Avance Gas Holding Ltd

Christian Andersen - President Peder Carl Gram Simonsen - Chief Financial Officer

Jeffrey Schwarz - Metropolitan Capital

Thank you. Thanks for joining us for the second quarter financial result for 2015.

We'll move to Slide 4, the highlights for the quarter. The quarter saw spot rates continuing to firming, which gave TCE rate average of $86,900 for the quarter that is up from $64,800 in Q1.

As you can see on the graph on the right-hand side, we have matched our earnings to the Avance Gas Spot Index, which has been moved one month to take into account the fixtures being ahead of the market, and we outperformed by nearly $7,000 for the quarter. That gave TCE earning of $59 million, which is up from $40 million in the previous quarter.

We had an OpEx of $7,400 for the quarter, down from $9,000 in the previous quarter and average for the first half of $8,177. We saw Monsoon and Breeze coming back into trade, and we also saw the delivery of three ships since our last earnings presentation.

The Passat came in late June; Sirocco mid-July; and Levant mid-August. And the board declared a dividend of $1.20 per share for the quarter.

Moving to Slide 5, the P&L. We saw operating revenue due to both more operating days and also higher rates.

As commented, we had a lower OpEx per day for the quarter. This is mainly due to the capitalization part of the initial OpEx for newbuildings.

And we will see that this figure will even out as the ship come into normal operation, and we expect this to come closer to our previously guided OpEx of $8,600 per day. Our financial expenses increased by $300,000 due to increased debt and our A&G increased by $500,000 mainly due to increased employee cost during the quarter.

Our net profit was $41.3 million, $1.20 per share. Moving to Slide 6, the balance sheet.

We saw that both total assets and interest-bearing debts increased through the quarter, as ships came into our fleet. We saw that the free cash totaled $99 million per quarter end, and together with the undrawn credit lines of $50 million gave us a liquidity of $149 million for end of quarter and that equals an equity ratio of 56.7% for end of June.

And moving to Slide 7, the cash flow. Our net operating cash flow was $26.2 million.

The cash flow from financing investments was negative $48 million, of which $24 million was paid as dividend and a net decrease in cash of $22.5 million, mainly due to dividend payment and the delivery of Breeze and Passat. And I'll then give the word to Christian.

Thank you very much. Good afternoon.

As you can see, we have now 12 ships on the water. The last ship was delivered 10 days ago and we have two more ships to come, one is scheduled end of September and the last one is scheduled end of October.

We expect the ships to need about three weeks to do the final story, before leaving yard and gassing up operations, which is likely to be done in Indonesia, and the ships will be available in Singapore about three weeks after delivery. If we go to Slide number 9, we can see on the left-hand side, the fixtures we've done in the quarter.

And as you can see, we have outperformed the index quite a lot, and normally we have done this by Indian charters. But actually this quarter there has been less Indian charters than normal, and we have had a lot of traditional Baltic-related business outperforming the index.

I would say that probably about 50%, 60% of these fixtures are already in the quarter and the balance is for third quarter. The waiting days, on the right-hand side on Page number 9, is 0.9 days in average per ship per month.

So slightly less than 1 waiting day per ship per month during the quarter, and the fleet utilization has been about 97%. If we look at to Page number 10, and the driver behind the good quarter is of course exports and Middle East is still the most important part of the LPG VLGC route.

And the export, second quarter has been very close to the average over the last couple of years, slightly down in May and June, but this is normal seasonality. If we look at right-hand side, and we see that the U.S.

exports are picking up. This is the first quarter with full exports from three terminals.

The Enterprise is the biggest terminal, and Targa and Nederland are slightly smaller. The exports from U.S.

Gulf is now close to 50% of the exports from Middle East. If we look at more detail on the exports from U.S.

Gulf on Page 11, on the right-hand side we can see that year-to-date the export from U.S. Gulf to Asia is about 34% of the total export, and this is slightly above our expectations and a main driver for term freight rate for summer, as North America is taking about half the exports from U.S.

Gulf and the balance is going to Europe. These numbers on Page 11, we have also included July.

And still in July, a couple of more tons have been going to petrochemical industry. In Europe, we have even seen the cargo going to [ph] Vlissingen and Terneuzen and a couple of cargos to ARA for retracting.

Looking at Far East, China is taking a lot of the volume going from U.S. Gulf to Asia.

And in China we expect of about two-third of this is going to PDH plants and one-third is going to consumption. Looking at the graph on the left-hand side on Page 11, you can see a number of cargos in red and actual tons in blue.

We have seen that a number of cargos are going slightly down in June and is also below full capacity in July. What we have seen in particularly in Targa, but also to a certain extent at Nederland in Texas is that they have listed some cargos on smaller ships, 50,000 cubic meter instead of the 70,000, 80,000 cubic meter, and those ships are not included in these numbers.

If we include the 50,000 cubic meter, it will increase slightly. I think that in the capacity, there is probably room for a couple of more cargos in Nederland and probably also in Targa.

So they are close to full capacity and average per ship for second quarter is 1.3 million tons export on VLGCs from U.S. Gulf.

Going to Page 12. There is no big changes in the order book.

On the left-hand side, about one-third of the fleet for '15 delivery is now delivered, two-third remains. These are coming.

Some of them already been delivered, including three ships to us in third quarter and also the Dorian and BW taking ships, so the ships are coming. We do not expect any slippage.

Maybe there could be one or two ships under construction in China, but the big picture is no slippage in delivery in VLGCs. Some of you may have heard, there was an accident in Korea this week, where there was a fire on one VLGC under construction.

We do not know if that would delay the ship, but it should be. But again, the big picture is that the ships would be delivered on time.

And as you can see, the peak is next year with more than 40 ships scheduled. There are also some rumors about Oriental ordering ships for ethane trade and multi-gas ships.

It's not included here. This is clearly [ph] rig ships.

And we are a bit careful to include the multi-gas ships and the ethane ships, and we also are awaiting the final confirmation of the business bond. As some of you will recall, Oriental has been announcing every now and then over the past five, six years that they have done big orders.

They have been standing at conferences, saying they have gone through ordering a lot of ships and charter a lot of ships. So we are a bit cautious to include those numbers.

For '17, there is no activity yet. We think that the newbuilding prices for VLGCs in Korea remain pretty firm.

We understand that there are letter of intent for one or two ships for '17 deliveries at pretty high 70s. So we don't expect the yards to lower the prices and we don't expect a rush for orders with the current order book.

So our expectations for U.S. export, Enterprise terminal opening fourth quarter this year is to lift 66 terminal opening first half next year.

We remain confident for next year. Obviously, the slide is there with this order book, but there is a fantastic upside as well.

If we go to Page 13 and summarize, Avance Gas will continue to pay strong dividends based on our earnings in the spot market. We have booked more than 95% of the freight for third quarter.

And for those of you like to play with numbers, you can have a look at Avance Gas Spot Index. They give 30 days prior to the quarter, and you will see that the index is close to $100,000 per day.

We have been delivering numbers sometimes above the index, sometimes below the index. The second quarter is above the index, $87,000 per day.

We expect that third quarter will be something like $8,000 to $10,000 above second quarter. The last two ships will come making money in fourth quarter, and we think that there will be more volatility.

We have seen the market coming down in August. There are ships coming into the market, so the freight rates are volatile.

We think that will continue in fourth quarter and first quarter, but we think the average rate for the balance of '15 and also for '16 will be strong. Anything else I should say, Peder?

Thank you very much. We'll open for questions.

We'll start with the audience first.

On your receivables, which increased quite a bit, is that [indiscernible], I understand that the price is not being [indiscernible].

I think mainly it relates with two things. One is that we have, for this quarter compared to last quarter, a lot of fixtures late in the quarter, of which payment came in the following quarter, in third quarter.

So that's one of the reasons. Another reason is that there has been a lot of delay in Indian ports, which both delays the payment under the freight, which is due for discharge and there has also been some demurrage accruals that comes into the receivables.

There is no change in the payments that [indiscernible].

No. Not at all.

And recently with the drop in oil price, I don't think anything kind of the change in [technical difficulty] change in attitude, anything at all?

I think there is one big change and that's the price of the dumpers. We were able to send a ship last week at the price of $210 per ton.

Thinking a couple of months back, we paid extra amounts of dollar per ton. So the earnings are higher, because of dollar bunkers.

When it comes to two other customers and trading activity, we have not been able to see any change whatsoever with the course of the change in oil prices. But obviously, LPG is becoming cheaper.

It could be positive for trading. It could also be a price war or competition between Middle East and U.S.

Gulf. So it's a bit disconsolate to draw any firm conclusions of business as such as going steady.

So there is no enterprise too coming at the [technical difficulty] expect that terminals to be fully optimized and fully utilized, I mean a lots of volumes [technical difficulty]?

We think that the new terminal will operate at the levels above 90% like the three other terminals, and we think that the molecules, which are already subscribed for will be moved.

Finally, on asset value, any change there either -- do you have your [indiscernible], and any activity going through the S&P market that you see here that [indiscernible]?

To the last part of your question, no, I can't really say anything. To the first part of your question is there any activity in the secondhand market, there are some torques.

Are they firm? Probably not.

We are obviously looking at everyone giving us offers to buy or to sell, so far, no firm activity.

We can take questions from the callers.

Chris, just wondering, why do you think the U.S. propane inventories have continued to build to such high levels.

Is terminal capacity the bottleneck, was ship availability the bottleneck? And if neither of those two, why aren't we're seeing, I know exports are very high, but why aren't we seeing even more exports with 95 million barrels in inventory?

I think that the ships have been a bottleneck second quarter, that the freight rates are extremely high. And throughout second quarter there has been a limitation to available ships.

So as we have discussed on a couple of occasions, most of the shipping capacities for the U.S. exports have been locked in by the cargo owners at fixed numbers, quite much below the current spot market or the current spot market in second quarter.

So I think when the inventories are building and people are trying to lift out larger cargos or placing an extra cargo, they have to go to the spot market with few ships available and freight rates very high, I think that's the hurdle.

So with some more availability now ships being delivered into Q3 and freight rates coming down from your expectation, I guess would be that perhaps will soon see the sum increase in the number of cargos with perhaps terminals becoming the bottleneck until the new enterprise terminal coming on.

Yes, I think we will be moving from the ship bottleneck and a terminal bottleneck, which we have now, when we come in continuous during the fall, I think then there will be, the pricing will have to fall together. Most of the cargos in the U.S.

Gulfs are already sold, converted into fixed price. If you're going to do the spot sale, you have to get it to make sense.

So that's going to be the challenge in the months to come, but I do expect to see more activity. And as you know, the Baltic is now trading at about $80 per ton, which is about $65,000 per day.

So we see there is lot more enquiries for freight out of U.S., more opportunistic. So I do expect to see more activities from the U.S.

We have a question from the audience here in Oslo.

Can you say something about your view on [technical difficulty] volumes from the U.S. back there and [technical difficulty] in terms of the origin?

In our models, we are assuming that about 30% of the U.S. export will go to Asia.

And if we look at ship employment, in order to do 1 million tons from U.S. to Europe or to South America, you need 2.5 million shipped per annum.

To do 1 million tons from U.S. Gulf to Asia, excluding Panama, you need six ships.

So in order to be able to take away the order book and the new deliveries, we need a certain amount of export from U.S. Gulf to Asia.

And in our models, we have been assuming 30%, which is close to 10 million tons in 2016. We are assuming that Panama will open for VLGCs in mid-16s and we have been assuming that the ships will go lading through Panama and [indiscernible] via Cape.

So if this is right, the freight market in 2016 is going to be very nice and the fleet utilization is going to be about 92%.

Have you seen any interest of moving U.S. cargos to India?

No, not yet. It might come, but again, India is a challenging market to operate in.

It's very rigid. So the Indians, they have very strict procedures for buying molecules and fix the ship.

And right now, I think it's difficult to match the Indian way of working with U.S. nomination procedures brought from the terminals in U.S.

Gulf.

On India, do you see the just sudden increasing or decreasing over the next year? And also, are there other areas where there is some problems going forward?

In India, there are two markets East Coast and West Coast. And the West Coast market, they are easier to build.

There are modern terminals with less congestion. On the East Coast, it costs bit, its few terminals, its low storage, and as the Indian import is continuously increasing, we do expect that the congestion on the East Coast will continue in the foreseeable future.

The terminal situations in most of the areas in Asia are not the problem, not the challenge, not the bottleneck. So far we don't see any congestion in Asia.

We do not expect that to happen during '16, if and when U.S. are exporting 10 million, 15 million tons, in addition to the Middle East export, yes, there could be demand for more terminals, because these storages are today about 12 VLGCs worldwide as flow-through storage.

Long-term, three years, I do expect that this will increase.

You just mentioned $1.20 dividends for the second quarter and [indiscernible] dollar a share. Now you've guided for higher rate at third quarter, so we can expect higher dividend this quarter.

Will you automatically payout like you've done before the publishing of the cash flow or will you look at the low rate in third quarter is below before you make a decision for the guidance to be higher.

If I am to make the decision, I would certainly continue paying out all earnings from the freight and dividend. It is the Board, has taken the final decision on dividend.

There has been no change in the dividend policy in Avance Gas. So it's a fair assumption that we will continue to payout full dividend.

You had earlier guided that for 2017, you have seen newbuilds [technical difficulty]?

Yes. End of Q&A

Thank you for coming. Thank you very much.