U.S. Gulf in September. Both factors contributed to the benchmark use in Chiba route known as VLGC 3, which reached a record high of $253 per metric tons, which is about $150,000 a day TCE on a modern ship.
We have so far focused mainly on the U.S. Far East arbitrage and associated that the causes and the effect on the Western freight market from VLGCs. But the prior mentioned factors also had a significant impact on the Arabian Gulf to Asia market because the increased number of VLGCs balancing to the U.S. via Suez or Cape of Good Hope from Asia region. In August, the number of theoretically available vessels for loading in the Arabian Gulf increased. The position is for August in the Arabian Gulf was therefore inflated. But by the time the market fully understood the implications and we are struggling to see clear tonnage in the Arabian Gulf during September, the benchmark rate Ras Tanura-Chiba known as the BLPG1 reached record levels with a peak of US$183 per metric tons, that’s about $170,000 per day.
To wrap up, about 30 VLGCs have been delivered in January through September 2023, including our own newbuildings and about 12 more are forecasted to deliver during the last calendar quarter of 2023. Although the number represent a significant increase in investor supply, increasing seaborne trade, healthy product, charter fundamentals, [indiscernible] and inefficiencies in the market altogether supported a firm trade market levels and even allowed for records to be set during the quarter. And while more new buildings will have to be absorbed going forward and macroeconomic and geopolitical concerns also exist, optimism remains on the VLGC segments, while we move deeper into the inventory building season. Thank you.
And with that, I will now pass over to John Lycouris.
Thank you, Tim. This quarter daily savings realized on our scrubber vessels stood at 2,938 per day, providing improved voyage economics. The fuel cost differential between high sulfur fuel oil and very low sulfur fuel oil averaged about $162 per metric ton. During the third quarter of 2023, the average price spread between the high sulfur fuel oil and the very low sulfur fuel oil narrowed compared to second quarter due to supply and demand factors. The pricing differential of LPG versus the low sulfur fuel oil at Houston stood at about $200 per metric ton for the third quarter, which is useful for dual fuel engine vessels.
We have recently completed another scrubber retrofit during the recent dry docking, which brings the total number of scrubber owned vessels in the fleet to 14. We plan to retrofit another vessel with a scrubber unit during calendar 2024. The installation of energy saving devices and silicone hull coatings on our vessels have provided significant performance improvements in fewer savings and a reduction of the fleet CO2 emissions. The implementation of engine power limitation across our fleet in line with the 2023 EXI regulations is almost completed as we have also completed the main engine upgrades, both of which result in better fuel efficiency and improved CII rating.
The updated IMO greenhouse gas strategy adopted in July 2023 accelerate transition to net zero and will set more stringent annual emission reduction targets. This will speed up the uptake of alternative low carbon and zero carbon fuels, as well as novel emission reduction technologies such as onboard carbon capture and storage. In the long run, we see this solution as key to meeting the IMO greenhouse gas accelerated reduction emissions.
The EU emission trading system regulation, which becomes effective on January 1, 2024, and will apply to all cargo and passenger ships over 5,000 gross tonnage calling it at EU ports will have shipping companies surrendering their first EU allowances by September, 2025, which will reflect all their emissions reported in 2024. We at Dorian have prepared to meet those new requirements.
The Global Maritime Forum last month in Athens brought together all the major stakeholders in shipping to discuss challenges and opportunities as governments and industries look to adopt global and regional decarbonization strategies and regulations. The solutions range from new fewer types to continued operating and technical improvements, but all these options come with a range of different considerations ranging from fuel level liability to worker safety and training. We expect that shipping will be able to tackle the decarbonization challenges that the world has put in front of it.
And now I would like to pass it over to John Hadjipateras for closing remarks.
Thank you, John. Thank you, all. We are happy to take questions. Asha, if you can handle that for us, please.
Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Omar Nokta from Jefferies. Please go ahead.
Thank you. Hey guys, good morning, and congratulations again on another strong quarter and clearly and obviously the outlook continues to get even stronger. This week has been pretty big, obviously with the latest Panama Canal restrictions and how that looks at least too on the face of it cause more disruption. I just had a couple of questions on that. Now obviously, Ted, I think you mentioned, or you showcased in the presentation, the pool has gotten 69% covered at 85,000 now, so you’ve already gotten that type of rate, and this is before the Panama Canal situation. That’s kind of really gotten more restrictive now. So just wanted to ask maybe big picture, what do you think happens to VLGCs now? Are VLGCs going to get shut out completely from using the canal here in the near-term? And how do you think that overall will affect the supply picture in the coming months?
So Omar, the Panama Canal situation has been developing, let’s say it’s only hit the press in the big way in the last two days. But what you see now is not – it didn’t happen overnight. So the coverage that Ted mentioned reflects of course rates that have been fixed during the course of the past few weeks. But it also reflects the anticipation of the canal difficulties. As for getting shut out completely – for VLGCs being getting shut out completely from the canal, it’s impossible for us to tell what will happen. There are very specific restrictions that are being planned, and that does not include shutting out VLGCs. It just makes it harder to book and fewer transits and Tim can give you in detail what they are if you’re interested. But at the moment, there are no plan to shut out VLGCs and who knows. If it does happen, of course, it would have a very meaningful impact on the freight rate, I expect.
Yes. Thanks, John. I mean, clearly, I mean, I guess you could say there’s a bit of a squeeze that’s taken place here over the past few days. I know the FFAs aren’t necessarily the best indicator and there’s not that much liquidity, but they did spike over the past couple of days. So where now expectations are for rates to continue to push higher here into the – well into the hundreds for the next couple of months. And so, just on that, we’ve always talked about the seasonality picture for LPG. Do you think, just based off of the backdrop that we have now, when you look, I guess, the conversations you’re having with charters and whatnot. Is that seasonality going to be skipped this year? And are we looking at basically just continuous strengthening throughout the seasonally weak or the theoretically seasonally weak period here in the next three to four months?
Tim, do you have an opinion on that?
Yes. I think, I mean, normally coming into the winter, we are seeing the delays in Panama go up, even without these reductions to the drought there. So we normally see the strength of the market coming here and the delays going up in Panama with the Black Friday coming up and Christmas coming up for the container ship. So there’ll be more pieces. So I think we will see more difficulties to get through than we’ve seen before. I think, so far touchwood, we’ve been lucky enough to manage to get through. But I think we are definitely considering sending ships the other way as well, via Cape and Suez, as I mentioned before, others have been doing. So I think that indicates a strong winter and it could be a prolonged period as well for this. And with the high inventories in the U.S. still going into the winter then the product op should be looked to be open throughout the winter.
Thank you, Tim. And maybe just one final one. Just in terms of how the market’s been reacting here recently. Obviously it’s been strong for some time and you’ve just now gotten, even tighter. In terms of say, charter attitudes, do you see somewhat of a scramble happening? Are we seeing time charter opportunities come your way and do you see an opportunity to fix into this strength?
Yes, sorry. Yes, I mean, it’s always kind of this time of the year where renewals happen because contracts and on product side is renewed as well. But we have seen in the last couple of months a little bit of a standstill between, standoff between owners and charters, what the rate should be. And as much as I think nervousness of like missing out or getting it wrong, because it’s been very, very difficult to read with some high swings on the freight, even day to day, both up and down. But I think, more charters is coming to the market now as you see, and asking and rates are definitely pointing outwards for the term for next year.
Great. All right. Well that sounds exciting. I’ll turn it over. Thanks guys.
[Operator Instructions] This concludes the question-and-answer session. I would now like to turn the conference back over to John Hadjipateras for any closing remarks.
Thank you, Asha, and thank you everybody for attending our call this time. And we look forward to the next time. And meantime, keep safe and be well. Thank you. Bye-bye.
This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.