Dorian LPG Ltd.

Greetings and welcome to the Dorian LPG second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Additionally, a live audio webcast for today's conference call is available on Dorian LPG's website which is www.dorianlpg.com. I would now like to turn the conference over to Ted Young, Chief Financial Officer. Thank you, Mr. Young. Please go ahead.

Thank you, Bikram. Good morning, everyone, and thank you all for joining us for our second quarter 2023 results conference call today. On the line today with me are John Hajibateris, Chairman, President, and CEO of Dorian LPG Limited, John LaCouris, Chief Executive Officer of Dorian LPG USA, and Tim Hanson, Chief Commercial Officer. As a reminder, this conference call webcast and a replay of this call will be available through November 9, 2022. Many of our remarks today contain forward-looking statements based on current expectations. These statements may often be identified with words such as expect, anticipate, believe, or similar indications of future expectations. Although we believe that such forward-looking statements are reasonable, we cannot assure you that any forward-looking statements will prove to be correct. These forward-looking statements are subject to known and unknown risks and uncertainties and other factors, as well as general economic conditions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions or estimates prove to be incorrect, actual results may vary materially from those we express today. Additionally, let me refer you to our unaudited results for the period ended September 30, 2022, that were filed this morning on Form 10-Q. In addition, please refer to our previous filings on Form 10-K, where you'll find risk factors that could cause actual results to differ materially from those forward-looking statements. Finally, you may like to refer to the investor highlights slide posted this morning on our website as we go through our remarks this morning. With that, I'll turn over the call to John Hadjibateris.

Thanks, Ted. Thank you for joining us. Ted and John are in Hamburg. Tim and I are in Houston. I will give a brief introduction and then open immediately for questions when you can access my colleagues directly. Including our recent dollar dividend declared on October 27, we will have returned nearly $500 million to shareholders since our IPO. Our board has focused on returns to shareholders while retaining commercial flexibility and ensuring a strong balance sheet. We've often been asked why we call our dividend irregular. to distinguish it from extraordinary and a regular dividend. That term is not our invention. It was more often used in the past, and Ted can elaborate on its history. We use it because we consider it a more accurate way for a shipping company to describe the prospects for future dividends. Our board prioritizes return to shareholders consistent with a strong balance sheet and value creation. We are confident in our sector's relevance in the energy mix and in our part in the supply chain and returns over the lifetime of our assets. But we acknowledge that even in the best of times, volatility makes it impossible to make reliable medium term predictions of the freight markets. The TCE achieved per calendar quarter was $36,858, and our OPEX, $9,541. Cash G&A was $5.8 million, and cash interest expense, $6.4 million, down from $6.5 million, reflecting favorable hedges and fixed-rate debt. Ted will answer any questions on our financials. Our shoreside teams have continued their hard work to ensure the safety and well-being of our seagoing staff, including our Ukrainian and Russian seafarers and their families, many of whom face extraordinary challenges. Difficulties in handling crew changes continue. China remains unavailable as a location to perform crew changes. Overall, however, the number of ports that allow crew changes has increased in comparison to the previous year. LPG export and import demand increased in the third quarter of 2022. Global exports are up 5.4% year-over-year with support from Canada and the Middle East. North American production continued to increase. A relatively quiet market over the summer and into fall put some pressure on freight rates. Despite the summer doldrums often seen across tanker segments, the VLTC market kept a steady floor above cash break-even level. and the recovery was swift. This indicates a well-balanced market supported by strong underlying fundamentals. The heavy fuel oil, low sulfur oil spread is currently about $260 per ton in Houston, down from $320 at the close of last quarter. We have managed the volatility in bunker price as well, and this has contributed to our strong earnings this quarter. Tim and John will answer any questions regarding our view of the freight and product markets going forward. In the meantime, here are some highlights. Despite lower than expected propane demand in China for olefin production, 2022 is forecasted to have about 4.7 million tons more of incremental NPG consumption compared to 2021. This was achieved in spite of only six out of 10 expected new PDH plants coming online this year. LNG spiking in Japan and South Korea is expected to increase LPG production over the winter. South Korea is expected to import about 800,000 metric tons of LPG additionally to counter the high LNG prices. Meanwhile, Japan has imported 43% more year-on-year during the first half of 2022 for city gas consumption. Similarly, in Europe, We have seen some substitution of LPG for LNG. North European substitution with ship-borne volumes from the U.S. continues to add about four VLGCs a month. Despite the fact that more LNG ships are going to Europe rather than through the canal to Asia, the Panama Canal has remained congested, adding on average... more than 10 days to the voyage both south and northbound, up from five in the last quarter. And while the VLGC order book next year is significant, increased export volumes coupled with canal congestions and the fleet slowdown will likely help absorb most of the new tonnage. Our outlook for the calendar year for the final quarter is positive. Estimates for U.S. exports point to further growth in 23 and 24. In its October short-term energy outlook, the EIA estimated that U.S. LPG exports will grow 8% in 22 and 11.3 in 23, up 1% and 1.3% from July's estimate. U.S. LPG production now is estimated to grow by 6.1% in 22 and 4.8% in 23. The 2023 IMO estimates Emission regulations, EEXI and CII, will come into effect in January 23 and will establish strict power limitation and carbon intensity limits to be complied with annually from then on. Our performance and new technology team have been diligently preparing our fleet and shoreside operations for these regulations, including retrofitting energy-saving devices and developing and harnessing new software to manage emissions. fuel consumptions. As Ted said, you can see more on our investor highlights and also we're here for any questions that you may want to ask. Thank you again.

Vikram, I'll give it back to you. Thank you.

With the prepared remarks completed, we will now open the line for questions. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. To ask question, ladies and gentlemen, please press star one now. We have a first question from the line of Omer Nocta with Jefferies. Please go ahead.

Thank you. Hi, John. Hi, Ted. You know, obviously, yeah, just another solid quarter and, you know, another irregular $1 dividend. You know, I wanted to just ask a bit. Obviously, you know, the market's really strengthened here over the past several weeks. And I just wanted to get a sense from you as you think about how things have developed here and, And when we think about the $1 dividend that you just announced, did you base that off of the financials from this past quarter and how that ended? Or was it a bit of looking forward as well? And I'm just simply asking so that maybe we get a sense of perhaps what you're thinking in terms of the next quarter, considering it seems likely that you're going to have a record result in the fourth quarter or calendar fourth quarter. And so I just wanted to get a sense from you how you approach that $1 irregular dividend for this quarter, given that earnings were lower than that and there weren't any sort of capital gains that came in for you to pay out. So just kind of a bunch of words out of my mouth, but just wanted to get a sense from you how you came out with that dollar and then what can we expect going forward?

Fair question, Omar. I'll let somebody else answer the question as it relates to what we see in the market in the next quarter. Obviously, the current quarter will be very good, and we did have that visibility when our board made the decision for the dividend. So generally – well, not generally. Invariably, we do not count our chickens before they're hatched. But you cannot buy – we take everything into consideration each time. This is why we don't call it regular. It's not formulaic. It's based on the judgment of our board at each quarter to decide how best to deploy our capital and our cash reserves.

I think that's pretty clear. Sorry, John, to cut you off.

No, no. I was going to invite Tim to give you a sense of where the market is now and how we see it in the next few weeks.

Yeah, of course, from when we had the board meeting and decided on the dividend, the market has just gone one way, which is up and very fast. And we see this for the coming period to maintain the firmness and also into the first quarter of, well, into the first quarter of 23, if not all 23, the first quarter. as we see the demand in Europe due to the unfortunate war in Ukraine, is helping our markets. And also now we're seeing the Panama delays, as John was mentioning earlier, going up to 20 days now at the moment. So this creates a lot of distraction in the market and a lot of inefficiencies in the markets. and also a better trading environment for the traders. So we believe that the market should stay firm at least for the short period.

Okay, thank you. Yeah, and I guess maybe just a bit more, I guess, a bigger picture. How do you think about the fleet deployment at the moment as we go into – You know, these next several months look to be very strong, but there are a good amount of deliveries coming in next year. How do you think about that? And then also I noticed you exercised an option to charter in a vessel for an additional two years, but then also extended an existing contract for two years that you have out. Was that done on a, you know, like-to-like basis, or are they completely sort of separate from each other?

Yeah, I would say they are separate from each other. The extension of the charter in was a rate that was done in 2018 when we did the charter party. So that rate is very different from today's market. And you can say the extension of the time charter out is with one of our companies, customers which we enjoy a good relationship with and at a rate that was in line with today's term market so we do take some coverage in the market but in general we believe that in 23 even with the high amount of new buildings coming in with the increase of production in the US and with the delays we are seeing and with that production mainly going to the east. This is a long haul. And then on additional the slowdown of the energy of the fleet at least with the EXI regulations and the CII compliance that we will have to take into account already from 1st of January. This will have a significant impact on the fleet. uh and the and the demand for vessels so in in our mind the the market looks uh okay for 23 um and we are we are we are there to to uh to take more um you can say uh assets in on time charter if we see the right opportunities but but of course also we do uh try to keep a uh a little bit of ships out on term as well to have a bit of a balance on our book. But for 2023, in our opinion, the production and the slowdowns will be able to absorb the flurry of ships coming into the markets. So we do see the 23 positive.

Got it. Okay, thanks for that color, Tim. And also, John, thank you. And Ted, thanks. I'll see you guys.

Thanks, Omar. Thank you.

Again, if you have a question, please press star and 1 to ask a question. We have a next question from the line of Brian Reynolds with UBS. Please go ahead.

Hey, good morning, John and Ted. Maybe to start off, just want to talk a little bit more about the spiking opportunities for LPG. Maybe on the upside demand of the equation, you know, you talked about, you know, demand that you're seeing potentially from Korea and Japan in terms of spiking. Curious if you could just put it maybe in perspective of like a percentage uplift relative year over year, all things equal, like what is the potential uplift in terms of overall, like, seaborne LPG cargoes being, you know, lifted this summer or this winter from potential LPG spiking. Thanks.

Thanks, Tim. We addressed that a little bit in the written remarks, and they were prepared remarks, but I don't know if we calculated that in ships per... Yeah, it would be integrated into...

To Europe, I would say it's about four wheels lifting a month, and a round trip U.S. to Europe is about a month, so you can say that's about four ships equivalent. And for Japan and Korea, it's, of course, a seasonal thing, especially for Japan, filling up for the winter, so that will tail off later in the year. when we get into the spring at some point, once we get through the winter and the stockpiling. But we can also say that a lot of these, of course, as was also mentioned by John, that PDA's demand has not been, or is not at its full capacity. So some of it is replacing these demands. But it is additional seabourn requirement for this and also what we see as the consumption from Ukraine and Poland and other countries that were supplied overland from Russia. This is also replaced by veals going into the storages in Karlshamn and other places and then shipped on smaller ships into Poland. So that is also a new demand that is created and that's about I think two VLs a month that we see going into to cover that at the moment. So there are definitely new users and new demands happening.

Really appreciate that color. So you maybe talked about four cargos for the spiking uplift and then two cargos going to Europe. You know, want to touch on the chemical, you know, demand aspect of it. You know, what are you seeing? You've highlighted previously a lot of new PDH capacity coming online over the next few years. It may take a while for that capacity to fill in. You know, how many, you know, cargos are you, you know, how do you see that demand filling up over the next few years? Do you really need to see an economic recovery? And are you seeing any early green shoots given the potential for, you know, China reopening potentially over the next couple months? Thanks.

Yeah, I think you say yourself China is a difficult one to say when they will go away from the policies of the zero tolerance on the COVID. But these plans are coming and they are running even at reduced rates. So we are still seeing the consumption grow, but not as rapidly as we had hoped. But there is definitely a big potential upside once China gets... It's either a control over the COVID or easing the regulations on that. And I think LPG doesn't seem to be as hard hit on even though you have a bit of an economic slowdown and so on as some other products as there is a general demand for these plastics produced. So we see this as an intermediate problem that will That will go away in the near future, and we will see more production and more demand from the PTH plant. But it's hard to say what the Chinese hollow will take before they come back.

Great. Totally understand and appreciate the color. Maybe just as a quick last follow-up, you talked about some congestion in the Panama Canal like we've seen the past few years. You know, curious if you have any updated comments or views around the potential LPG pipeline that could span the Panama Canal. Any updated views there on whether you're seeing some traction there on if that's happening? And then, you know, I guess just beyond that, do you see that as a, you know, potential solution towards the congestion, or do you think it's really not, maybe not worth the time it spent? Thanks.

Yeah, I think there's nothing really new on the pipeline, but when we looked at it in the past, the volume that it could handle and the implications was not a game changer, I would say. So it would be able to maybe solve the problem for a few real disease. But again, you would have the short haul on the one side and the storage issues and the and the meeting of the lake hands on the other side. So the total capacity was not something that we saw as a game changer, but I don't have any recent update on the progress of the pipeline.

Okay. I'll leave it there. Thanks for taking the time and enjoy the rest of your morning. Thanks. Thank you.

Thank you very much.

Thank you. Ladies and gentlemen, That concludes our question and answer session, and I'd like to turn the call back over to John Hadzipateras, Chairman and CEO, for closing remarks. Over to you, sir.

Thank you very much, Vikram. So thank you all for joining us. Wishing you a good holiday season coming up, and look forward to speaking to you again next quarter. Thanks. Bye-bye.

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.