BW LPG Limited

Welcome to BWLPG's Second Quarter 2022 Financial Results Presentation. Bringing you through the presentation today are CEO Anders Anaheim, CFO Elaine Ong, EVP Commercial Neil Srigu, and EVP Technical and Operations Pontus Berg. We are pleased to answer questions at the end of the presentation. Should you have any, please type them into the chat box in your Zoom panel. You may also use the raise hand option. Before we begin, we wish to highlight the legal disclaimers shown in the current slide. This presentation held on Zoom is also recorded. I now turn the call over to BWLPG CEO, Anders Olleheim.

Thank you, Lisa. Let me start by welcoming Christelle Sorensen to BWLPG. Christelle needs no introduction in our community, having been in the LPG shipping industry for over 20 years. He joins us this week, and we look forward to his contributions. I'm sure he'll hit the ground running right away. It has been a busy quarter for the team at BWLPG. We concluded the sale and delivery of BWL Liberty, completed a second tranche sale of our India subsidiary, which takes our ownership to 52%, and we entered into an agreement to acquire the LPG trading operations from Wilm Oil to expand our product services division. The acquisition is still subject to regulatory approvals, My thanks to all colleagues who worked hard to cross the finishing line. More on this later. I'm also pleased to announce that all 15 of our retrofits are now successfully back on water and capable of burning LPG as fuel. The world is facing great geopolitical instability. This is having a significant impact on the energy and shipping markets. Energy security is a growing concern and we want to play our part. Let me show you how LPG can contribute to the energy solution on our slide page four. The current instability highlights the value of LPG, and we're seeing increasing investments in US exports due to higher demand, and in particular from Europe. LPG is versatile, as it is imported by ships from global suppliers and provides attractive energy security compared to solutions that require costly investments in infrastructure and pipelines. LPG is also cleaner than most other alternatives. These attributes support further investments and growth in LPG exports, imports and thus transportation. On the right side, we can see that LPG continues to be highly competitive from a price perspective. And there can be a convenient substitute in industrial processes, given the current elevated prices on natural gas. At the moment, natural gas is actually six times more expensive than LPG in Europe. Given increasing importance of LPG as an energy source, we're committed to investing further in the LPG value chain. As part of this strategy, we were happy to announce the expansion of our product services through the acquisition of the LPG trading operations from Wilma. Let's turn to slide five. Again, we entered into the agreement on August 1st to acquire the LPG trading operations from Wilma Oil. Wilma has a strong track record and credible reputation in the LPG community. We are very excited to have a highly experienced team coming on board. The transaction is in line with our strategy and enables us to expand our product services division. The combined team traded over 4 million tons of physical LPG last year, and we have the capacity to grow further. The transaction also adds five additional TC and VLDCs, including one new build into our fleet. This also means we are expanding our coverage from US-centric to global presence, supported by teams in both Europe and Asia, and thus widening our service offering to our customers. The acquisition brings increased agility and important insight in today's volatile market, further enhancing our core shipping business. We also see tremendous growth opportunities ahead along the LPG value chain, allowing us to generate even greater value for our shareholders. As I mentioned, the acquisition is subject to approval from the Spanish regulatory authorities, and we expect the transaction to close by the end of Q4 this year. You can turn to slide six. Moving on to the highlights for the quarter, we want to leave you with some key messages. We will continue to deliver on our stated strategy of fleet renewal and further expansion into the LPG value chain. We continue to have amply available liquidity of $360 million and a record low net leverage of 25%. Against the uncertainties in global energy market and concerning order book, we remain still optimistic for 2023, but we are also prepared for continued volatility. More specifically on highlights, in addition to the development transaction, we also sold the BW Loyalty during the second quarter. In terms of outlook, we want to remind everyone that LPG, which mainly comes as the byproduct of upstream product production, is highly dependent on the oil and gas outlook. If oil and gas prices are sustained at high levels, we are well positioned to benefit from another strong energy cycle ahead. If the global economy experiences further turbulence and commodity price retreat, however, our balanced fleet and trading portfolio, ample liquidity, and strong balance sheet will prepare us to maneuver through those challenges also. And finally, on dividends for this quarter, with net leverage of 25%, we'll return to shareholders a dividend payout of 75% on their profit after tax for 20 cents per share. This amounts to a total of $27 million. Turn to slide seven, please. The key financials, the second quarter, we reported a day rate of $35,400 for a BLGC fleet per calendar day. Daily OPEX was $8,800. The increase was largely due to escalation in cost of lubrication rolls and rise in insurance premiums. This is something we're all facing at the moment. We generated a net profit after tax of $39 million, earnings per share of 26 cents. This translated into an analyst return on equity of 10%, with an analyst return on capital employed of 9%. Next up is Niels. He'll take you through the market review and the commercial update. Niels.

Thank you, Anders. Good morning, afternoon, and good evening to all of you. Please turn to slide number nine. On slide nine, we share our view of the market. As Anders mentioned, we remain positive for the rest of 2022 and next year. There are several encouraging developments. The two main export hubs continue to increase their export, US leading the way with record LPG export Middle East export is up significantly, in line with OPEC Plus phasing out its existing oil production cuts. For the coming winter, we expect strong winter heating demand and retail demand to switch more to the clean and cheap LPG compared to the expensive natural gas and oil. Today, LNG cost is about $500 in oil price equivalents. And oil price is today around $100. LPG is trading to 20% discount to oil, so the LPG cost is only $80 in all price equivalents. In other words, and as Anders also mentioned, LPG is about six times cheaper than LNG. I repeat myself, six times cheaper than LNG. So far, in Q3, we have fixed approximately 84% of our available fleet stays at an average rate of approximately $36,000 per day on a discharge-to-discharge basis. Hence, Q3 is in line or slightly weaker than Q2. Looking into 2023, we maintain a more positive outlook despite the order book. US midstream operators announcing to expand fractionation capacity, which will increase LPG production. We also expect the Middle East to continue their export growth, with Iran being a great upside potential should the sanctions be lifted. Iran alone can give employment to about 150 VLDC cargoes per year. On the demand side, we have been concerned of the current lockdown in China. However, the stats show that LPG imports were relatively stable compared to Q2 last year. Hence, this could be another great upside potential when China opens up again with the numbers of PDA plants, which are still scheduled to come on free. Let's turn to slide 10. The two chart on this slide reflects the current energy situation well. Compared to same period in 21, North America and Middle East exports have grown 6% and 16% respectively. For the same period, European exports were down 13%, and Russian exports declined substantially by 33%. Looking at the chart on the right-hand side, I want to draw your attention to the strong growth in the Indian imports, up 16% year-on-year, which is very positive for our BW India business. As mentioned, China remains the biggest importer of seaborne LPG, and imports were stable. European imports were also up by a significant 15%, again, reflecting the energy situation for the region. Let's turn to slide 11. US LPG export are fundamental to a well-balanced LPG shipping market. With Europe looking to become less dependent on Russian gas, seaborne LPG export from the US plays an important part in bridging that gap. Since our last earnings presentation, EIA has revised up its expectation for 2022. The result in net export growth of 10%. The previous growth forecast was 5.4%. The forecast for 2023 is unchanged with an 8.8% growth. Let's turn to slide 12. The current WC order book stands at 65 vessels. And only two ships were ordered during Q2. We see a clear tendency in the market that with current record high new building prices and a long delivery time, the appetite for ordering has diminished. Due to our return focus, we have no immediate plans of ordering vessels despite a positive market outlook. We remain comfortable with our current fleet profile, which should allow us to maneuver to all kinds of market conditions ahead. Our 15 upgraded LPG propulsion are currently enjoying a huge savings by burning LPG instead of the less environmental oil fuel. Today, the savings are about $8,000 per day while sailing on LPG. Please skip ahead to slide number 15, We have fixed 16% of our fleet to 23, at an average rate of TCE of $33,900 per day, or 15 million revenue locked in for our TCE book. Most of our TCEs out is for our BW India business. We are confident with our spot-open position to capture the positive market fluctuation ahead. and serve the expansion of product services through the acquisition of Wilma LPG Trading. The expansion enabled us to offer clients all over the world delivery of LPG directly from the world exporters. In addition to service our clients, product services has contributed to high fleet utilization, increased market information, additional revenues, and growth opportunities. That's it for me. Next in line is Pontus Beck, who will take you through the technical and operational update. Thank you.

Thank you, Nils. Thank you, everybody, for dialing in and listening to us. This quarter has been about capturing value for us. On the technical front, with the largest fleet of LPG-powered villages on water, we have been systematically scaling up our intake of LPG as fuel to maximize our earnings by reducing the cost for fuel. Our engineers are also honing their expertise in dual fuel engine management. On the operational front in Q2, we conducted close to 200 port calls, Panama and Suez Canal transits. And the team targets just-in-time arrivals to save bunkers and reduce emissions. A global network of select port agents help minimize turnaround times and maximize commercial availability. With all the 15 LPG-powered VLGCs now on water, we have been reaping the rewards of our ambitious retrofit project. We have supplied close to 10,000 metric tons of LPG as fuel, saving about 5.3 million US dollars in fuel costs for the fleet. We have also reduced the carbon emissions by just over 15% by using this LPG as fuel. Our LPG deck tanks complement existing fuel bunker capacities and provide us with full fuel and cargo flexibility during the operations. We have set up LPG bunker fuel contracts with new and existing partners in most major loading ports. Being able to lean on decades of operational experience has helped us to reduce the impact of inflationary pressures on the OPEX. For example, we are currently experiencing a 50% escalation in cost on lube oils and almost 40% increase in insurance premiums and consumables. As Anders earlier mentioned, We are in uncertain times and prices of raw materials are soaring due to widespread restrictions of movement of goods from major producing countries due to the war in Europe and COVID related lockdowns remaining in Asia. All of this reflect in the current increase seen on our OPEX. We will continue to do our utmost to keep the OPEX on market leading levels. However, without compromising on the wellbeing and safety of our crew and the reliability of the operations. Also, we have ensured that all our crew are fully vaccinated, which not only protect themselves, but also their shipmates, terminal employees and surveyors, and allow for minimal quarantine requirements during crew relief. That's my short update, so let me now turn over to our CFO, Elaine Ong, who will walk you through the financial positions and results.

Thanks, Panthers. Let me walk you through some financial highlights from our second quarter. Net profit for the quarter was $39 million, with an EBITDA of $83 million. This translates to an EBITDA margin of 68% for the quarter. At the end of June, our available liquidity was $360 million, with a continued low net leverage ratio of 25%. Our solid financial position will allow us to withstand any short to medium-term volatility and to invest in the right opportunities for future growth. Some key figures to highlight on our balance sheet. This quarter, net outflow from operations was 15 million, largely due to changes in working capital that amounted to 96 million. In brief, 68 million was due to the settlement timing for two LPG cargoes that straddled the quarter end. And 19 million was a result of higher bunker prices for inventory. We reported a positive free cash flow of 21 million, This includes $45 million in proceeds from the sale of the BW Liberty in Q2 and $9 million in capex spent for our LG IP propulsion retrofitting program, which was completed in May. As previously announced, we receive an additional $30 million in new equity from Mars Capital in June for their further stake in BW LPG India. From June onwards, BWLPG now owns 52% of our India subsidiary and will continue to consolidate our India results. During the quarter, we also prepaid $268 million of debt and returned $42 million in dividends to our shareholders. With a net leverage ratio of 25% at the end of the quarter, we have declared an interim dividend of $0.20 per share for the second quarter, which translates to a payout ratio of 75% of impact. For 2022, we expect our operating cash break-even for our total fleet, including our chartered-in vessels, to be at $22,300 per day. Here on slide 18 is an update of our financing structure and debt repayment profile. After the voluntary prepayment of $268 million of debt during the quarter, our outstanding bank debt was at $490 million at the end of June. Our gross debt currently stands at $653 million. This includes $61 million advances drawn from our trade finance lines and $107 million in lease liabilities from our time-chartered investors. With a cash balance of 166 million and 194 million on drawn revolving credit facilities, we ended the quarter with 360 million of available liquidity and a net debt of 487 million. On this note, let me open the floor for questions. Back to you, Lisa.

Thank you, Elaine. We will begin our Q&A session now. Should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question verbally. Please note that participants have been automatically muted. Please press unmute before speaking. We will begin our Q&A session now. Should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question verbally. Please note that participants have been automatically muted and please press unmute before speaking. We have the first question from Petter Hogan. Please go ahead, Petter.

Good morning and good day to all. This is Petr Haugen from ABG talking. Very interesting these days with the great discrepancies among the different energy carriers. First, could you shed some light upon what demand you've seen as of today in terms of utility-motivated demand for LPG in order to utilize the lower price for LPG compared to natural gas?

Niels, do you want to crack at that?

Yeah, I think it's still early days. I mean, the winter hasn't really started, for instance, in Europe. But it's clearly that people will tend to go for the cheaper energy. And we have also seen announcements on the petrochemical side that people are looking at different alternatives and, for instance, using LPG as a fuel.

But I think also we still see that it's I think the LPG market is still not well understood by all. And I think so we're starting to see more and more inquiries and interest. And of course, I think when, again, as Neil says, when the winter starts hitting, I think that the search will really, really step up. And we are seeing already industrial players stating they can replace quite a bit of their LNG with LPG. And we think that's something that will continue.

Interesting. Thank you so much. Another market-related question. We've seen congestion sort of issues starting to solve themselves in many segments. But in the Panama Canal, which to the best of my knowledge has been perhaps the most impactful in the LPG market, my understanding is that there is still substantial congestion there. Looking for comments and if possible any foresight on what to expect on the congestion issue in particular in Panama for LPG carriers.

It's definitely, first of all, it is very volatile, the waiting days. But we anticipate that to continue. I mean, currently now, I think some of our ships have been waiting on the northbound about two weeks to transit. So it's volatile, but the inefficiencies in the Panama Canal is here to stay.

Okay, a quick follow-up on that. Do you see congestion elsewhere?

Yeah, I mean, there are, for instance, in India has been a lot of, lately, a lot of congestions because they have increased their imports into RPGs. We've seen a lot of inefficiencies on the discharge ports, so ships are waiting. There's also been some, well, discharge inefficiencies in China. So, yes, I would say that the inefficiencies we have experienced the last 24 months are still there in our segments.

Okay, thanks. That's all for me.

Next, we have Anders Karlsson. Anders, please.

Yes, my question goes on the ships that you said were on charter to Vilma Oil. You said there were five ships, including one new build I heard. Can you say anything about the duration and what kind of propulsion these ships have, and also if there are any purchase options or anything similar linked to the charters? Nils, for you again.

Yes, I mean, there are five ships, so we will take over. They're all on TC. From the five ships, one of them is a new building. The duration is everything from eight years to two years. And the propulsion of the new building is the LPG, while some of them have scrubbers, and the rest is compliance fuel. But remember that three of the five already have CC attached.

Okay. Thank you. That's all for me.

Thank you. Next, we have Lars Christensen. Lars, if you please.

Yeah, thank you very much. Lars Christensen with Navigar Capital Partners in Copenhagen. On the outlook for 2023, you had Two highlights that you mentioned. One was obviously the economic outlook that has a lot of volatility in it these days. And the other one was the order book. Could you please put some more words on what it is you see with the order book that the order book coming in? How will that be absorbed in the market? And what impact do you believe that's going to have on the open ship dates you have for 2022?

I will start and I'll let Nils also talk. I think if you listened before, we have been somewhat concerned about the order book 2023 in the past, and we've been trying to voice that quite clearly. I think in the current energy environment, I think we do see and expect higher production, particularly from the US, and also higher exports. And I think we are seeing that the increased activity should at least to a great extent absorb the additional fleet. But of course, we're still cautious because we also know that with the interest rates environment we're seeing, it could hurt the economy and also, of course, energy prices. So we don't think that we're totally out of the woods, but I think we are more constructive and we believe that both inefficiencies, as Nils is talking about, and increased activity will lead to more exports and more activity on water. Nils, do you want to add something?

Yes. I mean, I said, I mean, the two main hubs, both of them have quite large export growth going forward. I mean, as I mentioned, the US is from 6% and the Middle East is 16%. And I have to admit that we just see already now how much LPC is coming up from the Middle East now. So they... At the Middle East, it's really delivering on the RPG side. And as we discussed a bit earlier, the deficiencies will still be there, both on the Panama and on the discharge area. So yes, if you combine everything. And also if you look at the forward market, the FFA market, they also anticipate the market about $30,000 per day. So in our view, even though the order book is large, it's still like next year will be a good year.

Okay, next we have Joe Mars. Joe, if you please.

Hi, thanks for taking the question. Just going back to your previous point, can you just explain a bit better, and excuse my ignorance, what the applications of natural gas that you think you could substitute into LPG from a price perspective at this point? at this ratio, whether that's, I mean, you mentioned utilities, but I assume it's not just utilities. There's also industrial use. If you could just talk about specific kind of use cases that you're seeing. And the second is, can you just explain in more detail? I mean, I understand that obviously to increase the exports, from both the U.S. and the Middle East as a combination of having the product and then also having the facilities. So is this a case where the facilities in terms of the export terminals need to be built out more, or is it a case that you actually need more output? I mean, I'm assuming in the Middle East and the U.S. you have sufficient output. It's just a question of facilities utilization, as you mentioned. Can you explain those points? Thank you.

I think the first question is the LPG-specific technology. I mean, I think the main part we'll see is from the retail. I mean, as we mentioned, currently the LPG is six times cheaper than natural gas. So obviously, if Europe and Asia will get kind of a cold winter, it's quite easy to substitute that to use LPG. uh we also see that as i also mentioned i mean we do use a lot of lpg i mean they use as much lpg to spike up the lng as possible so they maximize that so that obviously also it's uh it's the amount growth and uh we also see i mean there is a the margins not compared to lpg it's also very favorable so obviously the petrochemicals uh industry using as much lpg to crack compared to to nafta And then you said about if there is any bottlenecks or concerns of the export terminals. No, I mean, as I mentioned, maybe the fractionation, building up more fractionation to get more LPG export, that is underway. I mean, a lot of the midstream companies have had their earnings released and also mentioned that they will increase the fractionation capacity, which is very positive. When it comes to the export terms of the U.S., they still have capacity to increase export. So we don't see that. And the same thing goes from the Middle East.

I just want to add, we don't have any sort of good numbers. So we're still saying spike LNG, but I think we are seeing more and more people talking about it. And that's something that we are going to watch very closely, because obviously, if you can mix in LPG and LNG to a great extent, given the price differentials, I think that's going to be quite interesting also.

Yeah, I understand. Thank you.

Should you have questions, please type them into the Zoom chat box. You can also click on the raise hand button to ask your question verbally. Please know that participants have been automatically muted and please press unmute before speaking. One more round. Should you have questions? We have one question from Desmond Bimu. Please go ahead.

Hi, good morning. I'm a private investor from the United States. My question really quickly, I'm very pleased with the voluntary debt payments. Do you expect these voluntary debt payments to continue? And is there a specific target that you're looking to meet with the gross debt?

Elaine, do you want to answer that?

Hi there. I don't think these voluntary debt payments are going to continue indefinitely because a lot of our facilities now are predominantly term loan facilities that have scheduled repayment schedules. And also with the rising interest rate environment, I think it would be prudent, you know, not to be too aggressive in paying off the debt that we have, which are quite attractively priced.

Okay, next we have Joe again. Joe Mars, please go ahead.

Yeah, sorry, just a follow-up. And again, I recognize it's very hard to historically find any parallel to the current situation. So normally in the energy business, everyone tries to find the historical parallel. It's a bit hard. So, you know, I guess what I just don't understand is the capability of the various equipment to be able to take. I mean, I can certainly understand in the United States where the natural gas, you generally have LPG within the natural gas. So the whole system is built up to basically fractionate, but you can clearly keep it in. There's a whole economic discussion of whether you keep the liquids in or you split them. I just wasn't aware. I guess in the UK, historically, there has been a fair amount of natural gas liquids produced out of the North Sea, or I guess in Norway and other countries that use North Sea gas. Is that where you would think the majority of the capability would be to basically take more LPG? Because it seems like if If you built a system in Norway or the UK or maybe Denmark, historically, you had a lot of natural gas liquids just coming out of the North Sea that you were taking advantage of in your industrial system that probably as those systems ran down, you don't have as much LPG. So is that where you would see the sort of demand source, if you will, for the marginal equipment that could swish? Thanks.

I mean, I think I'm not going to dare to give you a clear answer on that, because I think we are still also investigating it. As we sort of move further into the value chain, we're also learning quite a bit. Obviously, so far, we've been basically shipping it from A to B, and I've been happy with that. Certainly in Norway, I don't think it's going to happen, even though we have here tough discussions at the moment because we're sending all our electricity out of the country, but I don't think this is going to happen here. UK might be a market. I think also on the continent, I would expect that more will look for opportunities at the sea. And I think we, again, we're going to be humble enough to say we don't know enough about that, but we're going to certainly try to, and also now with the Vilma team coming on board, We're certainly going to try to be better at understanding that and taking advantage of it. But I think also what Neil said, I mean, the, where I think the real potential is, I mean, there are many parts of the world where they, they are, they're not as into, they don't have the infrastructure and they're, they're not into the green shift like we are many other places. And, and I think that's also where we as a, as a world, we need to find solutions also for, for those places. So I, so I, so I guess we, We just think that gravity works. And if something, a product that's as clean and as efficient as LPG, if it remains that much cheaper, we do believe that it's going to be a, we're going to see increased demand and also substitution effects. But again, I'm sorry, I can't be more specific because I really don't know.

No, no, thanks very much. I mean, the logic is 100% true. It's just always, you know, it's always a path, which is the challenge. But I guess we'll see in coming quarters how it all shakes out.

But thanks for your help. At least we'll do our best to get you better and better answers.

Okay, that being no further questions, we have come to the end of today's presentation. Thank you for attending BWLPG's second quarter 2022 financial results presentation. More information on BWLPG is available on our website. Have a good day and a good night.