Dorian LPG Ltd. (NYSE:LPG) Q3 2024 Earnings Call Transcript

Dorian LPG Ltd. (NYSE:LPG) Q3 2024 Earnings Call Transcript February 1, 2024

Dorian LPG Ltd. beats earnings expectations. Reported EPS is $2.62, expectations were $2.27. LPG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Dorian LPG Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. Additionally, a live audio webcast of today’s conference call is available on Dorian LPG’s website, which is www.dorianlpg.com. I would like to now turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead.

Ted Young : Thank you, Rob. Good morning, and thank you all for joining us for our third quarter 2024 results conference call. With me today are John Hadjipateras, Chairman, President and CEO of Dorian LPG Limited; John Lycouris, Chief Executive Officer of Dorian LPG USA; and Tim Hansen, Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through February 8, 2024. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct.

These forward-looking statements are subject to known and unknown risks and uncertainties and other factors as well as general economic conditions. Should one or more of these risks or uncertainties materialize or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended December 31, 2023, that were filed this morning on Form 10-Q. In addition, please refer to our filings on Form 10-K where you’ll find risk factors that could cause actual results to differ materially from those forward-looking statements. Finally, please also refer to the investor highlight slides posted this morning on our website to which we will refer during the call.

With that, I’ll turn over the call to John Hadjipateras.

John Hadjipateras : Thank you, and thank you for joining us. John Lycouris, Ted, Tim and me will discuss our third quarter financial 2024 results. As you will hear in more detail from Ted and the financial year-to-date, we earned a record average TCE, record spot TCE and record EBITDA. While maintaining a strong balance sheet and capital to invest in our segment, adding our decarbonization initiatives, we continue to return capital to our shareholders. Including our recently declared dollar per share dividend, we will have returned over $690 million to shareholders since our IPO. As one of the largest operators in our segment, we believe we are well positioned to continue our profitable performance in the LPG sector and beyond.

More than 40 ships were absorbed into the fleet in 2023, a 12% addition, this was the largest number of ships delivered in a single year since the delivery in 2016 of 46 ships, which represented 23% of the then existing fleet. Of the 17 new buildings slated for delivery in 2024, 4 have already started trading. We view the market volatility of 2023 and particularly the big rate spikes as evidence of demand and supply being close to equilibrium. The recent near total elimination of waiting time for the canal, which is still draft restricted, is not sustainable. The Canal Authority is prioritizing containerships and LNG ships over LPG. There are 109 neo-Panamax containerships and 73 LPG ships slated for delivery this year. For these reasons as well as the power reduction resulting in slower speeds, which didn’t happen last year, we are optimistic.

On the HR side, we continue to invest in improving the quality of life of our display Ukrainian seafarers and their families. We recently introduced a simplified payment system through an e-wallet that enables them to receive their monthly allotments quickly and with less hassle. On the social front, we will enter our [indiscernible] [04:50] final program through the All Aboard Alliance, a global maritime forum sponsored initiative, which will enable accelerated data collection regarding diversity and increased opportunities for all genders at sea. We are evaluating compelling emission saving devices and low friction pains for our ships. During Q3, we paid at one of our dry actions with silicon paid and have signed new contracts for energy saving devices that will be retrofitted in the coming year.

We also continue our real-time emission monitoring program and have enhanced the initiative by installing MAN’s EcoTorque engine diagnostics tools on 20 of our own chips. We have expanded our performance team in Denmark by adding a mechanical engineer. We ordered a new building, VLGC, VLAC from Hanwa shipyard in Korea for delivery in 2026 and are investigating opportunities to upgrade some of our existing ships to carry ammonia. John Lycouris will speak further on this topic. Ted, you have the floor.

Ted Young : Thank you, John. My comments this morning will focus on our capital allocation decisions. At December 31, 2023, we reported $208.5 million of free cash, which represented a very solid increase from the $190 million is, of course, reported after the payment of the $40 million dividend that was declared and paid during the December quarter. As of January 31, we had an unrestricted cash balance of $215 million, which is net of the $23.8 million down payment made on our VLGC AC newbuilding during January 2024. We do not consolidate the P&L or balance sheet accounts of the Helios Pool, which has the effect of understating our reported cash. As of January 31, 2023, the pool held cash of $36.2 million, and since we have a roughly 86% economic interest in the pool, it equates to cash of approximately $31 million, which is not otherwise reported on our balance sheet.

With a debt balance at quarter end of $623.8 million, our debt to total book capitalization set at 38.8% and net debt to total book capitalization to increase our revolving credit facility from $20 million to $50 million and to add a $100 million accordion line for vessel acquisitions to the facility. We are grateful for their support and for their endorsement of our stewardship of their capital. We’ve begun to evaluate various pre- and post-delivery costs and high level of financial flexibility. Looking forward, we expect our cash cost per day for the coming year in capital expenditures for dry docking and potentially rates for ammonia capability in our existing fleet, which John will discuss later. For the discussion of our third quarter results, you also may find it useful to refer to the investor highlight slides posted this morning on our website.

I would also remind you that my remarks will include a number of terms such as TCE operating days, available days and adjusted EBITDA. Please refer to our filings for the definitions of these terms. For our third quarter targeting results, we achieved a TCE of $76,337 per operating day with a total utilization of 93.6%, yielding utilization adjusted TCE of about $71,431. This TCE result represents the best in the company’s history. As our entire spot trading program is conducted through the Helios Pool, the spot results for Helios are the best measure of our spot chartering performance. For the December 31 quarter, the Helios Pool are the spot TCE of $91,417 per day, which is the highest spot rate the pool has ever earned for a quarter. On Page 4 of the investor highlights material, you can see that we have 5 Dorian vessels on time charter within the pool, plus 1 MOL Energia vessel, indicating spot exposure of about 75% to 80% for the 27 vessels in the Helios Pool.

Turning to the quarter ending March 31, 2024, we currently have over 60% of the available days in the Helios Pool, booked at a time charter equivalent in excess of $100,000 per day, reflecting the very strong rates booked earlier for voyages that will be carried out this calendar quarter. Please note that, that rate includes both spot fixtures and time charters. Our OpEx per calendar day, excluding dry docking costs, was $9,909 which was down somewhat sequentially from the prior quarter. Reductions in lubricants and spares and stores drove the decline. Our time charter in expense for the 4-time charter in vessels came in at $8.4 million, which is lower than budgeted due to some fuel efficiency underperformance claims. Total G&A for the quarter was $7.7 million and cash G&A, that is G&A excluding noncash compensation expense, was about $6.3 million.

Of that $6.3 million, about $500,000 included Adour Ukrainian seafarers and some employee bonuses, plus our core G&A came in at roughly $5.8 million, which is consistent with our expectations. Noncash compensation expense for the quarter was $1.4 million, which is consistent with the guidance that we gave last quarter. Our reported adjusted EBITDA for the quarter was $133 million, which is the best quarterly adjusted EBITDA in our corporate history. Our adjusted EBITDA for the last 12 months is nearly $415 million. Turning to debt service. Our cash interest expense, which we calculated as the sum of the line items, interest expense, excluding deferred financing fees and other loan expenses and realized gain/loss on interest rate swap derivatives for the quarter was $7.5 million a decline of about $200,000 from the prior quarter, reflecting lower average debt and our all-in cost of debt of about 4.7%, which I would note is below current floating SOFR rates.

Quarterly principal amortization remained steady at $13.3 million. Our trailing 12-month net income is about $304 million and with average booked shareholders of equity for the same 12-month period of roughly $911 million, we generated a 33.4% return on shareholders’ equity. We are proud of this result because it not only reflects the strong profitability that our platform can generate, it also shows that we’ve managed to keep our shareholders’ equity at an appropriate level, balancing retention of capital while still paying out meaningful dividends to our shareholders. The $1 per share dividend declared last week and payable on February 27 to shareholders of record February 5, 2024, brings our total dividends paid to $11.50 per share or nearly $465 million in aggregate.

We underscore — [Technical Difficulty].

Operator: Ladies and gentlemen, please stand by. We’re experiencing technical difficulties, and our conference will begin momentarily. Thank you. [Technical Difficulty]

Ted Young : Thanks, Rob. Again, we’re positive on the long-term prospects of our business, but we are mindful of the near-term headwinds. With that, I’ll pass it over to Tim Hansen.

Tim Hansen: Yes. Good day, everyone, and thanks for dialing in. As always, the VLGC market created some interesting times for the participants. As a record-selling strength in December, contracted sharply with the market during January 2024. The quarter ending December 31 in ’23, saw record-breaking high freight levels for VLGCs. The primary drivers of the firm freight market where the widening U.S. to Asia arbitrage several new restrictions applying to the Panama Canal and subsequent vessel routing decisions amidst the uncertainty about the Panama and the Swiss Canal transits. Turning first to the arbitrage. In North America, production of natural gas liquids continue to increase inventories to record levels. This was amidst an unseasonably warm start to the winter.

The increased supply of LPG lowered the U.S. export prices offsetting some of the short-term concerns about Asia import demand as was also — the latter has also experienced a warm winter. The effect of the drought in Panama has been widely discussed. The Panama can now introduce new restrictions on VLGC transit at the end of October. A severe reduction of water level necessitated a reduction in daily transits with the cost of booking transfers of VLGC becoming more expensive. By the first week of November, auctions for neo-Panamax Canal transits reached a peak of just under $4 million. And some operators faced the real possibility of not being able to secure a northbound transit. VLGCs were opting for alternative routes, some turning around Mid Pacific to avoid uncertainty of the Panama Canal and a few optioning to balance around South America, resulting in increased ton miles as well as impacting lead time for owners and charters in estimating arrival in the U.S. Gulf for loading.

The scheduling impact was eventually priced into the freight levels and late currents were fixed almost 2 months forward of the fixing window. The uncertainties about scheduling and the cost impact apply for vessels in both ballast and in laden with charters facing potentially restrictive high auction prices at the Panama Canal or choosing the longer latent passage via the Suez Canal. On average, the quarter ending December ’23 averaged 25 VLGCs, balancing to the U.S. Gulf VLGCs per month, this compared to an average of 13 VLGCs per month on the quarter prior. The Suez Canal routing was preferred for vessels in ballast and laden to such a degree that in December, the Baltic Index saw fee rates fixed under the green index of use cheaper via Panama terms, with the [indiscernible] fixtures being reported on a huge achieve Suez rate.

The shift in pricing norms made assessment of the market more difficult but testifies to the significant shift in trading routes for the VLGCs over the period. However, geopolitical tensions in the Middle East, made the routing via Suez, a short-lived solution. When drone and missile tax and the Red Sea escalated during December, operators began to decline the Red Sea route on grounds of safety. And VLGC were pushed towards routing via the Cape of Good Hope. For the first time in several years, more than 10 VLGCs ballasted via the Cape of Good Hope in 1 month. As a result, the added miles supported the freight market in the strong term. Now reflecting on how conditions can change. At the beginning of January, several factors increased the fleet legs.

Forecast of [indiscernible] in January in the U.S. created an anticipation of a sudden increase in domestic LPG consumption, which began to be priced into the product market and reducing the West to East arbitrage one of the key drivers. Also, the 5 index prices were on the decline amidst Asian importers anticipating reduced import demand due to lower demand for heating. Therefore, the arbitrage started to narrow impacting the normal arbitrage economics. During January 6 newbuildings or 29% of the expected deliveries in 2024, we delivered creating a solid increase in the vessel supply for the first calendar quarter of ’24. Congestion in the Panama Canal declined significantly and rapid this month. Contributing factors include the rerouting of VLGC VK, liter container vessel traffic and increased rainfall in the Panama Canal.

In Italy, this unfortunately will create a temporary oversupply in both the U.S. Gulf and Far East ports, putting pressure on the rates as we’ve seen during this quarter, which should normalize as vessel supply is up sold. Our freight market can be volatile and is subject to a wide range of factors that may influence short-term freight rates but we also have a number of strong cyclical and secure factors in our favor. A warmer spring climate in North America will contribute to more LPG supply at more favorable prices. The anticipation going forward is, therefore, more widening east — the west to east. We expect only 15 remaining newbuildings to deliver this year compared to the 42 that was successfully absorbed last year, we expect the new building deliveries to be absorbed based on the forecasted increase in exports.

We continue to see LPG take market share from other fuel sources. And in 2024, significant growth in propane demigration as team tracking plans are expected particularly in Asia. The Panama Canal congestion issues are far from solved. The daily transit numbers are still 10 transits less per day than in July ’23, and it’s only expected to revert to the normal levels during the summer. Rebounding of VLGCs and other segments back towards Panama Canal will again increase the congestion, and in addition to the VLGC new buildings, there’s expected delivery of 73 L&T and 109 neo-Panamax containerships in 2024. This will increase the demand for passage of the canal and we thus expect congestion to return and to be the norm rather than the exception in the canal.

Routing with Suez VLGCs thus is expected to become more pronounced in 2024 due to the uncertainties of forecasting the Panama Canal alternatives and costs. Thus, we do remain positive on the medium- to long-term prospects for our business while acknowledging that short-term volatility is ever present. With that, I will pass you over to Mr. John Lycouris.

John Lycouris: Thank you very much, Tim. At Dorian LPG, we firmly believe that we should be part of and provide long-term solutions to the world’s decarbonization objectives and goals. Our investment in scrubbers continues to derive strong returns. Our average daily net savings over the quarter on our scrubber vessels stood at about $3,000 per day, $3,000 per day or about $3.4 million for the quarter. Fuel differentials between high sulfur fuel oil and low sulfur fuel oil averaged about $202 in the last quarter of 2023. The pricing differential of the LPG has fuel versus fuel oil, low sulfur fuel oil, stood at about $183 per metric ton, which was helpful for dual fuel engine vessels when operating with LPG. We now have a total of 14 scrubber-fitted vessels and 1 chartered in vessels.

And we plan to retrofit another vessel with a scrubber unit in the second quarter of 2024. The installations of energy saving devices and the silicon how coatings to our vessels have provided significant performance improvements in fuel savings, reduction of the fleet CO2 emissions and improved CII ratings. Besides our capital — vessel Captain John NP, which was originally built as a VLGC — VLAC, as now called, we are upgrading some of our vessels to carry ammonia as it is quite visible for a good portion of the world fleet to carry out such upgrades. The EU emissions trading system that came into effect in January 1, 2024, is applicable to all ships calling at EU ports. Shipping companies will surrender their gear 2024 EU allowances, latest by September 2025 and every year thereafter, and it will reflect the CO2 emissions while their vessels were trading in EU waters.

In line with end user pays principle, the cost of complying with the EU ETS is passed by the owner to the time charter, who is ultimately responsible for the purchase and transfer of the monthly EU allowances to the owner’s account. For spot voyages, we expect the EU allowances to be added to the freight invoice in line with the end users base rule. In continuation of Dorian’s commitment to sustainability and improving the company greenhouse gas profile, we have recently invested into companies to seek solutions to climate issues from carbon and methane emissions. Ionada is planning to market a compact modular carbon capture system for small and midsized carbon emitters that will be applicable to many industries, including marine applications.

The patented technology claims 30% better efficiency than conventional carbon capture technologies as it works with a large array of hollow fiber contactor membranes of absorbent solutions, achieving about 90% capture of carbon dioxide in post combustion flue gases. The second is [indiscernible], which focuses on the avoidance of methane gas emissions from wasted resources, such as landfill gas, biogas and waste biomass. These emissions instead of being granted or burned on site are converted into high-value carbon negative and carbon neutral fuels like bio-LNG, bio-LPG, green methanol and green ammonia. The modular and scalable technology can be situated at methane emission size where it can be transformed into high-quality syngas and after treatment consolidated and delivered to the energy, marine and aviation industries.

Finally, our recent newbuilding contract to build a new VLGC BLAC at Hanwha Ocean yard in South Korea is in line with our commitment to employ capital where we see commercial and financial opportunities for investments. We believe that the future green hydrogen economy will largely depend on large quantities of ammonia applying the season dedicated vessels. Besides earning good economic returns on such rates, we also firmly believe that we should be part of and provide long-term solutions to the world decarbonization objectives and goals. And now I would like to pass it over to John Hadjipateras for the closing comments.

John Hadjipateras : Thank you very much, John. We’re happy to take questions from anyone who is curious to ask them please.

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Q&A Session

Operator: [Operator Instructions]. Our first question will be coming from the line of Omar Nokta with Jefferies.

Omar Nokta : Congrats, obviously, on a very strong and I guess, record quarter. And Ted, I just wanted to ask if you could repeat maybe the guidance figure you mentioned for the bookings to date. Did you say it was 100,000 for 60% of the quarter?

Ted Young: Yes, that’s correct, Omar, in excess of 100,000 and in excess of 60% of the days.

Omar Nokta : And that includes the TCE.

Ted Young: That includes the pool TCEs.

Omar Nokta : Okay. All right. And then I just wanted to ask maybe — and I know, Tim, you touched on this, but obviously, last year was a very, very strong year for VLGCs. You had a big jump in U.S. set sports. You had the Panama Canal, which really all that can offset the new buildings. And as you mentioned, the fleet was fully absorbed in. So far, things have corrected over the past few weeks and perhaps look to have maybe overshot to the downside and especially in relation to where I say the low point was at this time last year, what do you see is driving the pullback in rates? And when can we start to expect things to turn around?

John Hadjipateras: Tim? Yes. You’ve asked Tim, so I’ll let him. We have the same answer anyways. Yes, yes.

Tim Hansen: Yes. So I mean you’re right, we’re at a lower point now than the drop of last year, and we’re kind of seeing these drop always in the first quarter at some point. But this year, it was very quick and dramatic but also coming from an exceptionally high point. So I will say the start was aligned in one direction and now they are in the other direction. I think that that what we see is both an overreaction. And as I mentioned in the end, I think we will see U.S. inventory still very, very high. So even with the cold winter would not create the same worries that you have seen before of the U.S. running out of gas. So I think the pricing will align again quickly as soon as the worst coal is over. And also, one of the other factors is the Panama Canal, which we see every year that after the festive season in the U.S., the number of transits decline and the transit especially for the container business, they are less busy passing in January and obviously to the Chinese holiday.

So we see also that situation has a temporary blip, and we think that we will return to being congestions being the norm rather than the exception. And as John mentioned, more new buildings on LNG in container. So we see this coming, and we still see the transits are still way lower than it was last year. The number of transits available. And if you think that the new canal today only takes around 7 a day transit. So — so if you add 100 and 170 some ships under almost 200 ships more for that I can use a canal next year and many of them that is a main trade route, and we see this — these rejections coming back. So I think to your question, when is it — when will we see a return, we think pretty soon within this quarter, we will see this aligned because I think it’s been overshot on the downward side.

So we do see these things correcting themselves what we’re coming into the holidays in China soon. So that always put a little bit of a damp on the market. And also there are some cargos unsold in the water also Iranian tons that seems to be a problem to clear. So it could take a little while before we see the bounce back within this quarter, we do expect this to correct of.

John Hadjipateras: Thanks, Tim. Thanks. I would just add that we can never really tell which quarter it’s going to happen. We can give you what we think is guidance were an average for the rest of the year or whatever. But hopefully, the market will react. And the question is, when it bounces, how well it bounces. So as I said, I think, before, when the market starts falling, they kind of forget where to stop. So I think we’re going to hit more quickly and then bounce back, but.

Omar Nokta : Yes. No, that’s very helpful. And that makes sense, John, you just said and obviously, Tim, very good color. I appreciate you kind of going into detail there. And then just a couple more for me and I’ll turn it over. Maybe just first — sort of next question is just on the Red Sea. Clearly, it’s been very, very topical and front and center really over the past few weeks. How would you size up the impact of what’s going on in the Red Sea with the diversions. How do you size what that impact on the VLGC trade stay in comparison to what we’ve been seeing or had seen in the Panama Canal last year.

John Hadjipateras: It’s not so obvious, Omar, because the trade through the canal — through the Suez Canal was almost kind of caused by the congestion of who — in Panama. Also, the — so the Suez Canal now itself, I’m not sure. The Red Sea trade had — the main VLGC trade out of the Red Sea is out of Jordan and in Jordan — Sorry, not out of Jordan, out of Saudi Arabia, Yanbu. And Jordan has absorbed some of the cargoes that would otherwise have gone East from Yanbu. And that has displaced some cargoes that would have come from the state. So that is a negative on the ton mile. On the other hand, Saudi could divert the loading of the cargo from Jordan to Rastadora, which probably won’t happen. So that total number of ships coming out of the Red Sea was, I think, 4 to 5 a month out of Yanbu, representing about 30% of the exports from Saudi Arabia.