Avance Gas Holding Ltd

Peder Carl Gram Simonsen - CFO Christian Andersen - President

Thank you. Thank you for dialing in and thank you for coming to our second quarter earnings release.

We'll just move to slide number four, which shows the highlights for the quarter. We achieved a TCE rate of just below $12,500 approximately $2,000 up from the previous quarter.

Our OpEx slightly up ended at $7,800 compared to $7,500 in Q1. Our available liquidity largely unchanged from the previous quarter, reflecting cash position of $64.9 million and available revolving credit lines of $75 million.

And lastly Marius Hermansen of Seatankers Group was elected to the Board at our AGM in July. Moving to our income statement that’s slide five; our TCE earnings came in at $15.8 million, up from $13.1 million which is a reflection of improved fleet utilization and a slight firming of spot rates.

Our operating expenses increased by $500,000, which was largely due to modifications made on to our ships to comply with Panama Transit. Our administrative and general expenses were down $300,000, which reflected a one-time impact of professional fees in the first quarter.

Our financial expenses were up by $200,000, which reflected slightly higher LIBOR rate. The interest rate swaps that became effective during the quarter, which was offset by a lower average debt as our revolving credit facility was partly repaid through the whole quarter.

We reported a net loss of $11.1 million or $0.17 per share. If we move to the balance sheet on slide six.

As mentioned our cash position was slightly up by $200,000 at the end of the second quarter. Our total assets ended at $924 million, which reflected the depreciation of the fleet and slightly lower receivables from this previous quarter.

Our interest-bearing debt ended at $472 million, which reflected the repayment of scheduled repayments of our debt, and our equity ratio was 46.4%, slightly down from the previous quarter. If we look at our cash flow, we can see that our cash flow from operations was $6 million compared to negative $3.6 million in the first quarter.

And this is mainly due to cash flows timing of freight payment and voyage expenses, which was favorable in this quarter compared to the previous quarter. Our net cash flow from financing activities was due to -- was negative $5.5 million, which equals our scheduled repayment each quarter following the bank agreements that we entered into last quarter -- last year.

And our cash position as mentioned equaled $64.9 million and total liquidity of $140 million. If we move to slide eight.

We have highlighted our cash breakeven, which we are very much focused on. We have illustrated our cash breakeven based on the actual first six months of the quarter and the estimated cash breakeven for the remainder of the year.

And this comes in at $17,300 per day and this includes the effect of interest rate swaps as mentioned, which will have full effects from the third quarter. And if you add the drydocking which will follow for the next few years, each drydocking will have an effect of around $230 per day.

We continue to focus on our low cash breakeven and look after our cash position as our main focus. Let me give the word to Christian.

Thank you very much. Good afternoon.

Let's start on page number nine, I think most positive thing I say about last three months that the weather [ph] results of Europe haven’t been too bad. Apart from that it’s not been encouraging.

Looking forward, the positive impact about the order book is starting here. We have now delivered more than half of the gas and by end September most of the 2016 will be delivered.

Order book today is about 12% of the [indiscernible]. As you can see on the right hand graph, page number nine is the huge number with [indiscernible] September and then based on the [indiscernible].

Of the ships on order, there are two to four ships at the yard Jiangnan in Shanghai which are a bit uncertain about the delivery. They are -- two of them are ready for delivery, the owner has so far decided not to take delivery.

We do expect these four ships to be deliver this year, but they might slip into next year, but the ships will be delivered. If we look at the Avance Gas performance, on page number 10, on the left hand side, we compare our fixtures with the spot index.

And you will see on the graph, there are four or five fixtures at the bottom on the graph at the point zero. And this is floating freight, so the freight is based on the Baltic formula and we don't know the outcome of the freight as we fix.

The other fixtures are done on fixed price and therefore we know how much we will make on these voyages. Particularly in June, we had a better of positioning, so we took positioning of ships from discharge port and move them to Singapore and even on a couple of locations to the Middle East.

This is a cost when we do it and we do it to position the ships for cargoes. So, when we fix these ships on a round shape the balance voyage will be much shorter and that's why you can see on the left hand graph on page number 10 that some of the fixtures done in June is very high.

So, this is because the cost of balance has mainly been taken in the previous month. Looking at waiting time, on the right hand side, on page number 10, June was terrible.

We had on average about seven days waiting per ship in June. And this is a bit the same as we have in February, in February those had about seven days per ship per month.

If we look at year-to-date by end June, the data is four days per ship per month. This is still more than we have the previous years, but we do expect and we do hope that we will be able to take this average down by higher performance in the next coming month.

The utilization is about 88% by end June. Moving to page number 11, and the exports, the Middle East is basically as expected, it was very much down in February as you might remember looking at the past three months or second quarter.

It's been very much, very close to three years history. Looking at U.S.

exports, on the right hand side on page number 11, it’s disappointing and you can see that the numbers are falling dramatically in the latter part of second quarter with a small recovery in July. The numbers on page 11 is including July numbers.

We can go a bit more into this at page number 12. On the left hand side, we are showing you the 2016, this is total listings of VLGC cargoes in U.S.

Gulf and U.S. East Coast.

In U.S. East Coast is one terminal Marcus Hook doing one to two cargoes a month, but the main number of these cargoes are from U.S.

Gulf. Looking at 2017 on the right hand, you can see that we started with 53 cargoes in January, which fall down to 43-44 in February, picked up again with 51 cargoes in April before falling again and this year low was 32 cargoes in June.

And this is the main reason for the slow market in the latter part of second quarter. Looking at July again 38 cargoes have been lifted on VLGCs in U.S.

Gulf and U.S. East Coast in July and from the numbers we've seen from August which is still not verified 100%, so August estimate, looks likes it will be about 40 cargoes.

So, we are a bit positive again seeing there is more activity out of the U.S. Gulf, although with full year capacity between 55 and 60 cargoes, we are far away from 100% utilization of the terminal.

Destination is very important, and on page number 13, we are comparing 2016 to 2017. And it's important to see that export to Asia is growing.

In ‘16, 52% of the export from U.S. Gulf and U.S.

East Coast went to Far East. This number is up to 64% by end July.

So, there is a big, big export and it's a growing export to Asia. What we have learned this year is that the freight market on VLGCs is much more dependent on the positive deferential from U.S.

to Asia. Some people are calling this the arb and we need -- we see that there are less take or pay contract, but we see the customers -- our customers they need to be able to put together cargoes and make money before they decided to lift.

The biggest change this year is that some of the Asian importers have included value, which is the full price in U.S. Gulf in their price formula in Asia, this is particularly in Japan.

So, the Japanese importers are less dependent on the arb than other importers. They are dependent of the arb, but they are able to take away most of the risk on the product side and send it to their customers.

So, when we looked at the numbers behind the graph on page 13, we see that import from U.S. to Japan is very stable in all FOB/CIF differential price scenarios.

We do hope that more Asian buyers will be able to book value price into their customer pricing and thereby taking away the geographical risk between U.S. and Asia.

Page 14 is trying to summarize and as I said we are more dependent on the arb, the FOB/CIF differential for exports, long-haul export from U.S. to Asia.

We think there is limited opportunities to export to Europe and South America mainly because of old age or because of receiving facilities. So, the only market, which are able to take unlimited tons of LPG is really the Far East.

So, the main problem we think is that Mount Belvieu the FOB price in the U.S. is too high to support sustainable export.

And we do think that overtime Mount Belvieu will come down and will have to come down to be able to get out all the propane which needs to leave the U.S. And with low U.S.

export, the freight market is suffering. But the most important part and the most important support for the freight market is really the U.S.

export to Asia. As I said another 11 ships will be delivered this year.

And when they are done, it's limited number of deliveries for next year. We have however seen some newbuilding activity, and it's interesting to see that two customers, two traders have ordered new ships.

Petredec has already a huge fleet of VLGCs, it's not really a big news, but they are adding two more ships to their fleet. But it's very interesting to see Vitol ordering VLGCs this is the first time I have seen since I started in LPG in 1990 that Vitol has ordered LPG ships VLGCs.

They invest in wide range of ships, but this is the first time we have seen them owning VLGCs. They have ordered two ships, they have options for another up to six ships, and it's still not decided the size of the ships, the order is traditional VLGCs of 83,000-84,000 cubic meter ships.

But Vitol have an option to reduce the size down to 78,300 cubic meter, which is the design to be able to go through the old Panama Canal. And as you might remember from my previous presentations, we have seen that the new Panama, the neo Panama has not been able to take all the VLGCs that we want to put through Panama.

So there is growing interest among traders to see this old Panama design. So far this year, two ships are sold for recycling, one of them were sold this quarter, second quarter, 99 built ships owned by NRK, Japanese ship owner.

So with the new orders with the firm orders we've seen with the two ships disappearing, the order book is about 7% of the existing fleet by end of the year, this is total of 18 ships. So I have to repeat, it is looking promising forward.

We do think that the remaining part of this year and probably early part of next year is going to continue to be very challenging on freight. But we think it will slowly go up and the feedback from the chartering table today is that we are able very, very small and increase freight a bit here and a bit there.

And the activity is not too bad, so we think that we have seen the bottom. However, if the U.S.

export falls down again, freight market will come down. I have to repeat what I'm normally saying when the market is as bad as it is now, the upside is much, much greater than the downside.

And for Avance Gas, we focusing very much on operations, cost and also the way of working. And as Peter were saying, it's very important for us to maintain our strong balance sheet and to be able to stand even if the bad freight market continues longer than we do expect.

So with this, we open up for questions, we start with the audience here? Yes.

You mentioned in your report [indiscernible] can you disclose with your COAs rapidly and what kind of levels and structures you're seeing with your clients now?

Yes, for those who didn't heard the first part of the question is about our COAs. And we are generally very interested in COAs and we do have a number of COAs.

However all our COAs are based 100% on the market. So that's why we don't go out and say it's so many days.

It's quite a lot of flexibility on the COAs. But since everything is marked 100% market related it's just a market picture.

So we are not going into details about that, but we are interested to maintain and build up COAs. We are not interested to do fixed price neither COAs, neither time charters today.

And there is a lot of -- it's not a lot, but there are some activity out in the market for fixed -- people are asking for fixed price three year time charters Statoil issued a tender recently for five years' time charter fixed price. So we do see that some people seems to think, but the freight market is very low and try to attempt owners to do fixed price we are not interested.

And your slide 10 where you have your fixtures where do fixtures are billable in the market. Does that to-date is building or as far as you focus.

Are those docks to-date are loading or they [indiscernible].

Page 10 on the left hand graph, this is the week of fixture. So in a bad market as we have now the date of fixture is a bit closer to loading date than in a good market.

But this represents the date of fixture, the date we go on subject compared to the index at the same time.

But it's fair to assume that July will have a few market [indiscernible].

I hear what you're saying.

Finally there is a Panama Canal you have there will be a price hike the [indiscernible] how that will impact the way you are thinking and thereby --?

I think the biggest conclusion about Panama is that there is not enough space for VLGCs and we see a great number of VLGCs ballasting via Cape. So I don't really think the pricing will change a lot because there are really few ships going through Panama anyway.

On both [indiscernible].

Yes particularly on the North bound, on the ballasting it's toll load [ph] for a very long time.

Thank you. You've talked about the sort of necessary increase in Mount Belvieu price, it probably again.

But if you look at the production or our cost versus other in ‘18, and the inventories in the U.S. you releasing that is sort of viable scenario?

We see that inventories in U.S. are higher than expected -- are lower than expected.

So in that respect, it puts price pressure on Belvieu. When we’re looking at floor cost for second half '17 and for '18 the floor cost for shale oil and shale gas production in the U.S.

is higher it's expected as gross. And we will have more LPG.

So yes, we do believe that either Belvieu will fall or CP will increase. So the arb will widen.

But I think it's fair to say that the conclusion from this summer and last summer is that the arb goes up and down continuously and it's very much down to crude prices. And trying to find out if Belvieu correlates more with crude than CP it's a bit difficult.

And we can talk about what's going to happen next month, but to have a firm opinion on this for '18 and '19 is almost impossible.

You think there is a sort of a number of holdings that you need to have on a monthly basis. It sort of has [indiscernible]?

Yes I do think, but we haven't really started calculating that very much. Because we'd like to see the order book being delivered or at least this year being delivered.

And then run calculations based on the distribution how much goes to Asia or how much goes elsewhere. Yes, of course there is a certain terminal utilization, which will give a bad or did market or let's say the turning point.

And finally on your COAs strategy, even if it's on a floating rate and you get what the market is. Having COAs that is in anyway sort of impact to our utilization because you need to wait whether the client owning it less of the system.

No, well we think it's possible and that's why we have it. And we think that normally a COA will be evenly spread over the year.

So you will employ your ships in the COA in the weak part of the year and the strong part of the year. So it will give us employment throughout the year.

The nomination structure is in such a way that we don't have to sit on ships and would serve them for our clients. It's a very close dialogue and it's a bit like fixing the spot market.

Okay, thank you.

Okay. I think we'll open up for questions from the dialers?

Okay, thank you for coming.

Thank you.