Avance Gas Holding Ltd

Peder Simonsen - Chief Financial Officer Christian Andersen - President

Thank you to everyone in the audience and thank you for the callers and welcome to the Avance Gas fourth quarter earnings release. I am here with Christian Andersen, the President and we will go through the highlights for the quarter, the financials we will give market updates and market outlook, and we will have a Q&A session at the end of the release.

If we move to Slide 4, as most of you are aware we have changed our fiscal year end this quarter from 30 November to 31st of December, which means that we are reporting a 4-month quarter and also a 13-month year for 2014. So, the comparative figures will be a bit off for this quarter specifically.

If we look at the averages of RTCA rates for this quarter, we earned a rate of $70,300 for the four months and that is compared to the $83,900 we earned in Q3 2014. If we look at the calendar fourth quarter which is the basis we will report in the coming quarters, we earned $64,600 for the quarter.

We established the financing for the last four new buildings this quarter, which now makes our CapEx fully funded with a group of five banks all in our existing banking group. We announced a $15 million share buyback program, of which we have so far spent $12.6 million and bought our own shares back at the average price of $104 per share.

The share buyback program was extended to the 6th of March, so it’s running out the end of next week. We took delivery in the 13th of January, the two first new buildings from Jiangnan shipyard in China from Frontline and they were fixed as expected during the course of – and trading now during the course of February.

And we declared a dividend of $1 per share for the quarter. If we move to Slide 5, the financials for Q4, we had operating revenues of $64.4 million and TCE earnings of $50.6 million, which is impacted by weaker market sentiment and somewhat higher waiting time for this period.

If we look at the operating expenses, they were increased by $1.4 million to $6.4 million, which mainly the result of the additional month, otherwise essentially unchanged. And the same goes for administrative and general expenses.

We added on some more employees for this quarter, which increased somewhat, but otherwise more or less in line with what we have reported earlier. Our net profit was $33.7 million or $0.95 per share.

And for the full year figures, we had a net profit of $82 million or $2.43 per share. On Slide 6, our balance sheet, there have been much new items on the balance sheet this quarter.

We had a net interest bearing debt of $183 million. Our free cash was $162 million for quarter end and we had undrawn available credit lines of $50 million.

Our equity ratio was 73%. And our cash flow for the quarter on Slide 7 we had net operating cash flow of $39.8 million.

We had net cash flow from financing and investment activities, a negative $40 million, of which $32.5 million was dividend and that figure is also fees related to the newly established financings and a net decrease in cash of $0.6 million for the quarter. I will then give the word over to Christian?

Thank you very much. If we move to the next side, which I think is number six.

The fleet list is now showing eight ships on water. For this quarter, we will have approximately seven ships on an average making money.

The two ships being delivered 13 of January started making money in February, one of them very early and the second one around mid-February. The new building program is going well.

We expect to have the next ship by end of this quarter, towards end of March and we will have three new ships coming in the second quarter. And as it looks today the last two ships will be delivered in the third quarter one early and one towards mid-third quarter.

We are going to update the delivery schedule as we are getting closer and we will keep our homepage updated at anytime. If we go to Page #10, we can see that the export of LPG in the Middle East gave us somewhat negative surprise in October and the export from Saudi Arabia went down by 10 cargoes or about 400,000 tons in October.

So this came back to normal export again in November and December, but the overhang of 10 ships caused the softer markets from October and into beginning of January this year. If we look at the export from U.S.

Gulf, it’s up to full capacity. It was slightly down in November due to some smaller ships, lots being loaded in Targa, but both Enterprise and Targa has been loading respectively 10 cargoes and 15 cargoes each month.

And outlook for this quarter is also good. Page 11, the order book, very little has happened.

We have moved our two ships from last year to this year, so the order book for 2015 is 38 ships. As we are talking now, one ship is about to be delivered, but right now there are three ships delivered of these three.

Next year, it is scheduled 41 ships and in ‘17 we have four ships ordered. There are some discussions going on in Japan and we expect ‘17 to have another couple of ships.

Fairly soon.

But Japan is not really a threat to destroying the market. It’s the large Korean yards who can destroy this market in just a year if they want.

We are keeping our employment model with the new building program and with the export terminals in the U.S. We do believe that the Panama might come on open by mid-‘16 and the outlook for fleet utilization in ‘15 is very high and outlook ‘16 is also very good.

I would to repeat what I have been saying a couple of times, but of course in ‘16 with the large order book, there are some more questions to be raised, but upside of ‘16 is still enormous and in our models, we have 10 million tons going from U.S. Gulf to Asia in 2016.

And if this is being increased, the fleet utilization in ‘16 is going to remain very high. If we look at pictures on Page #9 on this quarter, we have fixed nine voyages in the fourth quarter.

Four of these have been Indian voyages and the other five have been traditional Baltic related voyages from the Middle East. As the previous month, the fixtures are done on an average about 4 weeks before loading.

So of these nine fixtures, about half of them are being done in the quarter and the remaining has been done in January. India has been a premier market most of last year.

However, due to heavy competition in fourth quarter with the 10 cargoes disappearing from Saudi Arabia, we saw higher competition also to India and India for the later part of the fourth quarter was fixed below the index. So, since we did about half our voyages from India – sorry, to India, we have been slightly lower compared to the index than we have been earlier in the year.

So, for the four months of the fourth quarter, our performance has been about 93% to the index. It can also be explained on the right graph on Page #9.

We had some more waiting time in October and December and again the same reason, 10 cargoes disappearing from Saudi Arabia, giving a bit more waiting time and overhang of ships towards end of the quarter. If we look at the outlook, obviously also in January, we were suffering a bit from the overhang of ships coming from October.

We had a waiting time for the four months in fourth quarter average on the ship of 2.6 days compared to 1.3 days for the full year of 2014. So far in this year, which is really January and February, we had 1.9-day waiting for each ship and most of this was in January, hardly any waiting in February and we do expect this to come down also in March.

As I said half of the fixtures we have done in the fourth quarter will be performed in the first quarter and we do expect that for the first quarter we will also have about 93% compared to Avance Gas Spot Index as you will find our webpage every Saturday. The outlook for ‘15 is very strong.

The Sunoco Lone Star terminal in Texas started exporting cargoes 20th of January. And in February, they are coming up to full utilization.

Shell is the main taker of the capacity. Shell has a flexibility to do 6 to 8 cargoes a month and we do expect to see this coming in February and March.

The next terminal in the U.S. is the Enterprise terminal backed by Vitol.

Although Vitol has sold a lot of their cargoes FOB, this terminal is expected to come on stream late first quarter, early second quarter, but the outlook for this quarter is good. The outlook for second quarter is very strong and we also expect this to remain for the balance of the year.

We will continue to keep our ships employed in the spot market. With the spot pricing, we still have one ship on time charter to [indiscernible] at the floating rate and we have seven ships trading 100% spot.

We do expect to continue to payout full EPS as dividend. This year – this quarter, fourth quarter we paid slightly more.

For the coming months, we expect to be a bit more loyal to the EPS and pay more exact what we are making. I think I will round off my presentation and invite you to ask questions.

I think we will start with the audience and we can move on to the callers afterwards.

A month ago you said that [Technical Difficulty]?

Our buyback program is most likely completed. We have a couple of days more.

We have a couple of million dollars more to use, but we think when we will probably leave it as it is now. We will see what happens with the share price.

And obviously we will also look at opportunities out in the market. We do see that the second hand prices are very firm.

I don’t expect to be able to buy any ships on the water over the next 6 months.

You won’t as benefit strongly maybe than expected despite by some, how surprised are you by the recent development and also there has been a lot of noise and focus on the impact of falling and [Technical Difficulty] LPG to export, any concern about that?

We were a bit disappointed by the 4 out of 10 cargos from Saudi Arabia, October. We didn’t see that come.

Nobody saw that coming. So the end of fourth quarter and the very beginning of first quarter was a bit softer than we were expecting.

The market today is very much in line with what we have been expecting for first quarter. And we do expect as I have said a couple of times ‘15 to be very strong.

I used a lot of time talking about commodity prices during my Q3 presentation. Nothing has changed.

We are absolutely convinced there is enough LPG, enough wet gas in the U.S. to export 32 million tons by the end of ‘16.

We think that growth in onshore crude drilling will come down and we think also that towards end of ‘15 and into ‘16, we will probably have less crude production than we have today even if the crude price comes back to $60. But we do expect to see huge growth in the dry gas in natural gas production and we think U.S.

will be able to deliver enough LPG for export in ‘15 and ‘16 and even further.

Yes. And finally on the – are there any [Technical Difficulty].

The time charter shorter level for 3 years to 5 years hasn’t really been moving at all. And I think if anyone want – if any owner want to do something, they have to be accepting levels in the mid-30s.

I think that’s leaving too much money on the table. We will not go for fixed price contracts at all.

We are working long-term to build up a small portfolio of TOS. We have currently some interesting discussions going on, but these will be priced on the floating price.

[Technical Difficulty]

We fix ships all the time. Right now we have two or three ships on subject.

It was hardly any waiting time in February. We don’t expect to see any waiting time in March.

There is lot of things going on in the sport market and we think this is confirming that there is lot of cargoes to be lifted and it is confirming to us that it’s very likely that we will continue to see this strong market go on further into 2015. And its also nice to see that India is now back to the premium market and I think for those of you who follow ship broker reports, you will know that Avance Gas was linked to extremely high fixture to India some 10 days ago.

Anymore questions from the audience? We can move to questions from the callers.

Operator?

Hello. Thank you for a very good quarter and impressive earnings and dividend.

I just want to spend a little bit more time on the issue with the falling oil price in the sector, the shale gas CapEx. I know some Norwegian brokers have made the bear cases on the point, but we haven’t really seen an effect yet on either cargos or rates.

Can you kind of help us understand a little bit better where the LPG is coming from, how important are the shale oil projects and when you see rig counts coming down for the LPG production and how much is LPG actually coming from LNG production or from other sources, from refineries etcetera? Can you help us understand a little bit how sensitive it is?

I mean so far, we haven’t really seen any of that bearish effect that some people are talking about.

I think that most of the people are quite convinced that there will be enough LPG in the states even with falling crude prices. We see in particularly one company having questions about availability of LPG, but all the others are pretty relaxed.

And when we speak to investors, analysts and people in the states, we never hear about this question at all. About between 25% and 33% of the U.S.

wet gas production comes from oil refining, it’s a bit difficult to say how much of the balance is coming from shale oil and shale gas, but with all the final investment decisions on LNG export project, the four Cheniere trains and the three [indiscernible] trains, we know that there will be an increase in natural gas production in the U.S., and in particular, up in the Northeast, there are some of the reserves, which are quite wet. So, we know that there will be an increased production of wet gas from the shale gas going forward.

We also see that the rig count is coming down. We see that the least productive rigs are being kicked out.

So, I don’t think we will see a reduction in wet gas production from shale oil until towards end of the year. And at the same time, we will see ramping up of shale gas production.

So, in general, we are relaxed and basically all people we talk to are relaxed about the U.S. wet gas production.

It sounds good. Another question on the widening of the Panama Channel, you talked about that supposed opening 2016, how do you think about the effect on the demand for tonnage miles given the shorter route through the Panama Channel, but also on the other hand side, you could potentially get more of the LPG from the U.S.

going to Asia, so maybe you get an effect of the business actually becoming longer due to that. And then also the Panama Channel, of course, has a fairly high cost to go through, so maybe some volume is actually not going through because of that.

Can you help us understand a little bit more the effect that’s something to worry about basically or is it may be even an opportunity?

Yes, Panama has a very interesting opportunity. And as you are pointing out, if the market is going to have a fleet utilization of 99%, we certainly need Panama to be able to ship enough cargoes to the Far East.

If the market sometimes in, I don’t know, ‘18 or ‘19 becomes slightly softer than it is today, then for sure no ships will use the Panama Canal. And I think in reality, you can look at Panama as a bit like slow steaming.

In the weaker market, the ship’s speed will be slightly less than it is today and we will go around Africa, Cape of Good Hope. In a very strong market, the speed will be higher and we will use Panama.

It’s very difficult to get any firm information about Panama. Official statements are still that Panama will open towards end of ‘15 early ‘16.

I think it’s too optimistic. And we haven’t seen the tariffs yet, but we do know that it will be [indiscernible].

And we think that it’s unlikely that ships will go both in laden and by less through Panama we think that in some cases we will go laden but in very few cases we will go ballast. The difference between 1 million ton on an annual basis through panama and around Africa is one and a half ship.

So although if we look at distance table it seems much shorter but because of the current under swell in the Pacific Sea you can’t take the shorter route and have to follow the current. So you will save one and a half ship on 1 million ton on an annual basis through Panama.

So the effect is not scary.

Okay. Thank you.

Okay. Thank you for calling and thank you for listening.