Avance Gas Holding Ltd

Thank you. Good afternoon and welcome to Avance Gas first quarter earnings presentation.

I'm Øystein Kalleklev, Executive Chairman of Avance Gas. Today, I will be joined by Randi Navdal Bekkelund, our CFO, who will guide you through the financials a bit later in the presentation, and our Chief Commercial Officer, Ben Martin, who will join us for the Q&A session.

If you'd like to ask a question in the Q&A session, you can either use the telephone conference or just use the chat function in this webcast. Before we start the presentation, just to remind you of the disclaimer, we are providing some forward-looking statements and some non-GAAP measures linked to the TCE numbers and all in its completeness of detail we can provide.

So, I recommend reading also our earnings release today. Okay, let's start on the highlights.

In the first quarter, we delivered time charter equivalent income of $46.9 million, corresponding to an average TCE of $37,600 per day which we are reasonably satisfied with. We took delivery of our two first LPG dual fuel VLGC newbuildings, Avance Polaris and Avance Capella, which went straight from the yard on to variable time charters with Total and Petredec respectively.

The VLGC market started the year on good footing, but have been very volatile so far this year, with rates starting off at around $50,000 before falling down to about $15,000 in early March before quickly rebounding and now holding about $50,000 again. Financially, we are therefore also doing well with a net profit of $24.3 million for the quarter, equating to earnings per share of $0.32 per share.

This corresponds to an annualized return on book equity of 17%, while we are faring well below book value with a market cap today of around $370 million compared to book equity of $570 million, i.e. giving a price book ratio of around 65%.

Please note that we utilize hedging accounting for interest rate swaps and thus do not book unrealized gain. But just like a lot of other shipping companies, we also made big gains on interest rate swaps in the first quarter, which Randi will elaborate on.

Given the healthy bookings and improved outlook, as well as the new financing we announced today, improving our financial position, the board of Avance Gas has therefore decided to hike the quarterly dividend per share from $0.05 to $0.20 per share, which provides our investors with an attractive earning yield of around 17%. While we have taken delivery of two newbuildings, we have also utilized a strong secondhand market to divest two of our older 2008 build ships.

The two ships have been sold with a total book profit around $11 million, of which we are booking $6.2 million in Q1 for Thetis Glory sale, while the second sale will be booked in Q2 as delivery to the new owners took place in May. Lastly, we are today announcing a big $555 million sustainable loan at very attractive terms.

This loan will replace the loan for nine of our existing VLGCs plus our two next newbuildings with an accordion option to also add newbuilding five and six. This will push out major debt maturity from 2024 to 2028, boost our cast significantly, with pro forma cash of around $200 million, which gives us a very healthy cash cushion.

Turning to slide 4 and our fleet status. Avance Gas is a shipping company focused on seaborne transportation of LPG with a fleet consisting entirely of the largest ships in the segment, which we call a very large gas carrier or just VLGCs, for short.

The VLGC market represents about three quarters of all LPG volumes being moved at sea. Mid-size ships transport about 15% of volumes, large gas carriers, handysize ships and small coasters share the remaining approximately 10% of the market.

11 of our ships have a capacity of around 83,000 cubic meters, with our largest latest six LPG dual fuel ships having a slightly bigger parcel size of 91,000 cubic meters. So we also have space for LPG as fuel and/or cargo onboard.

As mentioned, we have sold two of our older ships. For the remaining three 2008/2009 ships, we have secured fixed higher time charter coverage for most of 2023, thus also eliminating the fuel price risk as these ships are on average thirstier than newer ships and are also not fitted with exhaust gas cleaning system or what we typically call a scrubber.

We're also seeing a very wide price spread between very low sulfur fuel oil and heavy fuel oil, with the spread currently at around $200 to $300 depending on where you tank at. Six out of our eight ships in the spot market are fitted with a scrubber and this fuel spread is significantly boosting the earnings potential compared to ships without the scrubber.

During the first quarter, we took delivery of two of our newbuildings which are equipped with LPG dual fuel system. These ships have a very favorable freight economics compared to older ships as they are the most efficient and have the flexibility to run on LPG fuel as well as combined fuel, which is also good for the environmental profile of these ships.

Before turning over to Randi for our financial update, I just want to reiterate the favorable characteristics with our six new dual fuel LPG VLGCs. By burning LPG, we have a low sulfur fuel and do not acquire any scrubber.

Particle pollution, which can be detrimental to people's health, is also reduced by 90%, while CO2 footprint is around 40% less than for our Thunder 2010 Korea-built ships due to more efficient engines, while also lower carbon levels in LPG compared to traditional marine fuel. Hence, it should not come as a surprise that these ships will score top tier in the coming EEXI ratings and also when it comes to the annual carbon intensity rating which we call CI.

Our next four VLGC newbuildings are also what we call ammonia ready. This means that we can, with some modification to the engine, [indiscernible] is working on, as we speak, burn ammonia as fuel in the future in case this fuel takes off.

One of our ships will also be able to carry ammonia as cargo. In connection with our annual report filing in April, we also published our fourth annual ESG report, which is based on the marine transportation framework from Sustainability Accounting Standards Board, and we are this year also adding the Global Reporting Initiative Index.

So, with that, I'll turn it over to Randi for a financial review before I will revert with a short market update.

Thank you, Øystein. And good afternoon from Oslo.

Moving to slide 6, I will briefly go through the key financial highlights for the first quarter of 2022. The time charter equivalent, TCE, earnings came in at $46.9 million, corresponding to a daily TCE per ship day of $37,600, which is up from $21.6 million or a daily TCE of $27,600 in previous quarter.

Operating expense were $10.7 million, equaling a daily average OpEx of just below $8,500. This compares to $9.3 million or $8,100 per ship day in previous quarter.

We're still seeing COVID-19 crew change expenses in our books. This is likely to continue somewhat, but it's expected to come down during the course of the year as the vaccine is rolled out to all of our seafarers and the local restriction being eased, as we speak, especially in Asia.

Administrative and general expense, A&G, for the quarter was $1.4 million, corresponding to $1,100 a day, down from $1.6 million in previous quarter due to the recognition of one-off personnel expense, and is expected to be maintained at $1.5 million on a quarterly basis in 2022. And based on this, we reported an earnings before interest, tax and depreciation of just below $35 million for the first quarter, up from $21.6 million previous quarter.

As Øystein already mentioned, we sold two of our older units. The 2008 built vessels, Thetis and Providence, were [Technical Difficulty] delivered to the new owner in March, thereby recognizing gain on sale of $6.3 million in the first quarter.

Providence was delivered to the new owner last week and will recognize a gain on sale of just below $5 million in the second quarter. Net profit was $24.3 million or $0.32 per share for the first quarter, corresponding to an annualized return on book equity of 17%.

Furthermore, we have recognized $11.7 million [ph] in positive mark-to-market adjustment related to our interest hedges designated for hedge accounting through other comprehensive income and equity. For the second quarter, we maintained the supportive commercial results which is expected to be similar to Q1 of $35,000 to $36,000 a day on a TCE per day basis on a discharge to discharge.

As the market is picking up at the end of the second quarter, we expect the reporting TCE to be approximately $32,000 to $33,000 a day, which is on a low to discharge basis. A few comments to the balance sheet.

At quarter-end, we had an interest-bearing debt of $444 million, equaling debt to total asset ratio of 43% and we have a solid equity position of $571 million, corresponding to a book equity ratio of 56%. We have a robust cash position of $110.6 million at quarter-end.

And I will now move to the next slide to go through the cash movements during the quarter. We generated $39 million in cash flow from operations and approximately $22.5 million in net cash proceeds from the sale of the VLGC Thetis Glory.

We paid quite a lot of newbuilding CapEx of $121 million, mainly related to our two first dual fuel Avance Polaris and Capella delivered in January and end-February. Of the $121 million in CapEx, $104 million was financed with bank debt and the remaining $16 million was sourced from cash [indiscernible].

Furthermore, we repaid $10.7 million in scheduled debt amortization and prepaid $20 million on the revolving facilities and just below $4 million in dividends, resulting in a cash position of $110.6 million by the end of the first quarter, which is up $9 million from year-end. And we will significantly increase our cash availability with the refinancing in place, which leads us to the next slide.

Slide 8. So last week, we signed $555 million sustainability-linked facility with a bank syndicate consisting of seven well reputational Nordic and European banks.

The new facility is for refinancing of the existing bank debt for nine of our vessels on water and consists of an amortizing term loan facility of $200 million and a non-amortizing revolving credit facility of $125 million. In addition, we also secured financing for the newbuildings number three and four for delivery in Q4 this year and Q1 2023, and this is structured in $115 million term loan facility.

We added an uncommitted option to finance the two last newbuildings for delivery second half next year at the same terms. The new facility bears a term of 5.7 years from signing and matures in January 2028, has an age-adjusted profile of 20 years, a margin of 220 basis points, plus floating SOFR and will significantly lower our cash breakeven with $800 per day for the nine VLGCs and $1,300 a day for the whole Avance Gas fleet.

This gives us a cash breakeven at attractive levels of $21,200 for the whole fleet, including the newbuilds and based on quoted SOFR today of 78 basis points. Looking at our debt maturity profile post the refinancing on the next slide, 9.

So including the uncommitted accordion option for newbuilding five and six, all vessels are financed with the first debt maturity in January 2027, pushing the majority of the outstanding debt from 2024 to 2028. And this leaves us with a very limited unfunded CapEx at approximately $20 million, which potentially can be solved through free cash flow within less than two months in the current market environment quoted at $50,000 a day.

Looking at today's cash position on the next slide. We have a cash position of $121 million and we will draw down the new facility of $325 million in the second quarter, corresponding to a pro forma cash position exceeding $200 million.

And as we have structured the new loan with a revolving facility of $125 million, we can utilize the flexibility to manage and optimize the cash to avoid associated interest costs for overcapacity in cash. And lastly, all of our bank financing has now a sustainable link structure attached, further demonstrating our commitment to reduce our carbon footprint, which is well integrated into our business model.

So, with that, I leave the word back to you, Øystein, for the market update and outlook.

Thank you, Randi. Well done with the financing.

So, let's review the recent market developments. As I mentioned in the introduction of market, of the VLGC market representing 75% of seaborne LPG market, so we'll focus on data for this market rather than the overall LPG market.

So far this year, the VLGC market has grown steadily with 11% in the first four months of the year compared to an overall growth of 9% for the whole LPG market in this period. US is about 50% of the market while Middle East delivered close to 40% of the VLGC cargoes.

On the import side, Asia is the main importer, taking around 75% of the VLGC cargoes. The export growth so far this year is driven primarily by the Middle East, growing a whopping 20%, with 68% export growth from Saudi Arabia, 56% from Iran, and 19% from the United Arab Emirates.

Export from Qatar is, however, down 18% compared to last year. The biggest export market, North America, where US exports represent about 95% of the volume, grew at a steady rate of about 6%.

On the import side, the biggest market is China, which represents about 25% of all VLGC cargo volumes and they're slightly ahead of Japan, with these countries importing about 14% of the volume. With the energy crisis in Europe, Europe has also been pulling in more VLGC cargoes than usual, with VLGC imports in the first four months going from 1.6 million tonnes to 2.6 million tonnes, equating to 60% growth.

Given the uproar in energy and commodity markets since the invasion of Ukraine by Russia, we do get some question about Russian LPG exports. Russia produces quite a lot of LPG, which is maybe not too surprising given the vast hydrocarbon infrastructure.

In 2021, Russian LPG production was about 16 million tonnes. However, around 75% of this is consumed domestically, so only about 5 million tonnes are available for exports and most of this is being exported overland, typically by rail.

Thus seaborne LPG exports from Russia is miniscule, with volumes slightly about 1 million tonnes in 2021 and with all these cargos being smaller than VLGC cargoes. So far, the seaborne LPG exports have been holding up.

Volumes so far this year is 0.5 million tonnes compared to 0.4 million tonnes last year, but we do see LPG exports by land to Europe declining and more Russian LPG exports by land being diverted to other markets. If we look at VLGC export markets with a bit longer view, the growth of US exports become more evident.

Following the shale boom in the US, volumes are up 400% the last seven years with US market share going from about 20% to about 50% today, while Middle East exports have stayed fairly stable. These have also resulted in steady overall growth for the market with close to 8% annual growth in VLGC volumes in this period with total volumes of around 83 million tonnes in 2021 compared to the overall LPG market of around 110 million tonnes, i.e.

the 75% market share of VLGCs that I mentioned. With a good start of the year, as I recently explained, we do expect volume growth to be steady both this year and next year, with US Energy Information Administration estimating close to 15% growth in US LPG exports in 2023, which will mitigate the high fleet growth for the next year.

So, what can we expect from US volumes going forward? In the past, US shale producers have been gobbling up debt in order to meet production targets.

Following the oil price slump in 2015, US shale players become somewhat more restrictive on investment, and this was further aggregated by the oil price crash caused by the COVID-19 outbreak in 2020, which resulted in shale producers becoming even more restrictive on CapEx. These have mainly been driven by investor pressure for the companies to rather return cash flow through dividends, deleveraging and buyback as evident from this recent survey by Dallas Fed where about 60% of companies point out this as the major factor for them restraining production growth.

With oil price firmly above $100 and also high natural gas prices both domestically in the US and even more so internationally, the free cash flow for the shale producer have therefore shot up as illustrated by this Wall Street Journal article [indiscernible] this week. We do think that there are a couple of drivers that will result in increased shale production, which will also benefit LPG exports.

We are in the midst of a global energy control where there are very many drivers favoring increased US production, which have short lead time to the market. This is also evident from the stock market where the energy stock in the S&P 500 Index [indiscernible] by about 50% this year despite the overall index being down almost 20%.

The Baker Hughes Rig Index has also staged a comeback and is up 60% compared to a year ago, which will be needed as the inventory of drilled but uncompleted wells, or DUCs, is now at the lowest level. Turning to slide 15 and let's have a look at the freight market.

The biggest driver for the freight rates is the price spread or arbitrage between the producing regions, US and the Middle East, and the main import destination, Asia. With improved arbitrage spreads and tight shipping market, Baltic LPG 1, Middle East to Chiba in Japan, has bounced back from around $40 per tonne to around $85 per tonne today, while Baltic LPG 3 index for US to Japan has bounced back from mid 70s to around $135 per tonne, while fuel prices have stayed relatively flat.

Keep in mind that VLGC shipping is predominantly a voyage aftermarket where the owner of the ship gets paid dollar per tonne of cargo shipped and take care of the fuel and canal cost in contrast to the time charter market where the charterers pay both for higher fuel and canal cost in advance. With the US LPG price Mont Belvieu at an arbitrage spread to farther east index of around $160 per tonne, shipping is thus grabbing a big share of the cargo economics.

The Q3 and Q4 freight forward agreement, or FFAs, are at very conductive levels with the two main freight indices at $75 and $123 per tonne for BLPG1 and BLPG3 respectively, which provides similar time charter equivalent earnings today, given the fact that fuel prices are in backwardation as well. With current prices [indiscernible] time charter equivalent earnings for modern non-scrubber ships today is, as mentioned, above $50,000 per day.

So, if we have a look at the current fleet, we do see a big chunk of the fleet is approaching retirement, with 31 vessels already past 25 years and 18 vessels between 20 and 25 years old [indiscernible] vessels are above 15 years and will be hit coming decarbonization regulation with expected engine power limitation for these ships as well as for some newer ships. Keep in mind that sanction trade is not just something we see in the crude oil market.

Around 30 older VLGCs are also transporting product which is sanctioned, primarily from Iran. So in case sanctions are lifted due to progress on the former Joint Comprehensive Plan of Action, these ships will probably not be around for trading any longer.

We pointed out slippage possibility for the order book for 2023 as the number of ships are quite big, but very slim for 2024. Hence, we would expect some slippage, particularly if the market turned weak [indiscernible] 39 expected deliveries in 2023 rather than the scheduled 46 as it's not unlikely that we do see some delays particularly in China where they have a stringent zero COVID Policy.

Okay, last slide before doing the summary. Again, our new look at the order book, as you can see from the graph there.

Scrapping of older ships has been very muted the last couple of years and we put it in the this question mark about scrapping from 2023 onwards when we do get implementation of the new IMO regulation, the EEXI and the CII which I mentioned. Another factor these days are the fuel prices, the older ships especially without our scrubber are becoming less economically.

We are also getting into EU carbon trading scheme for shipping, probably implementation 2024. For VLGC, this will not be a big factor because slim portion of the cargos are going into Europe, but we would expect other countries to follow the path of EU to implement carbon pricing in shipping which will penalize less efficient ships.

Another factor is the voyages are becoming longer. We do see that Panama Canal will nearly double the canal fees over the next three years, which means that we will see more ships continuing to avoid the Panama Canal, taking longer routes to end consumer market in Asia and this will be a positive for mileage.

So all in all, we think we have a fairly stable market. Order book for 2023 is a bit high.

But as I mentioned, we could see some slippage and we do expect scrapping activity to pick up in the coming year due to the reasons I mentioned. So then, I think we can just do the summary.

Good results, as we mentioned. We are reasonably satisfied with the TCE for the quarter.

Bookings for next quarter are also at healthy levels with good outlook for Q3 as most of the cargoes being booked now are for Q3. We are hiking our dividend from $0.05 to $0.20 giving our investors a pretty good effective yield.

We have done a great big new refinancing, pushing out maturities and boosting our cash position, while lowering our cash breakeven levels. We've started the renewal process of the fleet, selling two of the older 2008 ships at very good prices and booking at a profit to book values, while we are faring well below book values.

And then we have taken delivery of newer, more efficient ships. Outlook, as I mentioned in the presentation, is fairly good, very conductive rates for the second half based on the FFAs we are seeing in the market.

And 2023 will be – it's a bit too early to say how that will play out. Order book is a bit big, but also we'll see fairly high production goals.

We see reasons for increased capping. And with the current newbuilding prices of above $90 million for high spec VLGCs on dual fuel, which is the only type people are ordering these days, we do think also that contracting of newbuildings will be a bit muted as a lot of the yard slots are being taken up by LNGC carriers and container ships.

So with that, I think we conclude the presentation and we can check whether we have any questions.

You're now sitting on a very solid financial position, which will be further strengthened by the new refinancing. You declared a significant dividend on quarterly earnings.

But given the discount to NAV you're currently trading at, how do you think about balancing dividend distributions with share repurchases?

I think maybe I had you on my call in FLEX LNG conference call two weeks ago as well. I think we also have some similar questions where we have a big pile of cash and what to do with it.

Yeah, it's a good question. We just signed the loan agreement last week.

We are preparing drawdown of the new facility within a week and a half. And then getting them on the account ahead of the closing of the second quarter with a pretty big cash pile, as mentioned, pro forma cash slightly above $200 million.

We've put in some – similar to what we've done, in fact, we've put in a big revolver facility, which enable us to keep a lot of liquidity available without having to pay a very high price for that liquidity. We have a commitment here of 75 basis points, which means that we can have this cash available then for the next 5.8 years without incurring a lot of financial expenses, which will hurt our cash breakeven levels.

And our cash breakeven levels are clearly attractive, I would say, for this fleet. So, let's see.

It's a bit too early to comment on it. We are, of course – as a function of better market and better financial position, we are hiking the dividend quite substantially.

In terms of buybacks, it's a bit difficult as well with the liquidity and float and the share is not very great. We have Hemen Holding owning close to 77% and actually Avance Gas is one of the biggest shareholder also in Avance Gas with a big number of treasury shares.

So in that sense, buybacks, it's a bit difficult given the liquidity in the stock. And we have so far focused on paying higher dividends to the shareholders.

We have also good bookings for next quarter. So, hopefully, that is something we can keep on paying attractive dividends to our shareholders.

And then, let's see when we are getting everything in place and what to do with it, but we're also doing this to have more financial flexibility in case transitory market is a bit wobbly.

BW LPG conducted a very aggressive LPG dual retrofit program. Most of your fleet is now either a scrubber fitted LPG double fuel for the newbuilds or chartered out, but you have a couple of vessels which could be potentially retrofitted.

Is this something you have considered? And if so, how much would it cost?

I think we have two ships. This would be the Chinook and Pampero which is 2015 built.

So, before they're going in dock in 2025, we probably have to make a decision what to do, either retrofit LPG on them or scrubber. Right now, in current market, having scrubber is a huge advantage, as I mentioned, with scrubber spreads of $200 to $300 depending on location.

So, right now, we are just sitting back and enjoying having scrubber form our ships. Of course, how prices will develop will also affect our decision what to do, going for LPG retrofit or the scrubber, which is a cheaper alternative?

But we haven't made any decision yet on whether to go for the [indiscernible] because, for us, it's more like we have the option to wait and we don't need to make this decision at least 18 months before getting to dock in order to kind of place the orders for the equipment. But it's certainly something we're looking into.

But we will make that decision when we're getting a bit closer to 2025.

I think we have one question out on the web. What do you forecast regarding dividends in the coming quarter?

And the answer is very simple. Depends on the market.

We aim to pay out all excess cash and earnings to shareholders. So, if the market stayed strong, which it looks to be doing right now, I think people can enjoy a pretty good dividend.

But this is not really a company where we have a lot of backlog. We have made – we have put five ships on time charter, three of them on a fixed hire time charter, which is giving us stable income on those three older ships for the next two years or so.

And then, we have variable time charter on the newbuilding. So, the earnings for those chips are really dependent on where the market is going.

But as long as we are making money, we aim to distribute the money back to shareholders. And with this new financing, we also have a bit better financial position than we had in the past.

We had a much longer maturity profile. We've taken on the cashback even slightly and we will have a lot more cash on hand, so that we are able to kind of have the exposure to the market which we like to have the exposure to, but you need to have some money in order to take some risk.

So that's it. Then I would thank you all for joining today this presentation and we will be back with Q2 numbers in August.

So, hope to see you again then. Thank you.