Avance Gas Holding Ltd

Peder Simonsen - CFO Christian Andersen - President

Thank you. Thank you for joining us for this Q2 presentation and thank you for those dialed-in to the conference call and webcast.

First, I will start with the highlights and financials as usual and then Christian will cover the markets update and outlook. If you move to Slide 4, the quarter impacted by the weak market resulted in net loss of $14.5 million which includes a $6.1 million impairment charge on the LNG carrier Gaea.

This really compares to the net profit of $21.1 million in Q1 '15. TCE rate achieved for the quarter was $15,142 compared with $38,707 in Q1.

Since the quarter end, we have drawn $25 million under our credit facilities as well as received demurrage payments and also further freight receivables which brings our current cash position to close to $92 million as of today. If we move to Slide 5, the TCE earnings for the quarter was $19.2 million, down from $48 million in the previous quarter.

Our operating expenses were up slightly from previous quarter, mainly due to one-off expense relating to the Gaea. The impairment charge of $6.1 million was recorded as mentioned.

The non-operating expense which is mainly financial expenses were mainly unchanged for the quarter which gave the result as mentioned. Moving to the balance sheet; the total assets were down following depreciation and impairment and also the dividend payment relating to the Q1 results.

Our receivables decreased to $35.8 million which includes a reduction of $2.4 million in demurrage payments. The demurrage in the Q2 was $20.3 million and as reported we have reduced to approximately $13.5 million during the course of Q3.

Net total interest bearing debt decreased by $10.7 million, and our cash undrawn credit lines were $57.3 million and $25 million respectively in the quarter. The equity ratio was 43.7% at the end of Q2.

To move to the cash flow; the cash flow after interest expense from operating to this was $7.7 million, the cash flow includes $2.4 million as mentioned in demurrage compared to $7.2 million in Q1. The net cash flow for the quarter was negative $13.9 million which includes the $10.3 million dividend payments.

I'll then give the floor to Christian.

Thank you very much. I'll start at Page number 4.

And needless to say, 2016 has been a big disappointment. The freight rates have been falling from day one and has continued to fall throughout, not only first and second quarter but this has continued into the third quarter as well.

The freight rate is the lowest, we've seen for many years and although the Baltic freight level is now being basically unchanged for the last couple of weeks, the bunker charges -- the bunker costs came off significantly last week resulting in freight rates achieved from the company coming even further down. This is a big surprise for us and if you look at the underlying employment of the fleet and the exports of LPG from the Middle East and from the U.S.

it's really surprising and it doesn't really make sense, but market is market. If we move to Page number 9, the orderbook; this is the orderbook -- the left hand graph is showing the orderbook, going forward you can see that the majority of the ships this year has been delivered.

75% of the ships scheduled for delivery this year is delivered and the majority -- the biggest month was in June where we had 9 ships delivered. It takes two to four weeks from the ship is delivered from the yard until it's loading -- ready for load and have positioned itself to the load port.

We have another 24 ships coming next year and that's why we are negative to the market, going forward we don't expect a big growth in activity next year. There is another 10-11 ships coming this year, there will be more export coming on the stream this year so we are not worried that the market is coming further down this year but there is a question mark about the sustainability of the market for the next year.

There are a couple of orders also going into 2018-2019 and there are even a couple of orders for 2020 but these together are only seven ships, so it's not going to have a big impact; so the big one for this market is really the orderbook for 2017. As you can see, most of the ships are delivered this year and we have another 10-11 ships to be delivered.

25% of this year's orderbook is to be delivered but if we look at the global orderbook compared to the existing fleet, it's only 18%. So the orderbook in general has come considerably down of this late over this year [ph].

Page number 10 is the usual comparison between the Avance Gas spot index and our fixtures. And if you look at the next hand graph, we have dotted in the fixed price business we've done this year during this quarter and this is the day when they are fixed compared to the market that week.

Most of these ships are fixed in advance to three or maybe four weeks but for loading. So the actual voyage is starting late as the dot is showing.

But this is to show you how we are fixing compared to the spot index and we are quite happy with what we have achieved. And I see that some of you are bit disappointed with our earnings compared to the index and we are reporting slightly below the index for the quarter.

The main reason for this is that we have taken a lot of floating price fixtures in the first quarter and also second quarter. So of these -- of the fixtures we've done during the second quarter, eight of those are floating price relating to a future Baltic.

So for instance if we fix in April, depending if we are loading in the Middle East or in the U.S., we are receiving freight based on May or even June Baltic. And with the falling Baltic throughout the year, this has led to a slightly weaker performance this quarter than you should expect when you look at the freight level.

So of the fixtures we've done this quarter, 50% is fixed, 50% is floating. And also if you look at voyages we have performed during second quarter, five of these are related to floating price fixed in the first quarter.

We didn't use the waiting time -- the waiting time is low and if you look at the right hand graph on Page number 10, you can see that the monthly average waiting per ship year-to-date is less than three days and this is including January, as you might remember, we had a lot of waiting in January. So the average year-to-date by end of June is less than three days and when you look at the freight rates, you would assume that there was even more waiting day.

So we are happy with the waiting days and also going forward into July, the waiting is very low. Page 11 is about export of LPG and this is really the big surprise when you look at the fleet utilization and the freight rates.

While the fleet utilization is very high, it's 94% and the export of LPG from the Middle East is very high. So if we look at left hand graph on Page number 11, this is the Middle East, and the exports in second quarter was 9.7 million tons; first quarter was 9.2 but there is an increase from first to second quarter and if we compare this to second quarter 2015, the export was only 8.4, so there is a considerable increase of U.S.

-- sorry, the Middle East export this year, this quarter compared to previous quarter and the same quarter last year. The main increase from last year to this year is Saudi Arabia and to certain extent, Iran.

If we looked at the right hand graph, we can see that the U.S. export is high.

Second quarter this year the U.S. VLGC export, and remind you I'm only talking about cargos loaded on VLGC, is 9.4 million tons.

This is the same as we had first quarter this year. So I read different places just -- people are talking about lot of cancellations of cargos from the U.S., the number of tons from first quarter to second quarter from U.S.

is the same. And if we compare this to last year, second quarter last year, the export was 4 million tons compared to this month's, this quarter's 5.4.

So we can't see any reason for loan freight rates because the activity in our markets are very high. If we look at Page number 12, the left hand graph is showing the number of cargos and there was a small decrease as you might remember in February and March, was maintenance and a couple of cancellations combined with some cargos being moved on smaller tonnage.

If you look at May, May was record high, the highest number of cargos ever; into June it takes down a bit and in July, which is included on this graph, the same number of listings as in June. And the average this year is like 36 cargos lifted on VLGCs from U.S.

Gulf and we are including also Marcus Hook which had -- I think it was five cargos second quarter this year. So the activity -- export activity from the U.S.

is very high and contrary to what a lot of people are saying, most of these cargos go to Far East. Year-to-date, by end of June, 51% of the U.S.

cargos had a direct export to the Far East. In addition, there are some reloading's in the first quarter after Panama where cargos are loaded onto VLGCs and taken to the Far East.

So the actual number of VL export to the Far East is higher than 51%. In lot of talk about Panama and we have to my knowledge had two ships going to Panama in the second quarter, there was a bit -- we were both to be the first ship through but utmost you have plans for big events, was able to get the first passage to Panama and we have the second and the third.

Most of the U.S. cargos bound for Far East is going via Cape [ph] because of the low freight.

Page 13 is the summary. So it's important to see the U.S.

exports are continuing at close to 100% utilization and the U.S. export to the Far East exceeds expectations.

When we planned for 2016, we didn't expect to see more than 15% [indiscernible] but this is actually what is happening. We also have to accept that the pricing environment in the LPG product market is very difficult and we've seen that the loss of the traders in VLGC from the West segment have had difficult times, both first and second quarter.

And we see that there are a couple of cancellations on U.S. cargos.

We see that there are some of these progresses being mixed on smaller ships. We also see that some of the loading from the VLGCs are less than fleet cargo.

So because other customers are losing money, they are trying to lift less but the number of cargos are surprisingly high and most of these cargos have a commitment they need to fulfil the contract, the delivery contract. So our customers need two products.

So the huge flow of LPG going from U.S. to the Far East even if it doesn't make sense economically on the short time view.

We see improvement in the LPG prices; we do hope that when we come into fourth quarter, that the LPG prices will improve even further enabling our customers to make money and pay us more rates. As I said, there are another 35 ships to be delivered this year and next year.

This is about 15% of the existing fleet, so there is lot of ships coming. And I've said on several occasions, that I don't expect any slipperage or cancellations of newbuildings in this segment.

These ships will be delivered on-time. So what can we do?

Well, we are certainly trying to keep our ships employed, we are certainly trying to push the freight as much as we can but we have to be realistic and in this market we are price taker, we don't really have any impact whatsoever, so we have to face the market. We are trying to avoid if possible, floating price and trying to get fixed price.

So for us there is a focus to reduce while keep ships moving, reduce costs and maintain our cash as best as we can. We think that this is going to be very important over the next year and a half at least, to be able to have cash at hand because we think that we are going to have challenging markets, at least till we enter market of 2017-2018.

We are in very well advanced discussions about selling our LPG storage ship; the LNG carrier Gaea and we expect this to give us another $13 million to $13.5 million in cash to the Company. And we do expect to be able to announce an agreement on that pretty soon but you know things have a tendency to change [ph].

As of today, our cash position is $92 million. We have about $13.5 million in outstanding demurrages.

There is good track record on paying demurrages, we had a good dialogue with our customers and we do expect to be able to receive 100% of the outstanding demurrage, that's why we had included that one on the graph on the right hand side, the demurrage as a part of our cash position. So with this I am going to end my presentation and open up for questions.

We'll start with the audience here in Oslo.

You say you're focusing on reducing cash breakeven, yet you draw $25 million on the RSA [ph] which is not necessary. Right now what do we need to -- is there a better way to going away if you're going down?

I think that it seems to us that our investors and spot analysts have had problems to understand the facility, and we think when we have cash in the bank they will certainly understand that the cash is there. Well, that's the main reason for this.

And you hope for increasing LPG prices or see increasing LPG prices into the winter. What do you think is going to drive that?

Is that merely a reflection of oil prices going up or is there something more technical related to LPG which is I think once payer wants to see is of course not the price increase without having any effect on propane. What do you see there looking forward?

First, I'd like to remind everyone that freight is nearly about supply and demand of ships. So when we price freight, we have to look at our competition and we don't really ask our customers if they make or lose money on chartering our ship.

Having said that, of course it's easier to argue for good freight when our customers make money and we certainly hope that they make money all the time. So LPG is difficult and LPG pricing is difficult, and as you all know, one of the main challenges with understanding and unpausing LPG is that there is never ever been produced a ton of LPG because anyone wants LPG, it's a byproduct which they get from other things.

So in the end, this is about crude prices, it's about gas prices. We think that the Middle East produces are lower in their FOB price and thereby the fixed price in Asia in order to keep market share from the U.S.

product. And in September/October, normally the Middle East produces are renewing their one year contract for LPG deliveries.

So we do hope -- and it's quite normal to see that towards mid second half of fourth quarter, the LPG prices in the Middle East are coming up thereby they fixed prices in Far East, and if that's happening this year as well, there will be more competitive LPG from the U.S.

When do you expect that? Is there sort of a timeframe for that or…

The collection of demurrage is ongoing and it's coming in money every week but this is something we do every day.

Okay. So as you said all of the 13 would be arriving in…

We expect that, yes. So far we haven't written off any demurrage claims and there we have a close dialogue with the people who owe most money and they are coming in money or the time we had the combinations in one of the customers, actually today or was it maybe yesterday or is another big chunk of money coming in.

So this is looking positive.

And then you said that you would like to try avoiding both fixtures and you've done so, you've done it in the second quarter. I'm just wondering whether it's possible in the market -- sort of weeks [ph]?

That's difficult to say. At the levels we have today and if you look at Avance Gas spot index, from last week due to the high bunkers it was below $5,000 a day.

So we don't want to come in a position where we might be losing money on the voyage. So in that respect we kind of have a strong argument, we can't expect the growth in price because it's paid so low that we might end up paying you money to fix our ship.

So yes, I'm positive, I think we will be able to avoid it and if we have to take it we'll be having to get the floor to make sure that there will be a positive contribution.

And then on the charts you are showing number of liftings in the Gulf and the volumes -- can you sort of explain what it has been in July & August given that you are in there?

The August numbers are bit early, the July numbers are included on Page 12, on the left hand graph. We do see that the number of liftings from the U.S.

is about 34 or 35 which is the same as we had in June.

Thank you.

Hi, you mentioned that you think demurrage is going to be challenging for delivering for more in 2017-2018. At 10,000 a day, you're burning $160,000 of cash every day and assuming you have a liquidity covering for $30 million but $70 million you're showing you're just going to take your fleet forward which is just about where they're going from 2017-2018.

And my question is really, are you in discussions with the bank already in terms of looking at structures and additional rate to reduce cash breakeven further should the market remain as we head this way?

We are always having a very close dialogue with our banks. We have not entered into any discussions whatsoever on the loans and the covenants.

And this is something which might happen in the future but as we judge the company right now, we are in the good shape and we have necessary cash liquidity and reserves. We understand that the market -- if it's going to be as bad as we fare until the winter market of 2017-2018.

You said that you had become a part taker and from where theoretically could you derive pricing power if our -- move something and stay in Q4, like that's for instance that would contribute more for your equations. Did you mention some talks about where pricing power could come from even in West demand?

That's a very difficult question and it's really down to the charting desk of all the ship owners to have a view that the market can afford to pay more freight and fight for it. Today it's a lot of fear in the freight markets seen from the owner's point of view; there is a lot of relapse from the traders pushing the market down.

So we don't have any pricing power and we have certainly not had in '16, we can argue that we might have had it in certain times of late '15 but generally pricing power in the hands of a ship owner is rare to be seen.

Just a follow-up a bit on the last question on balance sheet, what's the next point where you will do loan-to-value Christian and where do you assess the Chinese build resale where volumes are between what's up in the spot market and time charter markets?

So the next testing, quarterly -- regarding on where the organization is present, going forward it's very difficult to say. Peder?

I think that when you look at evaluation of the fleet and if you look historically on the VLGC fleet, it's not really freight that is moving evaluation of the fleet, generally it's the newbuilding prices. And what we've seen in 25 years, I've been in the VLGC business, is that the variation of the newbuilding prices on the VLGCs on much, much smaller than in any of the segment.

So yes, we can see a couple of scenarios where evaluation on the fleet might come down but we don't really expect it to be priced based on the current spot market. And I'd also like to remind you that people are talking about the valuation of the Chinese build ships, people are talking about that there should be a certain discount of these ships compared to the Japanese and Korean build ships.

In the freight market there is no discounts whatsoever, not in this market and not when the market was $120,000 per day. On a day to day trade, our Chinese ships are getting paid the same dollar per ton as our other fleet and because of the speed and consumption on the Chinese ships; they deliver something like between $1,500 to $2,500 per day, better than the other ships because of the consumption.

[Indiscernible].

Strangely enough, these shipbrokers have an opinion that the Chinese ships should have a small discount to the Korean ships. We don't understand why but that's the reality.

Do you have the other two [indiscernible] and I assume running or these are all your ships? Have you slowed down these -- what's your carrier current -- do you see that trend among your competitors that these are also taken out in all your segments?

Yes, the ships are slowing down during this late [ph]. So what we do is really to make the speed we need in order to meet the terms and if we have enough time we will slow speed of the ships run in Baltic.

It's still our customers who is deciding the speed on length and normally they like to maintain service speed in order to meet the late terms for the delivery of their cargo.

Do you think we are going to see hence scrapping or how long do we have to stay below cash even forget the stockings and buyback options [ph]?

I don't really think we will see scrapping. If you look at the fleet, there are really very few ships being scrapped.

And maybe there are -- our competitor will say there are five -- some people will might say there are 10 or 12 scrapping candidates [ph] but I don't know. And what was seen on the older part of the fleet, they've been changing hands over the last couple of years at very, very high prices.

So I think scrapping is not going to save -- I don't expect to see any -- lot of scrapping in next year.

All right, thank you.

Just a quick question on the pricing, the Middle East; why is it not expected that they will lower the price or can you explain the average buying price there?

Well, I can't and I don't think anyone can. As you know, the price is set price, they ramp up rate once a month, it's the solely contract price.

And it's always a big surprise what number they arrive at but I think we can generally say that there had been -- it seems like they have been lowering the price a bit to meet competition from U.S. And is that a big surprise or not; maybe not, maybe it should be expected.

But then it forces the reposted price this year, some of the months that the prices are surprisingly high; so it's not really sustainable and it's difficult to understand that how they are offsetting this price.

No more questions.

Okay. Then we can take the questions from the dialers-in.

Okay. Thank you all for coming.

And we'll see you next quarter.