Avance Gas Holding Ltd (OTCPK:AVACF) Q2 2020 Earnings Conference Call August 26, 2020 9:00 AM ET

Corporate Participants

Peder Simonsen – Interim Chief Executive Officer and Chief Financial Officer

Conference Call Participants

Gregory Lewis – BTIG

Operator

Ladies and gentlemen, thank you for standing by and welcome to Avance Gas Holdings Ltd Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]

I will now like to hand the conference over to your speaker today Peder Simonsen, Please go ahead sir.

Peder Simonsen

Thank you. Thank you for dialing in to this presentation of the second quarter results for Avance Gas.

I will start to talk a little bit about the key financial highlights which will follow by a market and company outdates.

So if you start by moving to Slide 3, we recorded the time charter equivalent rate of just below 29,000 and 94% commercial utilization for the quarter compared to $45,000 per day and 97% utilization previous quarter.

We have about five ships completed special survey by the second quarter and four scrubbers have been installed. So we recorded a total of 89 off hire days for this quarter related to these installments.

We have a time charter coverage rate of 21% for the second half of this year at an average rate of just below 34,000 that I will return to.

We have announced today two transactions one was previously announced which is the sale of the Avance of $35 million which will contribute 17 million in cash when it closes, which is expected during next month and also another reduction in the CapEx of $2 million.

In addition, we have received credit approval for a 45 million sale leaseback transaction for the [indiscernible] with the Chinese leasing house at a very attractive terms giving a low cash breakeven which also will contribute to the $10 million in pre-cash. For the company, a total of 30 million raised which will be made during the course of the second half of this year.

On the cost side, the OpEx came in around 8600 similar to last quarter, still impacted by the COVID-19 situation, which makes it complicated to include changes, it increases travelling costs and freight costs, and also has increased our spares and stores on board the ships. We do expect some of these costs to come down during the course of the year. But some of them are expected to be unrecoverable as part of the COVID-19 pandemic.

On the administrative and general costs they have come in a little bit lower this quarter most of which relates to personal expense as we now have a joint CFO and CEO role.

In terms of cash flow, we have this quarter recorded 11 million in scrubber and drydock CapEx compared to 14 million in the previous quarter. We have also have equity ratio of 44% in cash position today of $78 million. Our net profit for the quarter was 6.7 million, $0.11 per share.

Moving to the Slide 4, as mentioned in the previous in our Q1 presentation it had been affected by the COVID-19 situation as our drydocking program at the Malaysian shipyard and this has also [indiscernible] date this quarter. We have 89 days recorded most of which can be related to COVID-19 on drydocking program. We have moved the program now to a Chinese shipyard and have by mid-September competed the drydock and scrubber installation for the Chinook and Passat, for scrubber installation for Passat only.

And we expect to have the program completed by mid-November with brief Pampero outstanding where Breeze have already carried out a special survey. We have approximately 75% of our drydocking and scrubber CapEx paid as of today.

Moving to Slide 5, our cash breakeven coverage overview, we have a cash breakeven overview or estimates for the full year 2020 at around 22,000, just below — above the $23,000 per day. This includes the reduction in the cash breakeven due to the refinancing over the Pampero and also the sale of the Avance.

The refinancing will give a cash breakeven for dock ship only of below $20,000 per day, which we find to be very, very attractive.

And on the coverage side for the second half, we have mentioned 21% coverage at a rate of around $33,500 per day. And also have approximately 5% of the days in the second half of this year for planned drydock as mentioned and also the remaining 74% are available days.

If we move to the market and Slide 6, we can see the volatility in the freight rate, on the graph showing the black line, the Houston Chiba dollar per ton rate and the Houston Flushing, the Ras Tanura – Chiba [indiscernible] in the blue and green color respectively.

In the COVID-19 pandemic has impacted the market through a temporary reduction in demand in Asia, for LPG, particularly in China and elsewhere in Europe — in Asia, it also created significant operational challenges to lockdowns and manning challenges and also to the drydocking program that we’ve had mentioned.

In coinciding with this, have been the OPEC plus production increases which affected the oil price in late last quarter. And this both led to lower oil prices or lower U.S. oil expectations for production, but also close the arbitrage between the U.S. and Asian LPG prices. And this reduced the trading activity for a long period, which [indiscernible] rates.

We have seen the rebound of rates since July. And this is obviously a result of returning demand in Asia where we’ve seen the Chinese return significantly and also Indian demand stabilized. And this is assume — remember predominantly residential demand in India, which is less affected by economic instability and then the Industrial demand.

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We have also seen the impact of lower fleet capacity due to drydocking and slow steaming, which has contributed to the freight market upstream that we’ve seen during Q3 to-date.

Moving to Slide 7, we saw the ARB close and following the oil price fall. And this has led to lower activity particularly out of the U.S. And we have seen an average of around 55 cargos for Q2 and this is — with the weakest month being May and June. And we’ve seen this rebound sharply in July as we saw the ARB open up and oil prices rebounding to around the level that they are now in the mid 40s.

The large increase from the terminal has been on the U.S. East Coast, where the market ship terminal, its sourcing propane from the Marcellus and Utica shale formations. And we’ve seen a strong growth in the exports out of this region, which also follows some of the seasonal trends as the winter market normally produces LPG exports from this area, in particular.

Moving to Slide 8, we can see that the export out of the Middle East has been following very much the behavior of the OPEC plus countries and the Middle East exports are very much driven by the production as there is very little storage capacity in the Middle East. And you can see the spike in April month on the left-hand graph which was 70 cargos for that month, while coming down to the more normal levels in May and June after the cuts were implemented. The July numbers are up after the cuts have been reversed slightly in July.

We do expect that the Middle East production and exports will be rather flat as you can see on the left-hand graph it does follow the same levels for a number of years now, although it’s a little bit below due to the pandemic in May and June this year.

Moving to Slide 9, we have the graph here, the graph on the left-hand side shows the expectations from the EIA after update in earlier this month. And it shows that it would be rather flat production in 2020 from last year, but they expect a reduction in U.S. production in the next year. We’ve seen that this estimate has come up significantly about 4 million tons since the May estimate and also we’ve seen looking at the EIA numbers that they have continuously year-on-year underestimated the U.S. production of between 2% and 20% underestimated, the actual LPG production during the year.

I think that have been discussed in the market these recent weeks, has been — they’ve been using a lower oil price as an assumption and it seems to be lagging the development of the oil price and expectations. So, we do expect that production levels will be higher than what is EIA here estimate. And this also relates to the fact that one-third to 50% of the production of LPG comes from non-oil based production or at least non-oil production based LPG, which is a natural gas production, where the natural gas prices have been low for a long time and it’s not the profitability of NGL contributes more significantly into that equation than it does in the oil based fields and also on the refinery runs, where the oil put into these refineries either have to be sourced from the U.S. or imported.

So, we expect this to increase and this follows also the U.S. export capacity, which includes still significant increases in export capacity from Targa coming on stream this year. And also planned increases from on the market ship terminal in the years to come and in addition significant pipeline and infrastructure investments which are due to come on screen in the next one to three years or starting with later this year, which will add more product availability in the terminals of the lower costs, which will contribute to improving the fundamentals of the U.S. export.

Moving to the demand side and we have mentioned it, we did see as you can see China particularly reducing their demand in the early part of this year and this was somewhat offset by Indian demand, staying strong due to the shutdown on the refineries in India and whereby their refineries, the output of LPG from the refineries had to be replaced by imports.

Once the refineries started up again, this has been balanced out by a growth in Chinese imports, which is up by 25% from first quarter and we do expect that this will start to normalize as move ahead. Chinese PDH plants are back to around 80% utilization. And we do expect this to normalize to more normal 90% utilization as we move along.

There is also still significant capacity coming on stream for the PDH plant in China in 2021 and 2022 which is still going on off plan from the information that we have. So the long-term fundamentals on the demand side just look very healthy and bearing in mind that 80% of the global demand is in Asia and not a lot of this is or most of this is non-industrial demand, residential demand and also auto gas demand which is inelastic and not as sensitive to economic volatility as industrial demand.

Moving to the order book, we have a fleet per July of 299 ships and of this 11% on order around 33 ships. We’ve seen 4 ships being ordered since May when we released the first quarter numbers. And there is 9 ships now due for delivery in or 8 ships due to delivery in 2022.

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As we have discussed previously around the quarter of the fleet to drydock in 2020 to 2022 at least seen that effect in the second or third quarter to-date, how quickly the fleet balance can change when ships are taking out the drydock and the most ships due for drydock here comes into the later this year and into 2021, after we had 40 ships being delivered in 2016, which are now due for their first special survey.

Other 27 ships still older than 25 years and these ships are getting closer to recycling by the quarter and this will naturally follow the state of the market, but with the improvements that we seen on technology and on efficiency and emissions, we do believe that these ships will be phased out in the coming years depending on the market of course.

We now see some of these ships staying in a storage where they are not impacted by fuel capacity and so on and emissions but this will have an impact at some point and serves as a reserve in terms of fleet balance against the [weakened] [ph] market where surely these ships will have the potential of being recycled.

Just to remind everybody of the strategy we have on our fleet renewal, we sold our oldest ship, the Avance which although being an efficient ship for her age did have a higher consumption of fuel than what we see our future fleet to be. And we have two newbuildings which will be fully dual fuel with LPG and low sulfur fuel oil. They have 91,000 cubic meter intake, which means that they have a much larger intake than the current ships on water, which will contribute to the flexibility of our customers in trading the ships.

We have significantly lower consumption and speed due to the size of the ships and also due to the higher calorific value of all the LPG. The ships will be able to go round trip U.S., Asia, on LPG without bunkering, so, it will be more efficient to trade the ships and they are fully defined as dual fuel which means that they have the shaft generators which will enable them to run on dual fuel in [indiscernible]. They will reduce SOx emissions by close to 100% and particle pollutions by 90% and together with the slow steaming we are already close to achieving the 2030 year to reduction targets with an estimate as CO2 reduction only on the engine itself of 28%.

We do also believe that these ships will be very, very attractive in the financing market given the green profile of the ships. The focus that you see from investors and banks on supporting the green ships in shipping.

So, moving to Slide 13, on the supply side I’ve mentioned we see a reasonable order book we do not expect that we will see a lot of ordering in this segment or due to the lack of capital, both debt and equity capital, which is now avoiding cyclical businesses in general. I think that this will limit the number of ordering going forward.

We have a lot of the fleet going out of the market going into drydock. Both ships being retrofitted with LPG propulsion and also going into the special service. And we also have quite a lot of ships being used for recycling and being older than the average scrapping age of 28 years, as we speak.

On the production and demand side, we have significant natural gas and the refinery based production in the U.S. which is going to continue to produce regardless of the oil price. The EIA estimates which we believe will be improved, we believe that they will be — they are under estimating the production and this is what we also saw in 2016 when the oil price fell the last time is that the LPG production stayed quite stable throughout the period much related to the fact that a lot of this product is not oil days as such and will continue to be produced regardless of oil prices.

We have significant improvements in U.S. infrastructure that will come on stream that have been confirmed throughout this period. We do have also some projects such as the enterprise, second expansion of their terminal, that have been put on hold, but they have confirmed that the pipeline — fractionation capacity will continue to be carried through. And also pipelines going out to the Marcus Hook mark terminal on the East Coast, the Mariner East 2X pipeline, which is going to contribute with more propane going out to the terminal and Marcus Hook.

The Asian demand is returning to normal and will also increase with the growth trajectory that we’ve seen on the domestic or residential demand side, but also with the growth in PDH plant, which is expected to be significant over the next couple of years.

So a key takeaway, I think on the outlook is that for the company, we have raised 30 million in cash that we will close during the next couple of months. And we have thereby covered our pre-delivery CapEx as a normal conservative financing for the newbuildings as to trade rates significantly below our cash [indiscernible], which means that we are very comfortable with our capital situation with these transactions. We will continue to look at ways of raising more capital and strengthening our ability to invest further but we’re very happy with these two transactions.

We also have covered our book for the second half of this year, with 21% [potential] [ph] coverage of attractive rates. And we believe that we’re very well positioned for what can be positive for cost durations going forward, both for U.S. production and also for freight rates in general.

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With that, I can take questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have one question from the line of Gregory Lewis from BTIG.

Gregory Lewis

Yes. Just kind of looking at the current moving rates that we’ve seen here over the last couple weeks, just trying to get a better understanding and you definitely touched on it throughout the presentation. And just your comments around some of the optimism that you’re having as we move into the back half of the year. Like do we think — we’re at a point now, where we’ve kind of moved through the impact of the pandemic, I mean, like, just looking like rates year-over-year kind of gotten back to where they were, I mean, we’ve definitely seen stronger rates but nevertheless, rates are okay by historical standards. Just kind of — if you could talk a little bit about, I guess what’s happened over the last couple months and kind of help tighten up the market a little bit?

Peder Simonsen

Well, I think as I tried to touch upon, it is the rebound that we saw in June was too logic than during by ship tightness and slow steaming and drydocking of ships. But obviously showing that the small changes in the supply and demand balance can have a significant impact on the freight rate. That’s combined with the oil price coming up to the levels that we have now, where we can see that the price arbitrage within the U.S. and Asia can open up. Normally, we’ve seen that the ancient prices have been very much linked to the oil price, while the value has been living its own life, so to speak. So, but with the oil price moving up to this character that we see now and with the slow recovery from the COVID and discipline supporting the oil price, we should see a further move on the oil price which will further help the arbitrage to open up.

So, it is a combination of the fleet being reduced and capacity due to stroking and drydocking but also obviously, the underlying fundamentals of the market returning. And this has also obviously impacted the inventory levels in Asia where you’ve seen that with the less imports, they have deterring to chew into their inventories, which then again, pushed the prices up. And the same in the U.S. with inventories standing at building over the past 12 months with a steady production level, bringing the inventories up to two solid levels, which has pressure on the belly.

Gregory Lewis

Okay, great. And then just one more for me, at least in North America, so gas flaring has really been put on guard as something that’s not really, it doesn’t seem like there’s — it seems like that’s going to just continue to kind of get the ability to flare gas — going to continue to get kind of pushed out of the market. As you kind of think about the development of that and it’s not going to happen overnight. But as you think about that over the next couple of years, do you see the potential for and you touched on the arbitrage, opportunities that sometimes drive volumes.

I mean, could it be one of these things? I mean, could it just be arbitrage or not this gas that was previously flared means to kind of be kind of needs to be pushed in the other markets. I mean, is that something, I feel like it’s something that we’ve heard a lot about over the last couple of years. Do you think that’s something that actually starts to happen or do you think it’s really going — whether the volumes there or not, it’s really going to come down the price I guess is what I’m asking.

Peder Simonsen

Yes, which is obviously a proper thing for the arbitrage, I mean, the gas that previously which has been flared needs to be pushed through the system that’s going to impact the inventories and the price levels. I think that the market is moving, as you know some of our competitive also been talking about, and we have discussed this before moving into a more demand driven market where the Asian demand is what’s going to drive things going forward. And we see that we’re now closing in on 50% of the U.S. volumes going to export and 7% of U.S. exports has gone to Asia. So rather than this being an ARB or not, this year, which hasn’t been historically either because there’s been a lot of volumes that are going regardless of the arbitrage, sort of base volumes that are basically lack of growth in the Middle East has made the Asian buyers turn to the U.S. for LPG. And that’s going to continue.

But I think at some point the growth will outpace the — it will need to be sourced from the U.S. and that will need to be cleared by the prices in the market in some way. And obviously, the more product that’s going to help them on pushing the U.S. prices down, but I think it’s going to work in both on the Asian price and the U.S. price.

Operator

Thank you for your question. We don’t have any other questions from the phone.

Peder Simonsen

Okay. Then, I thank you for joining today’s call and have a great week.

Operator

That concludes the conference for today. Thank you for participating. You may disconnect.



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