BW LPG : Second Quarter 2024 Presentation Transcript

Event BW LPG Q2 2024 Earnings Presentation

Date 22 August, 2pm Oslo/ 8pm Singapore/ 8am New York

Hosts Kristian Sørensen, CEO

Samantha Xu, CFO

OPENING

Welcome to BW LPG's Second Quarter 2024 Financial Results Presentation. Bringing you through the presentation today are CEO Kristian Sørensen and CFO Samantha Xu.

We are pleased to answer questions at the end of the presentation. Should you have any, please type them into the Q&A function in your Zoom panel. You may also use the "raise hand" option. Before we begin, we wish to highlight the legal disclaimers shown on the current slide. This presentation, held on Zoom, is also recorded. I now turn the call over to Kristian.

CEO - KRISTIAN SØRENSEN

Thank you, Lisa, and hi, everyone, and welcome to our 2024 Q2 presentation. Thank you for taking the time to join us today as we present our financial results and recent events. It's been an eventful period for our company. Let's turn to Slide Four.

Before we talk about the more recent events, let's focus on the Q2 numbers where we are pleased to report another good quarter for our fleet, with time charter equivalent in line with our guiding of US$49,000

per day. We're also happy to report another profitable quarter for our trading activity in Product Services, with a net accounting profit of just below US$16 million. As you will see from Slide 16, with our usual waterfall illustration of Product Services' performance, there was a US$29 million profit from realised positions, which was offset against an unrealised net loss from physical and paper hedging positions. Following our good results, our Board declared a dividend of US$0.58 per share, which corresponds to 100% payout of our shipping Net Profit After Tax (NPAT) of US$0.48 plus US$0.10 top up from Product Services.

The biggest news is the subsequent event of last week, where we announced the acquisition of 12 Avance Gas VLGCs for a total transaction price of US$1.05 billion. This transaction is a major milestone and shows our capacity to strike transactions with big scale and strategic significance. It also propels BW LPG forward as a leading VLGC shipping and LPG value chain player. On the next slide, we will look at the highlights of the transaction, which was enabled by our successful listing on the New York Stock Exchange, which has boosted the liquidity and robustness in our share.

Looking at the market outlook, we are currently in a market which is on its way back from the summer doldrums, where the spot rates bottomed out around US$30,000 per day from the U.S. Gulf because of disruptions in the terminal's lifting program after Hurricane Beryl. The demand side in the consuming markets East of Suez continues to show robust growth, and the FFA market is pricing December liftings at around US$50,000 per day. More about the market developments later in the presentation. Let's turn to Page 5 for a repeat of last week's announcement.

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For us as a company, we have historically had a clear preference for growing our fleet with vessels on the water without adding capacity to the global fleet. We did so when we acquired the Maersk VLGC fleet in 2013, as well as the Aurora LPG fleet three years later. So for us, this transaction was of the same scale and strategic magnitude, where we overnight created a much bigger footprint commercially, and a much larger company for the capital market to invest in. Through the transaction, a larger fleet will give us commercial advantages of scale, more flexibility, and market power.

Moreover, the acquired 12 vessels will contribute to the renewal of our fleet, and we will own and operate 53 VLGCs by the start of 2025, where 22 are dual fuel. However, to do this transaction at this point in the cycle, it was essential for us to use our shares as currency in a way which is accretive to our shareholders. Out of the total purchase price of US$1.05 billion, of which US$ 500 million is in debt, we will effectively fund 60% of the net asset value by issuing 19.282 million new shares at US$17.25, equaling US$ 333 million.

Avance Gas will have a 40-calendar day lockout period of the shares received when the vessels are delivered ship-by-ship in the fourth quarter. Consequently, we are increasing our total shares outstanding by 15%, while adding more than 40% earnings power through the expansion of our own fleet. The balance of the net asset value in the transaction is to be financed by cash at hand, and the drawdown of our current revolvers.

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The transaction is fully funded and financed with BW Group providing us with a revolving unsecured shareholder loan of up to US$350 million, allowing us to comfortably take over the 10 Avance Gas vessels with bank loans and swiftly refinance. The sale-leaseback facility currently financing two of the vessels will be novated soon.

On a like-for-like basis post-transaction, our liquidity will remain at a healthy level of US$343 million before any refinancing effect to optimise the liquidity position. Net leverage ratio is expected to increase to 30-35%, a healthy and more optimal level than the 7-12% range we have reported for the last two quarters. Basis our positive market view, this illustrates the attractiveness and the accretiveness in this fleet acquisition, which expands our market-leading business platform while we maintain a robust balance sheet. Let's turn to the next slide to look at the latest market developments.

After a slow couple of months over the summer, U.S. exports have picked up from the delays caused by Hurricane Beryl, and the export volumes from Enterprise and Targa terminals in the U.S. Gulf are catching up with the backlog. The most recent report from Gibson Shipbrokers shows an uptick of 10 VLGC export cargoes from July to August, meaning the number of VLGC loadings in the U.S., including the East Coast, will arrive at 104 for the month of August.

The price differential between the U.S. and the Far East is currently around US$ 230 per ton, giving room for higher freight rates on the back of tighter availability of ships, as we have seen over the last weeks. Heading into the winter season, the forward market is pricing the Houston-

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Chiba benchmark leg at around US$50,000 per day, and this is without any Panama Canal delays for VLGCs, indicating an upside on the rates should the Canal become more congested. If we look further out on the horizon, there are firm expansion plans from the three big terminals on the U.S. Gulf Coast, starting second half of next year, and we view these billion-dollar investments as positive for shipping demand when coupled with continued demand growth in the Asian markets.

In the Middle East, the annual export volumes are pretty much stable with seasonal reduction in export volumes over the summer due to maintenance and higher domestic consumption. According to Gibsons, the number of VLGC cargoes has fluctuated between 55 to 60 per month since May. What is interesting is that around 50% of these volumes end up in the increasingly important Indian market, which leaves the import markets further east in Asia more dependent on cargoes from the U.S., which in turn is supporting shipping.

For a period of time, there have been mixed signals from the overall Chinese economy, but the Chinese import demand for LPG, and in particular propane, continues to grow on the back of scheduled PDH plant expansions. As a final comment on the status of the LPG market, there's a lot of focus on the demand growth in China and the Indian subcontinent while the rise of the Southeast Asian market is overlooked by many observers. This region, with growing population and prosperity, imported around 13 million tons of LPG last year and is surfacing as a considerable consumer of LPG, which also sources significant volumes from the U.S.

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Looking at the supply side of the VLGC market, we have entered a period of modest fleet growth for the next 18 months. In addition, if you look at the fleet profile for vessels 15 years and younger, there are 35 VLGCs going into drydock this year, while the number increases to 65 next year, which under normal circumstances will reduce the global fleet capacity. And with that, I leave the floor to you, Samantha.

CFO - SAMANTHA XU

Thank you, Kristian. And hello, everyone. Let's have a closer look at the shipping performance. For the second quarter of 2024, we delivered a timecharter equivalent (TCE) of US$48,000 per calendar day and US$49,700 per available day - a continued solid performance on shipping.

We have healthy coverage through our time charter and FFA portfolio, which represents about 39% of our shipping exposure. For the third quarter, we have fixed 86% of the available days at about US$43,300 per day. For 2024, our time charter out fleet generates a profit of around US$27 million over the time charter in fleet. The remaining of our fixed time charter out portfolio is estimated to generate US$68 million for 2024.

Coming to Product Services, we're pleased to share that it delivered another quarter of strong performance. In Q2, Product Services yielded a net profit of US$16 million, contributed by a gross profit of US$25 million after netting off G&A and tax provisions. After deducting share capital returns concluded in Q2, the net asset value ended in June at US$69 million. The gross profit of US$25 million includes a realised gain of US$29 million, as mentioned, offset by US$5 million of unrealised cargo and derivative loss.

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Due to increased fiscal forward volume from the new multi-year term contract with Enterprise Products Partners being phased in and included in the 12-month rolling market valuation, we may see larger movements in unrealised positions in the future quarter as cargo price fluctuates. The reported net profit does not include the US$31 million unrealised fiscal shipping position based on our internal valuation. For Q2, we reported an average Value-At-Risk (VAR) of US$5 million on a well-balanced trading book, including cargoes, shipping, and derivatives.

Going on to our financial highlights. On the back of good performance from both Shipping and Product Services segments, we reported a Net Profit After Tax of US$85 million in Q2, including a profit of US$12 million from BW LPG India and US$16 million from Product Services. Profit attributable to equity holders of the company was US$77 million for the quarter, which translated to earnings per share of US$0.58. This means an annualised earnings yield of 12% when compared against our share price at the end of June.

We reported a net leverage ratio of 12% in Q2, an increase from 7% reported at the end of March, mainly driven by our cash position changes. As we progressively take delivery of the newly acquired 12 VLGCs, which mostly estimate to be in Q4, we expect that our net leverage ratio will gradually increase to an approximation of 30-35% range, as we slowly draw down on our revolving credit facilities. For Q2, the Board declared a dividend of $0.58 per share, a 100% payout of the company NPAT or 121% of shipping NPAT.

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This reassures that our continuous commitment to return value to our shareholders, as we deliver growth to our business. The balance sheet ended the quarter with a shareholder equity of US$1.6 billion, and our annualised Q2 return on equity (ROE) and on capital employed (ROCE) were 21% and 17% respectively. Year-to-date OPEX per day arrived at US$ 8,600, a slight reduction than last quarter.

For 2024, we expect our own fleet's operating cash breakeven to be about US$17,800 and US$22,300 for the whole fleet, including the time charters. As you can see, we continue to have a healthy repayment profile with outstanding shipping loan at US$ 230 million, of which BW LPG India term loan of US$127 million is only due to be refinanced in 2026 - a very manageable position.

On the liquidity side, we ended Q2 with a strong position of US$578 million, which paved the way for the announced Avance Gas fleet acquisition. Vessel deliveries will be carried out from 15 September to the end of December. When all the vessels have been delivered, our liquidity is expected to remain healthy at a level of US$343 million, with the estimate that US$235 million is drawn from our current revolvers. We also expect to gradually draw down the revolving shareholder loan of US$350 million, in part or in full, to fund the vessels' deliveries.

The shareholder loan makes sure the transaction can progress swiftly and that we can refinance with an improved term post vessel delivery. We expect the new fleet refinancing to be initiated as soon as possible, while we are working on other refinancing projects to optimise the balance

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sheet. We're confident of maintaining a healthy leverage and financing structure, as well as a sustainable repayment profile with a grown fleet.

On the Product Services side, trade finance drawn stood at a moderate level of US$159 million, or 20% of our available credit line, leaving healthy headroom for growth. With that, I'd like to conclude my updates. And back to you, Lisa.

Q&A

Host: Thank you, Samantha. We will open the floor for questions now. Should you have questions, please type them into the Q&A channel. You can also click the raise hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. […] We have some questions. [Participant 1], please go ahead.

[Participant 1]: In terms of the cost side of taking over those 12 VLGCs, could you give some specific guiding on just how we should model that going into Q3 and further into Q4, potentially also impact in Q1? In terms of doing inspections and so forth, I would assume that the handover would take longer than what the normal turnaround would be. And if there are any planned non-revenue making days needed for the transaction to go along?

Kristian Sørensen: The transaction is done on standard sale form terms in shipping, where you conduct an underwater inspection and have the vessel delivered at the same time as you pay for the ships. And then the

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ship is in our hands. So, there is no difference from a regular sale and purchase transaction in that respect.

[Participant 1]: I understand. But in terms of the revenue days in this time period, are you able to fix prior to the inspection and the delivery, and effectively not having lost revenue days when taking over the ships?

Kristian Sørensen: Well, the cost of the ships is on Avance until we have taken delivery. They can deliver the ship, typically in Asia, and then we ballast the ship into the Middle East and load, or go back to the U.S. Gulf. So it depends on the position of the ship, but all the cost for the vessel up until delivery to BW LPG is as per normal sale and purchase transactions for the sellers, at the seller's expense. Of course, the inspection and procedure around that is at our cost. But this is nothing material to be thought about from our side.

[Participant 1]: And if I just follow up on a quick one on the market outlook. This time you talk about the future growth for the next three years, which is at least in what I can read longer than what you normally have guided for. Could you shed some light on what sort of considerations you have been making to make statements now going into 2026, and perhaps also shed some light on why you think the U.S. LPG export growth is going to be in the high single-digit territory also in the coming few years?

Kristian Sørensen: We usually have a view two to three years out based on our own data collection. We see how the big terminals and the big players in the U.S. Gulf are gearing up and investing in adding capacity, how they are guiding on their volumes … these, on top of our own data gathering, supports our views. So, we get our data from various sources.

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