Ardmore Shipping Corporation

Good morning, ladies and gentlemen, and welcome to the Ardmore Shipping third quarter 2021 earnings conference call. Today's call is being recorded and an audio webcast and presentation are available in the investor relations section of the company's website, ardmoreshipping.com. We will conduct a question and answer session after the opening remarks. Instructions will follow at that time. A replay of the conference call will be accessible anytime during the next two weeks by dialing 1-877-344-7529 or 1-412-317-0088 and entering passcode 10161121. At this time, I will turn the call over to Anthony Gurney, Chief Executive Officer of Ardmore Shipping.

Thank you. Good morning and welcome to Ardmore Shipping's third quarter 2021 earnings call. Let me first ask our CFO, Paul Tidman, to describe the format for the call and discuss forward-looking statements.

Thanks, Tony, and welcome, everyone. Before we begin our conference call, I would like to direct all participants to our website at ardmoreshipping.com, where you will find a link to this morning's third quarter 2021 earnings release and presentation. Tony and I will take about 15 minutes to go through the presentation and then open up the call to questions. Turning to slide two, please allow me to remind you that the discussion today contains forward-looking statements. Additional results may differ materially from the results projected from those forward-looking statements. And additional information concerning factors that could cause the actual results to differ materially from those in the forward-looking statements is contained in the third quarter 2021 earnings release, which is available on our website. And now I'd like to turn the call back over to Tony.

Thank you, Paul. So let me first outline the format for today's call. To begin with, I'll discuss financial highlights, recent market activity, and the near-term outlook, after which Paul will provide an update on product and chemical tanker fundamentals and financial performance, and then I'll conclude the presentation and open up the call for questions. So turning first to slide four. We're reporting an adjusted loss of $12.8 million or $0.37 per share for the third quarter as compared to an adjusted loss of $7.6 million or $0.23 per share for the second quarter. Our MRs averaged $10,280 per day for the third quarter versus $11,300 for the second quarter, reflecting extremely tough market conditions impacted by oil demand still at that time low compared to pre-COVID levels. oil inventory destocking, and reduced refinery throughput. Our chemical tankers were similarly challenged, despite a stronger chemical tanker market, as they traded in CPP for a greater percentage of time than usual, earning 10,400 per day in chemical trades, but only 6,700 in CPP trades. Performance through the fourth quarter is expected to be much better, reflecting an improving market month by month, with October already done at similar levels to the third quarter, November a turning point, and December expected to be stronger still. To provide some data and context around this, our MRs quarter to date have earned $10,450 per day with 50% of the quarter fixed, and the chemicals at $11,400. However, our MR voyages fixed over the last two weeks are showing much better levels at $15,300 per day with chemicals at $17,400. In addition, as an indicator of the forward market, the MR EcoDesign one-year TC rate is now at $15,400 per day, and the FFA, or Futures Atlantic Triangulation, that would be TC214, for December through March is now at $16,200 per day, indicating expectations of higher rates this winter and into 2022. And most recently, we fixed an MR voyage U.S. Gulf to Carrots, earning $20,500 per day on a round-trip basis, representing a significant recovery in that market, which has been the worst hit in the recent months. As an aside, one thing to keep in mind is that the Ardmore fleet is not scrubber-equipped, and thus there is currently a $1,500-a-day TCE differential based on current fuel prices, boosting scrubber-equipped TCEs, but without taking into account the offsetting capital and operating costs of scrubbers. But back to the market, from what we can see, the product and chemical tanker trades are turning. On how far this goes, we will discuss further in the presentation. Meanwhile, we've made good progress in terms of our energy transition plan, which we'll also discuss later. But to highlight some of the recent developments, E1 Marine has secured its first order for a hydrogen generator from a leading global engine manufacturer. And there is now an agreement in place with Aramco Americas for a joint research project to apply its carbon capture system to E1 Marine's hydrogen generator. And as a final point, as a quarter end, we're maintaining a strong liquidity position of $61 million of cash and undrawn lines, plus an additional $15 million cash pending funding of the preferred equity tranche two. So moving on to slide five for a discussion of recent market activity and the near-term market outlook. The most notable development is the rapid oil demand recovery expected from the end of August to the end of December, which according to RISDAT is 3.2 million barrels a day, bringing oil demand close to the levels as of the end of 2019, and with the remaining jet fuel deficit being largely offset by other gains, which you can see in the graph to the upper right on this slide. However, this recovery is being masked by a reliance on existing refined product inventories to meet rising demand, in other words, undersupply and destocking, rather than oil production and refinery throughput, which, as is being widely commented on, is expected to end soon. As a consequence of this destocking, we now have very low refined product inventories worldwide, but in particular in the Atlantic Basin, which may lead to supply dislocations and thus additional cargo movement through the winter period. Added to which the energy crisis concerning the supply of coal, natural gas, and the impact on electricity supply and pricing has the potential to boost oil demand by an incremental half a million to a million barrels a day through the winter months, by virtue of higher gas oil consumption for power generation. When these factors are layered on top of an already improving product tanker market, we're now expecting a very good run through the winter months. The near-term outlook for chemical tankers is equally positive, but for different reasons, more in line with containers and dry bulk. Rapid GDP recovery, port congestion, regional imbalances and commodity price differentials, and a very strong outlook for 2022, which is probably already building in momentum. So I'm turning to slide six for a discussion of our energy transition plan. As you probably all know, we announced our energy transition plan in March of this year. It covers three key areas, transition technologies, sustainable cargoes, and transition projects. Through this period of the last seven months, we've made good progress on many fronts, including our investment in Element One, and the related joint venture, E1 Marine. Two recent milestones to report are the E1 Marine has completed its first sale of a generator system to a leading global marine engine manufacturer. The sale is on profitable terms and is expected to lead to a commercial licensing agreement and mass production. And Element One Corp. is entering into a JV agreement with Aramco Americas to apply their already developed automotive carbon capture system to E1's hydrogen generator, which, if successful, will result in the world's only functioning carbon-negative power system for the marine industry. In addition, we're continuing to advance all aspects of the ETP, increasing emphasis on sustainable cargoes, in other words, veg oils, chemicals, and biodiesels, now about 25 percent of ship days. In terms of energy efficiency improvements and less carbon emissions reduction, we're installing the lean marine system across our whole fleet. We're continuing the final installations of PVCFs. We're trialing other energy-saving devices. And we're in discussions regarding cooperation on the development of an advanced onboard performance management system. And during the quarter, we renewed the APN sustainability linked loan, extending the maturity to 2023 with a reduced margin for meeting sustainability targets, including emissions levels. And with that, I'll hand the call back to Paul.

Thanks, Tony. Turning to slide eight, Tony has taken us through the near-term market outlook, so I'll focus on the median-term outlook for product-anchored demand, which is also very favourable. No-blood demand is expected to fully recover and exceed pre-COVID levels in early 2022. and then continue a growth trajectory. Looking to the chart on the upper right, we can see the medium-term outlook for oil demand remains firm. Oil consumption is expected to reach 104.8 million barrels a day in 2025, representing a 1.5% growth rate per annum for the next four years. Meanwhile, refinery dislocation will continue to have a significant positive impact on product anchor demand, providing an additional layer of growth. At a high level, closures of refineries in developed countries, such as Europe and the U.S., means that oil products supplied by these refineries are replaced by seaborne imports from new refineries in the Middle East and Asia. The current volume of refined products moved at sea is approximately 21 million barrels a day, and in this context, the level of refinery dislocation is significant for product time for demand. Between 2021 and 2025, refinery capacity in export-oriented locations, such as the Middle East and Asia, is expected to increase by 9.7 million barrels a day as compared to refinery closures of 5.1 million barrels a day in the US, Europe, Japan, and Australia. In terms of live examples, a number of large refinery expansion projects are expected online in the next 12 months after many years of construction. The 400,000-barrel-a-day Jizan Refinery in Saudi Arabia is expected to be fully operational by the end of this year. The 615,000-barrel-a-day Al Jazeera Refinery in Kuwait scheduled to come online in the middle of 2022, and in Oman, the 230,000 barrel geochem refinery is expected to come online later next year. Overall, product tanker tonne mile demand is expected to grow by 3-4% to 2025, which is above current product tanker supply growth. Moving to slide 9, we highlight the very positive outlook for chemical tanker demand. Chemical tanker trade is highly correlated to global GDP, with a correlation coefficient of 95% from 2010 to 2021. The global economy has recovered strongly in 2021, with growth of approximately 5.5%, and chemical tanker demand is now approaching the same pace. As a consequence, chemical tanker freight rates are well ahead of CPP rates. Ardmore's chemical tankers are currently outperforming MR product tanker TCE by $2,000 to $3,000 a day. Demand outlook is very strong. Seaborne chemical tanker trade is expected to increase by 5.5% in 2022, driven by an ongoing global economic recovery, expansion of petrochemical production capacity to meet demand, and particularly strong export growth of edible oils, with an increase of 4% expected in 2022. Edible oils represent approximately 35% of chemical tanker demand. Therefore, we expect chemical tanker charter rates to continue running ahead of product tankers. And overall, we expect chemical tanker demand to grow by approximately 4% per annum to 2025, well above current chemical tanker supply growth. Turning to slide 10, supply growth for products and chemical tankers is increasingly constrained. There has been a significant increase in scrapping, with both products and chemical tanker scrapping levels well above prior periods. We're estimating approximately 70 product tankers, or 2.3% of the fleet, and 35 chemical tankers, or 2% of the fleet, to be scrapped this year. Elevated levels of scrapping is expected to continue as the energy transition accelerates the deletion of older, less fuel-efficient ships. EXI, Carbon Intensity Index, and other IMO legislation are expected to accelerate scrapping. The application of the new rules are to come into effect on January 1, 2023. In addition, the availability of product tankers less than 15 years old, which is the core fleet for mainstream trading available for oil traders and oil majors, is set to shrink over the next few years. For example, an expected contraction of 3.5% in 2022. This is simply a function of vessels aging out at 15 years old, which is a high number versus a relatively light number of new vessel deliveries. Meanwhile, the current order book is very low at 6.3% or 195 ships for products and 4.4% or 78 ships for chemical tankers. Product and chemical tanker new building deliveries are expected to remain relatively low for the coming years. Firstly, there is limited berth availability as yards are filling up following a surge in orders from other sectors, particularly container ships and dry bulk. And secondly, continued uncertainty on future propulsion and regulatory requirements is leading to ordering hesitation among ship owners. And overall, we expect net supply growth in products and chemicals to be low for the foreseeable future, absent a very strong market. Moving to slide 12, we take a look at our financial performance. And starting with TCE rates, it's important to reflect on the impact that COVID has had on product anchor charter rates. As you can see on the left-hand side of the chart, in late 2019 and into 2020, the market was steadily gaining momentum driven by improving fundamentals and increased demand for clean products. At the time, the oil market was also preparing for the IMO 2020 fuel switch. Product tanker rates were very strong in the second quarter of last year due to unprecedented volatility in the oil market driven by COVID and an oil price war. And as can be seen under the yellow banner in the middle of the chart, On the third quarter of 2020 to date, the oil market experienced unprecedented levels of demand destruction associated with global lockdowns and restrictions. Over the past five quarters, lagging oil demand, lower refinery throughput and inventory destocking has contributed to record low product anchor charter rates. We now believe the recovery phase is coming to a conclusion and rates are starting to trend up as you can see on the bars on the right hand side of the chart. We expect charter rates to continue to strengthen in the coming quarters as the market returns to more normalized conditions. Moving to slide 13 for a summary of our quarterly performance and financials. We're reporting EBITDA of 1.3 million and an adjusted loss of 12.8 million or 37 cents per share for the quarter. Earnings were impacted by the challenging charter market and dry docking is completed in the third quarter. We adjusted our docking schedule this year to take advantage of weaker charter rates and completed three dry dockings last quarter, resulting in 80 off-hire days. Meanwhile, we remain focused on cost control and operating efficiency. Operating expenses came in at $15.5 million for the third quarter, compared to $16.1 million for the same period last year. Looking ahead, we expect operating expenses for the fourth quarter to be approximately $15.9 million. Charter-in expense was $2.3 million for the third quarter and is expected to be $2.1 million for the fourth quarter. Interest and finance costs came in at $4.4 million for the third quarter, compared to $4 million for the same period last year, and the increased interest costs relate to refinancings on two ships completed earlier this year. We expect interest and finance costs for the fourth quarter to be approximately $4.4 million, including amortised deferred finance fees of $400,000. Total overhead costs were 5 million for the quarter, and for the fourth quarter we expect total overhead incorporating corporate and commercial to be 4.8 million, which includes both cash and non-cash items. Depreciation and amortization totaled 9.1 million for the third quarter, and we expect depreciation and amortization for the fourth quarter to come in at 9.2 million. As you can see from the graph on the lower right, We're maintaining a strong liquidity position of 61.4 million, comprising 54.5 million of cash at the end of September, with an additional 6.9 million available in undrawn lines. Turning to slide 14 for fleet and operational highlights. We're continuing to invest in the fleet to optimize operating performance. As mentioned, we completed three dry dockings and one ballast water treatment system installation in the third quarter, and we have no further dry docking scheduled until the second half of 2022. Fleet on hire availability was 99.2% in the third quarter and we're forecasting capex of 2.1 million in the fourth quarter, mainly comprised of payments for dry dockings completed in the third quarter and minor upgrading expenses. Revenue days for 2021 are forecasted at 9,500 and in October we time chartered out an EcoDesign MR for one year at an attractive rate. And currently we have five vessels fixed on time charter with an average remaining duration of four months. In total, for the fourth quarter, we have 19% of fleet days fixed on time charter. And finally, the fleet continues to perform well, and we're very pleased to report that as of today, 83% of the crew are now fully vaccinated and all COVID-related challenges are being managed carefully. Turning to slide 15, we take a look at our capital allocation policy, with financial strength remaining our top priority. We are continuing to focus on maintaining a strong balance sheet. We have $61.4 million in liquidity available, plus an additional $15 million in cash pending funding of the preferred equity tranche 2. Total net debt at the end of September was $326 million, and corporate leverage on a net debt basis was 48.5%, which is down 1.7% from fourth quarter 2020. Debt reduction remains a top priority. We have scheduled repayments of $9.2 million for the fourth quarter, and we're maintaining revolving credit facilities for financial flexibility. We've renewed the ABN revolving credit facility in September, extending maturity to 2023 with reduced margin for outperformance on sustainability targets. And finally, at the end of September, we have total equity of $2.6 million per owned ship, which we believe is the highest of our peer group. And with that, I would like to turn the call back over to Tony.

Thank you, Paul. So to sum up then, the third quarter was impacted by an extremely tough tanker market, but we believe that the worst is now well behind us and that we've reached a turning point in the market. We anticipate that the fourth quarter will develop month by month, with October already concluded at similar levels as the third quarter, November a turning point, and December expected to be much stronger. The market outlook is thus positive in view of the now close to complete global oil demand recovery and anticipated end to destocking. low inventories creating supply dislocations and potential spillover from the oil crisis into higher gas oil demand this winter. The chemical tanker market is similarly bullish, but for different reasons. Rapid GDP recovery, congestion, pricing differentials driving trade, and recognition of a strong market coming into 2022, which already feels like it's building momentum. The medium-term outlook for both products and chemicals is also positive in view of good demand growth coupled with a low order book and constraints on further supply. Meantime, we're pressing ahead with our energy transition plan and are making good progress with Element One and other initiatives, and we're maintaining our financial strength matched with significant spot exposure in order to benefit from what now very much appears to be a rising product and chemical tanker market. And with that, we're happy to open up the call for questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Chappell with Evercore. Please go ahead.

Hey, Tony and Paul. This is actually Sean Morgan on for John this morning. So I'd like to just ask a couple questions on the E1 Marine JV and what you're doing there. So is this a prototype that's been transferred to a manufacturing facility and then you would have a relationship where an existing manufacturer would sort of, I guess, mass produce the prototype for the JV?

Thanks, Sean. It's Paul here. So this is actually a sale. It's an outright sale to a global engine manufacturer for a pilot basis. The plan there is to match the generator up to a fuel cell, prototype that, and if successful, it's expected to lead to a commercial licensing arrangement for EWUT.

Okay, so would you be getting paid like a royalty or some sort of a commission on their sales of individual units, or how would the economics work?

Exactly. The commercial licensing model, the current business model for E1 Marine and, indeed, Element OneCorp is a royalty fee, a licensing fee based on the number of units sold. So it would be an asset-light model, but, you know, potentially, you know, very lucrative depending on the models that get sold.

Mm-hmm. And then I know it's the bill sort of in flux, but, you know, they released the preliminary language for the Build Back Better Act. And there was some stuff in terms of carbon capture credits and, you know, either carbon offsets or other incentives. Is there anything that you think is applicable to this marine hydrogen JV that you have working?

I guess it's too early to say on this, Sean. I think the carbon capture research project, which I want to have entered into with the Ramco, is that it's a research project. Their mobile carbon capture system has been made quite some time ago for mobility applied to trucks, and now they're looking to apply it to the E1 system, and it sounds like it's a very complementary system to the E1. So in terms of commercialization of this kind of carbohydrate system down the line in terms of offset credits. It's too early to say, but what we can say with green methanol, this would be the first and potentially only carbon-neutral system, your recycling capture from green methanol. Tony, any further to ask?

Yeah, it would be carbon-negative if it's run on green methanol. And just look, we don't want to go into a lot of technical detail, and we don't want to give the impression that we're no longer a shipping company. That's our main business. But the exhaust that comes out of the E1 hydrogen generator is already 50% CO2. So it's an ideal exhaust stream for carbon capture.

Okay, thanks. And then is there any limit to the scale that you can use this technology? I see on slide six you have kind of a smaller tug-looking vessel. Could you scale this up theoretically to like a CAPE or a VLCC, or is it kind of going to be sort of limited to smaller vessels?

Yeah, it's really ideally applied to smaller vessels, either river or coastal. But importantly, it's a very good generator replacement on board any ship. Great. And a surprising amount of – It's surprising that fuel is burned in generators on ships. Okay, I appreciate that.

Thank you.

Our next question comes from Randy Gibbons with Jefferies. Please go ahead.

Howdy, Tony and Paul. How's it going? Hey, Randy. Hey. So looking first at your fleet, it seems like the chemical tankers continue to maybe outperform the MRs here, even in recent weeks. Can you provide some additional commentary on that, and when do you expect MRs to kind of inflect above chems?

Well, I'll take a stab at that, Randy. Yeah, it's really interesting. I think it's largely due to the fact that when you get into periods of rapid GDP growth, that really helps the chemical tankers, whereas MRs are obviously impacted by that as well, but they're more subject to the forces of the oil market itself. And what's really happening is, you know, global GDP growth, some port congestion, rates are very, very strong in North Asia, for example, and that in the chemical sector, that's kind of spreading worldwide, we think. So, you know, I think as long as we We think that chemicals will continue to run ahead of MRs for a while. But having said that, we're really pleased with what we're seeing now in the MR space.

Sure. All right. And then I guess second question on kind of the balance sheet. Any updates on the 15 million preferred option? You know, I know you might not need it for cash reserves or fleet updates currently, but maybe thoughts on using those proceeds for share repurchases at this discount to NAV?

Yeah, thanks, Randy. So an update on the PREF. So we do expect to draw that and that will be subject to customer closing conditions and would expect that to complete within November. In terms of use of proceeds, I think, look, I'll direct back to early 2020 when we put in place our capital allocation policy and the priorities there in terms of debt reduction, financial strength, et cetera. So I think In terms of share repurchases, I think the priority is and will continue to be on debt reduction until we reach our target set out in the policy.

Yep. Good deal. That's it for me. Thank you.

Thanks, Randy.

Our next question comes from with Seaport Global. Please go ahead.

H.E. Wainwright. Anyway, hi, Tony and Paul. Just a question on your capital allocation. You mentioned that debt reduction remains a key priority. Maybe it's a little bit early, you know, with the rates picking up here. But as you go from playing defense to offense, what are the priorities, you know, besides debt reduction going forward, you know, product anchors versus investing in your, you know, E1 Marine Venture?

Thanks, Magnus. I'll take a stab at that again. I think when we drafted the capital allocation policy early last year, we very much kind of took account of the cyclicality in our business, and there's a time to, you know, financial strength in its true sense does allow a company to be counter-cyclical and really to kind of grow at opportune points in the market. So that remains the kind of longer-term focus, building financial strength and then using that as a as a competitive advantage to, to grow country. So you can see, I think that's, that still remains the top priority, uh, for us, uh, now and going forward.

Okay. And, and, uh, you mentioned the, uh, you know, the core product fleet, uh, you know, below 15 years of age, um, your average age is below 10 years. Uh, you have four smaller chemical tankers that are built after, uh, you know, oh, built before. Oh, six is, is the, uh, You know, how's the chemical market different from the product tanker market? And how do you see those vessels trade here over the next five years?

Hey, Van, this is Tony. Yeah, so actually those ships are under commercial management. We don't own them. But they trade alongside our very modern and fuel-efficient units that were built in 2015, about the same size. And the earnings differential is significant because of the fuel efficiency and the greater capability. But I'm glad you brought up the 15 years of age or less. I mean, I think it's as much an issue in the chemical sector as it is in products that, you know, the oil majors, oil traders – who also engage in chemicals to a degree, but also the chemical tanker companies, they have a strong preference for modern ships. And this is a really interesting point because the focus is always on scrapping, but the reality is that the fleet that's available to the mainstream traders oil majors, et cetera, is really up to 15 years of age. And it's very interesting to see how that's going to be shrinking, because deliveries are just not keeping up with the numbers of ships that are aging out at 15 years.

Okay. Thank you.

Again, if you'd like to ask a question, please press star, then 1 at this time. Our next question comes from Ben Nolan with Steeple. Please go ahead.

Hey, guys. I wanted to dig in. You talked a bit about the chemists, but in general, not all chemical tankers are created equal, right? And clearly, you know, you've been able to benefit here recently from an improvement, but as you sort of look out over the landscape of you know, what is developing? Is there a right fit that you can see and say, okay, this is the type we want. We want stainless or marine line or whatever that is matching up nicely with where you see demand going?

We just see broadly, you know, chemicals are attractive. It's something that, you know, there's an interesting article in Tradewinds written by Clarkson's, you know, based on some comments out of Autfel. that they're excited about the fact that MRs that have been, you know, trading aggressively into the chemical space are going to be pulling back in a stronger MR market. So that crossover business is very real. That's currently where we live. And we also have our, you know, the coated chemical tankers that go more deeply into the chemical sector. But I think broadly we just view the chemical sector in the very near term as being quite attractive. Longer term, we think that's where the growth is going to be.

Okay. So broad-based, but certainly easy chems kind of are in that sweet spot.

And let's see where opportunities take us down the road. But at the moment, that's what we do.

Right. Okay. And you just mentioned with Magnus that you're doing some commercial management of third-party vessels, You have for a while now. I'm curious, especially as the chems are getting more interesting, you've been at it for a while here. Do you think there's more opportunities to maybe be able to do more of that and sort of participate in an asset-light way, but it gives you a little bit more leverage in the market?

Yeah, we would love to, to be honest, but the challenge is it can actually end up being very distracting if you develop a kind of a third-party management pooling, you know, kind of model, which is not our intention. The four under commercial management are, you know, very high-quality German-based company that, granted, the ships are older, but they're in great shape and they're very good to trade. So we would be looking for, you know, strategic solutions. type of relationships like that as opposed to just opening the door to people with one and two ships at a time.

Yeah, sure.

Cool.

All right. I appreciate it. Thanks, Tony.

Thanks, Ben.

This concludes our question and answer session as well as our call for today. Thank you for attending today's presentation. You may now disconnect.