Avance Gas Holding Ltd

Peder Simonsen - CFO Christian Andersen - President

[Call Starts Abruptly] We'll start with slide number 4, which is a summary of the financials for the quarter. We came in with a TCE rate of 7,700 for the quarter, which compares to the 30 day adjusted index of 4,800.

The year-to-date TCE is 10,100, which compared to a year-to-date index level of 7,900 per day. We came in with the OpEx of $10,150, which corresponds to daily OpEx of $7,950.

The reason for the increase from the previous quarter is mainly slightly higher storing and maintenance expenses. Also in the previous quarter, we had two ships dry-docked, which normally reduces the OpEx per day somewhat.

We also in the previous quarter had a reversal of previously accrued insurance expenses related to Monsoon, which were reversed in Q1, which brought the OpEx and the A&G little bit lower than normal. The A&G is therefore in line with previous quarter, with this adjustment at just below $1,000 per day.

We saw that depreciation and non-operating expenses increased somewhat, depreciation due to depreciation of dry-docking, which commenced during the quarter, and the non-operating expenses due to slightly higher LIBOR and slightly higher average debt. We had one ship dry-docked during the quarter and we have so far this year dry-docked four out of the six ships due for dry-docking this year.

The CapEx for that has been $3.3 million for this quarter. Our debt is now at $505 million, following a $25 million drawdown, on the revolving credit facility, which bring this to an available liquidity of $81.2 million and a cash position of $56.2 million.

If we move to the next slide, we have a breakdown of our cash breakeven, with this slide the average year-to-date OpEx of $7,700, we estimate a full year 2018 OpEx of $7,600. Our G&A is estimated to a conservative $1,000 per day and the interest is based on the LIBOR forward curve and actuals for the second quarter.

And as you may remember, we have a 50% amortization reduction due to the agreement that we have with our banks, which runs until second quarter 2019. Our estimated cash break-even for the year is $17,900.

We have dry-docked as I mentioned four out of six ships by Q2 of the ships that are not the Chinese-built the wind class and the remaining CapEx that was estimated as per second quarter is $2 million. We have one ship dry-docking as we speak and one ship due to dry-docking in Q4, the Promise.

If we move to slide six, if we look at our operating performance this quarter, we had two ships dry-docked in Q1, which corresponds to 5% of the total calendar days for that quarter. We also had as previously announced some repairs for Passat, which corresponds to 4% of those days.

And the commercial utilization in the previous quarter of those days, which we call operating days was 98%. Out of that, we had 54% of those days employed under COA and 43% as spot fixtures.

For the second quarter, we saw that we only dry-docked one ship, which corresponded to 3% of the available calendar days. And had some repairs to Mistral and Passat, which correspond to 2% and out of that the commercial utilization was 88%, due to the lower rate and lower trading volumes.

But the COA volume instead fairly stable, while the spot volumes for spot utilization days. If you look at then the TCE rate, as mentioned it was 7,700 for the quarter, based on our calculation of operating days.

If we adjust in the waiting days and renew that from the days we arrive at 8,700 and increased our year-to-date TCE with around $750 per day. And now I'll give the word to Christian.

By end of first quarter -- sorry, end of second quarter, the global fleet of VLGCs were at 265 ships as you can see on page number seven. Four ships have been sold for recycling during the first quarter, and one is ship is sold for recycle in July adding total number of ships sold for scrapping so far this year to five.

We have not seen any scrapping after the last one in July. Looking at the order book, we have three more ships to be delivered this year, two of these are the famous Chinese ships sitting I think on shipyard in Shanghai.

They have been basically ready for delivery since last year. And the yard is telling us or telling the market that these ships are coming to the market any day, but so far we haven't seen it.

The last rumor is that they will be delivered in September. There is one further ship to be delivered in fourth quarter.

This will give an order book of existing fleet of 14.4 ships. If we look at the order book going forward, you can see that this year with the three remaining ships we come up to 10.

Next year, we are expecting 23 ships, and in 2020 we see 12. It's a bit too much of course.

We don’t need the ships maybe, but compared to previous year, we are far below the big deliveries of 2015 and 2016 with around 40 ships each year. So that's good news for the market.

Our business in the second quarter, page number eight. We haven't done any time charters.

We've done eight spot loadings and 11 contract restatement [ph] loadings in the second quarter. All this business is priced spot.

We do have some fixed price spot loadings across, but they will be priced at the market on the time, and COAs are 100% priced on the market. There has been a lot of waiting in the second quarter unfortunately.

This is in April and May, since that waiting has come down. But because of the high waiting, we have an averaged per ship per month for this quarter, for second quarter of 3.3 ships.

Peder mentioned that dry-docked one ship all-in-all with the voyage conditioning and the time in the dry-dock, it's 42 days. In the second quarter we also had four fire incidents, two at [indiscernible] and two a bit bigger.

One was collision and one was insulation on cargo tanks, which had to be repaired. So these four incidents in the second quarter have 30 days of fire.

If we look at where the ships are employed, we had nine loadings in the Middle East, six loadings in U.S. Gulf and four other loadings, which is basically actually we've been to Australia, we've been loading in Southeast Asia, West Africa total of four loadings.

And as on previous occasions, we basically go to the Far East, so almost all these ships have been discharging into the Far East. We have two discharges into South America.

This has been the contract of freight in voyages with the voyage in direct computation taking the ship to the Far East. So all-in-all 17 discharges in the Far East in the second quarter.

Still on page number nine, we have 14 ships, second quarter we have been into 25 different countries. We have had the 1,274 ships days.

We have the 12 people in the office and we have about 620 people onboard the ship. If you look at the graph on the right hand side on page number nine, you can see that in April and May we had between five and six waiting days per ship dragging up the average.

The first part of the year was pretty good and since May the waiting time has been hardly any. And this is of course due to the market and as for some of you are following this Avance Gas index will remember that the lowest part of this year was in April where we touched on $223 per day.

In addition, the waiting time where quite high in April. If we look at the exports from the Middle East on page number 10.

We compare the three biggest countries with three years average and three years high-low. And you can see in 2018 it's been pretty good compared to the three previous years and in May we had a record high lifting.

If we include the full Middle East, which is basically Iran and Kuwait in addition to the three main ports, you can see that there was the biggest number of tons listed in May since we started Avance Gas in 2007. So from first the first in 2008 we were very close to a monthly listing of 4 million tons.

This has helped the freight rate recovering from the 17th of April when the Baltic was down to $19.9, which was the CLO. And if we turning to page 11 and have a look at U.S.

Gulf, U.S. East Coast.

And again this is the same as always, we only count VLGC volumes, we do not count the smaller ships and we count each lifting. And again 2018 has been much, much better during the summer months than the past three years.

There is not any big difference between the continued export, because all volumes are on both these graphs. But you can see on the right hand side that we had one or two months in 2017, which were as high as we had in June this year.

If we look at the number of liftings, which I think is even more interesting, because the volume in the U.S. goes a bit up and down on the ship, so every time we employ a ship, that’s the interesting thing.

And looking at page number 12, you can see that the average loadings of 2018 has been very stable and as you remember from the previous graph, the past couple of years we had a dip into the summer, which we didn’t have this year. And this is the second thing, which have been helping us for the rates to recover from the years low and I would say maybe all time low in April this year.

Again, if we look at the trends from the U.S. export started with eight cargoes in January 2013.

We are now in June close to 60 cargoes between 55 and 60 cargoes. For the U.S.

liftings, the destinations are very important and page number 13 will show you the past four years. You will see that this year, we are just below 60% of destinations to Asia, to the Far East.

This is basically because of February, February had a low number of liftings and had a low percentage to the Far East. So when we add up year-to-date by end June, we end up 59%.

We think this will increase as we are moving forward because we see more cargoes going to ACMO than we did in February. So we do expect that this will end up somewhere between 64% and 66% when we come towards end of the year.

Sometimes we are talking about routing, I would say basically all ships go through Panama both laden and ballast. There are some ships however doing Cape on the ballast leg based on the position.

But as a main rule, it’s Panama both ways. And I think the experience we have today is telling us that it’s easier to get Panama slots both ways, than some people were talking about a couple of years ago.

We have also seen during the autumn, when the product market has been in contango [ph] some of our customers want to send the ships the long route the cape and do Panama, this could happen again, and will of course eat up some more capacity if it happens. It’s a bit too early to say, right now.

Back to the order book on page 14, as you remember 14.5% of the existing fleet. If we look at the age of these ships, 50% of the existing fleet is built 2011 and later.

17% it’s a bit difficult to see on this page, but the light blue one is 17%. These are ships had built 2000 and earlier.

And if we divide this again into the years, you can see that we actually have more than 20 ships, which are more than 26 years old. And we think that 33 ships or we think we know, we do know that 33 ships will be 25 years or older by 2020.

And, we do expect that the gray area 7% of these ships of the existing fleet is very likely to exit the freight market as we enter into 2020. The light blue one 7% on page number 14 is ship storage, ships sitting on storage.

And the average on the storage ship is both 10 years there are I would say storage ships are divided into two, some are very old and there are some new ones, bringing the average down to 10% -- 10 years but there are a number of older ships sitting on storage. And these ships are 75,000 and 78,000 cubic meter, while the modern fleet is 80,000 to 84,000 cubic meter.

So you could argue that a storage ship of 75,000 cubic meter and even 78,000 cubic meter is too small to take a full cargo from one of the big VLGCs and this will support an idea that these old storage ships will be moved out of the market and larger ships will take over. I am going to end this presentation with a short summary and it’s kind of repeating myself.

Second quarter, we had 48 cargos out of U.S. Gulf, on average for the three months, this is comparing to 42 cargos last year.

And of course again, this is of course the summer export was maintained at healthy levels this year, while it came a bit down last year. Also in the Middle East, we have had an increase, if we compared to last month, the export from the Middle East is actually up 20%, it’s not here to --compared to last -- to the previous quarter, because normally there is always lower export in first quarter than second quarter.

But even if we compare to second quarter last year, we are up 11%. So the Middle East export is also up based on the same period last year.

The difference, the main difference between second quarter 2017 and second quarter 2018 is Iran, Iran is taking 70% of the increase compared to the two quarters. If we look at the increase from first quarter to second quarter this year, it’s widely spread all over the exporting countries, I would say maybe Qatar and Kuwait has a bit higher growth than the other countries in the Middle East.

We see that U.S. production shale oil, tight oil and shale gas is increasing.

There’s a lot of questions about tolls, what is going to happen when Mr. Trump is going to put a lot of tolls on the LPG, nobody knows.

We and some people do expect that the Chinese don’t have any alternative they have to take U.S. tons.

Some people will claim that the Chinese will shift their purchase to the Middle East remains to be seen. What we do know is that the Chinese traditionally don't like to buy CP price, they like to have Far East indexed or value.

So are they able to shift all their purchases into the Middle East, we don't know, we don't think so. But when we do the stimulation on the fleet utilization, we see that the freight market is quite indifferent to U.S.

cargos ending up in China or other places in Southeast Asia. And I'm including India in other places.

So even if it will make all the Chinese tons to India and all the Indian Middle East purchase tons to China, the fleet utilization is not really changed a lot. Then the next big or the next move in this industry is the East Mariner II pipeline which we've been waiting for some time.

As you know, there have been disruptions on East Mariner I as well that seems to be solved. When we talked to our customers, they tell us that the East Mariner II pipeline will be commissioned very end of this quarter early next quarter and that we can expect volumes to reach markets during fourth quarter this year.

So we do expect that the market export will pick up considerably during fourth quarter this year. I did talk about recycling, I will not mention that again.

But it's interesting to see that we have not had any new orders in the VLGC segment lately. And finally, Avance Gas, we are studying what to do with 2020 emission regulations.

I guess there are three choices, on the Wind Class on the eight Chinese built ships. We can do nothing, we can look at scrubbers and we can look at LPG fuel.

There is CapEx involved with both LPG fuel and scrubber obviously. And it's more expensive to convert the ships to LPG fuel than to scrubber.

The difference is that any conversion into LPG fuel will last for the remaining part of the ship's life, while the scrubber has a limited lifetime for different reasons. We have not concluded yet, and we still have some time the docking schedule for Wind Class is in 2020.

And whatever we will do we plan to do during the scheduled dry-docking in 2020. We have decided not to do anything so far on these six older ships.

Obviously Avance Gas is also up for dry-dock again in 2020. So we have option to do the scrubber solution also there during the scheduled dry-docking.

And by this I think I will open up for questions.

Any question from the audience?

Would you say that your second quarter waiting days is indicative of the global fleet utilization or is it due to commercial reasons that you stood up again low freight rates?

It's a bit difficult to have a very firm opinion on that. But I would think that it's more likely to be all over the fleet than just us.

A bit more about the OpEx different, for the LGP conversion versus the scrubber have you sort of done any studies on that?

Yes, we are working on the pricing and so far we have some very indicative numbers. But I don't think I'd like to comment it, because I think it's a bit premature.

We like to work more with both the scrubber solutions and the LPG solution. And the LPG solution is technically quite complicated solution.

So we don't really know the price of it and we can also go with couple of different views, what kind of system will you have, do you want -- will you take LPG directly from the cargo tanks or are you going to build enough fuel tanks on the deck that will also have a big impact on the price. So we will come back to that, when we have a bit more clearer picture about the pricing.

Okay. And the loading that you are taking from the U.S.

Gulf, are they spot or are they under the COA structures.

It’s a combination, we had spot voyages out of the U.S. and we do have some COA loadings as well.

I think the big…

How is The COA structure priced?

The big difference between our commercial strategy in 2018 compared to 2017 was that we are positioning ships to the U.S. on the spot market, we did a he lot of spot loadings in the U.S.

in previous years as well, but at that time and the charters book the ships so early that we could -- Far East placed ships and take them to the U.S. over the last couple of years you had to balance them towards the U.S.

Gulf, before you could book spot cargos in the U.S. Then COA are based on a formula and basis of the formula is the Baltic related price.

Okay, thank you.

Just another quick follow-up on the last one. Does that imply a premium or discount to the Baltic?

Basically, it’s a bit complicated. There are no discounts to the Baltic in the formulas.

Just a quick question on the Panama capacity, you said that more or less everyone is travelling through Panama .Could you just say, will there be capacity to continue to do so? And do you see competition from LNG vessels?

And lastly has something happened with the pricing?

We do expect -- well again this is very much to do with Trump and the tariffs. If the U.S.

export to Asia is increasing, there will obviously be more volumes going through Panama. We think there are room for more ships, we think it’s likely that there will be more ships, but we think that Panama territories [ph] will allow more ships to go through per day.

Now we have not seen any big change in the pricing recently.

Again just finally on the costs side, compared your outlook in -- the written outlook in the Q1 versus Q2 and last time you said that you were expecting this year freight market to improve, you didn’t say that now. Is this -- was this the peak?

I think the big change was that when I had the presentation for the first quarter, we were at the absolutely rock bottom. The market has turned, the freight market based on dollar per ton has more than doubled, since I had my last presentation here.

We do expect the market to continue to improve. But it’s very much to do will we get East Mariner II to pipeline as promised in fourth quarter, what will happen to the older ships, as we are approaching 2020.

If we have 14% more ships delivered into the market with not too much growth than we have a challenge. If this is combined with the older ships disappearing into storage or being scrapped or a combination.

I think the freight market looks pretty good. I’m meeting customers all the time and I have been last week with a customer, last time I met in March, he was very pessimistic for 2019, when I met him last week, he had turned 100% around and he was now very optimistic on behalf of all the ship owners for 2019.

So we are certainly optimistic and we think the freight market will improve. When we met last time, the market was so extremely low that I was 100% sure that the market would turn pretty soon.

Right now, I don’t know if we are going to move from Baltic today around $40, $41, which is giving us about 15,000 on the old ships and about 17,000, 18.000 close to 19,000 on the so called aqua ships. How much further will we be able to push the market up this year, I don't know.

And on that last thought, I remember you said one that 55 to 60 VLGC cargos from the business [ph] are going to sort of balance markets that's where we are now. And now we are talking about the market being decent, but we are still in a sort of a cash breakeven territory.

So there is 20 plus vessel to deliver in 2019. So the picture getting brighter or darker?

I think, right now unfortunately we are not at 55 to 60 cargos of the U.S. we have an average of 48 cargoes in the second quarter.

So it's again, if we are may able to move up to 55 cargos plus on a monthly average, I'm very optimistic about the freight rates. And if we get the East Mariner II pipeline in October as we hope and we are getting another six to eight cargos from Marcusic [ph] then we are pretty much up to mid-50s plus and that will push the market up.

Again as I said if we get 14.5% more ships over the next couple of years without any ship disappearing and with a fairly moderate growth in exports, we might have a problem, might have a challenge. But I'm pretty sure that the old ship state it's no way they can compete with the modern ships in the freight market they're not even now, but certainly not from 2020.

So these ships will disappear from freight market. We -- I think that the older ships, the smaller ships will be broken up.

And I think that larger part of the older fleet will take over storage and we’ve seen it already some of the very old ships have been going out to storage for breakup and some of the not so old, but still very old ships have taken over their storage positions. So I think we’ll see more of this over the next couple years.

It doesn’t make sense to have a 26-year old ship competing on freight in 2020, when you have the spread between high and low sulfur of $250 to $350 per ton it doesn’t make sense at all.

Okay, thank you.

Okay. Now we can take questions from the dialers.