Navigator Holdings Ltd.

Q4 2023 Earnings Conference Call

3/14/2024

spk04: thousand dollars for q4 2023. this compares to less than 24 000 in q4 of 2022. fleet utilization stayed above 90 in q4 and that was just shy of the utilization that we achieved in q3 and same period 2022. Utilization at or above 90% typically allows for higher TCE rates. Throughput at our joint venture Ethylene Export Terminal was slightly down at 208,000 tons for the quarter, but it was nevertheless brought to a total of the terminal capacity of 1 million tons per annum. The expansion of the terminal continues to be on track for completion in Q4-24. And in 23, we contributed progress payments of $35 million made up of four payments of around $9 million each in April, August, October, and December. The outlook for our business remains robust. We expect utilization to remain near 90% and we continue to renew our expiring time charters at higher rates. With solid NGL production and thereby demand for transportation on handy sized gas carriers, combined with limited supply from new buildings in our segment, we expect this to continue. We also do not expect that the trade patterns through Panama Canal and Suez will be restored in the near future. which may lead to more cubic meter miles transport work for us. We work intensively with our customers to improve the efficiency and avoid idling or ballast voyages. The most recent examples of backhauling properly in from Asia is a great example of that joint work. With that, I'll just hand it over to Gary for a more detailed of our financial results. Go ahead, Gary.
spk03: Thank you very much, Mads, and good morning or good afternoon, everybody. I'm pleased to report our latest fourth quarter 2023 results in which we've continued our momentum with again, some very positive results. On slide six, we see our total operating revenue up over 18 million or 14.9% to 141.6 million in the fourth quarter of 2023 compared to the fourth quarter of 2022. With much of this increase, due to stronger time charter equivalent rates, as Mads has pointed out, that were on average 28,428 per day in the quarter compared to 23,622 in the fourth quarter of 2022. There were further positive effects as a result of having our five navigator greater bay vessels fully operational in the fourth quarter of 2023. And this was also reflected in our ownership days, available days and operating days figures as shown on the right hand side. Against this, utilization was a little down in the fourth quarter of 2023 compared to the fourth quarter of 2022, but at 91.3%, it was still very healthy, as Mads has already said, and as Oibin will confirm later. Erethylene terminal throughput volumes in 2023 were 987,000 tons, close in line with nameplate capacity at a million tons, and we currently expect to remain near capacity in 2024. Our daily vessel operating expense in the fourth quarter of 2023 was essentially in line with the fourth quarter of 2022 at 9,067 per day, noting that the fourth and the last quarter of the year is typically a little higher than the other quarters and 2023 was no different. We are providing some full year 2024 expense guidance on slide nine for those that are interested in this. Depreciation was up slightly over the same period in 2022, mainly due to the addition of the five Navigator Greater Bay vessels that were acquired at various times from and after December 2022. The non-cash movement in the mark-to-market valuations of our interest rate swaps was a loss in the fourth quarter of £5.2 million as a result of softening forward interest rates, and our interest expenses were cushioned by interest income earned on our cash balances in the quarter. Our income tax line reflects current tax and deferred taxes, mainly on our share of profits from our Ethylene Export Terminal at Morgans Point. Overall, our earnings per share for the quarter was 24 cents for the fourth quarter of 2023, compared to 13 cents for the same period in 2022, with adjusted EPS up at 32 cents. And as Mads mentioned, the fourth quarter of 2023 results provide a record equaling 72 million adjusted EBITDA. Then taken across the full year, we're reporting the highest annual adjusted EBITDA in Navigator's recorded history at $282 million. The balance sheet shown on slide seven remains strong with a cash balance of over $158 million at December 31st. This compares to a minimum total liquidity covenant on all of our bank loans and credit agreements of around $50 million. This cash balance is after all of our recent buybacks, our dividends paid in 2023 and after repaying $23.8 million of the $111 million term loan and revolving credit facility, which funds remain available to be redrawn under the terms of the facility agreement. This basically means that we had around $182 million of liquidity at the end of 2023. Our net debt capitalisation was just under 35% as of December 31st, and net debt to adjusted EBITDA was 2.6 times for the 12 months to December 31st. We see our cash being needed for our Ethylene Export Expansion project until we fix finance for that later in the year, as well as for other projects and investments that enhance shareholder returns. As you'd expect, there are a number of projects that we're actively looking at. In addition, under our five pillars that we'll mention later, we'll continue to reduce our debt look to capital distributions and share buybacks, and we're always looking at how we can renew and potentially add to our fleet. Of course, finance is very important to all of this, and as shown on slide eight, we have no low maturities until 2025. The maturities for 2025 include $100 million senior unsecured bond, which we might refinance depending on investment opportunities, and the two bank facilities totaling $190 million that will likely be refinanced in a cash-positive transaction. On these 2025 maturing bank facilities, we already have commenced discussions with our lending group and we've received very positive feedback already. We'll provide further updates on these as discussions progress over the coming quarters. On slide nine, we outline our estimated cash breakeven for 2024, which is $20,705 per day, which figure includes scheduled debt repayments and our heavier dry dock scheduling this coming year compared to 2022 and 2023. Even considering this, with this relatively low breakeven level relative to charter rates, recalling our average TCE for the fourth quarter of 2023 was over $28,000, it enables Navigator to generate positive EBITDA throughout the shipping side. Then to the right on this slide is daily OPEX expectations for 2024 across our differing vessel size segments, ranging from our smaller vessels to our larger, more complex ethylene vessels. We also provide a range for the expected annual spends for Vessel OPEX, general and admin costs, depreciation and net interest expenses, all of which are broadly in line with 2023 figures. On slide 10, we outline our historic quarterly adjusted EBITDA, showing a step up over the past four quarters and a continuing trend this quarter, all nicely demonstrating the very positive results we've been able to report across the whole of 2023, culminating in our highest adjusted EBITDA on record of $282 million. We also expect the first quarter of 2024 to provide a healthy result. On the right side of slide 10, we show our historic adjusted EBITDA bar, our last 12 months bar, essentially 2023, and an annualized adjusted EBITDA based on this quarter's result. In addition, the EBITDA bars to the right show the effects of an increase in adjusted EBITDA based on incremental increases in average charter rates of $1,000 per day to give some further perspective. Then on slide 11, we cover the important topic of our vessels' scheduled dry docks. We have 17 vessels scheduled for dry docking during 2024, with an expected total of 399 off-hire days, and with total dry docking capex anticipated of 22.9 million, all of which is fully budgeted. Some more detail on the expected timing and costs of these dry docks is shown below, noting that one vessel has already successfully completed its docking in January of this year. Also, as we have announced before, we will take these dry docks as opportunities to install energy saving technologies on those vessels at a cost of around $4.8 million, with many of those technologies having a very short payback period. Finally, we also provide here some guidance on 2025 and 2026 scheduled dry docks for those that are interested. Then with that, at the end of a good quarter and at the end of a very strong year and with a great foundation set up for 2024, I'll stop there and I'll hand over to Oivind to give you an update on our commercial position. Thank you.
spk02: Thank you, Gary. And good morning all. Let's move to slide 13 to take a closer look at the recent developments of American gas fundamentals. The US reported 210 million barrels of natural gas liquids production at year end, which is up 10 million barrels since of last earnings call. This is a meaningful increase, but why is it important? Well, remember, one barrel of natural gas liquids consists on average 42% of ethane, 45% of LPG, and the remaining natural gas liquids. US domestic consumption of ethylene and LPG is relatively flat. And therefore, any additional production is more or less solely aimed for export markets. As a consequence, American midstream companies are investing in additional gas processing plants, fractionators and terminal expansions to allow for the increase in production. This is good for gas transportation, In general, it is great for Navigator and our growing Ethane and Ethylene business. The graph in the middle shows global handy-sized demand measured in volume transported. The volume includes LPG, ammonia and petrochemical cargoes. As you can see, the total tons carried dropped during the last months of 2023. This is mostly due to disruptions at the Suez and Panama canals. many of the handy-sized petrochemical voyages were rerouted. Longer voyages reduced frequency of loading operations, which in turn reduced volume. However, as we can see, for the first two months of 2024, the total volume is more or less tracking historical seasonality. If we look at handy-sized ethane and ethylene exports specifically, we see a positive development. The right-hand graph shows a positive counter-seasonal development. We see more exports from the US of these cargoes compared to previous years. It tells us that despite the longer voyages, US ethylene and ethylene remains highly attractive to international buyers. The updated ethylene arbitrage between US and Europe and Asia is shown on the left graph on slide 14. Growing NGL production puts pressure on the domestic price of ethane. Ethane price, which is the lower line, continues to slide. US ethylene price is represented by the gray line on the left-hand graph. And European and Asian landed price is shown by the two top lines. As we can see, the arbitrage between the continents has widened since last earnings call. This is positive, of course. It is also needed to cover additional freight due to the longer voyages. However, as you see on the middle graph, ethylene export volumes declined somewhat. This is counterintuitive. The explanation lies with the restricted transits at the Panama Canal. The number of gas-carried transits through the canal went rapidly downhill from September of last year onwards. The vast majority of vessels, including ours, were rerouted via Cape of Good Hope when bound to Asia. The duration of our round trips from Houston to Asia increased by 50%, which in turn stretched vessel availability at Morgan's Point export terminal. From a shipping perspective, this is not a bad thing, though. What is interesting to comment on is that of ethane exports. Rerouting of larger ethane vessels, which service take-or-pay supply contracts, created a demand for handy-sized vessels. We fill the cracks that open in their supply chains. This is a nice increase in the handy-sized ethane volumes, and you can see that on the right-hand graph. Our earnings days mixed on slide 15 reflects the flexibility in our fleet. 42% earnings days are derived from petrochemical cargoes, 20% from ammonia, leaving only 33% from LPG when taking into account the non-utilization factor for December. Canal disruptions and knock-on effects to logistics do cause fluctuation in utilization, And utilization is a dynamic metric. It also includes unforeseen technical issues and downtime across the fleet. We have mentioned in the past, and you heard Mats mention it too, and I will take the opportunity to mention it again, that utilization around and above 90% mark represents a very good market. Around this level, we are in an environment where freight rates are relatively healthy. These healthy freight rates are shown on slide 16. There was a knee-jerk upswing in the third-party market assessment immediately after the Panama Canal issues, particularly for the Green Ethylene Index. The assessment has now settled more in reality at quite robust levels. What we can say is that semi-refrigerated and fully refrigerated vessels coming off time charters are being renewed at higher rates than we have seen for many years. What typically ruins the shipping part is oversupply of vessels. We have said it in previous calls and it remains valid today. We have clear visibility of supply coming into the segment over the next few years. It is low at 7%, shown on slide 17. At the same time, the segment has 21% of existing vessels over 20 years of age. Therefore, we are quite comfortable with the supply side of things in our core segment. And that's a good thing. I'm happy to take questions on all the above topics, but first I'll hand it over to Randy for him to go over a few exciting developments at Navigator. Randy.
spk00: Thank you. So, yeah, following up on several announcements we made in recent months, we want to provide some additional details on these developments regarding a few of those announcements. So turning to slide 19, we are pleased to announce our return of capital for the fourth quarter in line with our recently announced return of capital policy and the table below. We're returning 25 percent of net income. or four and a half million dollars to shareholders this quarter the board declared a cash dividend of five cents per share that will be payable on april 25th to all shareholders of record as of april 4th and that will be a quarterly dividend payment totaling 3.7 million dollars Additionally, with our shares trading well below our NAV of at least $24 a share, we'll use the variable portion of this policy to repurchase shares. As a reminder, between December 22nd and May of 2023, we repurchased 3.8 million shares at an average price of $13.12 per share for a total of $50 million. And subsequently, the board authorized a new $25 million repurchase program, of which we've used $4.1 million thus far. Now, looking ahead, we expect to purchase at least $800,000 of NVGS common shares between now and the quarter end, such that the dividend and the share purchases together equal 25% of net income. Return on capital shareholders will remain a core focus for us. On the next slide, following up on our previous announcement regarding the expansion of our ethylene export terminal, the project is frankly progressing nicely. Engineering is now fully complete. All the longer items have been ordered and many of the key components have started to become delivered. If you want to come down in Houston and see for yourself, just let me know. Construction is expected to occur throughout 2024 and be completed during the fourth quarter. The total capital contributions required from us for this expansion project are expected to be less than $130 million. To date, we've made five progress payments, totaling $43 million. And the remaining CapEx is expected to be paid from cash on hand until those new financing agreements are completed, likely later this year. And as you can see on the bottom left chart, despite some softness in December and January due to tight commodity spreads and limited vessel availability, throughput is now back to nameplate capacity, with March looking to be another strong month. Discussions are ongoing with current and new customers for the multi-year off-day contracts, and we expect the vast majority of the additional capacity to be contracted during the construction phase throughout the coming months. Finishing on slide 21, in shipping, consistently making money is obviously important, and so is spending this money wisely. As such, we just wanted to highlight our five key pillars for capital deployment. We remain focused on reducing debt, primarily through quarterly debt amortization. We remain committed to paying out consistent cash dividends, and also will continue to repurchase shares, especially at these steeply discounted levels. We've recently renewed the fleet by selling our oldest vessels, replacing them with modern secondhand vessels, and we'll continue to grow our energy infrastructure business, most recently highlighted by the ethylene export terminal expansion and our investment in the Zane Fuel Solutions for ammonia bunkering. Going forward, management will remain diligent in being good stewards of the capital. With that, I'll now turn it back over to Mads for his closing remarks.
spk04: Good. Thanks a lot, Randy. And on this page, we'll just take a quick look back at 2023. And as you can see here, we finished the year with strong earnings improvements over previous years and with progress on pretty much all parameters. Entering into an exciting 2024, Navigator is heading in the right direction and is well positioned for the future. Our leading market position, strong customer relationships, an experienced and engaged team, and our efficient fleet of handy-sized gas carriers, that leaves us with a really strong foundation for growth. The balance sheet is in its best shape ever, and it gives us the flexibility now to grow our business and return capital to shareholders at the same time. The best is yet to come. And with that, I'll just hand it back to you, Randy.
spk00: Thanks so much, Mads. Operator, we'll now open the lines for some Q&A. So to raise your hand, you can press star nine, and then you'll have to unmute yourself by pressing star six. Or if using this Zoom function, just use the raise hand function. First question, your line should be open.
spk01: Thanks, Randy. Hi, guys. This is Omar Nock from Jefferies. Am I coming through okay? Howdy, Omar. Loud and clear. All right. Thank you, Randy. Yeah. Well, thanks for the update. And good morning. Good afternoon. Just a couple questions for me. Wanted to get a sense of how the market thus far for your ships has progressed, you know, the first couple of months. You mentioned, obviously, I think, Mads, in one of the early slides, it showed utilization being kind of maybe closer to 90% so far in 1Q, which is still obviously strong, slightly down. And you mentioned rates being firm. But just wanted to get a sense, you know, in terms of, say, the volatility that we saw in the larger VLGCs, we saw a good amount of volatility with rates starting to year off very strongly. Then they fell off a cliff and then they started to rebound again. And just wanted to get a sense from you, has that same type of dynamic translated into the handy side?
spk04: Well, Ivan, why don't you give a few words to that one?
spk02: Yes, of course, Omar. The very large gas carriers dropped off a cliff earlier in the year. That did not happen with the handy size segment. Contrary, it increased both in the broker assessments that we show every earnings call, but it filtered through to the rates that we were able to renew at or some of the ethylene ethylene spot fixtures. We did not experience the same as the VLGCs, but it was positive for us and remains positive.
spk01: Okay, thank you. And then I guess maybe just perhaps maybe for you, Randy, or just for everyone, just in terms of the terminal expansion, thinking about the contracts that could be entered into, how do you envision those starting to develop as we move through 24? Do you think that there's, you obviously have the existing nameplate capacity with a big chunk of that million contract, that million tons, but for the expansion part, there's a 550,000 tons that are coming on. Do we think of, is that where we can see contracts coming? And then also what about contracts for the potential upwards of say the extra million and a half? Is that become contracted also this year or is it more of a spot?
spk00: Yeah, Amar, I'll start on that. So in terms of the scale of contracting, clearly we have the 94% on the existing million contracted, but those unwind over the coming years. So we expect some extensions there. And then for additional new contracting, we expect that to happen, frankly, this year. So when you look at it as a portfolio, we'll have about 1.55 million tons that we can sell forward starting January 1st, 2025, let's call it. The plan, the goal is to sell probably 90% of that forward. I think that's the enterprise and navigator model for this asset. So that would be 1.4 million tons, roughly, that we'd want to have sold in advance, right? And we think the first few of these contracts, both on the upsize, extension, new customers, should be happening here in the coming weeks, months at the latest. so that's kind of your first part in terms of contracting additional tonnage for now you know we are guaranteed the 550 000 tons from the new train the flex train that can do up to 2.2 million tons in addition to the million that we already have now and this in terms of contracting that we cannot contract that forward because we are not guaranteed that capacity Now, maybe in future years, we will start buying additional guaranteed capacity per se. But for contracting purposes, the most we could sell forward is 1.55 million tons. And then incremental cargoes would be then sold on a spot basis.
spk01: Okay. Thanks, Randy. That's okay. Very, very clear. Final one for me, and I'll pass over a separate topic, but something you guys have highlighted for several quarters now, and that's the ammonia trade as an area of growth. And you guys are very active in that already. And you mentioned recently seeing a good amount of cargoes there. You know, we have seen owners in the shipping segment kind of or shipping start to kind of go after the VLACs as a way to capitalize on this trade going forward over the long term. I guess one, is that something that Navigator has an interest in to explore the larger ammonia carriers? Or do you think that perhaps ammonia is more easily or realistically shipped on the midsize and smaller ships that you currently operate?
spk04: Maybe I can just kick us off on this and then I'll invite my colleagues to add to it. We think that the majority of ammonia in the future is going to be transported on midsize. They're very flexible and they're very well suitable for ammonia trade. It's not very expensive for VLGC owners today if they want to order a new build VLGC to add, you could say, a small cost onto that and then make it capable of transporting ammonia. So you could say it's not, I don't think necessarily you should assume that these VLGC owners necessarily expect that they will be transporting ammonia on those new build orders that they put in. When it comes to our view on it, we are talking to a number of customers around this and we do expect that over time we'll be building vessels that being handy size or mid-sized vessels that will be carrying ammonia. For now, we would probably be looking to do it against an off-take contract so that we have, you could say, at least the first couple of years covered. uh particularly if it comes to building vessels that are propelled also by ammonia so so we do expect to take part in this market we also expect to take part in in the wider supply chain asane fuel solutions is a good example of that and we think also upstream replicating a setup like we have with with enterprise today on morgan's point for ethylene if we can do something similar on on production of ammonia or the marine logistics around it we'd be quite interested in doing so okay thank you much for that very very helpful color and thanks guys for the time i'll turn it over appreciate it thanks omar next caller your line should be open
spk00: Okay, while we wait for that one, we had a question come in around Azane. So Oyvan, I'll turn this over to you. For the Azane joint venture, it seems like there is a lack of ammonia infrastructure to use as a fuel for the shipping community. How will Azane meet this need?
spk02: So it's very simple. In order to encourage the ship-owning industry to be confident in constructing vessels that use ammonia as fuel, the fuel needs to be available. Therefore, Zane Fuel Solution, which is one of the first infrastructure companies covering that particular challenge, is there to unlock that problem. So, since Zane, since the investment and so forth, et cetera, a few people have come confidently ordering vessels with ammonia fuel knowing that ammonia's fuel will be available in their short sea trades also oil majors particularly one in norway have since then launched a tender for offshore vessels exactly using ammonia's fuel so you can see it's the start is the is the forefront and pushing the button to start the change and it'll happen slowly in the first in the first instant and then grow exponentially That is our belief and ASEAN is part of that transition.
spk00: Thank you, Ivan. Operator, any other questions with their hands raised? One last question here on dry docking. Are we anticipating any delays in materials, equipment, which might delay the dry docking or make it longer? How confident are you in the schedule that you provide?
spk04: I can kick us off here and say that we are well underway in terms of planning and executing on the dry dockings that were planned for 2024. We don't expect per se that there will be any delays in these and we also expect that they will stick to the schedule in terms of duration and also in terms of cost that we laid out. yeah there's inflationary pressure in in the world around us it's abating somewhat now and and we think we planned well for this so so we don't expect that there will be cost overruns or delayed or delays sounds good i know we have one other analyst looking to ask a question is your line available
spk00: All right. Well, you know where to find us, so we'll take that offline. But thank you again for joining us for our 4Q23 earnings call. Feel free to email investorrelations at navigatorgas.com if you have any follow-ups. And we look forward to speaking with you in May for our first quarter 2024 results. Have a great day.
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